Patrick Baumann

Patrick Baumann from JPMorgan Chase & Co. inquired about the volume performance and recovery of major ducted OEMs like Rheem, Daikin, and Goodman, particularly after their transition issues in 2024. He also asked about Watsco's commodity-related product exposure as a percentage of total HVAC product sales and current inflation trends in those areas.

Answer

COO Paul Johnston stated that Rheem and Daikin are performing very well for Watsco but declined to provide specific growth figures for their volumes last year. CFO Rick Gomez and EVP Barry Logan clarified that commodity-related products (like copper tube, ductwork, refrigerants) represent about 5% of total volume and are conservatively managed with real-time inventory turns to mitigate price volatility. Paul Johnston noted that copper prices fluctuate daily, while refrigerant pricing has been holding steady without significant increases.

Patrick Baumann inquired about the volume recovery for non-Carrier ducted OEMs like Daikin, Goodman, and Rheem, following transition issues in 2024, and whether their market share has normalized. He also asked about the commodity-related product exposure as a percentage of the total HVAC product segment and current inflation trends for items like copper and refrigerants.

Answer

COO Paul Johnston stated that Rheem and Daikin are performing very well for Watsco but declined to provide specific volume growth data for them. Regarding commodity exposure, Paul Johnston and CFO Rick Gomez explained that it represents about 5% of total volume and is conservatively managed with real-time inventory turns to avoid price volatility impacting sales and margins. Paul Johnston noted that copper prices fluctuate daily, while refrigerant pricing has been holding steady without significant increases.

Patrick Baumann of JPMorgan Chase & Co. asked for details on the large institutional customers Watsco is targeting and the potential margin impact. He also questioned the 6% SG&A growth and plans for cost efficiencies.

Answer

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.

Patrick Baumann questioned if Q1 gross margin benefited from price optimization on legacy 410A inventory. He also asked about reports of 454B refrigerant shortages and their potential impact on the selling season.

Answer

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.

Patrick Baumann sought clarification on the year-to-date unit growth figure, asking for the split between total and ducted systems. He also asked about channel inventory levels and the potential for a seasonal gross margin lift in Q4.

Answer

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.

Patrick Baumann questioned the expected sequential decline in Q4 revenue guidance compared to historical Q3 to Q4 growth patterns and sought to understand the sequential decline in backlog despite a positive book-to-bill, including color on a large consumer order.

Answer

Interim CFO Anne Cybulski clarified that the full-year high single-digit growth expectation remains, with Q3 benefiting from timing and Q4 guidance consistent with full-year expectations. She explained backlog dynamics include products/services and execution timing, noting that a book-to-bill above one is healthy. She also confirmed strength in consumer products, with execution over 12-18 months.

Patrick Baumann asked for clarification on why the typical mid-single-digit sequential revenue growth from Q3 to Q4 might not occur this year. He also sought to understand the sequential decline in backlog despite a positive book-to-bill ratio, inquiring about potential rescoping in transport and details on a large consumer order.

Answer

Interim CFO Anne Cybulski explained that the full-year expectation remains high single-digit growth, with Q3 benefiting from scope adjustments and timing. The Q4 guide is consistent with full-year expectations, with nothing unusual. Regarding backlog, she noted that about half of the business is products and services, and a book-to-bill above one is healthy. She confirmed strength in the consumer area due to team capabilities, with work executed over a normal 12-18 month timeframe.

Asked about the near-term margin trajectory, the CapEx outlook for the food and beverage market, and whether any parts of the business portfolio are considered non-core.

Answer

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.

Patrick Baumann asked about Q2 margin dynamics, the CapEx outlook for the North American food and beverage market, and whether any assets in the current portfolio are considered non-core.

Answer

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.

Asked for details on large bookings during the quarter, the conversion of backlog into revenue, the potential for organic growth in fiscal '26, and requested more specific guidance on the expected Q4 margin improvement.

Answer

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.

Patrick Baumann from JPMorgan Chase & Co. asked for details on any large bookings in the quarter, the reason for the lag between backlog growth and revenue conversion, the potential for organic growth in fiscal 2026, and more specific guidance on Q4 margin improvement.

Answer

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.

Patrick Baumann asked for a breakdown of December's average daily sales growth before Christmas versus the overall 2.5% for the month, the reasoning behind the projected 3% January-February ADS growth compared to Q1, and the specific objectives and expected outcomes of the upcoming supplier event.

Answer

Greg Clark, Interim Chief Financial Officer, indicated that pre-Christmas ADS growth was roughly 4-5%. Ryan Mills, VP of Investor Relations and Business Development, explained that the 3% January-February ADS growth (compared to Q1) factors in a 50 basis point benefit from the federal government shutdown recovery, a 50 basis point headwind from the supplier conference, and confidence from mid-January price actions and continued core customer acceleration. Martina McIsaac, President and CEO, stated the supplier event aims to rebuild trust, strengthen relationships, and drive growth through detailed joint business planning with suppliers, expecting it to be a growth accelerator.

Patrick Baumann asked about the recent headcount reduction and the outlook for fiscal 2026 headcount. He also sought insight into current marketing spend levels and future investment needs to sustain core customer growth. Additionally, he followed up on the government shutdown's impact, specifically the federal exposure and the shift from double-digit to negative public sector sales in October, and requested color on product categories experiencing higher inflation.

Answer

Martina McIsaac, President and COO, attributed headcount reductions to sales force optimization (removing underperformers, better territory design) and overall operating system improvements, stating that more self-help actions will continue. Erik Gershwind, CEO, explained that marketing investment levels are fluid and tied to observed returns, with current increases driven by positive core customer growth. Ryan Mills, Head of IR, clarified that federal government exposure is about two-thirds of MSC Industrial Supply's public sector business, weighted towards military and defense. Erik Gershwind added that the October slowdown was primarily in federal pockets, with some areas down 50-60%. He noted that inflation is highest in products from China and those made of steel, such as fasteners and certain safety items, while made-in-USA private brands have been shielded.

Patrick Baumann asked about the drivers behind the headcount reduction at year-end and the outlook for headcount in fiscal 2026. He also sought perspective on current marketing spend levels and future investment needs to sustain core customer results, as well as details on the government shutdown's impact on federal sales and specific product categories experiencing price increases.

Answer

Martina McIsaac, President and COO, attributed headcount reduction to sales force optimization (removing underperformers, better territory design) and performance assessment across the operating system, leading to more effective coverage with fewer people. Erik Gershwind, CEO, stated Q1 marketing spend is up from fiscal 2025, with future levels fluid and dependent on returns from core customer growth. Ryan Mills, Head of IR, clarified that government exposure is about two-thirds federal, weighted towards military and defense, with Erik adding that the September-to-October pullback was primarily in federal, with some pockets seeing 50%-60% drops, expected to reverse. Erik noted higher inflation in products from China and steel-based items (fasteners, OEM, some safety), while U.S.-made private brands have been shielded.

Patrick Baumann of JPMorgan Chase & Co. asked about the sustainability of website metric improvements, the status of the 'Digital Core' initiative, and intra-month sales trends for June.

Answer

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.

Patrick Baumann sought clarification on the math behind the tariff-related price increase, questioning why the impact was only 0.5% if China represents 10% of COGS. He also asked about the significant decline in the 'Other' sales category within the operating statistics.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. inquired about the key drivers for the Q1 daily sales beat and asked for more clarity on the sales force territory redesign, specifically the metrics of 20,000 expanded coverage accounts and 2,700 new customer touches.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. inquired about the gross margin cadence for fiscal 2025 and the potential for deviation from normal seasonality. He also asked for details on the planned sales force coverage enhancements, raising concerns about potential disruption based on past company initiatives.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. asked for details on website performance metrics, the status of the 'Digital Core' initiative following a new CIO hire, and the sales trends throughout the month of June.

Answer

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.

Patrick Baumann asked about pricing trends, specifically the 15% year-over-year decline in municipal PVC pipe and pricing in other commodity products like steel, copper, and ductile iron, and inquired about the M&A pipeline activity and capital deployment strategy.

Answer

CFO Robyn Bradbury confirmed municipal PVC pipe prices were down 15% year-over-year, with overall pricing expected to be flat for the year and flattish for FY26, noting price favorability in steel and copper, and increases in ductile iron. CEO Mark Witkowski expressed excitement about the M&A pipeline with active deals, acknowledging a market lull but assuring no missed opportunities, and reiterated unchanged capital deployment priorities: organic investment, M&A, and share repurchases.

Patrick Baumann asked for clarification on the residential outlook revision from flat to down low double-digits, comparing it to starts data, and whether there was an overbuild of lots. He also sought an update on the Canada Waterworks acquisition, its size, and the current M&A pipeline.

Answer

Mark Witkowski (CEO) explained that the residential market worsened throughout the first half, with some build-up in developed lots due to single-family starts not meeting expectations and a significant slowdown in previously hot markets. He described the Canada Waterworks acquisition as three branches, each around $15 million in revenue, building a strong platform in Canada. He also noted that the M&A pipeline remains healthy with various deals in different stages and sizes.

Patrick Baumann asked for details on the recently announced Canada Waterworks acquisition, including its size and whether it's included in current guidance, and an update on the M&A pipeline.

Answer

CEO Mark Witkowski confirmed the Canada Waterworks acquisition involves three branches, each typically around $15 million in size, and builds a strong platform for growth in Canada. He stated the M&A pipeline remains healthy with various deals under evaluation.

Patrick Baumann asked for additional color on the timing of the executive leadership transition. He also inquired about pricing trends for commodity products beyond PVC and sought clarification on the expected SG&A growth rate for fiscal 2025.

Answer

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.

Patrick Baumann inquired about the status of IIJA water funding, asking how much has been allocated and why the rollout has been slow. He also asked about the company's exposure to data center construction.

Answer

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.

Patrick Baumann asked for the expected sales and margin cadence for Q3 and Q4, the impact of the 53rd week, the M&A sales contribution in Q2, and the expected revenue from two recently announced acquisitions.

Answer

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.

Patrick Baumann asked about the likelihood of gross margin expansion in 2026 given LIFO timing and pricing actions, and also inquired about dynamics within the government customer segment.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. inquired about the potential for gross margin expansion in 2026 given the current LIFO and pricing dynamics, and also asked about trends within the government customer segment.

Answer

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.

Patrick Baumann asked for a rule of thumb on the price discount and gross margin difference between private label and branded products, and the percentage of the private label portfolio at risk from high tariffs. He also requested a breakdown of COGS components to better understand the net inflation impact.

Answer

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.

Patrick Baumann asked about the top-line growth rate Grainger needs to achieve margin expansion. He also requested an update on the company's global sourcing mix and its strategic approach to handling potential tariffs.

Answer

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.

Patrick Baumann asked for an update on the KeepStock business, including its size and growth, and for thoughts on the competitive threat from Amazon's new Business Restock program. He also inquired about the drivers of the sequential gross margin improvement expected in Q4.

Answer

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.

Patrick Baumann asked if the strong 10% July growth included a significant pricing benefit, questioned the impact of copper price volatility, inquired about the drivers of double-digit growth in the security business, and asked if WESCO would consider acquiring Resideo's ADI business.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. asked about changes to the components of the full-year margin guidance and inquired about the performance drivers in the Canadian market.

Answer

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.

Patrick Baumann asked about the implied sales cadence through 2025, the outlook for the U.S. construction market by vertical, and for details on the run-rate sales of the recently acquired Ascent business.

Answer

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.

Patrick Baumann asked for details on the non-residential construction market within the EES segment, the size and performance of the solar business, and the scale of the automation business.

Answer

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.

Asked for clarification on the second-half organic volume ramp in the Utility segment, the implied full-year margin expansion, and the split of EPS growth between Q3 and Q4.

Answer

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.

Patrick Baumann of JPMorgan Chase & Co. asked for a quick clarification on the price-cost outlook within the full-year gross margin expectation and any unusual drivers to consider for modeling beyond 2025.

Answer

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.

Patrick Baumann inquired about the drivers of the free cash flow guidance reduction, asking what working capital drags could reverse next year. He also asked why Service margin expansion is expected to slow in 2025 after a strong 2024 and if modernization margins would continue to expand.

Answer

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.