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The full-year outlook for margin expansion remains intact, but progress may not be linear quarter-to-quarter. The food and beverage market is stable and expected to expand. The company does not currently consider any part of its portfolio to be non-core but conducts annual strategic reviews.

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CFO Ryan McLeod stated that the full-year outlook for margin expansion remains unchanged, though progress may not be linear quarter-to-quarter. CEO Andrew Hider described the food and beverage market as stable with ongoing opportunities. Regarding the portfolio, McLeod said there are no assets currently considered non-core, but the portfolio is reviewed annually as part of their strategic process.

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The company confirmed several large orders, with the top 10 averaging a higher-than-usual $30 million. They expect a 1-2 quarter lag for these bookings to materially impact revenue, leading to organic growth benefits in fiscal '26. They anticipate modest margin improvement in Q4 but declined to provide a specific absolute margin target.

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Ryan McLeod, Chief Financial Officer, highlighted that the top 10 orders averaged a higher-than-usual $30 million and were well-diversified across all market verticals. He explained that large orders typically have a 12-18 month delivery period, with revenue ramping after an initial design phase, which will benefit fiscal 2026 organic growth after a 1-2 quarter lag. He declined to provide specific absolute margin guidance for Q4 but reiterated that improvement would be modest. Andrew Hider, CEO, added that funnels remain healthy.

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CEO D.G. Macpherson and CFO Deidra Meriwether both agreed that, all else being equal, 2026 would likely be a year of gross margin expansion as pricing actions annualize and the LIFO impact normalizes. On the government segment, Macpherson noted that the non-military federal business has been struggling, while the military and state and local portions have been performing better.

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CFO Deidra Meriwether and CEO D.G. Macpherson agreed that a return to higher gross margin levels in 2026 would be a reasonable and likely expectation, all else being equal. On the government segment, Macpherson noted that while the non-military federal business has struggled, the military business has been good, and the overall impact is limited as government is a small part of the business.

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Chairman and CEO D.G. Macpherson stated that these factors must be evaluated on a product-by-product basis, as cost advantages vary widely, and a sustained 145% tariff could affect gross margin in the short term. SVP and CFO Dee Merriwether noted that freight is a mid- to high-single-digit percentage of COGS but did not provide further detail, emphasizing that the product component is the majority of the cost and requires granular analysis.

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CEO D.G. Macpherson stated that mid-single-digit growth would likely allow for margin expansion. On sourcing, he noted that while 60-70% comes from China, the company has been diversifying its footprint. He explained that if tariffs are imposed, the typical approach would be to pass them on to maintain margins, contingent on the competitive environment.

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Chairman and CEO D.G. Macpherson stated that KeepStock continues to grow faster than the overall business and is a key part of the value proposition for a large majority of revenue. He expressed confidence in Grainger's ability to compete with Amazon's offering. SVP and CFO Dee Merriwether confirmed Q4 gross margin is expected to expand sequentially, aided by supplier rebates, and noted that the first half of 2025 will likely resemble the end of 2024.

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EVP & CFO David Schulz noted it was too early to discern the July price benefit and stated that copper volatility did not have a material impact in Q2. Chairman, President & CEO John Engel attributed the strong security growth (up high-teens including data center sales) to advanced IP-based solutions and broad-based momentum over several quarters. Engel declined to comment on any specific potential acquisitions, per company policy.

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David Schulz, EVP and CFO, advised that full-year gross margin is now expected to be down slightly year-over-year, a shift from the initial outlook, but noted that higher sales should provide SG&A leverage. John Engel, Chairman, President and CEO, described the Canadian business as very strong in Q1, stating that it outperformed the market and grew its backlog across all three business units, setting up a strong outlook for the year.

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EVP and CFO David Schulz explained the full-year sales cadence is influenced by an expected utility market recovery in the second half. He noted the construction outlook is supported by non-residential projects in manufacturing and healthcare, with solar headwinds abating. He also confirmed the Ascent acquisition had a run-rate of about $115 million at the time of purchase and is expected to continue growing at a strong double-digit rate.

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CEO John Engel noted that momentum improved in Q3 for the construction and OEM businesses within EES, though industrial slowed. CFO David Schulz quantified the solar business as roughly 5% of EES sales and confirmed it has been down over 25% in recent quarters, acting as a significant drag. Regarding automation, management acknowledged its importance and strong supplier relationships but noted it was impacted by the broader industrial slowdown and did not provide a specific size for the business.

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President A.J. Nahmad described the target as multi-location contractors and home warranty companies, which will be served by a new 'Watsco One' platform. While acknowledging potential margin pressure, management believes a broader product mix sold to these accounts would be accretive. VP Rick Gomez explained that about 25% of SG&A growth was from acquisitions, with the rest reflecting transition-related inefficiencies that should moderate as 410A inventory is sold off.

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Executive Barry S. Logan confirmed there was some ability to gain price on 410A, but the impact was measured in basis points and not material. Executive Paul Johnston acknowledged a shortage of refrigerant containers, affecting both 454B and 32A, but stated it would not have a long-term impact as branches are finding creative solutions and the equipment itself is pre-charged.

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EVP Barry S. Logan clarified that year-to-date, total units were up 5% driven by double-digit ductless growth, while ducted units were flat. Executive Paul Johnston and President Aaron Nahmad explained that the channel is currently executing a 'pull forward' of 410A equipment, not a general restocking. Paul Johnston added that a seasonal Q4 gross margin lift is a reasonable expectation due to a favorable mix shift toward heating products.

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Management stated that Utility organic volumes will ramp in the second half but are not expected to reach double-digits in Q4. They confirmed that full-year margin expansion of around 50 basis points is in the ballpark, with more expansion in Electrical than Utility. They declined to give specific color on the Q3 vs. Q4 EPS split, noting that volume is the biggest driver.

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CEO Daniel Florness stated that managing price-cost will become more challenging in the second half of the year as higher-cost inventory flows through. He indicated the company's goal is to stay aligned with cost increases, but whether they end up slightly ahead or behind remains to be seen.

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CEO Erik Gershwind confirmed that the lift in web traffic and conversion has been consistent, impacting both new and existing customers. He also noted that the 'Digital Core' systems upgrade initiative is now gearing back up to unlock future productivity. CFO Kristen Actis-Grande added that sales trends were fairly consistent throughout June.

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CFO Kristen Actis-Grande clarified that while 10% of COGS originates from China, MSC is the direct importer of record for a much smaller portion, explaining the limited initial price action. CEO Erik Gershwind added that China-sourced products are more skewed to MRO than metalworking. Regarding the 'Other' category, Kristen Actis-Grande explained it's a catch-all for small industries and fluctuates as customers are reclassified, advising against drawing strong conclusions from its movement.

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CEO Erik Gershwind attributed the Q1 outperformance to strong public sector results, momentum in vending and implant solutions, and some large orders in November. President and COO Martina McIsaac explained the territory redesign aims to deploy the sales force more efficiently, clarifying that 20,000 accounts were brought into 'active coverage' and the 2,700 touches represent increased engagement where changes were implemented.

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CFO Kristen Actis-Grande projected gross margin to hold steady around 40.8% (+/- 20 bps) through the year, slightly better than typical seasonality, with price/cost improving. CEO Erik Gershwind and President & COO Martina McIsaac clarified the sales force changes are about optimizing execution, not a strategic shift, and are designed to avoid disrupting key customer relationships.

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CEO Erik Gershwind reported that website traffic and conversion improvements have been consistent, driven by marketing efforts impacting both new and existing customers. He confirmed the 'Digital Core' initiative, a key productivity driver, is now being geared back up. CFO Kristen Actis-Grande noted that sales trends were fairly consistent throughout June.

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CEO Steve LeClair explained the transition was a planned succession, timed to ensure the company's culture and momentum are carried forward by a talented internal team. CFO Mark Witkowski noted positive pricing announcements for steel and copper pipe and resilient pricing for ductile iron pipe. He added that for 2025, SG&A is expected to be relatively flat, with most margin expansion coming from gross margin.

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CFO Mark Witkowski estimated that roughly one-third of the IIJA water funding has been allocated, with significant funds yet to reach the state level, but noted that project momentum is building for 2025. He confirmed that Core & Main participates significantly in data center projects, supplying infrastructure for water, sewer, and storm drainage, which has been a positive driver in the non-residential market.

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CFO Mark Witkowski expects a relatively better Q3 due to Q2's weather impact and noted the 53rd week will add 6-8% to Q4 sales growth. He confirmed acquisitions contributed 9 points of growth in Q2 and guided that the two new deals, while not in the forecast, could be sized using the historical $10-15M revenue per location framework.

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EVP and CFO Cristina Mendez attributed the cash flow revision to lower down payments from China New Equipment orders, a working capital headwind she expects to stabilize and unwind. She noted that cash flow growth should outpace operating profit growth in 2025. Regarding margins, she reiterated the medium-term goal of 50bps annual expansion for Service, and CEO Judith Marks confirmed that modernization margins are expected to continue expanding.

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