We are live and keeping everything on time. Thanks everyone for joining us. My name is Dave Manthey. I am Baird's industrial distribution analyst. Pleased as always to have MSC Industrial. I got a little hot mic action here. Can you tone it down a little bit? Okay. Great. MSC Industrial, leading provider of metalworking products, MRO products, measuring instruments, safety products, et cetera. One of the largest North American distributors of MRO products through e-commerce, inventory management solutions, and on-site installations as well. To speak with us about the company today, and we are going to, as usual, do a brief overview, and then we will go into Q&A. I will go in order from your right to your left. We have Ryan Mills, VP of IR and Business Development, Jahida Nadi, who is SVP of Sales, and Martina McIsaac, President and CEO of MSC Industrial.
Martina, are you going to do the opening comments?
Let us overview.
Okay. Let us do the overview, and then we will come back for Q&A.
Okay, sounds good. Thank you for joining today. It is nice to see everybody. I thought we could start, I will give you a little bit of an overview of company operations and financials, and then maybe some of what is going on at MSC recently. We are an industrial distributor, as Dave said. We support over 2.5 million SKUs. We have about $4 billion in sales. Our history dates back to 1941, so 85 years, which has helped us build a leading position in metalworking. We lead the metalworking market with a strong technical reputation, and we support that business. It is about 45% of our sales today is metalworking, and we support that business with 150 really industry-recognized metalworking specialists. We compete primarily in North America, and that is still a very fragmented market for us.
It is about $200 billion in size, and the top 50 distributors really still have only 30% of the market. We still think there is a lot of room to grow. For us, our sales are 95% in the U.S. We are heavily tied to light and heavy manufacturing. Those end markets represent 70% of our end market exposure. Moving on to some of the financials that make us a compelling investment. Very healthy balance sheet with a net debt to EBITDA ratio of approximately 1x. We have a strong cash generation profile, free cash flow conversion north of 100% for the last three years, and that lets us consistently return capital to shareholders. We have had a history of annual increases to the ordinary dividend that really puts our dividend yield top of the class among our peer group.
From a financial perspective, our fiscal year runs September to August, so we reported our annual results last month. This was a really important inflection year for us as a company. We have set a mission to restore the company to mid-teens operating margins. Adjusted EPS for this past fiscal year grew 25%, and adjusted operating margin increased by 110 basis points as these turnaround initiatives have really started to take hold, both in growth and some of the actions that we are taking to address our cost structure. It is a pretty exciting time at MSC. I am going to give you a little bit of high level of what the path looks like before we jump into Q&A. Our path to a mid-teens operating margin has two primary initiatives.
One, we have rebuilt an organic growth engine which will recover and sustain our core customer business, and the second one is we are aggressively reshaping our cost structure. The core customer to MSC, our core metalworking customer, very important to us. It is about 55% of our revenue. It is our highest margin customer, and we had lost that customer over several years. Over the past couple of years, we have done a couple of things to bring that customer back. We completely reshaped our pricing. We built a digital marketing engine, and through the course of calendar 2025, so ending in December last year, we completely reshaped our sales structure for greater coverage, greater efficiency. We now use AI to drive a data-driven territory planning model. We have implemented best-in-class sales management process. That is why I am so glad to have Jahida Nadi here with us today to talk to you about that.
Early indicators, sales and volumes have improved in the past year with 100 fewer sellers in the field. We are doing more with less. Sales per rep per day has improved and continues to improve in the mid to high teens range, so efficiency. Our core customer, now at the end of our fourth quarter, was growing double digits. That is the first time in over three years that our core customer growth has been at that level. We are starting to see the results that we wanted. On the cost side, we have committed to a productivity pipeline that will get the company back to a mid-teens operating margin, and we have made significant progress in year one against those objectives. You see that in the results, and we just recently committed to an AI-first path to accelerate those initiatives and that productivity.
Now we are almost closing our first quarter of 2027. We continue to see momentum building, higher levels of growth, further margin expansion. We think we are strongly positioned to deliver the incremental margins that we have outlined in our framework and make progress on the long-term targets. It is a great time to be alive at MSC.
Very good. You have made some significant changes to the organization, and things that I believe needed to happen for some time, and you addressed them head-on immediately when you took over as CEO. Could you talk about the sales force realignment and why that was so important to the company?
Yeah. MSC had a massive deployment of resources in the field, so we were spending over $350 million on sales resources, and our organic growth was just stalled and stagnated. What we did was, I will talk a little bit about the structural stuff, and then I will let Jahida talk about the process and behavioral stuff, and I am very happy that she joined MSC right at the right time to do that. Essentially what we did is we redesigned every territory in the company. We used to have a very inefficient account assignment process. We have gone to a fully AI, data-driven, geographically based territory model, which improves efficiency. If you can imagine, we used to have a rep from Chicago driving to Wisconsin and a rep from Wisconsin driving to Chicago. I mean, these are pretty basic things. You need to have efficient territory coverage.
But we also needed to update our coverage. We were very heavily indexed to the industrial Northeast, and we needed to move some cover. We were over-resourced up north and under-resourced in areas like Texas and California. So redesigned all the territories, and in that, we were able to cover more of our core customers. So we did shed some customers that were non-strategic for us in favor of covering new accounts. And we also eliminated what we had, which were legacy overlapping sales structures. So MSC had made acquisitions over time, and those sales forces were still completely independent. So that led to this redundancy and this sort of bloating of the cost structure. So we have now streamlined down to one seller, one service person kind of a model in the field, and in doing so, also greatly simplified our compensation system.
When you had two or three or four MSC sellers calling on the same account, you had two or three or four MSC sellers bonusing on the same sales dollar, so it became very cumbersome and very costly. So new structure and new comp system, and then new leader.
Thanks, Martina. I think, yeah, operationally for me, there are five key elements in running a very professionalized sales organization. I think Martina hit the first one, which is how you design great territories and healthy territories, super critical. The second piece being how quickly you can hire strong, good talent into the organization. The third one, how you ramp up that new talent or new seller in your organization and get a return on that investment. The fourth one is a very professionalized, structured sales management process that drives disciplined execution at scale across the business. And then the fifth one being that simple pay plan that Martina already articulated as well.
But those are the five key elements, and as you heard her state, that first one and that fifth one, we really took care of during the restructuring, and we created a simple pay plan on top of the restructure and optimization of the sales force. And then the other ones, we really complemented those two immediately after December and into Q2 to say, "Okay, we want to improve our time to hire," and we did that by 20 days, which was pretty significant. If you take 20 days and multiply it out by the number of vacancy you have, I mean, that's customers that you aren't covering on all of those days, and so that improves dramatically. The next one was, of course, the sales management process, and we really didn't have scaled, structured standards across our sales organization.
I think our leaders would wake up in the morning and make sure that they did the best they could, but there's 150 sales leaders, and that was defined by each of them differently. For us to take what's best in class and make that the standard of expectation for every seller by role and responsibility, how many calls you do a week, a day, a month, for instance, and then manage a pipeline of opportunities with the velocity that you want them to, from lead to close, is critical in making sure that we can steer our sellers exactly where we want them at the right time, at the right place. That, of course, efficiency helped, and then we created a new onboarding program.
Imagine as a new seller coming into an organization and sitting behind a screen for hours learning, building your competency remotely in your remote office or in a coffee shop through video-based learning. The stickiness of that isn't so great. We now move to cohorts. All of the new sellers start on the same day of the month. They are in a cohort. They have a curated curriculum from day one to all the way 52 weeks, their first 52 weeks within the organization, and they are trained by subject matter experts that then they go and apply and do while they're visiting customers with homework and so forth.
Prior, easy to say that not even in a year or even longer, we broke even with a new seller coming into the organization, and now we've reduced that to less than six months at times to have a return on your investment for a new seller, which is exactly what you want to do. It also allows our sales leaders to have the confidence to performance manage and drive accountability, because it's hard. As a sales line leader, if you don't believe that you're going to get talent coming in, you don't have a pipeline, it's also hard to performance manage and do that. Prior to the restructure that Martina was speaking about, we had sellers that hadn't hit quotas for eight quarters, perhaps. We really weren't driving that type of culture, which has now improved.
When we see the number in the operational statistics of the outside sellers, clearly that number came down initially. Based on what you're saying, maybe I'm hearing, is there more churn going on there still as these changes are being implemented? What I'm asking is, it would seem like if I was a longtime MSC sales rep and I sort of had my territory and my customers, I had my way of doing business, and then all of a sudden everything changed, and then I'd be like, "Okay, I'll try this." After a while, you're like, "You know what? This isn't working for me." Just wondering if you've had any pushback as it relates to the existing sales force. The number that we see is not the same people necessarily. There's some additional churn going on there.
Right. Maybe I will tackle the initial churn. We did expect attrition, right? The standards are going up. The performance expectations are so much higher. We modeled it completely differently than it happened, I have to admit. We lost a little more than 90 people right away when we put the changes in place, because it was just a bridge too far. We expected that to happen over months, and it happened within a matter of weeks. Do you want to talk now about your hiring and what you are doing?
Yeah, for sure. I would say most of the folks that struggled with the change management have left. We do have natural attrition, of course, and we have normalized, let's say, vacancy rate since Q2. Q2, our vacancy rate shot up. Q3, it came down. Q4, it got better. I believe we are in a healthy state, and I do not expect that to go to zero ever. That is okay. I do not know, did I answer your question on that piece?
Then the engagement.
Yeah, then the engage. So, the behavioral change and I guess the feedback from our people. My leadership team and I spent a good part of four months on the road, even more so than we are normally, and we did over 40 local town halls across the country to answer questions, make sure that we bring our people along. Two things happened, I think. One is, you have leaders there. At times they were saying, "Hey, this is the first time someone has come and visited us and is doing all of these things," which I think they appreciated. More importantly was that once we implemented standards and all of these things, though it could have felt hard, while our overall compensation dollars went down, what we paid in variable comp, the number of people hitting quota and achieving increased.
People started winning and realizing, "Okay, I have my leaders." The standards weren't just for the sellers. The standards were also for the leaders and to be great coaches, to be out in the field and riding along with sellers at least once a month, et cetera. They started to appreciate the fact that, "Okay, I have people that are leaders that are going to sit by me, coach me. These standards are helping me." They started to understand it and buy into it.
Make money.
Make money. Once you start getting paid, you follow through. A lot of people thought we just had our employee opinion survey, and a lot of people thought our engagement score would fall off the cliff in a year like this. Actually, we scored at 84, which is well above any benchmark of a sales organization and held strong and did well. Very proud of that.
Okay. Final point on this, then we can move on, but I think one of the statistics you gave us last quarter was the number of sales touches per day or per timeframe, and it doubled or something.
Yep.
How sustainable is that? How were you able to make that happen?
It's a great question. I definitely believe it's going to continue to improve. Will it continue to double? I probably won't set a target like that for us. But it improved. As you mentioned, it doubled year-over-year. How I define a customer touch is an in-person interaction with a key objective that has an outcome. It helps to ensure that we're driving the velocity of that pipeline, that we're not only covering customers, but penetrating and getting more share of wallet with our customers. I believe that the work that the team's doing is going to improve and continue to mature, and it's going to increase.
Also, we are looking at investing in a good tech stack to enable our sellers to even drive more productivity, have more time away from screens, planning, looking at who should they call on and when, and spending time doing that so that agents can do that, apply which customer with what white space, have account level planning, go execute it, close their calls for them, move opportunities along the pipeline. If we can provide the right technology to our team members, I definitely believe that that's going to continue to go up.
That system is in place today, and it's just a matter of training?
Elements of it are, but there's a good roadmap I have for this year and continuing that.
Okay. I think the e-commerce experience is another element of sales that needed attention. Could you talk about where we are with the website and the e-commerce experience in general?
Yeah. The commercial engine that we're trying to build kind of has three pieces. This one piece is the field sales. We also built sort of a customer experience ecosystem at the same time to work on customer retention, and then the third was this digital marketing engine. I mean, all of our website We will never be done with our website, but all of the metrics are green. The small uncovered customers have been growing double digits. They would primarily serve themselves through our website. They've been growing double digits now for three quarters. And we're measuring things like, not only the simple things like cart conversion and that kind of thing, but the time it takes to search. When you have 2.5 million SKUs, search is a big deal, and so we're investing there.
I think the next threshold is really digital self-serve tools for our customers. We have some pretty aggressive headcount targets. Today, we've enabled very little digital self-serve for customers, so you still have to call MSC if you want an invoice or call MSC if you want a packing slip, and all of that stuff should be available hands-free to customers. And so that's kind of the next wave. But in terms of straight website performance and e-commerce performance, we're in double-digit growth territory.
Okay. Okay, the other component, and you referenced it, is the back office
Yeah
and getting more efficient there. I think you've made it pretty clear that you think there's 1,000 people too many in your back office. Number one, could you talk about how you arrived at that number? Then number two, you're not doing some massive RIF or something. This is just through attrition and through productivity and reassigning people and that sort of thing. Maybe you could just talk about how long this timeline is.
Yeah. When I was going to take over as the CEO, one of the commitments that we made internally and externally is to address MSC's cost structure. It had become, over time, bloated, and our back office cost was growing out of step with sales, we had to do something. What we did was we created for ourselves what I would call our proxy competitor. There's no perfect competitor in the market. We all do things a little bit differently, but we looked at our public peers and took sort of by department who's most relevant to us, who looks like us the most, and we compared headcount and productivity in each of those departments.
What we realized was that at, let's say, a $4 billion level of sales, it would take us 1,000 more people to generate the same result than it's taking our competitors today. But we got that broken down into granular detail, so where are those heads? Why is this? MSC has lagged behind in automating work. We still do a lot of manual work. I mean, I gave you the example of phoning for your invoice, but if maybe some of our peers have automated certain functions, we are still doing it with people. It gave us a path to where that opportunity is, and because we've lagged behind in technology, it now gives us a really interesting opportunity to leap forward with AI. You saw that decision that we made last month to move to more of an AI-first tech strategy.
We attrit normally in these back office roles somewhere around 1,000 people a year. What we're hoping is our team is completely engaged across the board in identifying these opportunities, and I think about it on two levels. We've got capital P productivity, so big projects where we're going to change how work is done in an entire function, and then we've got small P productivity, where people are just going to look at their own work process and automate. Both are ongoing. There isn't an obvious I mean, in sales, there were obvious branches that we could snip immediately to reshape the structure. As Dave said, now there's nothing obvious where we just don't need a department and we could clip it, but we know where we can go to get that headcount, and we've kind of mapped it out.
The speed depends on two things. It depends on tech complexity, and it depends on customer adoption. If there are internal processes where we don't need a customer to rely on us, we can move much more quickly. If it's a customer-facing process, obviously there's an adoption timing that's planned in. Mid-teens operating margin is our goal with this work, and we have now this With this new tech roadmap, we've sequenced it in a way to go after it. We're not going to signal ahead of time just because of the cultural element, but we'll share it when it happens. It's not going to be linear. It's going to be chunky, but we're highly committed to it.
To be clear on the tech tools, you've talked a lot about, these are modules and plug-ins.
Yeah.
This is not a platform.
It's not an ERP, no. Thanks for asking that. We actually just took an impairment last quarter on a near-ERP project that had been live at MSC for a couple of years. We do have multiple legacy systems that are all stable and can support our business, and this is not a big bang. This is a lay it on top and leverage the headcount productivity. We want to pay as we go.
And Andrei coming in.
That's right. Two important points. We have, in driving this productivity, found the space to make sure that we can pay as we go. We don't expect any big on-top investments because we were already investing a lot in technology, so we've replaced that, and we expect to be able to keep a stable run rate. The really exciting thing is that we've just hired Andrei Dumitriu, who was the head of revenue technology at Shopify, to come in and help us transform. An AI-first company thinks differently, acts with a different speed, has a slightly different risk profile. With Andrei already on board, now we've been able to attract some really exciting engineering and product talent as well. I feel really excited about what's ahead.
There's a lot of opportunity. We spent all this time because there is a lot going on at MSC internally, and then let's talk a little bit about externally. Of course, we've got tungsten prices. We've got your organic volume growth that we've seen return positive recently. Could you talk about those two elements as we look forward? Because I think there's an assumption that pricing, you're at least comping more difficult year-over-year compares on pricing. While volume has ticked up gradually, is there a handoff here at some point where volume accelerates in spite of pricing maybe moderating in the 18-24 months ahead?
Yeah. There's like four pieces there. Let me see what I can do. First let me say, in our end markets and from a volume perspective, we are definitely feeling a recovery. Our top five end markets, aero, auto, fabricated metals, primary metals, and machinery and equipment, all positive after a long trough. We're excited about that, and we're feeling it. Where you can see that as an indicator is in the sales through our vending machines, which we do publish, which are growing double digits. That's installed demand, no new share gain, just greater customer demand. We have a tailwind there. Tungsten pricing has been a tailwind for us for the past year. I mean, it's been difficult to navigate. We didn't see a lot of demand destruction. We're still seeing strong dollar and unit growth in metalworking despite the pricing.
The tungsten index itself sort of peaked in the early part of last year, stabilized, and has now started to come down a little, but that has not made its way through the supply chain yet. We're still taking tungsten-based price increases now in this quarter. For reference, tungsten impacts the production of carbide cutting tools. Carbide cutting tools represent about 15% of our revenue. It was a significant impact. We don't expect to see price decrease from the tungsten index changes. Our suppliers would have to lower their published list price for that to start happening, and there's no indication that anybody is going to do it. Some of our carbide cutting tool suppliers have actually been public about the fact that they're banking this buffer right now. We'll see what happens there. On the volume side, we lap a really important moment in December.
When we did this sales restructuring, we actually walked away from some customers. That's been baked into our number all year. These were non-strategic customers that we weren't going to cover anymore. If you look at our customer base, you can largely split it into two buckets. The customers that were already strategic to MSC, well-covered, well-resourced, they're growing mid-teens, mid to upper teens. They're performing at or above public peer levels. The other set of customers are three things. Either we covered you for the first time because you were part of this new strategic coverage play, we dropped you because you don't make sense to us anymore, or we changed so much of your coverage that we had to rebuild new relationships, so you felt like a new customer. Those customers were a drag on our volume for the second quarter.
They broke even and turned positive in the third quarter. By the end of the fourth quarter, they were growing mid-single digits. When you look at our volume and our sales growth, it's the average of those two buckets. We expect, as Jahida's work continues and we've stabilized, that that gap keeps closing.
Okay. In the last minute here, maybe you could talk about the competitive landscape. I know it's a long tail of a lot of small competitors predominantly, but anything, it seems like some of the national players are getting more aggressive in abrasives and cutting tools. Anything you're seeing on the ground as it relates to the competitive landscape?
I think our major competitor is still that regional or local distributor that has metalworking technical personnel and relationships. We do see public numbers. I could tell you that our fastener business is growing 20%. Small base, right? So far, I mean, we're playing our game, and we have such a robust metalworking portfolio and technical expertise. We're still confident.
Great. All right, that went fast, but we're out of time. So thank you very much. We appreciate the overview and-
Thanks
Sounds like things are going great at MSC.