MSC Industrial Direct Co., Inc. (MSM) Earnings Call Transcript & Summary

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. We announced it yesterday. So 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 Koons, who was the CFO of TopBuild. -- will join us next Monday. So very, very excited about that. And if you look into Rob's history at TopBuild, really, really excellent and strategic management of his 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 TopBuild. 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 support continued growth in the dividend and buyback of share-based comp. But besides that, I'll wait and let Rob tell you when he's on board.

We 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 an 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? .

Yes. One of the things during the past year that we've done is we 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 General Counsel. Now we have a new CFO. We also have a new CIO, who has been assessing over the past quarters what the strategy is around our tech stack. So we are lucky, I think, that we have a lot of legacy technology. So we have a real opportunity to leap ahead there. And so we gave John Righilto, his name, our COO. We gave him this time to kind of do an assessment, and we'll be sharing more in the coming months of where we're going with that. But clearly, AI is an opportunity. And I do think we're 1 of the fortunate that can we don't have a lot of an anchor, we can leap forward into new possibilities. So automation in our warehouses 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 we -- another ad who's been here about 1.5 years on my team. We have an outstanding SVP of Operations, who comes to us from Amazon and Walmart, and he continues to build 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. Are there -- is it your dream to expand more in other geographies? .

Yes 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.

Okay. Do you think it makes more sense to focus more on metal working 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 1 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 size 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 sales force 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 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 metalworking partner, metalworking is usually the break on throughput through a plant. So when you're trusted to be the metalworking partner, doesn't take too much to be the paper towel partner, right, or the maintenance crop partner because we are trusted at the heart of a customer's technical operations. So do we lead with metalworking? Yes. 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 result. So I expect you'll see us talking more about the rest of the business.

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

We still have lots of room to go -- it's highly fragmented, yes.

So why do people pick you instead of somebody else because there are some other distributors out there? .

Yes. I mean, I'll give you my opinion. We've been doing this for over 8 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 1 brand. And so a customer 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. let's say, working capital. It's interesting. I get questions from investors about how distributors can manage that more tightly. But at the same time, your whole kind of goal in life is fulfillment, right? And In 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 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 is supporting us. I think there's also, obviously, on the DSO side, This is, again, a complex business, and it's the 20% of our customers' world, so it doesn't always get their attention. So I think again, bringing order there to the chaos, we should have an opportunity to improve.

Okay. There's been a lot of sort of discussion around 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 5 years? .

What we call recognizing 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 in assortment. And so we've been working with our supply community for about 1.5 years 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. 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 have 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 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 1 of our customers, yes, we don't know when they're going to need something, but we've 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 -- 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 analyze together with suppliers white space. So to give you a reference, what's white space, if you're buying metalworking tools for 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 for me. So we were able to map that with our core suppliers. and linked 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 sellers 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. This is -- 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 had to 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's Martin, I think the supplier console is a key enabler for that. So maybe if you wanted to give some us...

Yes. So obviously, suppliers are a critical stakeholder for us, and we have a very active flyer 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. . Right maybe not.

it's too early for industrial distribution.

I think that the process -- we're going to go back to kind of the head count reductions and the cost reductions. And I think the process 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? How would you characterize that?

Yes. So let me take a step back and kind of talk about what we were trying to achieve with our sales force optimization. So MSC has a very large presence in this feet in the street presence, and we intend to keep that. We are committed to a human direct sales force. 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 to kind of define for us what the structure should look like. And so we did that and we -- that's not in our 1,000 heads. That was before that. But we -- in 3 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 3 or 4 or 5 MSC people calling into the same MSC account, which just led to handoffs and a poor customer experience. And so now you have 1 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 force. 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 have -- 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 know -- 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 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 Ji Danai, -- the culture is positive. People are back to growth. They're very excited. People want to win. So we're there now.

Okay. One last chance. 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, -- is that pretty quick for you guys to pass through or roll back? And like 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 2 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? I would give -- if you'd ask me about 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 in lower cost inventory would take some time to work through the P&L. But primarily, it's the trigger of supplier signaling to the market.

But if it did roll over, you would eventually pass that back year.

Yes, 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 costs .

Yes, and there's inflation that you're in. .

Yes.. So right now, we're very happy with our transportation performance because -- not that we foresaw this, -- but like I said, we've made so many changes to our supply chain, again, whether it's better contracts better placement, understanding where customers are getting product closer to them, reducing airfreight, the whole bunch of initiatives in our network optimization. And that's offsetting for right now. And again, we move with published freight pricing.

All right. Good. Well, with that, unless there's any [Technical Difficulties - Please refer to the preliminary transcript that will be posted shortly.]