MSM - NYSE

Good morning, and welcome to the MSC Industrial Supply Fiscal 2025 First Quarter Conference Call. All participants will be in a listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first quarter fiscal 2025 earnings call. Erik Gershwind, Chief Executive Officer; Martina McIsaac, President and Chief Operating Officer; and Kristen Actis-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 US security 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 is noted in our earnings press release and 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 reconciliation in our presentation or on our website, which contains the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Erik.

Thank you, Ryan, and good morning, everyone. Thanks for joining us today. Let me start by wishing all of you a happy and healthy New Year. On today's call, I will reflect on our recent results and the progress of our mission-critical program. I will then cover the current operating environment and provide some longer-term perspective before turning over the call to Martina and then Kristen. Before getting into the details, I will start with a brief state of the company. We delivered a solid first quarter that exceeded our expectations, driven by higher-than-anticipated revenues. While it was a good start to the year, we are mindful that the near-term environment remains soft, and our company remains in a transition period during fiscal 2025. Looking beyond the near term, we remain committed to restoring growth and to achieving the objectives for market share capture and margin expansion that we outlined at the start of this mission-critical chapter. The combination of an improving net outlook in calendar 2025, longer-term secular tailwinds, and our slate of growth and productivity initiatives all make for a compelling opportunity for us to deliver on our mission-critical targets. Let me now turn to the specifics of the quarter. I will begin on slide four with an overview of our results and an update on our mission-critical progress. Average daily sales declined 2.7% year over year. This came in ahead of our guidance range of a decrease of 4.5% to 5.5%. Growth in the public sector and sustained momentum in solutions were the primary drivers of our top-line performance. Additionally, it is worth noting that we had a strong November with a return to growth. While certainly a positive sign, we are not viewing November alone as an inflection point, as the month benefited from some large orders and the timing of a late Thanksgiving, which shifted a greater amount of shutdown activity into the December holidays. Gross margin of 40.7% was in line with our expectations. Thanks to solid expense controls, we were able to absorb our higher-than-expected revenues without much incremental expense. This resulted in an adjusted operating margin of 8%, also above our expectations. Free cash flow conversion of 179% was also particularly strong during the quarter. And while these results are encouraging, we still have work ahead of us in restoring performance to meet the standards set by our mission statement. We have a slate of opportunities under our mission-critical program that are well within our control, and I am encouraged by the trajectory of improving execution. As a reminder, our mission-critical program is comprised of three pillars. First, we continue to maintain momentum in our high-touch solutions offering. On a year-over-year basis, we improved our implant program count by 29% to 369 programs and total installed vending machines by 10% to more than 27,000 machines. Second, while core customer growth rates remain suppressed, progress on reenergizing the core customer continues. This begins with enhancements to our e-commerce platform and direct.com. During the fiscal quarter, we made further progress on improving overall site performance, the shopping experience, navigation, and product discovery. We provided customers with digital versions of MSC's marketing suite of materials, including our well-known big book on our website. We improved search relevance and streamlined the number of clicks and navigation. These improvements are beginning to make their way into important leading website indicators along with customer net promoter scores. Further improvements will continue to roll out through the balance of our fiscal year, and we plan to launch enhanced marketing efforts during the back half of our fiscal second quarter. Reenergizing our core customer will also be aided through the sales force optimization efforts that Martina outlined on the last call, and she will provide a progress update on that in just a bit. Another new element to our growth formula as we introduced this mission-critical chapter is accelerating our OEM category through cross-selling with the broader MSC portfolio. This is made up of primarily fasteners but also includes other product lines such as clamps, fittings, and more that end up in our customer's finished product. We have seen significant acceleration in cross-selling activities and hence our opportunity funnel. And that funnel is beginning to translate into results, as the OEM category showed healthy growth year over year in our fiscal first quarter, and we expect momentum to continue this quarter. Third, we are making progress in optimizing our cost to serve. This includes the subset of actions from our network optimization initiative and our enhancements to drive productivity in the field that we shared last quarter. Martina will also provide more color on these shortly. Switching to the macro environment, as you can see on slide five, the IP readings across most of our top manufacturing end markets continue to contract and weigh on our performance against the overall IP index. Automotive and heavy truck, primary metals, fabricated metals, and machinery and equipment continue to be soft. Aerospace, while a net positive for us in the quarter, experienced a step down related to strikes that have since been resolved. Additionally, manufacturing and metalworking-related softness continues to be reflected in MBI readings, which have now been contracting for 22 consecutive months. These soft demand levels evidenced themselves in our fiscal December, which ended on January 4th, with average daily sales declining approximately 8%. It is worth noting that the first three weeks of the month looked consistent with our fiscal first quarter performance. December was heavily weighed down by the last two weeks, as the timing of the Christmas and New Year's holidays, along with the timing of our fiscal calendar, proved to be a significant headwind. The last week of our fiscal month was particularly weak on a year-over-year basis. This year, with New Year's falling on a Wednesday, the final week performed like a holiday week, whereas last year, with New Year's falling on a Monday, the comparison was against a more typical business week. Kristen will provide more detail on what this implies for our second-quarter outlook. While we remain in a transition period during fiscal 2025, we are fully committed to restoring our company's growth trajectory as we look past the near term. Let me now provide more specifics behind the factors that give us confidence in our ability to do so. First, future prospects for North American manufacturing are promising, driven by increased focus on reshoring and incremental manufacturing investment into the US. Second, we are well-positioned to help our customers navigate any pressures that arise from tariff policy. We see benefits from our lower non-domestic exposure. For reference, approximately 10% of our cost of goods sold are sourced from China, and we have low single-digit exposure in Mexico and Canada. Additionally, we have a strong MSC-specific made-in-USA product offering that spans well over 100,000 SKUs across a number of categories. As an example, our AccuPro brand of high-performance cutting tools is sourced domestically and represents a great option for customers looking for performance tooling while being shielded from tariff impacts. Beyond our product offering, MSC's technical expertise and ability to drive operational savings on the plant floor are powerful tools helping customers offset cost pressures. We saved our customers over $500 million in our fiscal 2024 and plan to build on that success this fiscal year. Third, we see runway to continue growing where we have already been successful. This includes our inventory management and implant solutions offering and targeted high-growth end markets such as aerospace, medical, Department of Defense branches of the federal government, and more. Fourth, the MSC growth and productivity initiatives that we outlined for you on these calls are not yet realized in current results and are poised to improve our performance as we move through the fiscal year and into fiscal 2026. And with that, I will turn things over to Martina.

Thank you, Erik, and good morning, everyone. As Erik mentioned, we outlined a series of initiatives for this fiscal year during our fourth-quarter earnings call. These initiatives were aimed at driving productivity in our distribution network and selling operations, and I am pleased with the progress made during the first quarter. Starting with selling operations, we have launched a series of initiatives designed to maximize the coverage and effectiveness of our sales team. A major element of this work focuses on sharpening the deployment of our highly trained field team through better territory design to maximize potential. We launched the first changes prior to the start of the fiscal year with a redesign of our public sector coverage, the effects of which are starting to be seen in the first-quarter results in that market. For national accounts, we completed this work at quarter-end. For our core customers, our territory design is complete, and we expect to complete implementation by the third quarter. Early findings support our expected results. For example, we estimate that in the first seven weeks of the program, we now have expanded coverage for 20,000 active buying customers or locations. In December, we saw an increase of over 2,500 customer touches for those newly engaged accounts. Additionally, where routes have been optimized, we are making better use of our sellers' time by freeing up a minimum of two selling hours per week. All of this work is further supported by changes in our training and onboarding processes for all roles designed to maximize hands-on learning and accelerate independence for new sellers. Moving on to network optimization, we remain on track with the expected savings of $10 to $15 million to grow through the fiscal year and achieve full run rate in fiscal 2026. As a reminder, these efforts are centered on the following three initiatives. First, is to streamline the supply chain of our OEM fastener and C-part categories by consolidating demand planning and procurement. Second, we are upgrading our use of technology and our system-wide inventory planning and allocation functions to ensure that we have the right inventory as close to the customer as possible. And lastly, optimizing our management of inbound and outbound freight to reduce split shipments and lower reliance on higher-cost airfreight. All initiatives are on track to deliver planned savings. As it pertains to our OEM and C-part consolidation, having this work in progress puts us in an excellent position to navigate the potential impact of tariffs. As Erik said, roughly 10% of COGS are sourced from China, and this team is already working to consolidate volume for procurement synergies. We began taking proactive measures to ensure that we are well protected. On the larger tariff question, we have taken a series of actions, including stocking inventory of our highest-turn products that would be impacted by tariffs and developing marketing campaigns that are made in the USA product. We have a cross-functional SWAT team in place to oversee these efforts and plan to treat any tariff-related costs as a supplier price increase. On the freight and planning initiatives, we continue to make progress adjusting and balancing inventory. The work we have done on statistical planning is $73 million, as I was especially pleased with the sequential, especially given that Q1 also reflects actions associated with year-end buys and early tariff actions. Lastly, I would like to highlight that we continue to strengthen our leadership team. We are happy to welcome Derek Collier as our new VP of Supply Chain Operations. Derek brings over 20 years of experience in distribution operations, including 13 years at Walmart and Amazon. I am confident that Derek will play a successful part in driving efficiency throughout our network. And with that, I will turn the call over to Kristen to cover our financial results in more detail.

Thank you, Martina, and good morning, everyone. Please turn to slide six where you can see key metrics for the fiscal first quarter on both the reported and adjusted basis. Fiscal first-quarter sales of $928 million declined 2.7% year over year and exceeded our prior expectations of a 4.5% to 5.5% decline. Lower volumes were the primary driver of the year-over-year decline, which was partially offset by benefits from acquisitions. Sequentially, average daily sales declined 90 basis points and underperformed the historical quarter-over-quarter average as conditions moderated across our primary manufacturing end markets. By customer type, we are pleased by the return to growth in the public sector, with a 9.8% improvement year over year. National accounts declined 1.6% year over year, while core and other customers declined 5.3%. Sequentially, average daily sales were roughly flat for core and other customers, while national accounts and public sector sales declined a little less than 2%. From a solution standpoint, as Erik mentioned, we continue to expand our footprint in the first quarter. However, the average daily sales performance of these solutions reflected the current demand environment, as the growth of our installed base was largely offset by lower levels of activity. In vending, first-quarter average daily sales were up 5% year over year and represented 18% of total company net sales. Sales through our implant programs grew 5% year over year and represented approximately 17% of total company net sales. As a reminder, this information can be found in the upper section of our earnings presentation. Gross margin of 40.7% was in line with our expectations. This was driven by higher-priced inventories working through the P&L and a headwind from acquisitions of approximately 20 basis points. Operating expenses in the first quarter were approximately $304 million on both the reported and adjusted basis. On an adjusted basis, operating expenses were up approximately $14 million year over year, primarily driven by the combination of personnel-related costs, investments, and carryover operating expenses from acquisitions, which were partially offset by productivity. Combined with lower sales year over year, this resulted in a 240 basis points step up in adjusted operating expense as a percentage of sales for the quarter. Sequentially, adjusted operating expenses were up $7 million as expected. This is primarily related to the reset of variable incentive compensation programs entering the fiscal year, other personnel-related costs, and modestly higher DNA. Reported operating margin for the quarter was 7.8% compared to 10.6% in the prior year. On an adjusted basis, operating margin of 8% declined 90 basis points year over year. We delivered GAAP EPS of $0.83 compared to $1.22 in the prior year quarter. On an adjusted basis, EPS was $0.86 compared to $1.25 in the prior year. Now let's turn to slide seven to review our balance sheet and cash flow. Our balance sheet remains strong with net debt of $163 million, representing roughly 1.1 times EBITDA. Working capital continued to be a favorable source of cash during the quarter. This resulted in another strong quarter of operating cash flow to the tune of $102 million. Capital expenditures of $20 million increased approximately $2 million year over year, resulting in free cash flow of $82 million. This represented approximately 179% of net income. Turning to capital allocation on slide eight, our priorities remain unchanged, 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&A strategy and allocate capital to shareholders. The repurchase of roughly 150,000 shares combined with the dividend resulted in returns to shareholders in excess of $60 million during the quarter. Moving to our expectations for the fiscal second quarter, the timing of holidays and heightened customer shutdown activity resulted in an average daily sales decline of approximately 8% in the month of December. Given the slow start to the quarter and limited visibility on trends in the new calendar year, we are taking a wider approach to our quarterly sales outlook and expect Q2 average daily sales to decline 3% to 5% year over year. This range assumes January and February average daily sales perform similar to the first quarter at the low end of the range and to November levels at the high end of the range. Additionally, the midpoint of our outlook implies that January and February ADS are down approximately 2% year over year. We expect our adjusted operating margin for the second quarter to be largely influenced by our sales performance and ultimately fall in the range of 6.5% to 7.5% under the following assumptions: gross margins of 40.8%, plus or minus 20 basis points, and within operating expenses, productivity to partially offset sequential increases in personnel-related expenses and depreciation and amortization. Turning to slide ten, our expectations on certain line items for the full year remain unchanged. As a reminder, this includes depreciation and amortization expense of $90 to $95 million, or an increase of $10 million to $15 million year over year, interest and other expense of roughly $45 million, capital expenditures including cloud computing arranged of $100 to $110 million, a tax rate between 24.5% to 25%, and lastly, free cash flow generation of approximately 100% 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 key considerations. And with that, we will open the line for Q&A. We will now begin. To ask a question, you may press star then one. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Stephen Volkmann with Jefferies. Please go ahead.

Great. Thank you for taking my question. Kristen, I am sorry. I just missed your commentary around gross margin plus or minus 20 bps. Can you just say that again?

Yes, Steve, were you referring to the Q2 commentary on gross margin?

In the prepared remarks?

Yeah. So for the second quarter, and this really stands for the year, we had said previously we roughly plus or minus 20 basis points. For the second quarter specifically, I would expect it to be fairly flat to Q1. There is potential for improvement there. In the second half, there is some potential to the top end of that range. What we would be looking for in order for that to happen are a few things. I would say first, neutral price cost, potentially even slightly positive. The second item we are looking at carefully is productivity improvements sequentially through the year. Martina covered some detail on what those programs were. Some of that hits back to the core, some of it also does hit the cost of goods sold. Wild cards against that, though, that we do not have great line of sight to are the mix impact, which, as you know, has been a headwind lately. There is the potential for that to improve depending on the inflection in core. And then the other thing that is hard to predict is the top line. The stronger the top line, the easier it is to expand gross margins. And really beyond the second quarter, if we had better insight on those last two, we would be giving more specific guidance. But as Martina mentioned on the productivity initiatives, we are really focusing the team internally on what we can control within that, which is the price cost management, delivering the productivity, executing on the initiatives that drive the core growth inflection. And maybe the last item to point out, Steve, to put a finer point on the end of the gross margin discussion for forward look, none of this includes the impact of tariffs. Which, if that happens, and of course, we do not know size or timing, we would anticipate moving on price similar to the start of an inflation, so all of that comment excludes tariff impact.

Right. Understood. So just pulling on that thread a little bit. Presumably, if we get an inflation-type situation, that should actually be a gross margin tailwind for you normally. Is there any reason that would be different in this situation?

No. We would not see any reason that would be different.

Okay. Thanks. I will pass it on.

The next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Hey, Ken. Good morning, Chad.

Morning. You know, maybe for my first question, first thing, sorry if I missed this. But can you just remind us how much in savings from the productivity initiatives you are expecting on SG&A dollars in Q2? And then, you know, just to follow up with that, maybe just some color on how you think about OPEX as we move through the back half of the year because, you know, the easy comps start to show up in your fiscal third quarter, but, you know, I am just curious if there are some items that we should be aware of on how SG&A levers if that revenue does start to stabilize in the second half.

Sure. Yeah. So, Ken, specific to Q2, I am expecting productivity to improve slightly. We delivered about $5 million of productivity in the first quarter in the OpEx line. So I think we will do a little bit better than that in Q2. Beyond that, what we have said for the year is a range of productivity between $15 and $25 million in operating expense. The initiatives that Martina covered, as we talked about last quarter, on an annualized basis, those initiatives specifically are worth $10 to $15 million. But they are going to ramp inside the second half. So I am not sure if your question was specific to some of that newer stuff, but on a full-year basis, if you think about where we are expecting OpEx to land, we are anticipating $15 to $25 million of productivity.

Right. But I guess the question is, are we really kind of driving towards what you think the core incremental margins could be, you know, because, again, you are down, I think, ADS is down, like, high single digits. The comp is starting in the third quarter. And I know the decrementals do not really make sense this quarter and last quarter, but is it fair to assume that you are not necessarily expecting a reverse in those in that operating leverage, you know, decremental to incremental here in the second half?

Yeah. I mean, it is really noisy to your point. You look at decrementals and incrementals in the year. Because a lot of that is because of actually the OPEX level. So I think to answer differently, Ken, I think how you originally asked it. If you are trying to think about modeling OpEx in the second half, I would still use kind of the general rule of thumb of taking 8% to 10% of variable cost on top of whatever revenue number you are modeling for the second half. And then we will get more specific as the quarters roll forward here. But I think, you know, if we have got the 40.8% gross margin plus or minus 20 basis points and then you use that rule of thumb of second half OpEx being tied to really just where you are putting your top line based on that variable OpEx rate, that should get you close to what we do have line of sight to at this point. And, of course, as we talked about, the revenue is really the bigger unknown for us. We are watching carefully. And then I would say that that 8% to 10% variable OpEx is whatever your growth assumption is in the second half relative to the first half. So first half versus second half is that 8% to 10% variable OpEx that we are talking about.

Got it. That is helpful. And then just my last question here. You know, understand that visibility is clear as mud right now, but maybe just what you are seeing from your larger customer in the OE Automotive and OE Aerospace side. I know that is about 20% of your sales today. Just any color on the pull rates relative to last quarter, and is there any commentary on their visibility?

Yeah. Ken, it is Erik. So good morning. Look, I would say in the prepared remarks, you know, the overarching theme is the conditions in our world of metalworking and heavy manufacturing are still soft. So, you know, most of the end markets, automotive certainly has been soft, but I would say that that word can carry through all end markets, you know, probably with the exception of aerospace, which has been strong. It remained positive for us. Definitely a little choppier over the last quarter because of the residual effects of the strike, which have since sorted themselves out. So we would expect aerospace, the outlook to be good. That notwithstanding, generally soft conditions. I mean, two data points I will give you. That just put a finer point on it. So if you look, we talked about our vending growth and our implant growth. And we feel really good about those two programs. But if you parse them out and look at an average daily sales per machine, if you normalize for signing, vending these are our best customers. Some of our largest customers. You know, vending average daily sales per machine down mid-single digits. In plant, where our penetration and our market share position is perhaps the best, average daily sales per program down in the low double digits. So that will give you a feel for conditions and, you know, customers clamping down on spend. I will say though that there is certainly post-election. There is some more optimism weaving into the discussions and the outlooks that we are having, what we are hearing about from customers. So, you know, look, we are cautious. As you said, visibility is clear as mud, especially for us. This call is always a tricky one. We are coming off of this was a really wonky holiday period, which I am sure we will touch on at some point during the Q&A. And we barely have any window into January. So we are cautious. But I will say there is some more optimism weaving into our conversations with about 2025 outlooks.

Really helpful. Thanks, Erik.

The next question comes from Tommy Moll with Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Morning, Tommy.

Hey, Tommy. Kristen, one last maybe last item on OpEx, just to make sure everyone's on the same page. Can you just bridge us from the $304 million that you just reported sequentially? In the past, you have given us some helpful bridging items. Just the pluses and minuses on the fixed items that will change and then the I assume the 8% to 10% variable assumption holds for Q1 to Q2 as well. But anything you can do to provide granularity there is always helpful.

Yeah. So, Tommy, Q2 OpEx sequentially from Q1, we are expecting to be roughly flat. Within that, there are a couple of moving pieces. So we do have another step upcoming in personnel-related expenses, which is typical for us at this time of year. Another small increase coming in DNA. And then we do expect that to be offset by two things. One is a little bit more productivity, and then the second would be the decrease on the top line if you apply that 8% to 10% of variable OpEx on that. That is the puts and takes to get you back to basically flat to Q1.

And then just going forward from there, Kristen, other than the 8% to 10% variable, which will be a function of revenue in the second half, are there any other personnel, DNA, whatever other items you would call out?

Yeah. So DNA does continue to increase sequentially. I think without going into more of a specific number for the third quarter and the fourth quarter, Tommy, maybe what you are thinking of is some color we gave on the full year around sort of certain categories of expenses that we know on a full-year basis are going to go up. Which is one of the big challenges we are facing in 2025 that really weighed on the December growth rate. So in essence, December and look at January, February, what you are getting for Q2, if you look past, is not much different from Q1.

Thank you, Erik. I will turn it back.

The next question comes from David Manthey with Baird.

Good morning, and happy New Year, everyone. I think after you do this, first question, I guess I am going to go back to the OpEx laundry list here. The one thing that had not been mentioned was the savings from the Columbus distribution center. Did that $5 million to $7 million accrue to the first quarter as expected, or are the benefits greater in the second quarter, or is that already incorporated in the run rate? And then refining question here on the compensation. I think you said merit increased $7 million. I think that is the variable compensation component. But then, Kristen, you mentioned higher personnel expenses, which sounded different, whether that is wages or health care or whatnot. Could you talk about those things? And then on that personnel expense, does that also step up? I think you get a full quarter of the merit, so that is going to be a little bit higher sequentially. What about the other personnel costs? Thanks.

Yeah. Sure, Dave. So first part of your question on Columbus, yes, still tracking comfortably in that $5 to $7 million range. That was about half of the productivity that we saw in Q1, and that is really at run rate by quarter now. Most of that work was kind of wrapped up at the end of our fiscal Q4. So we see a pretty equal benefit through each quarter of fiscal 2025. And then the second part of your question on the OpEx, you touched on the personnel-related expense. So we are wrapping up a few things in that bucket. And I think the $7 million, I am so we quoted a $7 million sequential increase Q4 to Q1 OpEx, which I think is what you were referring to within that. The largest kind of candlestick in the bridge is a personnel-related expense increase of $9 million sequentially. And to your point, that includes a few things. So it does include the merit increase you mentioned, which we have one month of incrementally in our first quarter. We also had a slight step up from benefits inflation, and then the biggest piece, though, within that $9 million is the reset of the variable compensation program. That is a little bit more than half of it. And then I think I heard you comment on merit increase in Q2. Yes. You are correct. We would see another step up sequentially in the second quarter of about $4 million.

Perfect. Thank you. Then with all of the administration change and the saber-rattling, one of the key themes we have heard a lot about is government efficiency. And it seems like if the government is looking at streamlining or consolidating purchasing, that might be an opportunity for MSC. I know this is kind of blue sky, but maybe you could comment on how you see that opportunity, if at all.

Sure. Thanks, Dave. Good morning. This is Martina. So when you think about our public sector business, about two-thirds of it is federal today. Now the majority of that is weighted towards military and defense. So we do not see a lot of change or we do not anticipate that the administration would drive a lot of change there. We do see that there, based on our own public sector restructuring, what we have done is specialized sellers now at all levels of the government and increased our level of investment there as part of our sales effectiveness program. So I think we are poised to take advantage of any change that might occur. So we do not really see any downside risk, and as you say, we see that there might be some upside.

Again. Appreciate it.

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

Hey. Morning. Thanks for taking the questions.

Hey, Chris.

I guess just kind of going back to the tariff conversation, I think last time around, a lot of those tariffs were treated as discrete surcharges. You mentioned in the prepared remarks the expectation you can treat that as, you know, a supplier price increase. Any reason for the shift in applicability here?

Chris, I will take it. No. I think, you know, look, what we wanted to get across was that I think we will first of all, there is still a lot of uncertainty. Something is likely coming. We do not know how much. And we do not know when. What we wanted to get across is we are prepared. We have a playbook. We dusted off the playbook. A team is ready to go. Yeah. I think we will see how it plays out, Chris. But, you know, more or less, we would follow a similar playbook. What we were trying to convey was that we would move in whatever form we will move on price time around as warranted. And, you know, remember, Chris, there is sort of like if I think back to last time, there are two inflationary effects from the tariff situation, the direct and then the knock-on effect. The direct effect is any imported products going up, and that is where you are referencing surcharges as the more likely means. The secondary effect is more broad-based industry-wide inflation. So, you know, something like 75% of our sales are through industry-branded product. But we are not directly affected by a tariff, but certainly, you could imagine tariffs are going to influence list price changes from our manufacturers. And there, that would trigger more broad-based pricing actions, and that is what we are referring to.

Got it. That is helpful color. Thank you, Erik. And then I guess, you know, when it comes to, you know, the enhanced marketing that is going on in the back half of the year, I guess, are you able to kind of bucket out where that investment spend is going generally? Are we talking about, you know, keyword search, is it more, you know, will there be any kind of discounting in addition to drive traffic? Maybe just kind of help flush out that marketing investment a bit would be great.

Sure. So what I will do, and you can imagine this one is a little sensitive competitively, particularly before we are in market, but I will sort of give you the broad strokes. So the way we are thinking about this is we have got two objectives with our marketing efforts. So I will talk about the two objectives and then give you a feel for what sort of programs are we looking at to achieve those objectives. So the objectives are basically top of funnel and bottom of funnel. Top of funnel meaning generating more awareness and demand for MSC's product and services. And bottom of funnel would be taking customers who we already have a relationship with and increasing retention rates and share of wallet of folks who already know us and come to us. So you can imagine the programs to achieve those are a bit different. I tell you that there is going to be a pretty healthy mix in the media used, Chris, and it will be a combination of digital marketing along the lines you are suggesting. In terms of pricing and discounting, what I would say there is we already have in our arsenal promotional programs and tools that we will use and leverage more extensively, but it is not like we are making them up brand new. And it will be a combination of digital, some print, as you know, some heavy focus on website improvements and merchandising. And then also some personal outreach between our sales force both inside and outside. And, you know, prospecting and follow-up calls. So that is the color I would give you. As we said, it will be beginning and do not think of this as big bang necessarily. It will more be sort of iterative and incremental end market. Beginning late in Q2. Or fiscal Q2.

Very helpful, Carter. Thanks so much, Erik, and best of luck to everyone in 2025 here.

Thanks, Chris. Happy New Year.

The next question comes from Patrick Baumann with JPMorgan. Please go ahead.

Hi. Good morning. Happy New Year. Quick one on the sequential daily sales performance in the first quarter. It was down 1%, and I think Kristen said core was flattish and national account and public sector was down 2%. What surprised you within those customer groups on a sequential basis that drove the upside versus your guidance?

Pat, I would say I am not sure I am going to answer it sequentially. You know, overall, what I would say is, you know, if you look at exceeding guidance and where it came from, there are a couple of things I call out. Number one, clearly public sector. And public sector looking sequentially is really tricky to do because their fiscal timing is all off at the end of September. So sequential view on public sector is not great. Look, that team is really performing well. And I give kudos to the leadership team. It has been momentum in the been building for a while. And then, you know, add on top of that, Martina touched on some of the early stage seller effectiveness work sales optimization work that went directly to public sector just turbo charged what is already a strong team. We feel really good about that. In fact, today's questions about further opportunities we feel like strong teams well positioned there. The second thing I call out is solutions momentum. Clearly, you know, vending an implant. So look, while our national accounts growth rate is not where we want it, and that number is nothing to write home about. I will tell you under the covers, we feel good about execution. And a lot of that is driven by Microsoft. But then look, the third thing I will say about Q1, and we did mention this in the prepared remarks, is that, you know, we did benefit November was particularly strong. And there, we had some large order activity. We do think the timing of the Thanksgiving holiday being pushed almost a week later in the month probably boosted November and came back to bite us a little bit in December. But I would say those are the big drivers behind the Q1 and November performance.

Helpful. And maybe, Martina, on the selling ops side of things, can you talk about that territory redesign a bit more? You mentioned, I think, some things about timing across public sector, national accounts, and core in terms of when that redesign would be completed, maybe rehash some of that. And then the 20,000 accounts you referenced, I guess, are new because of the redesign. I guess that is across public sector, and you also mentioned something about 2,700 new touches. Any color on what percentage of underlying accounts this represents for public sector? Like, how much of an expansion is that, you know, on an account basis? And then, you know, what is the opportunity across national accounts and core from this redesign in terms of, you know, new touches or account expansion?

Sure. So there is a lot in there. Let me unpack it. Let me kind of pull up the big picture and review what we are doing. And thank you for the question because it is something I am very excited about. So we are basically our goal in the whole redesign across all the customer segments, the public sector, national account, and core, we want to deploy our Salesforce as efficiently as possible. So we want to put trained people in front of the best potential. And that obviously has a slightly different flavor in each customer segment, but fundamentally, our goal is to look at growth. We believe in this equation that says growth comes from coverage and capacity, which is related to time and competency. So there are pieces of the program that touch on all three for all three segments. Public sector was where we moved first, and it was fully deployed as we started Q1. So that is where we are sort of seeing the results. But I did not mean to create the impression that 20,000 accounts were particularly to public sector. That is so far overall what we have done as we have been looking at territory design. So we are trying to design all territories now to cover efficiently, maximize seller capability, maximize coverage. And some of that results, like in the time saving, like I shared with you. So essentially, we believe that coverage, time, and touches are going to improve sales development. It is too early yet for me to give you any kind of flavor to forecast impact, but I did want to share those specifics because we are very encouraged with the progress. And as we implement now, fully implemented national accounts and implement over the next sort of quarter and a half on core, we will be able to share more. So design is all done and all things that and implementation is starting now in the others.

So just to be clear, I am a little confused. So what do the 20,000 accounts represent, and what was the 2,700 new touches you mentioned?

Yeah. So the 20,000 accounts have now been pulled into what I would call active coverage. They have been assigned to sellers. And that does not mean they were not actively buying from MSC in the past, but we have designed the territories to include them. Now we have not maybe implemented in every case the seller change yet, but we know that that design is coming. And on the touches, that is in what has been implemented already, we have been able to engage with new customers and new relationships, and we do keep track of customer touches. And in December, we saw that increase.

Okay. That is helpful. Thanks. I will leave it there. Appreciate the time.

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 on today's call. We look forward to interacting with you and seeing you at investor events and upcoming conferences. Our next earnings call is on April 3rd.