MSC Industrial Direct Co., Inc. Q3 FY2026 earnings call

### Core Strategic KPIs and Long-Term Targets - Management has aligned internal performance tracking with shareholder expectations, focusing on five core KPIs: sales per rep per day, sales per total headcount, year-over-year volume improvement, adjusted operating margin expansion, adjusted incremental margin, and long-term ROIC improvement. - The company's primary long-term financial target is restoring MSC to a mid-teens adjusted operating margin, a goal that guides all enterprise-level actions.

### Salesforce Optimization and Sales Excellence Progress - The Salesforce Optimization Initiative was completed in December 2025. The headwind from this transition is largely behind the company, with improving ADS for impacted customers and a clear inflection in national account growth in the quarter. - With 225 fewer field heads, the restructured team is targeting higher-value customers and increasing customer touches, with sales per rep per day improving year-over-year, demonstrating the company is doing more with less. - New enhanced onboarding and training processes have been rolled out for new sellers, paired with updated sales management processes, tools, and pipeline reviews. These changes have driven improved cross-selling, leading to OEM fastener growth of over 15% in the quarter.

### Cost Structure and Productivity Initiatives - Adjusted operating expenses as a percentage of sales declined 150 basis points year-over-year, driven by headcount actions, elimination of duplicative sales commissions, and network optimization-driven freight savings despite elevated fuel costs. - Competitive benchmarking shows the company is approximately 1,000 full-time employees overstaffed at current revenue levels relative to peer companies. Management is targeting this gap through increased use of AI and automation to improve productivity, with already successful real-world AI deployments that earned the company VARENT's Global Customer Award in Accelerated Insights with AI. - A new responsive variable compensation design was fully implemented this quarter, and is now working as intended to align SG&A costs with sales levels, a historic pain point for the company.

### Macro and Demand Environment - Management sees ongoing signs of a nascent industrial recovery, with five consecutive months of MBI readings above 50 and positive industrial production trends across most top end markets. MSC ADS has outpaced the IP index for four consecutive quarters. - Volume growth turned positive across all customer segments in the third quarter, after being negative 4% in the second quarter during the sales restructuring transition. Weak year-over-year volume comps are expected in coming quarters, which should further accelerate volume growth. - Early signs of the expected "coiled spring" effect from the installed vending and in-plant base have emerged, with per-unit ADS growing high single digits year-over-year as industrial activity improves.

Total company fiscal third quarter sales were $1.047 billion, a 7.8% year-over-year increase, with price contributing 720 basis points and volume contributing 50 basis points to growth. By customer segment: Core customer average daily sales (ADS) grew ~8% year-over-year, outperforming total company growth; National accounts ADS grew ~7% year-over-year, an improvement from first half trends; Public sector ADS grew ~8% year-over-year, driven by increased defense activity and easier prior-year comparisons. By solutions segment: Vending ended the quarter with 30,800 installed machines, a 7% year-over-year increase. Vending ADS grew 15% year-over-year, accounting for 20% of total company net sales; In-plant programs totaled 426 programs at quarter end, a 7% year-over-year increase. In-plant customer ADS grew 16% year-over-year, accounting for 21% of total company net sales. Profitability: GAAP gross margin was 41.1%, up 10 basis points year-over-year. Reported operating margin was 10.2% (8.5% prior year), while adjusted operating margin was 10.6% (9% prior year). GAAP EPS was $1.44 ($1.02 prior year), and adjusted EPS was $1.43 ($1.08 prior year), a 32% year-over-year improvement.

- **Fiscal Fourth Quarter 2026**: Management expects average daily sales to grow 6.5% to 8.5% year-over-year, with pricing expected to contribute ~6.5% to 7% growth, implying ongoing volume improvement against tougher year-over-year comps. Gross margins are expected to see a sequential 40 to 50 basis point decline, in line with historical Q3 to Q4 trends. Adjusted operating margin is expected to range from 10% to 10.8%, with a midpoint implying adjusted incremental operating margins in the mid-20% range. - **Full Fiscal Year 2026**: Depreciation and amortization expense is now expected to be ~$100 million, up from the prior guidance range of $90 to $100 million. Capital expenditures are now expected to be ~$100 million, down from the prior guidance range of $100 to $110 million. Free cash flow conversion is now expected to reach ~95% for the full year, up from the prior expectation of 90%. All other full-year guidance is unchanged: interest and other expenses are expected to be ~$30 million, and the effective tax rate is expected to be between 24.5% and 25.5%. - **Long-Term**: Management reaffirmed its long-term framework that for mid-single-digit sales growth, incremental operating margins should be at least 20%, and for high-single-digit to low-double-digit sales growth, incremental margins should approach the upper 20% to near 30% range. No formal changes to long-term incremental margin guidance were made, with management noting they will update targets as progress is logged.

- There remains an ADS performance gap between customers minimally impacted by the Salesforce restructuring and customers that experienced more changes or rep vacancies, as new customer relationships are still being established. Closing this gap remains a key near-term priority. - Tungsten/carbide input price inflation remains ongoing, with prices up over 500% year-over-year in the third quarter, and additional supplier price increases are expected in the fourth quarter, with no end to inflation currently in sight. - Productivity and headcount optimization gains will not be linear, as some projects are small, while larger, more impactful projects require longer implementation timelines. Small quarterly gains should be expected as progress is made toward the long-term headcount benchmark. - Forward-looking statements about demand recovery, volume growth, and margin improvements are inherently uncertain, and actual results could differ materially from expectations due to unanticipated changes in the industrial macro environment, input costs, and competitive conditions.

Q: What is the split between volume and price growth implied by the fourth quarter guidance, and how much tougher are the volume comps compared to the third quarter? / A: Pricing contributed ~7.2% to growth in the third quarter. In the fourth quarter, pricing is expected to be 6.5% to 7% as the company laps prior-year tariff-related price increases, though an additional pricing action was taken in May for metalworking products. Even with this tougher pricing comp, the guidance midpoint still implies net volume improvement against volume comps that are 300 basis points tougher than the third quarter.