MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply Fiscal 2026 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Ryan Mills, VP of Investor Relations and Business Development.

Thank you, and good morning, everyone. Welcome to our fiscal 2026 second quarter earnings call. Martina McIsaac, President and Chief Executive Officer, and Greg Clark, Interim 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 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 on our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Martina.

Thank you, Ryan, and good morning, everyone. On today's call, I will briefly cover our performance in the fiscal second quarter, then share my thoughts on the progress of our initiatives and the current state of underlying industrial demand. I will then turn the call over to Greg to provide greater detail on our quarterly performance and outlook for the fiscal third quarter. Starting with our performance in fiscal 2Q, ADS growth of 2.9% fell short of 4.5% growth at the midpoint of our outlook. While we did experience modest headwinds from weather and the partial government shutdown, the change in our service organization, which represents the last structural phase of our sales optimization work, created some noise in the quarter that's worth digging into. As we previously shared, at the end of 1Q and early 2Q, we completed the last round of structural changes and accompanying headcount reductions related to our sales optimization work. To recap, in fiscal year 25, we took actions designed to bring headcount levels more in line with an efficient territory design. Those actions primarily impacted our core sellers. Then in December, as we shared, we had a final round of changes which involved all of our remaining customer-facing roles. Prior to this change, for legacy reasons, It was possible that an MSC customer was serviced by two, three, four, or even five MSC representatives, creating overlap of multiple sales and service activities and resulting in multiple MSC reps supporting the same revenues. These inefficiencies caused our cost to serve to become inflated over time, particularly within national account customers where customer needs are the greatest. In the action taken at the beginning of our fiscal 2Q, this resource model was greatly simplified to create a geographically aligned service organization that matches our sales structure and is appropriately sized to customer potential. Total impacted customer facing headcount was approximately 130 associates. This consolidation was complex and could not be achieved without some level of relationship change in the field. We anticipated this and intentionally calendarized this change in fiscal 2Q when demand is seasonally low. Impact varied by customer, but was most felt in our national accounts and larger core customers who have the largest service teams. Those customers saw some level of face change as responsibilities were handed off through the consolidation of the team that supports them. The new structure now clarifies responsibilities and will result in greater ownership and accountability in our teams, driving focus across all of MSC's product offerings. It's important to note that these changes did not impact the momentum of our vending and implant programs as reflected in our op stats for the quarter. Under Jai Dhanati's leadership, we are accompanying these organizational enhancements with a strong sales management process and improved pipeline management. While these actions weighed on our results in the quarter, this change was necessary. We are enhancing MSC's ability to produce sustained levels of profitable growth for the future by taking measured steps to optimize our cost structure and improve our effectiveness in the field. We have greatly simplified and aligned our sales and service organizations, and though it takes time for a change like this to take hold, month to date in March, we are seeing the year-over-year trend in the sales to impacted customers continue to improve compared to levels in January and February as new relationships are developed. Following these changes, growth acceleration is our primary objective. Supporting my confidence is the momentum I see building across the organization from our supplier growth forum. By intentionally bringing more than 1,000 MSC associates and 400 suppliers together, we strengthened relationships, aligned priorities, set the foundation for meaningful long-term growth, and created a defining moment for our company. We facilitated over 3,000 pre-scheduled meetings to discuss white space overlap and joint growth opportunities that we identified using AI, and I couldn't be more pleased with the outcome. In just three days, these strategic conversations translated into nearly 10,000 opportunities, totaling close to $500 million in combined near-term and long-term potential, creating tremendous energy both internally and externally, as shown in the quote from a supplier on slide four. Strong execution, like that seen in the growth forum, can be seen across MSC. A good example is the year-over-year margin expansion that our team achieved in the quarter. Growth margin of 41.1% performed better than expected and improved 10 basis points year-over-year. This improvement is the result of price actions taken in fiscal 1Q and 2Q in response to inflation, as well as the continued professionalization of our pricing processes and margin management. The combined impact of these activities resulted in price contributing approximately 6.5% to our daily sales performance in the quarter. In addition to gross margin, I'm encouraged by how the team managed operating expenses more closely to sales during the quarter. Adjusted operating expenses improved 20 basis points compared to the prior year as a percentage of sales. This was primarily driven by the combined benefits of our headcount reductions and the productivity actions associated with our network optimization strategy, which is beginning to show through in our financial performance, as you can see on slide five. Our planning and procurement team, led by Cathy Mauck, has been focused on improving our planning processes. embracing AI and embedding it into our daily work to produce the improved inventory metrics shown on the slide. Our operations teams, led by Derek Collier, continue to optimize within the four walls of our distribution centers as seen by the favorable trends in their headcount and compensation expenses. Both cases are perfect examples of the results a data-driven focus on continuous improvement can have and I'm looking forward to the greater impact it will have on MSC as this mentality takes shape across the company. Progress made in both these areas of the P&L resulted in adjusted operating margin of 7.5%, a 40 basis point year-over-year improvement, and within the range of our outlook. Together, this allowed us to achieve 2Q adjusted incremental margins of 21% towards the upper end of our expectations. Switching to the macro environment, I would describe the current state as a tale of two realities. On one hand, signs of a potential industrial recovery are encouraging. As you can see on slide six, the IP readings across most of our top manufacturing end markets are beginning to form more favorable trends. Customer sentiment has been improving also, as seen by recent MBI readings, which have produced consecutive monthly readings above 50 for the first time in a multi-year period. However, on the other hand, geopolitical tensions, the war with Iran, and rising fuel costs present heightened uncertainty. While we haven't seen any meaningful disruption yet, we are in constant communication with customers and are taking proactive steps to secure supply. Looking at our performance against the IP index, our average daily sales has outperformed for the third consecutive quarter. That said, outgrowth remains below our stated goal of 400 basis points and has been primarily supported by price. I am encouraged, however, by our volume performance in February that began showing modest year-over-year improvement in core customer daily sales. The changes to our sales structure were the right ones. and were necessary to set MSC up to achieve higher levels of growth. We see encouraging signs of improvement, and this momentum is captured in our outlook for the fiscal third quarter as seen by the accelerated growth that is implied in April and May. We are making progress on our strategic initiatives. We are operating with greater focus and discipline, and we have a leadership team committed to building a stronger business. Looking ahead, this gives me confidence in MSC's ability to execute and create long-term value for shareholders. And with that, I will now turn the call over to Greg to cover our financial results in greater detail and expectations for the fiscal third quarter.