Msc Industrial Direct Co Inc (MSM) September 2026 Conference Transcript

Welcome, everybody, to session two for the Jeffries Industrials Conference. I'm Steve Folkman, Industrials Analyst at Jeffries. We're going to be doing a bit of a fireside chat here today with MSC Industrial, and I'm very pleased to welcome Martina McIsaac, who's the CEO, Ryan Mills, who is VP of IR, will keep us all in line here. We're going to do sort of a fireside chat format here. If anybody wants to get involved, I'm certainly happy to share the wait. I'll come up for air a couple times and cue you guys. But if you don't, I'll keep going, and we'll have an interesting conversation. So, Martina, welcome. Thank you for coming.

Thank you. Thanks for having us.

So you've been at MSC now, I think, around four years or coming up on four years. You've been the CEO since? January. And since you took over in January, you've been working on some Salesforce restructuring, and we've seen margins expand. So far, so good, it seems. Maybe you can talk about sort of your big picture, sort of what your goals are, how you're trying to manage the business, and where you think it can go.

Sure. Thank you. Well, thanks for having us, Steve. So yeah, I've been at MSC for just about four years. I was able to start as the COO and really get under the covers of the company and then did a year as president. And we were able to lay the groundwork for a turnaround that we're really, we're in the middle of executing. We're very happy with our progress. us. We intend to return the company to a mid-teens operating margin framework. We're in the early innings of the game, but we've made a lot of progress so far. I mean, our Salesforce restructuring is what we've talked about the most this year.

That's my next question.

Yeah. But we've also, we've completely revamped our pricing structure. We have invested a lot in network optimization, So managing our the balance of freight versus footprint, optimizing within the four walls of our distribution centers. And there's a lot of early wins to be seen in our numbers already. You know, if you look at at what's happening with fuel cost, we've been able to offset most of that because of what we've done already on our network on the network side of things. So whether it's contracts or AI-driven planning and inventory placement, we have built a lot of fundamentals in the first three years that I was at the company. And now we look to accelerate organic growth with the sales restructuring.

So just in case people aren't in the weeds here, the goal is mid-teens, EBIT margin. Today we're around 10%. So that's a pretty good hill to climb.

Yeah, we ended last year at 8.4. So it's a climb.

So what are the tools that get you there?

To get us to the mid-teens? I mean, there's a couple of things I'll dive kind of right into the gut. So the first thing that we did was we aggressively benchmarked our cost structure against our competitors. Now, there's no perfect proxy competitor to MSC and industrial distribution, so we looked across the competitive set to kind of hold ourselves accountable to what we think best in class is. And we identified that our cost structure, to give you kind of a representation, at the same sales level, we're about 1,000 heads heavy to deliver the same sales result as our competitors. So that gave us sort of the north star of where we want to go. So certainly tackling that, and we have a roadmap to do that, to basically look at ways to take out manual work, to change work, to automate processes, to introduce AI, and we're on the roadmap to do that. And then the other side of the equation is, of course, to accelerate organic growth. So we have looked hard at our sales structure, which customers we cover, how we cover them with what resources, and we feel we've now designed a structure that covers the right potential. And now we look at kind of putting in place the sales, disciplined sales execution to get us there.

So the thousand heads comes up a lot.

It does, yeah. I'm sure it's a nice round number. um what does that remind me that's sort of a percentage of total msc so we're about 7 000 okay so yeah all right so you're looking at a reasonable chunk of folks and is it um a situation where you think you can operate without these folks or is it more you want to grow into that type of cost structure it's an excellent question um so the metric that we've given uh you to watch is the trailing 12-month revenue divided by total headcount because obviously there is a numerator and a denominator in this game and growth will help us but we actually intend to attack the cost structure and take those heads out. Now, just for clarity, over the last year we took about 400 people out of our field-facing team so we eliminated some redundancies, some overlapping teams, some duplication. That's not included in the 1,000. This is an additional 1,000 that is primarily in the back office in our warehouses right now. So how do we do without them? We change the way we work. So we're looking at increasing the level of automation in our supply chain and in our back office and leveraging some AI as well.

Okay. So if my math is right, which is always a big question, that probably, if you can do that, gets you 2 to 250 basis points. So maybe halfway to your 15% goal, but do you want to? Correct me before I go to the next part of the question.

Um, that's probably fair.

Yeah, you want it Directionally, that's right, but there's also some fixed cost leverage to be had to on the top line so we also have the the margin benefit from from Us attacking our cost structure and reducing heads But also as we grow to because there's a lot of fixed cost in the business to leverage okay?

Okay. Yeah, you don't have to go easy on me here. It's okay. I can take it if I'm wrong. So the other half of the gain, then, is more about what you're talking about, Ryan, the sort of fixed cost leverage. Is there anything else that we should focus on in terms of opportunities there?

I think one of the best ways to look at it is we gave the incremental margin framework. Mid-single-digit growth, incrementals should be at close to 20%. High single, low double digit, the incremental should look upper 20s or potentially a little bit better than 30%. That's the baseline. So as you model out the out years, as we attack our cost structure and take heads out, that'll be additional or incremental to that incremental margin framework, if you will.

Okay, good. And for some reason, distribution investors seem to obsess about gross margin. So talk about how gross margin sort of reacts to this whole process.

So we have, starting in 23 and ending in 24, we revamped our whole pricing structure. And we have now, I believe, put in place a very logical, competitive, and reliable pricing system. So we're producing pretty stable and predictable gross margins right now. We have not yet started to use gross margin as an offensive weapon to grow volume, which is the next step for us. So we are not really looking to expand gross margin anymore. We'd like it to be stable in that 40 to 41 percent range. So that's what you can count on while you're modeling.

Okay, great. So you talked about pricing. So let's dive into that a little bit. I mean, pricing has been pretty good this year.

We've had this backdrop of tungsten being sort of crazy. um just let let's lay the groundwork for what you're seeing in terms of pricing and what the outlook is okay uh so for the just some a little bit of background if you don't know our business well so cutting tools represent about uh 15 of our total revenue and and so the tungsten carbide affects cutting tool production and the inflation there um has been extreme like in the neighborhood of 500 percent so there's been a lot of uh price activity on the metal working side of our business and then of course the rest of our business impacted by geopolitical events so there has been inflation um but tungsten is is uh has been the biggest driver and it's not our whole business but it's a it's a chunk of business and it's not behind us so um we're still hearing from suppliers based on their own control of their own supply chains and their access to so tungsten is an input to um to carbide which is an input to cutting tools and based on their own supply chains they're still taking and seeing inflation that they'll pass through and it's been significant i think you had seven and a half points of price and 50 pips of volume right and yes was that the second quarter our second our second quarter third quarter third yeah sorry oh our third quarter yeah The calendar is second quarter.

Exactly, yes. So the fact that we're seeing sort of 50 basis points of volume, do you think there's any demand destruction from all this price that's being pushed through?

No, if you think about the metalworking business, it is complicated to change the way you make a part, to change the way that part is designed, to change the inputs to it. So it's relatively inelastic. the demand there it's also a relatively small part of a customer's inputs right so even though the cost is is going up in an extreme way it's not a big piece of their cost structure so so far we haven't seen we're still seeing units growth on the metal working side we are uniquely positioned to capture any issue capture any leakage that would come from a demand shift because what is a customer going to look at doing now they're going to look at reusing their tools regrinding their tools they're going to look at redesigning their applications and msc has all of the resources to support that so so far not not a big issue from customers it's hard for them to switch when they do switch they stay within the msc house do you get a gross margin tailwind albeit it perhaps temporary with these sort of inflationary conditions? We have been price cost positive on metalworking for the year. We try to maintain rate when we pass through inflation. We've been successful doing that. We also have a tremendous scale in the market. I mean, I think we're the biggest metalworking player. So we've also been able to use our cash to pre-buy some product. We have great cooperation with our suppliers to navigate this.

Okay. And you said that it wasn't over yet, but I believe tungsten prices have kind of flattened out a bit.

They have stabilized, but the ripples through the supply chain aren't over yet. So some suppliers, for example, depending on where they source their tungsten powder and how much they had on hand, the cadence of their increases is all different. So every supplier is behaving a little differently, but there's still a wave to come. I think we said in the third quarter, we expected our late fourth quarter, early first quarter, there would be another price increase.

So let's talk about the other 85% or so of customers. Just give us sort of a lay of the land. What are you seeing in terms of demand? You guys have a lot of various verticals that you serve.

I mean, we have been positively encouraged by the way the landscape looks right now. If you look at the sub-IP indexes of most of our end-use markets, they're positive. Some, you know, barely positive, but after a long sort of trough, we're starting to see indications. We look for things like sales through individual vending machines or sales through in-plant programs. Why we were so confident that we were not losing share in the downturn that our business has gone through is that our people are on site and our customers every day. And so the drop in demand was more a drop in their production. And now we're starting to see the throughput increase on those machines and in those programs, which means that our customers' actual demand is picking up. So we're most excited. Aerospace has been strong for this whole period, but we're most excited. We're starting to see machinery and equipment get turned positive, automotive. We had some early signals, heavy truck. So we're optimistic.

Anything lagging that we should know about?

Anything lagging?

No, it just feels like broad-based improvement. Okay. And since we're tugging at that thread and we're on a webcast, any update you might want to provide relative to the current quarter? No. No, that's good. That's a good answer, too. The last one, it was funny. I don't know if any of you guys were in this, but I did the whole thing. And at the end, he says, can I just say the third quarter is looking good? I guess I should have asked.

Well, our fourth quarter is closed at the end of August, so we'll report at the end of October.

Perfect. We'll be ready. Let's talk about capital allocation and sort of your plans for that going forward.

Can I first tell you how excited I am that we have a new CFO?

Yeah, yeah, let's do that.

We announced it yesterday. So we have been we have been looking for a new CFO to join our team since last August. We've been extremely picky. And so we announced yesterday Rob Coons, who was the CFO of Top Build, will join us next Monday. So very, very excited about that. And if you look into Rob's history at Top Build, really, really excellent in strategic management of his balance. balance sheet and the way he supported aggressive growth, both organic and inorganic during that time, I think a 16% CAGR while he was with top build. So obviously, we'll let him take a fresh look at our capital allocation priorities. But right now, what I would say is the best opportunity that we have is still organic reinvestment in the business. So continuing to drive the supply chain improvements this automation that we're doing and to go after our turnaround objectives and then obviously we we support continued growth in the dividend and and buyback of share based comp but besides that I'll wait and let Rob tell you once he's on board we'll look forward to having him next year maybe so fine we can leave that let's talk a little bit then about some of the technology stuff that you guys are working on because it feels like technology and perhaps AI maybe there's a overlap there in terms of your path to getting your cost structure where you want it to be talk about some of what's happening there yeah one of the things during the past year that we've done is we've completely revamped our leadership team so in the past 12 months we have a new SVP of sales we have a new SVP of customer experience we built a whole customer experience ecosystem we have a new uh general counsel now we have a new cfo we also have a new cio who's been assessing over the past quarters um what our the strategy is around our tech stack so we are uh lucky i think that we have a lot of legacy um technology so we have a real opportunity to to leap ahead there and um so we gave uh john reichelt is his name our ceo we gave him you know this time to kind of do an assessment and we'll be sharing more um in the coming months uh of where we're going with that but clearly ai is an opportunity um and i do think we're one of the fortunate that can we don't have a lot uh a lot of an anchor we can leap forward into new new possibilities so automation in our warehouses um is is ongoing we have fully automated our picking operations in half of our network. We still have more to do there. So all across the business, there's opportunity for that.

Is your fulfillment footprint sort of what you think it should be today?

I think we certainly have capacity. We can double our revenue without needing to add any capacity. And another ad who's been here about a year and a half on my team, we have an outstanding SVP of operations who comes to us from Amazon and Walmart, and he continues to build, you know, internal capacity, bring new processes. The wear of our network, I think, will be something that we'll look at as we go forward, and it will certainly be something that we take into consideration before we invest. But capacity is not driving a change in network.

Okay, interesting. Is it your dream to expand more in other geographies?

I have a lot of dreams, though.

Are all those geographies in North America?

Right now, our focus is North America. We have a highly fragmented environment in North America. We have a unique role to play in the distribution market because of the strength that we have in metalworking. And right now, that's our focus.

Do you think it makes more sense to focus more on metalworking and sort of do what you do best and be the player there? or do you want to be more diversified overall?

It's an interesting question. So one of the reasons that we looked hard at our sales structure is the fact that we actually have businesses that touch almost every part of a customer's operation. So we have metalworking. We have an equal-sized business that is what we call MRO. So obviously MRO is our whole category, but then you're thinking about things like safety and janitorial and power tools and that kind of thing. We have a C parts business. So think fuses, fittings, fasteners, hydraulics. And then we have an OEM production fastener business. These have been run relatively separately up until now. So when we did our Salesforce redesign, the goal was to say, how do we leverage the whole portfolio across the whole sales force and we're already seeing a lot of fast growth there that's where i think our fastest organic um uh growth will come in the next in the coming months so the benefit to that is it lets us play everywhere in the plant and when you are trusted to be a metal working partner metal working is usually the break on throughput through a plant so when you're trusted to be the metal working partner uh doesn't take too much to be the paper towel partner, right, or the maintenance crib partner, because we are trusted at the heart of a customer's technical operation. So do we lead with metalworking? Do we want to sell the full portfolio? Yes. And so now we compensate our sellers on selling that full portfolio. That's new since last December, but we've been growing 18, 20% in OEM fasteners as a So I expect you'll see us talking more about the rest of the business.

And on the metalworking side, what do you think your market share is, roughly?

Oh, we still have lots of room to go.

Yeah.

It's highly fragmented, yeah.

Right, okay. So why do people pick you instead of somebody else? Because there are some other distributors out there.

I mean, I'll give you my opinion. We've been doing this for over eight decades. And we have a reputation for not only technical competence, but what I call technical integrity. So we respect very much the choices that customers have to make in their metalworking production. We are brand agnostic. We have the technical capability to optimize production and to make the right recommendation. So we are not tied to any one brand. And so customers sense that, and they understand that we're really there to be a productivity partner. We returned $500 million of documented productivity to our metalworking customers last year. So our sellers and our technical team have the goal to optimize applications for customers, and we actually track that. So it's part of their performance metrics, and customers have to sign off on the recognized profit that we drive. So I think that's unique.

Interesting. Okay. Um, let's see, working capital. It's interesting. I get questions from investors about, you know, how distributors can manage that more tightly. But at the same time, your whole kind of goal in life is fulfillment, right?

And so for being exactly right.

So how do you strike the balance with that? Is there an opportunity?

There is. I mean, I think if you look at the last 18 months, we've made a significant reduction in our inventory one of the first changes that we made in our supply chain optimization was to bring AI into our planning process so we do sell 2.5 million SKUs it's it's a complex business to manage and inventory is our weapon and especially in metalworking we are very proud of the fact that we have what customers need and we can get it to them next day but that doesn't mean that there can't be optimization in terms of the way we plan and what we stock and so we're going to we're continuing to focus on that and that's a big area where ai uh is supporting us um i think there's also obviously on the on the um on the dso side this is again a complex business and it's it's the 20 of our customers world so it doesn't always get their attention. So I think that, again, bringing order there to the chaos, we should have an opportunity to improve.

There's been a lot of sort of discussion around, excuse me, 80-20 optimization in distribution. I don't know if you would characterize yourselves as doing that or not, but would you expect to have more SKUs or fewer SKUs in five years?

What we call weaponizing inventory is about the right assortment. So in distribution, you don't necessarily grow because you add SKUs. You grow because you add categories. But within a category, you need to have the right assortment and not too big an assortment. And so we've been working with our supply community for about a year and a half to kind of define what is the strategic assortment. And so that would actually narrow the SKU count instead of increasing it, inflating it.

Okay, interesting. And so maybe a growth question, and then I'll see if there's anything here in the audience. But you talked, I think, about a February event where you had like a $500 million sort of funnel of opportunity. And I think you converted maybe 10% of that as of the last quarter. Talk about that process and how that drives some growth.

So in distribution, you hear a lot of times that we're a short cycle business. So the word pipeline doesn't come up very much. Like, if I were making airline turbines, you know, you would have this long backlog and you would know what your pipeline is. And historically, I think people shy away from that in something like distribution. I completely disagree with that. I think if you think about one of our customers, yes, we don't know when they're going to need something, but we better know that they're going to come to us when they do need it. And so white space management becomes critical to our strategy, and that's new for MSC. So what we did in February was we had basically a supplier conference, not a typical supplier conference, which is like a trade show where you walk around and pick up swag, but actually more like what you're going to do today. We we analyzed together with suppliers white space. So to give you a reference, what's white space? If you're buying metalworking tools from me, but you're not buying PPE, there's that's white space, right? You need PPE to run your machines. Why aren't you buying it from me? So we were able to map that with our with our core suppliers and link to individual customers. And then every seller got a list of opportunities that they had to work with the suppliers. Then we rolled that up to a pipeline. Like you said, it's about $500 million of vetted opportunities that the supplier signed off that they were going to support us and our seller signed off that the opportunity was real. And now we're just working that pipeline. So we'll give you an update on it in October. But after the first quarter, we had closed about 10% of it. These are new muscles for MSC. But to me, that's how you – I know I've told you this before, but I have an expression. You either get wet when it rains or you make it rain, right? So we want to get wet when it rains. We want to cover the right customers and be there. But the real growth will come from bringing some of these techniques into our business so that we can actually drive the result.

And, Martina, I think the supplier council is a key enabler for that, so maybe if you wanted to give some good on that.

Yeah, so obviously suppliers are a critical stakeholder for us, and we have a very active supplier council that works with us. And together what we're talking about is what does industrial distribution look like in the future, right? How do we professionalize it together? What processes do we want to bring? It's things like how do we more effectively commercialize their innovation or how do we jointly work together to capture more share? And so they've been really, really instrumental, and they helped us plan that event.

Great. Let's take a second. Anybody in the audience would like to ask a question? Maybe not. It's too early for industrial distribution. i think the process uh we're going to go back to kind of the head count reductions and the cost reductions and i think the process uh has changed out some sellers and i think you've noticed a little bit of friction in some of your past couple of quarter calls around people seeing new faces and things like that are we done with that process yet is that going to continue where Or how would you characterize that?

So let me take a step back and kind of talk about what we were trying to achieve with our Salesforce optimization. So MSC has a very large presence in this feed in the street presence. And we intend to keep that. We are committed to a human direct Salesforce. You need to be standing beside a machine to help an operator optimize it. So we want to do that. But we had legacy structures, overlapping structures, overlapping compensation systems, redundancy. And in some cases, we were straight up covering the wrong customers, so customers that were no longer sort of core to our strategy. So over the course of 2025, we implemented a new territory planning model, very data-driven, again, help of AI, to kind of define for us what the structure should look like. And so we did that. That's not in our thousand heads. That was before that. But in three chunks, we took out about 100 sellers. And what we basically landed on is a model where we have a geographically designed organization where you have a seller and a service person covering a customer. Prior to that, it was possible that you could have three or four or five MSC people calling into the same MSC account, which just led to handoffs and a poor customer experience. And so now you have one unified compensation plan and this very clear team assignment. So when we made the final set of changes, we did expect to have attrition in our sales It feels very different to sell for MSC now than it did a year ago, and it will feel different a year from now. So we put telematics on our vehicles. We have a new sales management process. We're asking you to build and manage a pipeline. We're coaching to that. So it's a different environment. And we knew that some people would opt out. We didn't expect it to be as immediate, and that's what I shared in our Q2 call. we actually had 90 more people than we expected to leave the company. The overall attrition is less than our total anticipated attrition, but it happened in a more compressed time frame. So we felt the brunt of that in our second quarter, because if you're not physically there covering customers, then we lose sales. And so we were able to fill all that vacancy. The team is in place now. And so there was some face change that then we couldn't control. We had tried to minimize face change to customers. That's always important in a change like this. But having the 90 people leave kind of on an unplanned basis imposed some face change on us that we weren't ready for. So now we're building that back up. And I think the culture, we have a fantastic sales leader. Her name is Jida Nadi.

The culture is positive. um people are back to growth they're very excited people want to win so we're there now okay one last chance a good one in the back there's a mic that i think thanks if we go back sorry like 10 minutes to the tungsten pricing yeah um is that pretty quick for you guys to to pass through or or roll back and like what what happens if tungsten rolls over for you guys like Do you hang on to that price for a little bit or no?

So let me answer that in two ways. The suppliers obviously will have to work through their own supply chain, and we try to anchor our pricing to movements that tie to their published list prices, right? If you'd asked me about tariffs, I would have given you the same answer. Until they move their list price, we don't typically move, and so we would have to see their reaction time. And like I said, I think that is still in an inflationary mode. On our side, we run an average costing system. So it takes time for higher cost inventories to work through the P&L. And then consequently, any change, any lower cost inventory would take some time to work through the P&L. But primarily, it's the trigger of a supplier signaling to the market.

But if it did roll over, you would eventually pass that back again? Absolutely. What about the only cost you didn't mention in that short statement was transportation and freight? How are you handling that?

In terms of the current fuel cost?

Yeah, I assume there's inflation that you're seeing.

So right now we're very happy with our transportation performance because we, not that we foresaw this, but like I said, we've made so many changes to our supply chain. Again, whether it's, you know, better contracts, better placement, understanding where customers are, getting product closer to them, reducing air freight.

There were a whole bunch of initiatives in our network optimization, and that's offsetting for right now. and again we move with published freight pricing Alright, good Well with that, unless there's any one last question maybe we'll wrap it up seems like a good place to stop Thank you guys so much, very interesting I think you guys are the first to report October 22nd So we'll have that to look forward to Thank you Thanks Steve