A conference call is held to discuss Msc Industrial Supply's fiscal third quarter 2025 earnings. The call includes instructions for participants, a mention of the presence of key executives, and guidance on accessing financial data and presentation materials online. It also highlights the inclusion of forward-looking statements and non-GAAP financial measures, with references to SEC filings for risk information.

The fiscal third quarter saw a slight decline in average daily sales year-over-year but showed improvement sequentially. Gross margins met high-end expectations despite tariff-driven inflation, leading to positive price-cost dynamics. Strategic focus areas included re-energizing the core customer, maintaining momentum in high-touch solutions, and optimizing cost to serve, reflecting progress in newly launched growth initiatives and sustained high-touch solutions momentum.

The company prioritized re-energizing its core customer base, observing year-over-year declines in daily sales that aligned with broader company trends. Significant efforts were made to enhance the website, improving direct traffic and site conversion rates. Additionally, the company saw momentum in high touch solutions, with increases in implant program count and vending machines, along with progress in expanding its OEM product line. Leadership was bolstered with the addition of a new senior vice president and chief information officer, focusing on improving operational efficiency and customer experience through technology. Despite subdued conditions in the manufacturing end markets, the company maintained confidence in its opportunities and plan, noting particular growth in the aerospace sector.

The company experienced growth in its solutions footprint and saw positive results from cellular effectiveness and coverage initiatives. Core field sales showed improvement, with an increase in customer location touches and a positive trend in sales rep performance. Marketing campaigns, including digital and personal outreach, have started positively, with improved return on digital product marketing spend. Tariff mitigation plans are in place, aiming to minimize impact through close collaboration with suppliers and customers, while increasing the number of cost savings assessments for customers. Network optimization initiatives continue, focusing on inventory proximity to customers and aiming for annualized savings by fiscal year 26.

In the fiscal third quarter, sales reached $971 million, declining slightly year-over-year due to lower volumes, offset by pricing benefits and acquisitions. Average daily sales saw a 7% improvement quarter-over-quarter, driven by higher volumes and pricing benefits. Core and national account customers showed improved year-over-year and two-year sales performance. Public sector sales continued to grow, albeit with a lumpy nature. Sequentially, core and other customers led growth, followed by the public sector and national accounts. The installed bases of bending and NPLs solutions expanded, contributing significantly to total company net sales.

The company reported improved gross margins, increased operating expenses, and a decline in adjusted operating margin compared to the prior year. It maintained a healthy balance sheet, returned significant funds to shareholders, and expects fiscal fourth-quarter sales to be flat, with an adjusted operating margin between 8.5% and 9%. Capital expenditures are projected to be at the lower end of the expected range, and free cash flow conversion is now estimated at approximately 120% for the full year.

The discussion centers around the price outlook for the fourth quarter and the following year, addressing the impacts of recent tariff exposures and inflationary pressures from suppliers. There's a focus on the company's response to these challenges, including surgical price increases and the anticipation of further adjustments depending on market conditions. The company highlights its agility in managing price adjustments and maintaining communication with both customers and suppliers.

The discussion outlines a 50 BPS year-over-year increase at the midpoint of guidance, with prices expected to remain flat or sequentially increase by 1% in July and August. This aligns with historical Q3 to Q4 averages. Caution is advised regarding price realization in Q4 due to contract holding periods. Volume guidance is optimistic following Q3 performance, noting 'green shoots' but remains cautious due to broader market uncertainties.

The 4Q margin outlook shows better-than-usual seasonality with margins expected to be flat or decrease by 50 basis points QoQ, driven by improved gross margin performance. Key factors include strong public sector performance, sequential improvement in core operations, increased price contribution, and the onset of cost increases in Q4. Productivity improvements are also anticipated to contribute to the gross margin line.

The company is experiencing fluid and ongoing conversations with suppliers regarding price increases, influenced by global inflationary pressures and sourcing challenges, particularly from countries affected by tariffs, such as China. Initially facing more surgical increases targeting specific products, the company now observes broader-based inflation impacting a wider range of products due to suppliers' global manufacturing and sourcing strategies.

The conversation focuses on providing an update for fiscal year 26, discussing the comparison of margins with fiscal year 25, particularly highlighting the stabilization in revenue lines and cautioning against giving detailed guidance due to uncertainty.

The company observes encouraging signs in customer engagement and revenue stabilization, attributing improvements to ongoing initiatives. Gross margin remains stable with potential for enhancement, contingent on market conditions and customer mix. Operational expenses, after significant increases, are expected to moderate, aided by productivity initiatives aiming to level out the rate of increase. The outlook for fiscal 26 includes a more typical incremental margin picture.

The discussion focuses on understanding the factors affecting recent changes in average daily sales, including the impact of macroeconomic conditions, pricing strategies, and internal initiatives. It's noted that a late March price increase contributed to the sales trend, but significant price fluctuations haven't been a major variable recently. Instead, the improvement in sales is attributed to a combination of macroeconomic influences and the progress of company initiatives, with Easter timing also affecting April sales.

The discussion highlights the company's progress in improving core accounts, emphasizing the effectiveness of web pricing realignment and website upgrades. Marketing efforts, including digital programs and personal outreach, are noted to be in full swing, aiming to remove price as a competitive headwind and target growth consistent with company averages, particularly focusing on the small to medium-sized customer base.

The discussion focuses on the outperformance of a specific product set in the USA market, attributing it to cost-out programs rather than price increases. There's also a detailed inquiry into maintaining stable or growing margins relative to volume growth and price opportunities, with plans to provide further financial details in the next quarter.

The discussion revolves around website metrics, noting an increase in direct traffic and site conversion improvements. Questions are raised regarding the effectiveness of marketing strategies in sustaining these enhancements, particularly focusing on whether the improvements are more pronounced with existing customers or new ones.

The portfolio of activities includes a mix of digital, personal, and print outreach methods, showing consistent progress in engaging both new and existing customers. Despite improvements in personalization, site navigation, and efficiency, there's recognition of the need for ongoing enhancement based on customer feedback and industry benchmarks.

The team discusses the hiring of a new member, John, enhancing their strength. They revisit the Digital Core initiative, paused due to website issues, now reshaped and accelerating to upgrade core systems for productivity gains. The speaker also notes consistent sales trends throughout June without any significant fluctuations.

The discussion focuses on the confidence in achieving a 20% incremental target over the cycle, attributing it to stable gross margins and the potential for leveraging fixed cost investments as revenues recover. Additional emphasis is placed on productivity enhancements and cultural improvements within the company. Further, questions are addressed regarding the contribution of acquisitions in the third quarter and clarifications on other expense dynamics.

A discussion unfolds regarding the potential for efficiency gains within the sales force, specifically exploring actions taken to enhance focus on the top 20 customers, aiming to optimize performance and market impact.

The discussion focuses on a sales excellence and effectiveness program, particularly addressing coverage strategy adjustments to optimize customer potential. Key topics include territory redesign, ensuring the best potential customers are covered by well-trained sales personnel, and the development of sales pipelines. Additionally, the conversation delves into the dynamics of price-cost spreads for the upcoming fiscal quarter, noting the narrow margin and the impact of recent price increases on sales margins.