MSC Industrial Direct Co., Inc. Class A 2026 Q4 Earnings Call

Thank you, and good morning, everyone. Welcome to our Fiscal 2026 fourth quarter earnings call. Martina McIsaac, President and Chief Executive Officer, and Rob Kuhns, 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 2 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 are 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'll now turn the call over to Martina.

Thank you, Ryan, and good morning, everyone. We appreciate your interest in MSC and your participation on the call today. We are very happy with the way we finished our fiscal 2026 and continued to strengthen our position in the marketplace. Before we get into those details, I want to turn to slide 4 to share just how excited I am to have Rob Kuhns, who joined MSC last month as CFO, on the call with me today. For a brief introduction to Rob, he's a seasoned public company CFO with extensive financial and operational experience across both industrial and distribution markets. In his leadership roles, he's demonstrated an ability to deliver high levels of profitable growth, developed a proven track record of successfully executing on M&A, and has a history of strong team building and talent development.

I look forward to increasing the value MSC creates for its stakeholders with Rob's contributions towards the achievement of our long-term financial targets. At this time, I would also like to take a moment to thank Greg Clark for his interim leadership of our finance team over this past year and his ongoing support of the transition with Rob. Now, moving to slide 5, I will begin with a high-level overview of our results for the quarter that Rob will cover in more detail. I am really pleased by our strong finish to the fiscal year that resulted in record sales and further margin expansion in the fiscal fourth quarter. Sales of approximately $1.1 billion grew 8.6% on an ADS basis, driven by both price and volume.

The team also did a great job executing on this growth, as seen by the adjusted incremental margin of 27% that resulted in adjusted operating margin expanding 170 basis points to 10.9%. Execution is improving, as seen by these better-than-expected results and everything accomplished by the team this fiscal year. I would like to reflect on a few of the milestones the team achieved this year, shown on the slide. First, we successfully navigated the impact of tungsten and tariff-driven inflation. As you recall, we entered the fiscal year in a tough price-cost position that pressured gross margin in 1Q. However, due to consistent action throughout the year, we were able to manage gross margin to support volumes while navigating price-cost dynamics. This resulted in gross margin expansion year-over-year, beginning in 2Q and throughout the remainder of the fiscal year.

During this challenging period, we nevertheless made significant progress in strengthening our key supplier relationships. We continue to benefit from those partnerships, in particular through the ongoing momentum from our growth forum in February that had over 1,000 associates and 400 suppliers in attendance. This event established a solid pipeline of joint opportunities, which has supported an important change in our sales culture as we continue to track and realize wins from this pipeline, which now exceed $100 million. Fiscal year 2026 also saw us strengthen other strategic relationships. A great example of this would be our relationship with Autodesk. As we announced recently at IMTS, we have deepened our partnership with Autodesk and now leverage Autodesk Fusion's connected supply capabilities and all-in-one cloud platform.

This will further differentiate MSC as a leader in metalworking by allowing our experts to optimize tool paths and validate cutting tool parameters more efficiently through state-of-the-art virtual testing capabilities. Lastly, we have transformed the way we operate in the field. We have an optimized structure that targets potential, maximizes coverage of the right customers, and integrates MSC's full value proposition. We have an effective compensation system that rewards the right behavior. We have new standards within a professional sales management process that has accelerated momentum and supported execution. For example, by the fourth quarter, we have nearly doubled the number of daily in-person customer touches with roughly 170 fewer sellers, and are growing volumes with roughly 250 fewer total heads. We have rebuilt the team after a period of attrition.

We're attracting great talent to MSC and have put a best-in-class onboarding program in place, which is already accelerating time to money for our sellers. Turning to slide 6, this improved execution is reflected in the KPIs that matter most to MSC. Starting with the core customer, ADS trends have now outpaced total company growth for five consecutive quarters, achieving double-digit growth in the fourth quarter for the first time in over three years. Sales per rep per day and trailing 12-month sales per total headcount trends also remain favorable and show we continue to do more with less. I take this improved performance during a period of immense organizational change as evidence that our team is with us and our execution and operational rigor is strengthening. This gives us the confidence to continue on our path to transformation across other areas of the business, for example, our technology strategy.

As a reminder, we have defined an aggressive productivity roadmap focused on customer experience, associate productivity, and the headcount opportunities that come with automation of manual work. To ensure our path to mid-teens operating margins, it was necessary to align our technology investments to this strategy. As I have shared on previous calls, our CIO, John Reichelt, has spent the last few quarters performing a detailed assessment of our technology infrastructure against the needs of the business. To this point, MSC had been pursuing a program we have referred to as Digital Core, which was an end-to-end modernization of our procure to pay and order to cash processes. Following the completion of John's review this quarter, we concluded that a greater degree of speed and flexibility is required to achieve our goals.

As a result, we have reshaped our tech strategy, moving towards an AI-first modular approach to systems enhancements and have decided to discontinue the previous Digital Core program, resulting in an asset impairment charge of approximately $42 million. This shift allows us to take a faster, more flexible pay-as-you-go approach to our productivity roadmap. We see lower risk due to smaller and narrower implementations, reduced fixed costs, and faster time to money in achieving ROI. We are already seeing benefits from our early implementation of AI solutions in the areas of cross-sell, up-sell and inventory management. We will now accelerate this focus to other areas of the business. To support the speed and agility we seek in this transformation, I'm pleased to announce that we've added Andrei Dumitriu to my team in the newly created role of VP Business Systems and AI Strategy.

Andrei comes to us from Shopify, where he most recently served as Head of Revenue Technology and AI. We will keep you posted as we progress and expect these investments to fit within the envelope of our profitability targets. Switching gears to the macro environment, we continue to see increasing evidence of an industrial recovery taking hold with positive IP readings across all of our top manufacturing end markets. Further evidence can be seen in recent MBI readings that remain above 50 and in the ADS trends of our solutions that continue to show volume improvement on a per unit basis. As you can see on slide 7, average daily sales outpaced the IP index for the fifth consecutive quarter and was above our target of 400 basis points again this quarter.

While this continues to be largely price driven, our improving volume trend signals that our initiatives are taking hold and we are headed in the right direction. Before I turn it over to Rob, I would like to acknowledge the efforts of the entire MSC team. We implemented a lot of changes during my first year as CEO. A year ago on this call, I said that we would succeed if we raised our own expectations, inspired curiosity and a spirit of continuous improvement in our team, and drove speed and accountability as we deliver on commitments. We are building a performance culture, and I could not be more proud of our MSC associates for the way they have responded. With that, I will now turn the call over to Rob to introduce himself as our new CFO and cover our financial results in more detail.

Thank you, Martina, and good morning, everyone. I am very excited to be here and to work with Martina and the entire MSC team as we make progress on the unique opportunity that MSC has for improved financial performance and shareholder value creation. My focus will be on the key drivers of that value creation, profitable organic growth, sustainable margins, strong cash flow generation, and disciplined capital allocation. To further support the performance culture Martina mentioned, I will ensure we take a rigorous, fact-based approach, establish clear accountability, and translate our priorities into measurable results. I commit to maintaining clear and consistent communication with all of our stakeholders as we move forward. Moving to our fiscal 4Q performance on slide 8, I am encouraged by the continued momentum that led to these better-than-expected results. Sales of approximately $1.1 billion grew 8.6% year-over-year on an average daily basis.