MSC Industrial Direct - Earnings Call - Q3 2025

Executive Summary

• Fiscal Q3 2025 landed broadly in line with internal expectations and modestly above Wall Street on revenue and normalized EPS; net sales were $971.1M (-0.8% YoY) and adjusted diluted EPS was $1.08, with sequential ADS up 7% and adjusted operating margin improving to 9.0%.
• Against S&P Global consensus, MSM delivered a slight beat: revenue $971.1M vs $969.2M estimate and Primary EPS $1.08 vs $1.03 estimate; EBITDA $109.4M vs $106.6M estimate* (beats).
• Q4 FY25 outlook guides ADS YoY between -0.5% to +1.5% and adjusted operating margin 8.5%–9.0%; full-year free cash flow conversion raised to ~120% from ~100% previously (positive).
• Near-term stock reaction catalysts: tariff-driven pricing actions and cost pass-through forming a narrow price-cost spread, execution on sales optimization and web initiatives, and Q4 gross margin seasonality vs guidance.

*Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Sequential momentum: ADS improved 7% QoQ, above historical patterns, with adjusted operating margin up 190bps sequentially to 9.0% at the midpoint of outlook; CEO highlighted “early signs of progress” across core customers, high-touch solutions, and cost-to-serve.
• High-touch solutions growth: vending ADS up ~8% YoY and implants up ~10% YoY; both each represented ~19% of total net sales, underscoring traction in solutions footprint.
• Cash generation and capital return: Q3 free cash flow conversion ~134%, year-to-date ~129%; $56M returned in Q3 and $181M YTD via dividends and buybacks.
• Quote: “We delivered fiscal third quarter results that were in line with our expectations… we saw early signs of progress in… reenergizing the core customer…” — CEO Erik Gershwind.

What Went Wrong

• Margin compression YoY and higher OpEx: GAAP operating margin fell to 8.5% (from 10.9% YoY); adjusted OpEx rose ~$22M YoY, driven by personnel costs, pressuring adjusted operating margin to 9.0% (down ~240bps YoY).
• Macro softness and tariffs: Manufacturing end markets remained subdued with caution around tariffs; April was notably soft, followed by improvement in May/June, leaving customers hesitant on future production levels.
• Gross margin mix headwind: Public sector strength typically creates Q4 seasonal gross margin pressure; management expects only a narrow favorable price-cost spread as costs step up into Q4.

Transcript

Operator (participant)

Good morning and welcome to the MSC Industrial Supply Fiscal 2025 Third Quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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.

Ryan Mills (Head of Investor Relations)

Thank you and good morning, everyone. Welcome to our fiscal third quarter 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 in the earnings presentation and operational statistics document, 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 U.S. securities 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 our 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 reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Erik.

Erik Gershwind (CEO)

Thank you, Ryan. Good morning, everyone, and thanks for joining us. On today's call, I'll cover our fiscal third quarter performance. I'll provide an update on our strategic initiatives and the state of MSC before wrapping up with my perspective on the operating environment. I'll hand the call over to Martina, who will give a progress update with our sales optimization initiative, our productivity efforts to lower our cost to serve, and our tariff management plan. Kristen will then review our fiscal third quarter financial performance in more detail and provide our outlook for the fiscal fourth quarter before opening up the line for questions. As a reminder, throughout fiscal 2025, we've been focused on strengthening execution in three critical areas: one, re-energizing the core customer; two, maintaining momentum in our high-touch solutions; and three, optimizing our cost to serve. Our fiscal third quarter results reflect progress across these fronts.

Average daily sales, or ADS, for the fiscal third quarter declined 0.8% year-over-year, which was slightly above the midpoint of our outlook. Additionally, average daily sales improved 7% quarter-over-quarter, exceeding historical 2Q to 3Q sequential averages. Gross margins also came in at the higher end of our expectations as we navigated tariff-driven inflation to produce positive price cost. This resulted in reported and adjusted operating margins of 8.5% and 9.0%, respectively. Our adjusted operating margin was up 190 basis points sequentially and at the midpoint of our outlook. While there is certainly plenty of room for improvement, our fiscal third quarter performance reflects progress in several areas. This includes an encouraging start to our newly launched growth initiatives and sustained momentum in our high-touch solutions. I'll now provide some more color. First, re-energizing the core customer was one of our highest priorities entering fiscal 2025.

Early evidence began to emerge in fiscal 3Q as core customer daily sales were down 0.8% year-over-year, in line with results for the total company and our best performer sequentially. This was also supported by our recent web enhancements, which, as a reminder, were aimed at making it faster and easier for customers to do business with us, enhancing our product discovery platform, streamlining our customer's buying journey, and increasing personalization to better meet specific customer needs. Also, as a reminder, these upgrades were rolled out towards the end of our fiscal second quarter. Since that time, direct traffic to mscdirect.com grew low double digits year-over-year and mid-single digits quarter-over-quarter. Additionally, we're seeing encouraging progress in our site conversion rate metrics. These improvements were supported by our enhanced marketing and salesforce optimization efforts, which Martina will cover in more detail momentarily.

Second, as I mentioned earlier, we are maintaining momentum in high-touch solutions. On a year-over-year basis, we improved our implant program count by 23% and the installed base of our vending machines by 9%. Additionally, expanding our OEM product line remains a focus area where we continue making progress. Average daily sales in OEM improved low single digits year-over-year. Moving on from the numbers, I'll highlight another priority, which is building out our leadership depth. During the quarter, we added John Reichelt to the MSC team as our Senior Vice President and Chief Information Officer. John joins Brian Bello and the rest of our existing technology leadership team as they continue to deploy our portfolio of systems initiatives that improve operational efficiency and enhance the customer experience. This includes areas such as the web improvements, supply chain opportunities, and the digital core initiative.

Given John's track record at TriMark USA, Aramark, and Procter & Gamble, I'm confident that he will play a successful part in advancing MSC's business technologies and our overall capabilities. Switching now to the macro environment, as you can see on slide four, conditions in our manufacturing end markets remain subdued. Most of our primary end markets remain soft, including automotive and fabricated metals, which continue to contract as reflected in the IP index. Aerospace remains a bright spot with continued growth and a strong outlook. The more broad-based softness we're seeing is reflected in sentiment readings such as the MBI. After turning positive in March for the first time in nearly two years, MBI readings returned to negative numbers in April and May, reflecting customer caution around tariffs and general uncertainty. We saw this reflected in our own sales numbers.

We experienced the soft April that went beyond Easter timing. Conversations in the field suggest that our customers took a temporary pause in activity as they contemplated the impact of tariffs on their business. While this short lull in activity was followed by improving trends in May and those that continued into June, there remains hesitancy and caution among our customer base around future production levels. That said, we are encouraged to see our performance gap improve against the overall IP index as we outperformed in three of our top five end markets. Regardless of the macro conditions, we remain confident in the opportunity in front of us and steadfast in the commitment to our plan. With that, I'll now turn the call over to Martina.

Martina McIsaac (President and COO)

Thank you, Erik, and good morning, everyone. I will begin by covering our growth initiatives in greater detail. As Erik mentioned, the expansion of our solutions footprint continued in the fiscal third quarter. We are also starting to see positive early indicators from our seller effectiveness and coverage initiative. Public sector, which was the first portion of the business to complete our coverage initiative, continues to grow. The biggest change in our fiscal third quarter was in the expanded coverage in core field sales. The number of customer location touches logged by field sales grew low double digits year-over-year and low single digits quarter-over-quarter. Improvement in these areas is reflected in our sales per rep per day trend, which was down low single digits year-over- year compared to down high single digits in the first half of the fiscal year.

Our marketing campaign, which encompasses both digital and personal outreach, is also off to a positive start. The return on digital product marketing spend showed an improvement in the 20% range quarter-over-quarter. This is also reflected in the performance of certain KPIs on mscdirect.com, such as stronger direct traffic and conversion rates, as previously mentioned by Erik. I'm also encouraged by the daily sales trend on the web as we began to see the year-over-year performance improve in fiscal 3Q compared to trends over the past several quarters. On slide five, you can see our tariff mitigation plans and our direct COGS exposure across the globe. While the situation remains fluid, we are confident in our ability to mitigate the potential impacts of tariffs. We intend to continue to work extremely closely with our suppliers and customers while maintaining our core pricing principles.

Since our tariff-related price increase in late March, we took minimal further actions during the quarter. In the last couple of days, we took a more broad-based price increase, and we will evaluate additional moves as warranted. We continue to view tariffs as an opportunity to strengthen our relationships with customers and MSC's position in the marketplace. We have a proven track record of identifying opportunities that deliver meaningful productivity to customers. We're doubling down on this by increasing the number of cost savings assessments performed in the field for both existing and new customers. We are also providing alternative solutions for products impacted by tariffs, which plays well to the depth and breadth of our product assortment.

As a result, our Made in USA offering is beginning to gain traction as the daily sales of these products were up year-over-year and outperformed total company sales on a sequential basis. We intend to continue using this as a lever to gain share of wallet and attract new customers. Lastly, we continue to make progress on our network optimization initiatives. As a reminder, this work is focused on ensuring we have the right inventory close to customers. We seek to optimize working capital, freight, and our distribution footprint. We remain on track to deliver $10 million-$15 million in annualized savings by fiscal year 2026. With that, I will turn the call over to Kristen.

Kristen Actis-Grande (CFO)

Thank you, Martina, and good morning, everyone. Please turn to slide six, where you can see key metrics for the fiscal third quarter on both a reported and adjusted basis. Fiscal third quarter sales of $971 million declined 0.8% year-over-year as lower volumes were largely offset by benefits from price of 80 basis points and acquisitions, which contributed another 60 basis points. On a sequential basis, average daily sales improved 7% quarter-over-quarter and outperformed historical sequential averages. The primary drivers of our strong sequential performance were higher volumes and a small benefit from price. Looking at average daily sales by customer type, we were encouraged to see improvement in both the year-over-year and two-year stack performance of our core and national account customers. Core customers declined 0.8% year-over-year, while national accounts declined 1.7%.

Public sector continued its trend of delivering year-over-year growth and improved 2.4% in the quarter. As a reminder, sales in the public sector can be lumpy in nature. However, we expect growth to continue. Sequentially, core and other customers were the best performer with 8.3% growth, followed by improvement of 6.2% in the public sector and 5.8% in national accounts. Moving to our performance in vending and implants, we continue to expand the installed base of both solutions to 399 implant programs and more than 28,700 vending machines at quarter end. Average daily sales through vending in the third quarter were up roughly 8% year-over-year and represented approximately 19% of total company net sales. Sales to our customers with an implant program grew 10% year-over-year and coincidentally also represented approximately 19% of total company net sales.

Moving to profitability for the fiscal third quarter, gross margin of 41% improved 10 basis points year-over-year as benefits from price inclusive of mix more than offset headwinds from higher cost inventories working through the P&L and lower margin acquisitions. Sequentially, this resulted in flat gross margins quarter-over-quarter. Operating expenses in the quarter were approximately $312 million on a reported basis. On an adjusted basis, operating expenses stepped up approximately $22 million year-over-year to $311 million for the quarter. The primary driver of the year-over-year increase was higher personnel-related costs. Combined with slightly lower sales year-over-year, this resulted in a roughly 250 basis point step-up in adjusted operating expense as a percentage of sales for the quarter. Sequentially, adjusted operating expenses were approximately $9 million higher compared to 2Q.

Approximately $7 million of this was driven by higher variable expenses associated with the increase in sales. The remaining balance of approximately $2 million was driven primarily by the combination of higher medical plan expenses and increased outbound freight costs associated with certain public sector customers, which offset benefits from higher productivity. On a percentage of sales basis, adjusted operating expenses decreased 180 basis points sequentially. Reported operating margin for the quarter was 8.5% compared to 10.9% in the prior year. On an adjusted basis, operating margin came in at the midpoint of our outlook at 9% and declined 240 basis points compared to the prior year. We delivered GAAP EPS of $1.02 compared to $1.27 in the prior year quarter. On an adjusted basis, EPS was $1.08 compared to $1.33 in the prior year. Now let's turn to slide seven to review our balance sheet and cash flow performance.

We continue to maintain a healthy balance sheet with net debt of approximately $449 million, representing roughly 1.1 times EBITDA. Capital expenditures declined approximately $8 million year-over-year to $21 million. This resulted in free cash flow conversion of approximately 134% in the fiscal third quarter and 129% fiscal year to date. Turning to capital allocation on slide eight, our highest priority remains organic investment to fuel growth and operational efficiencies. We repurchased approximately 117,000 shares during the quarter and approximately 494,000 shares fiscal year to date. Combined with the dividend, we returned approximately $56 million to shareholders in fiscal 3Q and $181 million fiscal year to date.

Moving to our expectations for the fiscal fourth quarter on slide nine, with preliminary sales for the fiscal month of June trending approximately flat, we expect average daily sales to be down 0.5% to up 1.5% compared to the prior year and to be approximately flat compared to 3Q at the midpoint. Our expected range takes into consideration benefits from price and early momentum in our growth initiatives continuing into the fiscal fourth quarter, coupled with continued caution with respect to demand as the tariff deadline approaches.

Under this revenue scenario, we expect our adjusted operating margin in the fiscal fourth quarter to be between 8.5% and 9%, driven by the following assumptions: fiscal Q4 gross margins to perform better than the historical seasonal decline of 40 basis points and to be 40.9% plus or minus 20 basis points, and a sequential decline in adjusted operating expenses of approximately $2 million-$4 million, largely driven by lower variable expenses on lower sales, increasing productivity and lower outbound freight expense, which will be partially offset by an increase in medical plan expense. Moving to our guided metrics for the full year, there are a few tweaks to assumptions as we move closer to the end of the fiscal year. Depreciation and amortization expense is likely to be at the lower end of the $90 million-$95 million range.

Capital expenditures are also expected to be at the lower end of the $100 million-$110 million range. Lastly, given strong cash generation fiscal year to date that is expected to continue into the fiscal fourth quarter, we now expect free cash flow conversion to be approximately 120% for the full year compared to our prior expectation of approximately 100%. With that, we will open the line for Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ryan Cooke with Wolfe Research. Please go ahead.

Ryan Cooke (Analyst)

Good morning, and thank you for taking my questions today.

Erik Gershwind (CEO)

Morning, Ryan.

Kristen Actis-Grande (CFO)

Morning, Ryan.

Ryan Cooke (Analyst)

Great. I'm hoping we could start with the price outlook for 4Q and into next year. You called out 80 basis points of contribution this quarter. How should we be thinking about incremental price from those actions that you took late in 3Q? I think that the tariff exposures you share on slide five would pencil out to roughly a mid-single-digit increase across the portfolio to offset current tariff rates. I'm curious if that's the right way to be thinking about price acceleration from here.

Kristen Actis-Grande (CFO)

Yeah, Ryan, I can take that.

Erik Gershwind (CEO)

Good morning.

Kristen Actis-Grande (CFO)

You jump in.

Erik Gershwind (CEO)

After you, Kristen.

Kristen Actis-Grande (CFO)

Yeah, you go. You start.

Erik Gershwind (CEO)

You got it. Right, I'll talk about the outlook and then Kristen will give some of the numbers. Look, overall, what you're hearing from us is since we last spoke to you, which if you remember was right on the cusp of Liberation Day, we had taken some surgical increases. Obviously, there's been a lot of tooling and flowing since then. In general, we are seeing inflationary pressures build from our suppliers. Martina mentioned just in the last few days a more broad-based increase, which is the first time we've taken a more broad-based increase. In terms of outlook beyond that, obviously that will have an impact on Q4. That will carry into Q1. It's so tough to give you a longer-term perspective because it does feel like things change regularly. We're staying in constant contact with customers and suppliers.

What you heard is we're going to continue to be agile. If there is opportunity and/or need to move again, we will. In terms of size, I'll let Kristen add any color, but it's more like a, in terms of the increase we just took, if that's what you're referencing, more like a low single-digit increase as opposed to mid-single-digit.

Kristen Actis-Grande (CFO)

Yeah. And Ryan, I agree. That's totally agreed with everything Erik said. The other thing I would just add maybe to zoom out for the top line guide overall for Q4 to talk about how price fits within that. If you look at the midpoint of the guide, that's up 50 bps year-over-year, and then it's about flattish sequentially. Ahead of the historical Q3 to Q4 averages. A couple of points to add some detail to that. If you look at the ops desk, you'll see that June was flat or down 1% if you're looking at the month-over-month sequentials. At the midpoint, what that means for July and August is we're up 1% sequentially, and that's about in line with the historical averages.

With respect to the price that Erik referred to, you would see a slight increase in contribution for that as you move through the fourth quarter. Although in addition to sizing at low single digits, somewhere in that range, depending on where you put the guide, I would caution that we do not get a full two months of price realization on that. Some of our contracted customers have a holding period. I definitely recommend being cautious about the amount you assume for price in the fourth quarter. I guess the last thing I would just add is that with respect to volume, if you think about where that puts volume in the guide, we are very encouraged by what we saw in Q3.

We're going to talk—we talked in the prepared remarks about some of the green shoots that we're seeing, but definitely trying to take sort of an overall cautious approach given the broader uncertainty that's out there.

Ryan Cooke (Analyst)

Okay. No, that's very clear and all makes sense. Then I guess maybe we could pivot over to the 4Q margin outlook, which implies a bit better than usual seasonality with op margins flat to down 50 basis points QoQ. I think the historical trend is down at least a point. It seems like this is mainly from the better gross margin performance that you're expecting. Maybe you could just talk about the moving pieces there. Anything we need to think about in terms of timing for price versus cost? Does this margin tailwind flip the other way once COGS flows through P&L? Any detail there would help.

Kristen Actis-Grande (CFO)

Yeah, sure. Yeah. To your point, 40.9% ±20 basis points, so kind of flattish to the Q3 gross margin number of 41% even. That is, to your point, better than the historical sequential decline we see, which is about 40 bps down. A few points within that to think about. One of the drivers of why we're typically down sequentially is customer mix, specifically the public sector business, which we are expecting to be strong in the fourth quarter. With respect to core, we're expecting to see continued sequential improvement, but not yet big enough that it's kind of moving the needle against that public sector change in performance Q3 to Q4. We talked about price, of course. You're going to pick up a bit of increased contribution from price sequentially, but I heard you mention cost in your question.

We are absolutely starting to see cost increases come online in the fourth quarter. A pretty narrow price-cost spread sequentially from Q3. I said a lot, but to summarize, you have a mixed headwind. You have some small price-cost improvement. The last thing I would add is that we are assuming some productivity that would come online sequentially within the fourth quarter that would be in the gross margin line. To whatever extent those three main drivers move, that will dictate where we fall on the guide.

Ryan Cooke (Analyst)

That's great. Thank you very much for the detail there. I'll turn it back over.

Operator (participant)

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

Tommy Moll (Equity Research Analyst)

Good morning, and thank you for taking my questions.

Erik Gershwind (CEO)

Morning, Tommy.

Tommy Moll (Equity Research Analyst)

You referenced supplier price increases a few times, and I'm just curious if you can share more there. There's been a lot that's changed since you referenced Erik there in late March where you announced the first round of increases. What do those conversations look like today? Do you feel like you kind of know what you need to know about what's coming? Or is there a lot still in flux and you could look up? We have this conversation a quarter from now, and there's a whole new round of supplier increases to contend with.

Erik Gershwind (CEO)

Yeah, Tommy, I'll start, and then certainly Martina can fill in anything that I don't cover. The first thing I'd say, I'd hesitate at any point during this process to say that we have clear line of sight into what's coming or have it all figured out. I don't think we do. What I would say is the discussions with suppliers are ongoing, and they're fluid. It's not like it's a one-and-done. This is an ongoing topic, given the headlines, as you could imagine. What I would say, and we tried to get across in the prepared remarks, and Martina put some color on this, but if you go back to where we were a quarter ago, we were looking at more surgical increases. Specifically by surgical, what we mean is specifically products related to direct sourcing from tariff-driven countries, i.e., China.

What's happening now is we are seeing more general inflationary pressures. Many of our suppliers are manufacturing all over the world. They're sourcing products all over the world. They are feeling cost pressures. There is just a broader base. We are seeing more of kind of what we would see in a typical inflationary cycle with list price increases as an example. That is what we have just brought to market in the last couple of days.

Operator (participant)

Okay. Was there a follow-up?

Tommy Moll (Equity Research Analyst)

Sure. I'll ask a follow-up here, probably for Kristen on this one. We're a quarter ahead of when you'll guide for fiscal 2026, Kristen, but to the extent you can level set us on margin compares for 2026 over 2025, that's always helpful, whether quantitative or qualitative. I'm just thinking in terms of the gross margin percentage and then in particular, any big OpEx drivers, positive or negative, that you can already identify for next year. Thank you.

Erik Gershwind (CEO)

Yeah, Tommy, maybe I'll start here, and I'll let Kristen add color specifically on gross margin, but sort of like if I zoom out from gross margin and just look at the drivers. Again, what I would say is we're cautious right now to not give too much color on anything that could happen even a quarter out, given how murky it is and how much uncertainty. We'll give a lot more color next quarter. If I sort of walk down the P&L lines and give you some perspective there, I think what you're seeing from us right now on the revenue line, I characterize it as stabilization. That stabilization, more or less sequentially year-over-year, look, we're encouraged, as we said, around some green shoots that we're seeing, particularly the core customer.

Tommy, we did see a nice sequential improvement there that we can track back to things that we've been talking about that are in flight. We are encouraged, but it's still early. On the revenue line, it's stabilization between the core customer, the initiatives, and then maybe the dust settling on the macro. There is some opportunity, and we hope we can do better, but right now it's stabilization. You had mentioned gross margin, and I think it's kind of a similar right now, a similar theme. What you've seen from us through the year is it's a pretty stable picture. Again, given what we just took in pricing, that could be an encouraging data point. There could potentially be more behind it, depending upon how things go. The other thing on margin that we're going to keep our eye on is mix.

Certainly, if progress that we saw in Q3 continues on the core customer, that could help relieve what's been a historic mixed headwind. Cautiously optimistic on gross margin, but a lot of moving parts. On the OpEx front, what we've been talking about for a while now is we've had some pretty heavy step-ups in OpEx over the last two fiscal years. What we had said is that as we looked to 2026, we expected some of those line items that were driving the increases to moderate. Increases, but moderating, and that's still how we see it. The added element there is the productivity initiatives that Martina touched on that are starting to build. We talked about the $10 million-$15 million in annualized run rate. We're on track there.

We have talked about that there's quite a bit in the pipeline behind that that the team, Martina and team, are executing upon. We do see opportunity there to level out the rate of OpEx increase as compared to the last couple of years. You put that together, and again, it's really early, and we'll come back with more, but we would expect starting in 2026 that you could expect a more typical kind of incremental margin picture for the company.

Tommy Moll (Equity Research Analyst)

Thank you. I appreciate the insight. I'll turn it back.

Operator (participant)

The next question comes from Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel (Research Analyst)

Hey, good morning. Thanks for the question.

Kristen Actis-Grande (CFO)

Hey, Ryan.

Erik Gershwind (CEO)

Hey, Ryan.

Ryan Merkel (Research Analyst)

The first question I have is just on the average daily sales trends. This might be hard to answer, but when I look at April down three and then July, August, kind of guidance implies up one. This is average daily sales. The pieces that drove the improvement, how much of it was the macro? Erik, I think you said in April and May was slow, but has since improved a bit. Then you have pricing, and then you have initiatives. It'd be helpful just to hear from you the sources and how much each has contributed.

Erik Gershwind (CEO)

I'll start, Ryan. I mean, and it's tough to—this is a tough one to break apart. What I'll tell you of the three, as you move through, we had talked about on our last call that we took in a late March pricing, a price increase. Other than that, price was not really a variable in the last—if you're looking at sort of the growth rate the last couple of months, pricing wouldn't be a major variable. We're talking about the last couple of days for any sort of meaningful movement. Really what you're left with, if pricing is not a wild swing there, you're looking at macro and initiatives. We tried to give you some color on the initiative progress. It's not a perfectly straight line, but it's been encouraging. We do think that there has been some influence on those numbers on the macro.

It wasn't surprising to us that post-liberation day, uncertainty for customers is generally not their friend or our friends, and people pause. Not shocking that April would have been soft. On top of that, remember, we did have an Easter timing headwind in April and then begin to ease May and June. I would expect the swings month to month, probably as much as anything macro as it was the initiatives, which are kind of like a build in the numbers.

Ryan Merkel (Research Analyst)

Okay. Yeah, I knew that was a hard question, so thanks for entertaining it. My second question on the core accounts, it's great to see some of the improvement there. How aggressively have you started to market the web pricing yet? I've asked you this question before, but where do you think core account growth can get to? Remind us how much higher the gross margins are versus the national accounts.

Erik Gershwind (CEO)

The marketing, and I'll touch on marketing, Ryan. Marketing, we're in full swing there. Remember for us that you'd referenced the web pricing realignment, Ryan, that we did last year. For us, that was really an enabler because we have a value proposition that's focused on saving our customers time, money, improving their production process. We don't want to win business on price, but it was an enabler to take price away as a headwind. Check on the web pricing realignment, check on the website upgrades. You're now seeing our marketing pretty much in swing. I mean, that will continue to build, but we are seeing it. Martina mentioned it's a combination of digital programs. It's a combination of personal outreach.

Some of the metrics that we cited there in terms of, for instance, the direct traffic increases to mscdirect.com, as much as anything, are a reflection of the marketing program. We feel like it's in market. We still feel like, Ryan, look, we're encouraged, as you said, by progress in Q3 on the core. We have a ways to go. Ultimately, where we'd like to see it, given how low our share position is and how fragmented the core customer, that small to medium-sized customer base is, ultimately, we'd like to get that customer base growing consistent with company average, which happened this quarter, but obviously getting company average up to our goal of 400 bps or more in terms of outgrowth above IP. There we still have work to do.

Ryan Merkel (Research Analyst)

Got it. All right. Thank you. Pass it on.

Operator (participant)

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

Ken Newman (Analyst)

Hey, good morning, guys.

Kristen Actis-Grande (CFO)

Hey, Ken.

Erik Gershwind (CEO)

Hey, Ken. Good morning.

Ken Newman (Analyst)

Morning.

First question for me, maybe just going back to the comments that Martina touched on on the USA product set, the outperformance you saw in the ADS growth from your US-ready product set, how confident are you that that isn't reflecting a pull forward ahead of price increases, just given it sounds like you're being a little bit more constructive on further price increases as we move into fiscal 2026?

Martina McIsaac (President and COO)

I think that, I mean, we really have not—it's obviously hard to measure, but we haven't seen a lot of meaningful pull forward in any of the months since the tariff activity has started. We are actually seeing the growth come more directly from our cost-out programs that we conduct with customers. There we are seeing a lot of pull to say, "Come and do an assessment. Look at my overall portfolio. Bring my overall cost down. Let me anticipate how I can move ahead of tariffs." It seems to be a legitimate shift based on our optimization work that we do in the field with customers on a regular basis. I wouldn't attribute it to pre-buy.

Ken Newman (Analyst)

Understood. Okay. From a follow-up, Kristen, I think we've—and Erik, you mentioned this—kind of moving back towards this more normalized incremental margin. I think your target's 20%-ish. I know it's still kind of hard in terms of visibility on the volume side, but while we're also kind of throwing in this opportunity from price, is there a way to kind of help us think about what is the right level of volume growth to kind of keep margin stable or growing relative to the flow-through on price?

Erik Gershwind (CEO)

Yeah. I would say there are so many moving parts right now. What I'd rather do is come back, "Look, we'll give you full color next quarter in terms of specifically for 2026." What we did want to give you, though, is a little bit of sort of walking line by line revenue, margin, OpEx to say that we do see, absent major shifts in the environment, a more normalized, especially on the OpEx line, a more normalized—so stable on revenues, more or less stable on margin pending what happens on pricing—and a more normalized OpEx view between a couple of these big line items leveling and then the productivity moving in. You're right. Look, what we've said is our goal on incremental margins is 20%+ over a cycle. That's where we want to be.

We will come back with more detail next quarter to give you a better feel for 2026.

Ken Newman (Analyst)

Got it. Thanks, guys.

Operator (participant)

The next question comes from Patrick Baumann with J.P. Morgan. Please go ahead.

Patrick Baumann (Analyst)

Hi. Thanks for taking my questions.

Erik Gershwind (CEO)

Hey, Pat.

Patrick Baumann (Analyst)

Hi. On the website metrics, just going back to that, you quoted, I think you said, direct traffic up below double digits, and that's year-over-year, and then mid-single digits since the enhancements. I think you said site conversion improving. Can you talk about the marketing that's required to drive that and whether you're seeing that lift in the quarter sustained, or did you see kind of an initial boost from any marketing that you did on the changes that then faded a bit? Just kind of curious on how that performance looked through the quarter relative to when you started marketing it to your customers. Along those lines, are you seeing this more effective with your existing customers, or are you seeing any progress on new customers?

Erik Gershwind (CEO)

Yeah, Pat, I'll start here. I think in terms of the portfolio of marketing efforts, and you are right to connect the website performance and the marketing performance specifically as it relates to traffic. When we want to evaluate how is the site doing in terms of enhancing the customer experience, making it easier to find, shop, buy, etc., etc., we're really looking at conversion rates, and we're seeing some encouraging green shoots there as we referenced. The marketing influences getting customers to the site, and you were quoting the metrics. In terms of a portfolio of activities, it's along the lines of what we've been describing to date, and it's a combination of digital, personal outreach, even some print, believe it or not. In terms of the timing, no, it's been fairly consistent.

It has not been like a kind of this mad rush in the beginning and then either a dissipation or leveling off, which has been encouraging. It's been more or less, and it's not exactly a straight line, but fairly consistent. In terms of the makeup, yeah, no, we're seeing it both in terms of, and you could imagine we're tracking performance of our existing customers, how are they doing, and how are we doing generating new customers. I would say progress. Again, we're calling it progress. There's still a ways to go here, but progress would be along both dimensions, new and existing.

Patrick Baumann (Analyst)

What have been the pushback on changes that people still want to see that you haven't done? What have people said like, "Okay, good, you've done this, that, or the other thing, but you still need to do this or that?

Erik Gershwind (CEO)

Oh, I think we have a ways to go. One of the things, we're constantly speaking to customers. We're constantly benchmarking both inside and outside of the industry of who does certain elements really well. You could go through any portion of our site, and we have a team that's focused on getting better every day, Pat. We have made significant strides in terms of the personalization of the experience. We have made significant strides in the ability to click and find stuff and the presentation once you find it. We have made significant strides in getting on and off the site really quickly. That said, we can be better in all areas. Again, we have a team focused on constant improvements really on a weekly, monthly basis.

Patrick Baumann (Analyst)

On the new hire and tech that you called out, you mentioned something about Digital Core. I think that was something that you paused a year ago while you were doing the website redesign. Remind us what Digital Core is, and is that initiative moving ahead now? Remind us kind of what that entails.

Erik Gershwind (CEO)

Yeah, Pat. First of all, we're really excited that John has joined the team. We've talked about the team internally on a few of these calls. We've got a strong team internally. John brings even more strength and depth to the group. Yeah. The Digital Core, if you remember, is intended to be an upgrade to our core order-to-cash, procure-to-pay systems. The intent was we see a lot of productivity unlock from legacy systems and legacy processes. You're correct. We really slowed it down. Given some of the issues we had beginning last year, particularly with the website, we were in triage mode and saying, "We're putting first things first." Progress on the Digital Core slowed. We're now feeling good about progress on the website, as I described. Still work to do, but good. Progress on getting a few other key projects over the finish line.

We have reshaped the Digital Core initiative and are gearing it back up at a faster pace now to move at a faster pace. Again, the idea there is it's going to be part of our productivity unlock, not just 2026, but beyond 2026, 2027, 2028 by attacking some of the core value streams in the business.

Patrick Baumann (Analyst)

Last one, quickly, if I can. Can you talk about the trends you saw through the month of June? Did the month start better than it finished? Was it consistent? Did it finish better than it started? I do not know. Any color on trends through June?

Kristen Actis-Grande (CFO)

Yeah. Nothing specific that I would note there, Pat. Fairly consistent through the month.

Patrick Baumann (Analyst)

Okay. Thanks so much.

Kristen Actis-Grande (CFO)

Just a reminder too, Pat, we're still in our fiscal June, just as a reminder.

Patrick Baumann (Analyst)

Yep. Got it. Thanks.

Operator (participant)

The next question comes from David Manthey with Baird. Please go ahead.

David Manthey (Senior Research Analyst)

Good morning, everyone. Thanks for taking my question. First off, Erik, why is 20% the incremental target today? When I look back historically, you touched that level back in 2022, but that was with sort of mid-single digit pricing. What about the business structure today gives you confidence that you can get back to that level of contribution margin when growth resumes? I guess focusing primarily on OpEx, assuming gross margin might be up a little bit, but primarily I'm thinking on the cost structure.

Erik Gershwind (CEO)

Yeah, sure, Dave. I'll start, and then either Kristen or Martina can fill in. First of all, what I wanted to reinforce is that the 20% or better is over the cycle. That's our goal. We absolutely still feel it's achievable, Dave. I think a few things I'd point to. Number one, and I'll get to your OpEx, but number one is gross margins. Yeah, they've been relatively stable now, and that certainly helps. Let me address OpEx. I think a few points I hit. Point number one, you look at what's happened over the last couple of years, and we've layered in some fixed cost investments into the business at a time when revenues dropped.

Right out of the gate, we do feel like at some point, as progress continues internally in our self-help on the share gain side, the core customer, etc., and markets restore, and look, our outlook for the manufacturing sector remains positive long-term, there ought to be a lot of latent leverage, and we see a lot of latent leverage in the business. A great proof point that we have talked to was our implant and our vending installations where you look and we are expanding our footprint and our potential for share capture at a time when customer spend is suppressed. I think the first thing I would say is we see a lot of leverage to be had to just leverage the fixed cost that has been added into the business as revenues restore. That is point one.

I think point two, and I'd really lean on the changes that Martina and Kristen are driving in the company. There is a greater focus on productivity. Even beyond productivity, I'd refer to it as sort of a cultural enhancement on continual improvement and constantly looking at sharpening our performance edge, sharpening the lens. Martina's been touching on the $10 million-$15 million in productivity projects, but from our standpoint, that's just the beginning of what we see in terms of opportunities to get better. I think that's a new kind of tool in the tool belt relative to where we were years ago, Dave.

David Manthey (Senior Research Analyst)

Okay. Thank you. Then second for Kristen, just a couple of modeling questions. Is it correct? I think the 60 basis points of acquisitions in the third quarter were Premier and ApTex, and those were sort of lapped now. Unless you do something here prospectively, fourth quarter acquisition contribution should be zero, I believe. Just checking that. Then second, on other expense net, I think that line item usually runs about $5 million-ish. This quarter was like $2 million, but you did not change your interest in other guidance of $45 million for the full year. Could you just talk about that dynamic as well?

Kristen Actis-Grande (CFO)

Yeah, Dave, on the first question, yes, you got it absolutely right on the acquisitions. On the other expense line, we had a revaluation on the balance sheet primarily tied to the Mexican peso, which is what you're seeing. That made that sort of anomalous this quarter.

David Manthey (Senior Research Analyst)

No change in the full year. Is there a catch-up in the fourth quarter? It doesn't sound like it, so.

Kristen Actis-Grande (CFO)

No, no. Nope.

David Manthey (Senior Research Analyst)

Okay. Yeah, right. Thank you.

Operator (participant)

The last question today will come from Chris Dankert with Loop Capital Markets. Please go ahead.

Chris Dankert (Senior VP of Equity Research)

Hey, good morning. Thanks for taking the question. I guess just quickly for Martina, maybe on the sales force efficiency and productivity gains, maybe can you talk through what some of the actual actions are being taken there? Is this 80/20 customer focused? Maybe just some flavor there would be helpful.

Martina McIsaac (President and COO)

Yeah, absolutely. Thanks for the question. Just to go back, this is the first step of a bigger program around sales excellence and sales effectiveness. What we're talking about right now is coverage. What we have done over the past couple of quarters is taken a look at where the customer potential is relative to how our sellers are deployed. Obviously, respecting existing relationships, we have redesigned territory. It's basic sales hygiene to make sure that we're covering the best potential with the best trained people. From then, we have to obviously build relationships, gain access, and start to develop a pipeline of opportunities. What we look at is how often are we touching these customers with these new relationships, how is the pipeline developing, and then how is the sales per rep per day starting to grow?

We completed the public sector redesign first. That was completed in our first fiscal quarter. Then we went into national accounts, did the same thing to make sure we were touching the right locations with the right frequency, and we did our core redesign as well. It is a step one, and it is really about account coverage for the best potential.

Chris Dankert (Senior VP of Equity Research)

Got it. Thanks so much for the detail there. Just as a follow-up for Kristen, sorry, I missed it earlier when you were talking about the moving parts for fourth quarter margin. What was your comment on the price cost spread into the fiscal fourth quarter?

Kristen Actis-Grande (CFO)

Yeah, Chris I just said it would be pretty narrow. We are going to have more price stepping up sequentially. We will not get a full two months of realization from the increase that just happened a few days ago. The other thing to note is that we are seeing a step up in cost Q3 to Q4. Overall, it is a pretty narrow, though favorable price cost spread Q3 to Q4.

Chris Dankert (Senior VP of Equity Research)

It should be fairly neutral sequentially because you had a positive price cost this quarter as well, correct?

Kristen Actis-Grande (CFO)

We did, yeah. I would not model a significant benefit from bottom line. I would not model a significant benefit from price in Q4. It will be up, but it will be offset a healthy amount by the increased cost.

Chris Dankert (Senior VP of Equity Research)

Got it. Thanks so much for the color there.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Ryan Mills for any closing remarks.

Ryan Mills (Head of Investor Relations)

Thank you for joining us.

Operator (participant)

Okay. His line has disconnected. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.