MSC Industrial Direct Co., Inc. Price & Performance (MSM)

Thank you, and good morning, everyone. Welcome to our second quarter fiscal twenty twenty five earnings call. Eric Gershwin, Chief Executive Officer Martina McKisic, President and Chief Operating Officer and Kristen Akas Grande, Chief Financial Officer are on the call with me today. During today's call, we will refer to various financial data 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 two of the earnings presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward looking statements within the meaning of the U. S. Securities. Laws. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks are noted in our earnings press release and our other SEC filings. Lastly, during this call, we may refer to certain adjusted financial results which are non GAAP measures. Please refer to the GAAP versus non GAAP reconciliations in our presentation on our Web site, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures.

I'll now turn the call over to Eric. 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, though 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 implant program count by 24% to three eighty seven 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 re energize 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 four, 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 customer's 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 five, 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 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 six, 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, Eric, 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 seven, we offer over 200,000 made in USA products that are in stock and ready to ship.

Of those, 40,000 are our own, branded products, including well known brands such as AccuPro and Hurdle. Not only are these products at lower price points than most industry brands, they are 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 Eric 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. The public sector, we completed this work prior to the start of the fiscal year, and were 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 two q 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 10,000,000 to $15,000,000 in annualized savings by fiscal year twenty six.

As a reminder, this will be achieved through three critical actions. Consolidating demand planning and procurement functions to streamline supply chain of our OEM and CPARC categories, upgrading our use of technology in our system wide inventory planning and allocation, 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 eight where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $892,000,000 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 continue 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 implant 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 and L customer mix, and a slight headwind from acquisitions.

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 $3.00 2,000,000 on both the reported and adjusted basis. On an adjusted basis, operating expenses were up approximately $11,000,000 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 two seventy basis point step up in adjusted operating expense as a percentage of sales for the quarter. Sequentially, adjusted operating expenses were down $2,000,000 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 three forty basis points year over year. We delivered GAAP earnings per share of $0.70 compared to $1.1 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 nine to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $498,000,000 representing roughly 1.2x 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 139%. Capital expenditures increased approximately $4,000,000 year over year to 30,000,000 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 and 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 60,000,000 shareholders in fiscal 2Q and $125,000,000 year to date. Moving to our expectations for the fiscal 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 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 8.79.3% 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 90,000,000 to 95,000,000 an increase of 10,000,000 to $15,000,000 year over year interest and other expense of roughly 45,000,000 capital expenditures including cloud computing arrangements of 100,000,000 to 110,000,000 a tax rate between 24.525%, and lastly, free cash flow generation of approximately % 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 and A. We will now begin the question and answer session. To ask a question, you may press star, then one. On your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question today comes from Ryan Cook with Wolfe Research. Please go ahead.

Good morning, and thank you for taking my questions. Morning, Maybe we can start on the top line guide. And just how you're thinking about the back half. So we have marched down about 70 basis points adjusting for Easter, which I think implies kind of flattish ADS in 3Q based on normal April seasonality. So the kind of down 0% to 2% guidance assumes some softening in the end markets at the low end? And is it reasonable for us to be thinking of 4Q as getting back to positive year over year growth? Based on normal seasonality?

Yeah, start with that. And Eric, feel free to jump 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 that are going our way with the share gain initiatives, We're not contemplating much improvement in the top line from price related to tariffs at this point. So I think we are leaving some room for some potential softening in the 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 is very clear. Maybe we could just touch on the moving pieces for margins in the back half next. Know you called out the 20 basis points 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 for second half sales. Would that still be the case? And I think that pencils out to about 8% operating margin this year.

Yeah, that's so roughly I would think about the big moving driver and OpEx as you sequence it through 3Q and 4Q to be the variable expense. I'll put maybe a little bit more more color on this There are some other things moving up and down to be clear, but if you're trying to net out a simple way to model OpEx, that would be it. One thing I'll clarify, Ryan, on how you cast out 4Q is that that 8% to 10% variable expense associated with your top line change would be excluding anything that you add on for tariff. At this point. That's how we're still thinking about the guide on OpEx Although we're not giving a specific number out into Q4, if that provides some helpful coloring on 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. [indiscernible] Good mentioned some price increases announced in late March. 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. [indiscernible] Eric, do wanna start broadly and I can talk some about some sizing on March? Martina, anyone want to jump in? Let me start by answering the question, Tommy first.

And then Martina, I'll turn it over to you a little bit on what we're doing. Your direct question, Tommy, I think was about the March increase first. So obviously, this entire thing is very fluid and we got a lot of new information yesterday. The increase that we took in late March was small and it was mainly covering items where we are the importer of record. And that's primarily in this case on product that's coming in from China. And if you're trying to size that, I'd say it's about a half a point of price benefit on the top line. And we don't expect to see much of that in the third quarter. But again, all of this is evolving The modeling is challenging right now. I think fluid is probably the best word to describe the situation. And I'll let Martina share some color on this, but we don't have a lot of firm information from our suppliers yet on cost or timing which is obviously a key variable in our modeling. We've been running a pretty robust process on scenario planning, monitoring what's happening, and then decisioning, of course, in response to what increases become clear.

We'll keep providing color right on the road in May, we can add more detail as it becomes available. But that's really color specific to how to think about cost and price related to tariffs. What makes this even more challenging is you have a have a lot of second order derivatives here that are harder to predict. And that's I think pretty obvious things, but like, is there a mix shift that results from this across products?

Is there any change in underlying demand levels? Those are some things that we really need to continue working through on scenario planning. And Martina, I think you're running a pretty tight playbook on how we're managing this. Maybe you can jump in and add some color.

So maybe just in light of the news from yesterday, let me recap our mix. So I think we've said some of this before, but but just to review, more than half of our product is sourced in The US. We have roughly 10% coming from China. We have another about the same amount coming from Europe. Low single digits from Canada and Mexico, and then beyond that it's low single digits from a number of countries. What's important, though, to understand is we're not the importer of record on all of that So about 75% of our sales are industry brands that are coming from other suppliers. And right now the way suppliers are handling this, it sort of falls into into a few buckets. So as Kristin said, we're the importer of record. That's very clear. We know what the tariff is. That's the price increase that we pushed through at the March. Then we have a group of suppliers who are importing finished goods, They, up until now, had a relatively clear line of sight and are communicating to us kind of in more of a surcharge format. So it's a little clearer for us to model.

But the bulk of our suppliers are looking at multiple overlapping tariffs that are impacting them. And so to simplify it, they are still doing the math and of course now we have new information as of yesterday. So while we are in negotiations with them, they haven't given us size or timing yet. But what they're implying is it will come in the form of a general price increase, a across their whole product line, not in a visible surcharge. In the meantime, we're working the playbook as Kristen said, and we're working with customers on how to understand their mix and how their mix could possibly be shifted to a made in America framework and how we can help them with productivity to offset 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. Tommy, good morning. I'll It's Eric. I'll take this one. So I think you're right. I would say I would characterize progress as on track. And you heard in the prepared remarks that we were pleased. We had a bunch of things that we wanted to get over the finish line in Q2. We did. So across the board, the overwhelming headline is on track.

I would not call out anything where we're behind. Look, last year, we had areas to call out behind. I think we're doing what we said we were going to do as of now, Tommy. Progress has generally been encouraging. And obviously, our performance is going to be influenced by the macro. We've talked about a lot of uncertainty now, but what we're focused on is what can we control. And that's do we deliver what we say we're going to deliver? And then how do the leading indicators look? And that's in terms of the web marketing. We gave you a sense of some of the KPIs we're tracking internally. They're on track. So as far as we're concerned, it was a solid quarter. Each one of those tracks, it's not like it's one and done. There's continue what we talked about with the web upgrades we got a good foundation in place that we're going to build upon with a product roadmap now. On the marketing front, we got started. We're seeing some nice traction and momentum. I mentioned in the prepared remarks, seeing new customer acquisition tick up, which is encouraging. There's a lot more to come there.

And then of course, Martina hit sales optimization, which is running ahead of plan in terms of executing on the actions. Now it's about translating those into results. So I think in general, what I would say is we're on track We expect core customer growth to improve. Of course, obviously, we'll be influenced by stuff that's outside of our control here, But in terms of how we execute and perform, we expect to see some improvement.

Thanks, Eric. 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.

Morning. So for my first question, Eric, 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 been trying to get ahead of yesterday's announcement [indiscernible] if that's being reflected in the preliminary March numbers.

And we have not. And our stuff, it's tricky because our customer spend with us is fragmented across so many SKUs. But we've seen to date and I would include March in that, no evidence of outsized pre buying to speak of.

Okay.

And then maybe quickly for my follow-up here.

Totally get that the visibility in the cycle is is 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. You know, 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. 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. Yeah, sure, Ken. I'll that one as well. So I'll give you look, the headline was Q2 remains soft for heavy manufacturing. And you could see that in IP metrics that we that we referenced. I think another headline though, is we saw continued improvement through the quarter. And that improvement continued into March. For the most part, across our heavy manufacturing end markets. So while soft, progressive improvement with pretty much all of them with the exception of automotive and heavy truck. Which still remain really soft. Now, obviously, trying to predict what's to come is nearly impossible right now. One would think that automotive has been really soft. One would think that yesterday's news and the recent events could weigh on that segment further. The flip side is aerospace, the outlook continues to be robust. But I would say the general tone would be soft, but in improving over the past few months. And just a lot of uncertainty around how recent events are going to shake out.

Very helpful. Thanks.

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

Hi. Good morning, guys. Thanks for taking the question. Just I was curious 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?

Yeah, in the second quarter, Steve, we saw a pretty healthy amount of mix within that price number. And some of that has to do with how customer sector mix for example, comes into the calculation. There's a few different ways that we look at the price measurement. If we look at it on sort of a lower level of detail, same customer, same item, We had a more favorable price number. It was washed out in the way we reported overall because of mix within customer types. So it's 2Q and then I think you asked about 3Q on price cost. So I'll remind everyone 3Q last year we were this is when we'll comp the issues we had with the web price. Realignment in the third quarter of last year. So, that creates a tailwind for us on a year over year basis of about 30 basis points. So, if you think about the midpoint guide of 40.9% on gross margin, that would imply flat to prior year.

And [indiscernible] break that down, you've got 30 basis points of tailwind on the price cost lapping from web price realignment. We're expecting some additional improvement from product productivity and very slight benefit on the tariffs. That's probably worth about 10 to 20 basis points. But we're also expecting continued mix headwinds. And then we have some headwind from acquisitions completed since the prior year that largely offset that to get you to about flat at the midpoint gross margin number. For 3Q.

Great. Okay. That's super helpful. Thank you.

And I apologize, this question might be a little bit too 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. 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 and get a little bit of gross margin benefit from this as it happens, or is that gonna be tougher this time because we're not in quite as big a demand environment?

Yes, Steve, I'll take that one. Look, you and everybody else are trying to figure it out, right?

It's fluid, as Kristen said. But in all seriousness, here's what I'd say. We have always said and continue to believe that in general, inflation, and particularly the early stages of an inflation cycle, is constructive and positive for a distributor and for us. And we continue to believe that. So particularly, as I said, early stages of an inflation cycle we do expect to be able to pass pricing along. As we did in the past. Martina referenced, we're going to lean hard on two things this go around in particular that are tools at our disposal even more so than they were in tariffs one point zero, if you will. One is our product offering, which is we have made some moves certainly reducing China exposure, And we've got a really strong Made in USA offering. And then two is our playbook in terms of productivity. To deliver for customers. So we think all of those things, even notwithstanding what happens in the demand environment, support our ability to get pricing through. We're going to have to. And those are supportive of it, will help with customers. That said, Steve, it's really difficult to go back to prior cycles here because this is a little bit of unchartered water in terms of number one, the fluidity and just how fast things are moving and changing.

Number two, the scope. Obviously, we're looking at, at least as of yesterday's announcement, far reaching beyond China. So there's a lot of unchartered water here. But if I pull it back to the headline, we would expect to get price through. We're going to lean on our playbook, our inflationary and tariff playbook here. And particularly early stages of an inflation cycle, we would expect to be price cost positive as we have been in other cycles.

Much appreciated. Thanks.

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

Hey, morning. Thanks for taking the questions. [indiscernible] maybe just to dig in a little bit more on 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. Yes, Chris, it's a good question. You heard us reference some of the indicators that we're looking at and then we kind of said some website KPIs, which obviously we're sensitive to how much we share a call like this for competitive reasons. But you could imagine you hit on two of them. We're looking at very carefully, conversion rate. And average order value. Conversion rate, in particular, out of average order value, has some other moving parts. But conversion rate does give us a good indication of how the site is doing. And we are seeing we referenced some improvements. And obviously, it's still early days here because most of the meaningful upgrades, the ones that you saw on the slides happened fairly late in Q2, but we are starting to see positive momentum in those indicators. Which would bode well. We are seeing sequential increase in website revenues as well. But I would call the revenue one a trailing indicator, whereas the conversion rate, the average order value, one or two other things that we look at are leading indicators. We are starting to see some movement there.

Got it. Got it. Good news there, I guess. And then I'm going to ask an unfair question, 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? Like just any way to size the export exposure here?

That would be so a tough one to size. Chris, I see where you're going. If things were to escalate, look, I think that's one of the unknowns. So the short answer is it's tough to size. We do know that I'm thinking back to prior cycles. If there were a trade war, would there be impact on demand? Would there be impact on production in The U. S? Yeah, there would. We've seen it in other cycles where there's been massive. I mean, I'm thinking of past cycles where it's less about tariffs, more about currency Does that impact production? It does. So there would be an impact. Directionally, and this is qualitative, not quantitative, but since prior cycles, there has been a shift back to made in USA, meaning putting production closer to end markets. To shrink lead times, which might buffer some of the impact because there'd be more stuff here that's going to this market as opposed to being exported. But in general, if export demand softens, we would feel it here. Understood. Really appreciate your thoughts I'm sorry, couldn't give I realize that's qualitative, not quantitative.

No. I knew it was an unfair question at the beginning. So thanks for your thoughts. And Chris, going back to your previous question on the web enhancements, just to give you a size, if you look in the e commerce DOP 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 Web site. Thanks, Ryan.

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

Thanks. May you live in interesting times, right? You ain't kidding, Dan, especially the timing of this call.

Well, good morning.

My question is on performance versus IP. It looks like it took another step back this quarter. And even relative to your the five heavy industries of IP, it seems like you're losing share measurably currently. And Kristen, in your comments, you said you're confident in your share gain efforts.

I'm wondering if you can outline sort of from a timeline perspective, which of the initiatives are going to start to chip away at that gap the soonest, maybe in the next quarter or two?

Yeah, Dave, maybe take it. And let me parse out sort of two things, which is if confidence in executing on what we said we were going to do and beginning to see early leading indicators that those initiatives are going to make a difference Dave, you're absolutely right. The one thing I would call out is and Martina mentioned this in her prepared remarks looking at the quarter on an average, part of what we are encouraged about is seeing sequential improvement through the quarter and into March. So for instance, if you look at performance the last two months, let's say February or March, you're going to get a much different story. It was sort of a tale of two quarters. December was heavily weighed down by holiday timing. The January was really lousy, and we think some of that may have been weather or whatever. But the back half of January into February, now into March, a bit of a different story. Look, I would say from the start here, we have underperformed, in part portfolio mix and in part our own doing. And where it's our own doing, it was around the core customer predominantly. And we've outlined four things, Dave, to get done.

Web pricing, e commerce, marketing, and sales optimization. And if I think about those four web pricing pretty much behind us and complete. E commerce, the heavy lifting portion of it, now complete. Just complete, but now complete Marketing now in market and in flight will build sales optimization winding down. So we feel like we are just at the beginning stages of seeing the fruits from the labor. So what we're encouraged by is from an execution standpoint, we're on track with what we said we're going to do. And the leading indicators seem encouraging. We now need to see that. And again, February and March may have been early signs. We've to see more of that. That's great, Erin. Thank you.

One point of clarification from what Eric said too. Like, if you go and you look at that year over year performance that Eric referenced like in January, February and into March, that 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 implant 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 you're saying long term impact from growth of implant and you said something else after was it implant vending?

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

Yep, gotcha. Yeah, so implant and vending, when we I'll start with gross margin and then go to operating margin. We tend to see on the gross margin line that you see more national accounts participating in those programs. The national accounts, as we've talked about, tend to have a lower gross margin than the average of the company. So from a gross margin perspective, there's some pressure there. And then the profile of those accounts so the longer that they're in place and the more they mature, we see that impact start to neutralize and eventually will benefit operating margin, especially relative to where we are today. But core customer is the one that we're really the most focused on. You have the opposite effect on core customer gross margin and that it's higher than the company average typically has a lower cost of support in a lot of cases. So, very accretive on the operating margin side. And that's really one of the areas that have been challenging our operating profit levels today, also the area where we've chronically kind of undergrown the most in the last eighteen to twenty four months.

So, as we think about how those two elements move together, we have necessarily guided like a desired mix of revenue across the two. But we would expect core as these initiatives come online to start growing at a fast rate than some of the underlying implant and vending businesses where we've continued to do fairly well. Despite the overall growth declines in the company.

And Dave, I'm just going to chime in with what more point on implant and vending. And particularly, impacts our outlook. What you're hearing 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 '20 and 'twenty seven why we're encouraged. So implant 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 implant 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, the program counts are way up. And yet, program revenues are up 1%. Obviously, 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 encouraged and excited about the outlook when we get beyond twenty five.

Thank you, and good luck.

Thanks, The last question today comes from Patrick Bowman with JPMorgan. Please go ahead.

Hi. Good morning.

Morning, Pat.

Good morning, Pat.

I just had a couple, I guess, cleanups here. First, on the price that you put through in March, I just wanted to get a sense of what tariff rates you're pricing to offset And I'm asking because you said it was China related. But before yesterday, I think there's been 20% tariffs on China and also like the Section two thirty two tariffs, which were 25% So I guess I'm wondering why it only provides a half a percent impact if China's 10% of COGS I'm sure it's like simple math and I'm missing something, but just wanted to clarify that. Then also kind of relatedly, what and then also kind of relatedly, what's the what's the type of products you're importing from China? Is it like a certain type of MRO? Is it metalworking skewed? Any color on that?

Yes, so on the first part of your question, Pat, you're right. That was sort of like the known tariffs at the time. But just to clarify, the 10% of COGS in China is is looking at total COGS with a country of origin from China, not necessarily where we are the importer of record. So are more things that we will likely be responding to as our suppliers provide information for us. As we just get our arms around the whole picture. There will likely be more to come and that kind of leads you into that bucket of what is yet to be quantified that I alluded to. Earlier in response to one of the one of the first questions. And then your can you clarify the second part of your question again? Oh, what products did you support? I'm trying Sure. Sure. Sure. I 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 type yeah. The types of products you're bringing in from there? Spicy products. Yeah. It's a it's a it's a it's a broad spec Pat, which is probably not a surprise just considering how much is coming out of China. Martina or Eric, you wanna jump in on anything? We're more overweighted too, but really is about every product line. There's some portion of that coming out of China.

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

Okay, that's helpful. And then my second question is on the e com sales down 4% in the quarter. I think you said in response to a question that website is half of that category. I don't know if you provided color on how website sales are tracking year over year within that or if you could, would be useful. And then maybe also in the operating stats deck there's like an other category and it was 10% of sales in the quarter was 13% last year, 14% in the fourth quarter in the first quarter I think. So that implies like it was down 25% year over year, 30% sequentially. What is happening in that other category in the op stats deck?

Yeah, so let me take the I can take the first part of your question on e commerce and answer the op stats question. Pat, so on the e commerce number, a couple things I would reference in there. I won't go specifically into like MSCdirect.com performance through the quarter necessarily, but particularly in the December, January, we saw some movement in e comm that was pretty depressed that would have impacted that number. And then because there is quite a lot of things that actually are considered e commerce, One thing to keep in mind is that when we see really strong growth in public sector, for example, or in businesses that are not as weighted to an e commerce transaction. That creates a movement in the numbers since we're reporting it as a percentage of total revenue. The public sector probably being the most notable one, there is not as much electronic ordering that happens in that or not as much e comm exposure within public sector. And then your question on other in the operating statistics, So, two things. There's a lot of industries that map in there where we're like have very low weighted exposure. I believe we say under two under 3% of the operating statistics.

But the other thing that can happen in there is as we clarify certain end markets that customers belong to, they may move they may move out of other if we can more clearly assign them somewhere. So, there's a lot of pass through in and out of that bucket. So I would not I would encourage you not to draw any strong conclusions from the other being down that much.

Okay, so don't look at like the Got it.

Understood. Okay. Thanks a lot. Best of luck. Appreciate the time.

Thanks, Pat.

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 today. As Kristen mentioned earlier, we'll be at we'll be on the road in May at the Wolfe Research Conference and the KeyBanc Capital Markets Conference. And we'll host our fiscal third quarter twenty twenty five earnings call on Tuesday, July 1. Thank you.

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