Good morning, and welcome to the MSC Industrial Supply Fiscal 2025 First Quarter Con- ference Call. — Operator Instructions — 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.

Thank you, and good morning, everyone. Welcome to our first quarter fiscal 2025 earn- ings 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 documents, 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 other SEC filings. Lastly, during this call, we may refer to certain adjusted financial results, which are non- 1 GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our pre- sentation 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 Erik.

Thank you, Ryan, and good morning, everyone. Thanks for joining us today. Let me start by wishing all of you a happy and healthy New Year. On today’s call, I’ll reflect on our recent results and the progress of our mission-critical program. I’ll then cover the current operating environment and provide some longer-term perspective before turning over the call to Martina and then Kristen. Before getting into the details, I’ll start with a brief state of the company. We delivered a solid first quarter that exceeded our expectations, driven by higher-than-anticipated revenues. While it was a good start to the year, we’re mindful that the near-term envi- ronment remains soft, and our company remains in a transition period during fiscal ’25. Looking beyond the near term, we remain committed to restoring growth and to achiev- ing the objectives for market share capture and margin expansion that we outlined at the start of this mission-critical chapter. The combination of an improving macro outlook in calendar 2025, longer-term secular tailwinds and our slate of growth and productivity initiatives all make for a compelling opportunity for us to deliver on our mission-critical targets. Let me now turn to the specifics of the quarter. I’ll begin on Slide 4 with an overview of our results and an update on our mission-critical progress. Average daily sales declined 2.7% year-over-year, this came in ahead of our guidance range of a decrease of 4.5% to 5.5%. Growth in the public sector and sustained momentum in solutions were the primary drivers of our top line performance. Additionally, it’s worth noting that we had 2 a strong November with a return to growth. While certainly a positive sign, we are not viewing November alone as an inflection point as the month benefited from some large orders and the timing of a late Thanksgiving, which shifted a greater amount of shutdown activity into December holidays. Gross margin of 40.7% was in line with our expectations. Thanks to solid expense con- trols, we were able to absorb our higher-than-expected revenues without much incre- mental expense. This resulted in an adjusted operating margin of 8%, also above our expectations. Free cash flow conversion of 179% was also particularly strong during the quarter. And while these results are encouraging, we still have work ahead of us in restor- ing performance to meet the standards that are set by our mission statement. We have a slate of opportunities under our mission-critical program that are well within our control, and I’m encouraged by the trajectory of improving execution. As a reminder, our mission-critical program is comprised of 3 pillars. First, we continue to maintain momentum in our high-touch solutions offering. On a year-over-year ba- sis, we improved our In-Plant program count by 29% to 369 programs and total installed vending machines by 10% to more than 27,000 machines. Second, while Core Customers growth rates remain suppressed, progress on reenergizing the Core Customers continues. This begins with enhancements to our e-commerce platform at mscdirect.com. During the fiscal quarter, we made further progress on improving overall site performance, the shopping experience, navigation and product discovery. We provided customers with digital versions of MSC’s marketing suite of materials, including our well-known big book on our website, we improved search relevance and streamlined the number of clicks in navigation. These improvements are beginning to make their way into important leading website in- dicators, along with customer Net Promoter Scores. Further improvements will continue 3 to roll out through the balance of our fiscal second quarter. And we plan to launch en- hanced marketing efforts during the back half of our fiscal second quarter. Reenergizing our Core Customers will also be aided through the sales force optimization efforts, that Martina outlined on the last call, and she’ll provide a progress update on that in just a bit. Another new element to our growth formula that we introduced this mission-critical chapter is accelerating our OEM category through cross-selling with the broader MSC portfolio. This is made up of primarily fasteners, but also includes other product lines such as clamps, fittings and more that end up in our customers’ finished product. We’ve seen significant acceleration in cross-selling activities and hence, our opportunity funnel. And that funnel is beginning to translate into results as the OEM category showed healthy growth year-over-year in our fiscal first quarter, and we expect momentum to continue this quarter. Third, we’re making progress in optimizing our cost to serve. This includes the subset of actions from our network optimization initiative, and our enhance- ments to drive productivity in the field that we shared last quarter. Martina will also provide more color on these shortly. Switching to the macro environment. As you can see on Slide 5, the IP readings across most of our top manufacturing end markets continue to contract and weigh on our per- formance against the overall IP index. Automotive and heavy truck, primary metals, fab- ricated metals and machinery and equipment continue to be soft. Aerospace, while a net positive for us in the quarter, experienced a step-down related to strikes that have since been resolved. Additionally, manufacturing and metal working related softness continues to be reflected in MBI readings, which have now been contracting for 22 consecutive months. These soft demand levels evidenced themselves in our fiscal December, which ended on January 4 4, with average daily sales declining approximately 8%. It’s worth noting that the first 3 weeks of the month looked consistent with our fiscal first quarter performance. De- cember was heavily weighed down by the last 2 weeks as the timing of the Christmas and New Year’s holidays, along with the timing of our fiscal calendar proved to be a significant headwind. The last week of our fiscal month was particularly weak on a year-over-year basis. This year, with New Year’s falling on a Wednesday, the final week performed like a holiday week, whereas last year with New Year’s falling on a Monday, the comparison was against a more typical business week. Kristen will provide more detail on what this implies for our second quarter outlook. While we remain in a transition period during fiscal ’25, we are fully committed to restoring our company’s growth trajectory as we look past the near term. Let me now provide more specifics behind the factors that give us confidence in our ability to do so. First, future prospects for North American manufacturing are promising, driven by increased focus on reshoring and incremental manufacturing investment into the U.S. Second, we are well positioned to help our customers navigate any pressures that arise from tariff policy. We see benefits from our lower nondomestic exposure. For reference, approximately 10% of our cost of goods sold are sourced from China, and we have low single-digit exposure in Mexico and Canada. Additionally, we have a strong MSC-specific Made in USA product offering that spans well over 100,000 SKUs across a number of cat- egories. As an example, our Accupro brand of high-performance cutting tools is sourced domestically and represents a great option for customers looking for performance tooling while being shielded from tariff impacts. Beyond our product offering, MSC’s technical expertise and ability to drive operational savings on the plant floor, are powerful tools helping customers offset cost pressures. We saved our customers over $500 million in 5 our fiscal 2024 and plan to build on that success this fiscal year. Third, we see runway to continue growing where we’ve already been successful. This includes our inventory management and In-Plant solutions offering, and targeted high- growth end markets such as aerospace, medical, Department of Defense branches of the federal government and more. Fourth, the MSC growth and productivity initiatives that we outlined for you on these calls are not yet realized in current results and are poised to improve our performance as we move through the fiscal year and into fiscal ’26. And with that, I’ll turn things over to Martina.

Thank you, Erik, and good morning, everyone. As Erik mentioned, we outlined a series of initiatives for this fiscal year during our fourth quarter earnings call. These initiatives were aimed at driving productivity in our distribution network and selling operations, and I’m pleased with the progress made during the first quarter. To start with selling operations, we’ve launched a series of initiatives designed to maximize the coverage and effectiveness of our sales team. A major element of this work focuses on sharpening the deployment of our highly trained field team through better territory design to maximize seller potential. We launched the first changes prior to the start of the fiscal year with a redesign of our public sector coverage, the effects of which are starting to be seen in the first quarter results in that market. For national accounts, we completed this work at quarter end. For our Core Customers, our territory design is complete, and we expect to complete implementation by the third quarter. Early findings support our expected results. For example, we estimate that in the first 7 weeks of the program, we now have expanded coverage for 20,000 active buy- 6 ing customers or locations. In December, we saw an increase of over 2,500 customer touches for those newly engaged accounts. Additionally, where routes have been opti- mized, we’re making better use of our sellers’ time by freeing up a minimum of 2 selling hours per week. All of this work is further supported by changes in our training and on- boarding processes for all roles designed to maximize hands-on learning and accelerate independence for new sellers. Moving on to network optimization. We remain on track with the expected savings of $10 million to $15 million to grow through the fiscal year and achieve full run rate in fiscal 2026. As a reminder, these efforts are centered on the following 3 initiatives: First is to streamline the supply chain of our OEM fastener and C-part categories by consolidating demand planning and procurement. Second, we’re upgrading our use of technology and our system-wide inventory planning and allocation functions to ensure that we have the right inventory as close to the cus- tomer as possible. And lastly, we’re optimizing our management of inbound and outbound freight to reduce split shipments and lower reliance on higher cost air freight. All initiatives are on track to deliver planned savings. As it pertains to our OEM and C-part consolidation, having this work in progress puts us in an excellent position to navigate the potential impact of tariffs. As Erik said, roughly 10% of COGS are sourced from China. And this team is already work- ing to consolidate volume for procurement synergies. We began taking proactive mea- sures to ensure that we are well protected. On the larger tariff question, we’ve taken a series of actions, including stocking inventory of our highest turn products that would be impacted by tariffs and developing marketing campaigns of our Made in the USA product. 7 We have a cross-functional SWAT team in place to oversee these efforts and plan to treat any tariff-related costs as a supplier price increase. On the freight and planning initiatives, we continue to make progress adjusting and balancing inventories. The work we have done on statistical planning is reflected in the year-over-year reduction in inventory of approximately $73 million. I was especially pleased with the sequential reduction in our inventories of roughly $7 million, especially given that Q1 also reflects actions associated with year-end buys and early tariff actions. Lastly, I would like to highlight that we continue to strengthen our leadership team. We’re happy to welcome Darrick Collier as our new VP of Supply Chain Operations. Darrick brings over 20 years of experience in distribution operations, including 13 years at Wal- mart and Amazon. I’m confident that Darrick will play a successful part in driving efficien- cies throughout our network. And with that, I will turn the call over to Kristen to cover our financial results in more detail.

Thank you, Martina, and good morning, everyone. Please turn to Slide 6, where you can see key metrics for the fiscal first quarter on both a reported and adjusted basis. Fiscal first quarter sales of $928 million declined 2.7% year-over-year and exceeded our prior expectations of a 4.5% to 5.5% decline. Lower volumes were the primary driver of the year-over-year decline, which was partially offset by benefits from acquisitions. Se- quentially, average daily sales declined 90 basis points and underperformed the historical quarter-over-quarter average as conditions moderated across our primary manufacturing end markets. By customer type, we are pleased by the return to growth in the public sec- tor with a 9.8% improvement year-over-year. National Accounts declined 1.6% year-over-year, while core and other customers declined 8 5.3%. Sequentially, average daily sales were roughly flat for core and other customers. While National Accounts and Public Sector sales declined a little less than 2%. From a solutions standpoint, as Erik mentioned, we continued to expand our footprint in the first quarter. However, the average daily sales performance of the solutions reflected the current demand environment as the growth of our installed base was largely offset by lower levels of activity. In vending, first quarter average daily sales were up 5% year-over-year and represented 18% of total company net sales. Sales through our In-Plant programs grew 5% year-over- year and represented approximately 17% of total company net sales. As a reminder, this information can be found in the operating statistics posted on our website. Within the Op Stats, please note that we reclassified our customer end markets to align with the North American industry classification system. Moving to profitability for the quarter. Gross margin declined 50 basis points year-over- year to 40.7% as expected. This was driven by higher priced inventories working through the P&L and a headwind from acquisitions of approximately 20 basis points. Operating expenses in the first quarter were approximately $304 million on both a reported and adjusted basis. On an adjusted basis, operating expenses were up approximately $14 million year-over-year, primarily driven by the combination of personnel-related costs, investments and carryover operating expenses from acquisitions, which were partially offset by productivity. Combined with lower sales year-over-year, this resulted in a 240 basis point step-up in ad- justed operating expense as a percentage of sales for the quarter. Sequentially, adjusted operating expenses were up $7 million as expected. This is primarily related to the reset of variable incentive compensation programs entering the fiscal year, other personnel- related costs and modestly higher D&A. Reported operating margin for the quarter was 9 7.8% compared to 10.6% in the prior year. On an adjusted basis, operating margin of 8% declined 290 basis points year-over-year. We delivered GAAP EPS of $0.83 compared to $1.22 in the prior year quarter. On an adjusted basis, EPS was $0.86 compared to $1.25 in the prior year. Now let’s turn to Slide 7 to review our balance sheet and cash flow performance. We con- tinue to maintain a healthy balance sheet with net debt of approximately $463 million, representing roughly 1.1x EBITDA. Working capital continued to be a favorable source of cash during the quarter. This resulted in another strong quarter of operating cash flow to the tune of $102 million. Capital expenditures of $20 million increased approximately $2 million year-over-year, resulting in free cash flow of $82 million. This represented ap- proximately 179% of net income. Turning to capital allocation on Slide 8. Our priorities remain unchanged with organic investment to fuel growth and our operational efficiencies being first in the pecking order. Additionally, we will continue to pursue our strategic bolt-on M&A strategy and allocate capital to shareholders. The repurchase of roughly 150,000 shares combined with the dividend, resulted in returns to shareholders in excess of $60 million during the quarter. Moving to our expectations for the fiscal second quarter on Slide 9. The timing of holidays and heightened customer shutdown activity resulted in an average daily sales decline of approximately 8% in the month of December. Given the slow start to the quarter, and limited visibility on trends in the new calendar year, we are taking a wider approach to our quarterly sales outlook and expect 2Q average daily sales to decline 3% to 5% year-over- year. This range assumes January and February average daily sales performed similar to the first quarter at the low end of the range and to November levels at the high end of the range. Additionally, the midpoint of our outlook implies that January and February ADS are down approximately 2% year-over-year. We expect our adjusted operating margin for 10 the second quarter to be largely influenced by our sales performance and ultimately fall in the range of 6.5% to 7.5% under the following assumptions. Gross margins of 40.8%, plus or minus 20 basis points. And within operating expenses, productivity to partially offset sequential increases in personnel-related expenses and depreciation and amortization. Turning to Slide 10. Our expectations on certain line items for the full year remain un- changed. As a reminder, this includes depreciation and amortization expense of $90 mil- lion to $95 million or an increase of $10 million to $15 million year-over-year. Interest and other expense of roughly $45 million; capital expenditures, including cloud computing ar- rangements of $100 million to $110 million, a tax rate between 24.5% to 25%. And lastly, free cash flow generation of approximately 100% of net income. To assist in modeling the cadence of sales for the remainder of the fiscal year, the bottom of the slide provides historical quarter-over-quarter averages and key considerations. And with that, we will open the line for Q&A.

— Operator Instructions — The first question today comes from Stephen Volkmann with Jefferies.

Kristen, I’m sorry, I just missed your commentary around gross margin, plus or minus 20 bps. But can you just say that again?

Yes, Steve, were you referring to the Q2 commentary on gross margin in the prepared remarks? 11

Yes.

Yes. So for the second quarter, and this really stands for the year, what we had said pre- viously, we expect throughout the year gross margin to be roughly plus or minus 20 basis points. For the second quarter specifically, I’d expect it to be fairly flat to Q1. In the sec- ond half, there is some potential for improvement there potentially to the top end of that range. What we would be looking for in order for that to happen, a few things, I’d say, first, neutral price cost potentially even slightly positive. Second item we’re looking at carefully is productivity improvements sequentially through the year. Martina covered some detail on what those programs were. Some of that hits OpEx, of course, but some of it also does hit cost of goods sold. Wildcards against that, though, that we don’t have great line of sight to or the mix impact, which, as you know, has been a headwind lately. There’s the potential for that to improve, depending on the inflection in Core. And then the other thing that’s hard to predict is the top line. The stronger the top line, the easier it is to expand gross margins. And really beyond the second quarter, we had better insight on those last two, we’d be giving more specific guid- ance. But as Martina mentioned on the productivity initiatives, like we’re really focusing the team internally on what we can control within that, which is the price cost manage- ment, delivering the productivity, executing on the initiatives that drive the Core growth inflection. And maybe last item to point out, Steve, to put a finer point on the end of the gross margin discussion for forward look, none of this includes impact on tariffs which, if that happens, and of course, we don’t know size or timing, we would anticipate moving on price similar to the start of an inflationary cycle. So all of that comment excludes tariff 12 impact.

Right. Understood. So just pulling on that thread a little bit. Presumably, if we get inflation type situation, that should actually be a gross margin tailwind for you normally? Is there any reason that would be different in the situation?

No, we wouldn’t see any reason that would be different.

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

Maybe for my first question, Kristen, sorry if I missed this, but could you just remind us how much in savings from the productivity initiatives you’re expecting on SG&A dollars in 2Q? And then just a follow-up with that is maybe just some color on how you think about OpEx as we move through the back half of the year just because the easy comps start to show up in your fiscal third quarter, but I’m just curious if there are some items that we should be aware of on how SG&A levers if that revenue does start to stabilize in the second half?

Sure. Yes. So Ken, specific to Q2, I’m expecting productivity to improve slightly. We deliv- ered about $5 million of productivity in the first quarter in the OpEx line. So I think we’ll do a little bit better than that in Q2. Beyond that, what we’ve said for the year is a range of productivity between $15 million and $25 million in operating expense. The initiatives that Martina covered, as we talked about last quarter, on an annualized basis, those ini- tiatives specifically are worth $10 million to $15 million but they’re going to ramp inside 13 the second half. So I’m not sure if your question was specific to some of that newer stuff. But on a school year basis, if you think about where we’re expecting OpEx to land, we’re anticipating $15 million to $25 million of productivity.

Right. I guess the question is really kind of driving towards what you think what the Core incremental margins could be. Because again, you’re down – I think ADS is down like high single digits. The comp is starting in the third quarter. And I know the decrementals don’t really make sense this quarter and last quarter, but is it fair to assume that you’re not necessarily expecting a reverse in those – in that operating leverage, decremental to incremental here in the second half?

Yes. I mean it’s really noisy to your point, you look at decrementals and incrementals in the year because of – a lot of that is because of actually the OpEx level. So I think to answer differently, Ken, I think you originally asked it, if you’re trying to think about modeling OpEx in the second half, I would still use kind of the general rule of thumb of taking 8% to 10% of variable costs on top of whatever revenue number you’re modeling for second half. And then we’ll get more specific as the quarters roll forward here. But I think if we’ve got the 40.8% gross margin, plus or minus 20 basis points, and then you use that rule of thumb of second half OpEx being tied to really just where you’re putting your top line based on that variable OpEx rate that should get you close to what we’re – what we do have line of sight to at this point. And of course, as we’ve talked about, the revenue is really the bigger unknown for us that we’re watching carefully.

And Ken, I would say that at 8% to 10% variable OpEx, that’s whatever your growth as- 14 sumption is in the second half relative to the first half. So first half versus second half is that 8% to 10% variable OpEx we’re talking about.

Got it. That’s helpful. And then just my last question here. I understand that visibility is as clear as mud right now, but maybe just what you’re seeing from your larger customers in the OE Automotive and OE Aerospace side? I know that’s about 20% of your sales today. Just any color on the pull rates relative to last quarter? And is there any commentary on their visibility?

Yes, Ken, it’s Erik. Look, I would say in the prepared remarks, the overarching theme is the conditions in our world of metalworking and heavy manufacturing are still soft. So most of the end markets, automotive, certainly has been soft. But I would say that, that word can carry through all end markets probably with the exception of aerospace, which has been strong. It remained positive for us, definitely a little choppier over the last quarter because of the residual effects of the strike, which have since sorted themselves out. So we would expect aerospace the outlook to be good. That notwithstanding generally soft conditions. I mean, data points I’ll give you that just put a finer point on it. So if you look – we talked about our vending growth and our In-Plant growth, and we feel really good about those 2 programs. But if you parse them out and look at an average daily sales per machine, so if you normalize for signings, vending. So these are our best customers, some of our largest customers. Vending average daily sales per machine down mid-single digits, In-Plant where our penetration and our market share position is perhaps the best. Average daily sales per program down in the low double digits. So that will give you a feel for conditions and customers clamping down on spend. I will say, though, that there’s certainly – post-election, there is some more optimism weaving into the discussions and 15 the outlooks that we’re having – we’re hearing about from customers. So look, we’re cautious, as you said, visibility is as clear as mud, especially for us. This call is always a tricky one. We’re coming off of. This was a really wonky holiday period, which I’m sure we’ll touch on at some point during the Q&A, and we barely have any window into January. So we’re cautious, but I will say there is some more optimism leading into our conversa- tions with customers about ’25 outlook.

The next question comes from Tommy Moll with Stephens.

Kristen, one last – maybe last item on OpEx, just to make sure everyone is on the same page. Can you just bridge us from the [ 304 ] that you just reported sequentially. In the past, you’ve given us some helpful bridging items, just the pluses and minuses on the fixed items that will change and then I assume that 8% to 10% variable assumption holds for Q1 to Q2 as well. But anything you can do to provide granularity there is always helpful.

Yes. So Tommy, Q2 OpEx sequentially from Q1, we’re expecting to be roughly flat. Within that, there’s a couple of moving pieces. So we do have another step up coming in personnel- related expenses, which is typical for us at this time of year. Another small increase com- ing in D&A. And then we do expect that to be offset by two things. One is a little bit more productivity than we saw in the first quarter. And then the second would be the decrease on the top line, if you apply that 8% to 10% variable OpEx on that, that’s the puts and takes to get you back to basically flat to Q1.

16 And then just going forward from there, Kristen, other than the 8% to 10% variable, which will be a function of revenue in the second half, are there any other personnel D&A, whatever other items you would call out?

Yes. So D&A does continue to increase sequentially. I think without going into more of a specific number for the third quarter and the fourth quarter, Tommy, maybe what you’re thinking of is some color we gave on the full year around sort of certain categories of expenses that we know on a full year basis are going to go up, which is one of the big challenges we’re facing in ’25. It’s just a large body of sort of fixed OpEx that’s going to increase in the year. And what we had touched on there, which may be helpful in filling some of the blanks for the second half. And again, this is full year year-over-year expectations on certain items. We know we typically face about a $20 million to $25 million increase in personnel-related costs that typically encompasses both salary inflation for the associates and the benefit – any ben- efits inflation. This year, one of the unique items that we were facing was the headwind from the variable compensation programs resetting in ’25. And that was, of course, be- cause there was almost no payout from the variable comp programs in ’24. That creates about a $30 million to $35 million headwind year-over-year. D&A for the full year, we’re expecting to increase $10 million to $15 million. And then we’ve got about $5 million of acquisition carryover that we’ll see until we lap in the fourth quarter of our fiscal year. And then what we had signaled on investments in productivity, we touched on the pro- ductivity just a few questions ago, $15 million to $25 million of productivity and OpEx for the year. We’re expecting about $10 million to $15 million of investment to offset some of that, and that’s really largely investment into the In-Plant growth and into the market- ing program that will be launching here soon. And that – those sort of like fixed buckets 17 would get you to $60 million to $65 million of increase. And then obviously, as we talked about, you want to maneuver your volume-based expenses at 8% to 10%. And if we really don’t see much of an improvement in our normal sequential pattern in the second half, then you probably start to inch down some of that variable compensation increase. So without being overly specific for what’s going to drive the 3Q and 4Q specifically, if that gives some more color into some of the headwinds that we’re facing within operating expenses.

Yes, indeed. As an unrelated question, I wanted to pivot to just the end market trends. And Erik, you called out on Slide 5, I’m going to exclude the aerospace and defense num- ber just for the reason you already cited on the strikes. Just focusing on the other 4 key markets for you. It seems like the message there and the underlying demand environ- ment is maybe flattish, same. No real change to call out versus last quarter. Just correct me if I’m wrong there. And then help us understand syncing that up to the guidance you provided for daily sales in the second quarter. You do talk to daily sales improving as the quarter progresses. Maybe that’s just simply a function of the comp from December and some catch-up. But sync all that up for us, if you could.

Yes, sure, Tommy. So I think what you’re looking at, I think your assessment is right that end markets remain soft, no major change. So if your question is, [ jeez ], going from Q1 ADS of down 2.7%, why is the range worse in Q2? It really, Tommy, comes down to December, which was a really funky month. So I mean, basically, what we tried to do – what Kristen tried to do in the prepared remarks is give you a view into what does that guidance range imply for January, February. And we tried to compare that on a sequential basis relative to similar to the – somewhere in the first quarter range. And then year-over- year, you’re looking at 2%-ish down. 18 Really, the story about the Q2 guide, it’s weighed down by December. And I know we touched on it in the prepared remarks, but it probably is worth a minute here because it’s a pretty nuanced thing. Our December, because we’re on a fiscal calendar, we’ve got a 5-week month. And the first 4 weeks of December, in the prepared remarks, I said on an ADS standpoint, they looked a lot – the first 3 weeks looked a lot like Q1. On year-over- year growth rate basis, the first 4 weeks, so the fourth week is the Christmas week looked a lot like Q1. So – and I know we’re always one of the first ones out and everybody tries to get a read off of December. Our situation is going to be more acute in that fifth week. And the reason is our fifth week, which was New Year’s week, this year was really a holiday week. The fifth week last year, and we tried on Slide 9 to put this visually showing the calendar, the comp was basically a full week because you had 4 days after New Year. So we were lining up a holiday week against the full week. That really weighed on the December growth rate. So in essence, what you’re getting for Q2, if you look past December and look at January and February, it isn’t much different from Q1.

The next question comes from David Manthey with Baird.

First question, I guess, I’m going to go back to the OpEx laundry list here. The one thing that hadn’t been mentioned was the savings from the Columbus distribution center. Did that $5 million to $7 million accrue to the first quarter as expected? Are the benefits greater in the second quarter? Or is that already incorporated in the run rate? And then refining question here on compensation. I think you said merit increased $7 million. I think that’s the variable compensation component. But then, Kristen, you mentioned higher personnel expenses, which sounded different whether that’s wages or health care or whatnot. Could you talk about those things? And then on that person- 19 nel expense, does that also step up? I think you get a full quarter of the merit. So that’s going to be a little bit higher sequentially. What about the other personnel costs?

Yes, sure, Dave. So first part of your question on Columbus, yes, still tracking comfortably in that $5 million to $7 million range. That was about half of the productivity that we saw in Q1, and that’s really at run rate by quarter now. Most of that work was kind of wrapped up at the end of our fiscal Q4. So we see a pretty equal benefit through each quarter of fiscal ’25. And then second part of your question on the OpEx, you touched on the personnel- related expense. So we’re wrapping up a few things in that bucket. And I think the $7 million – so we quoted a $7 million sequential increase Q4 to Q1 OpEx, which I think is what you’re referring to within that, the largest kind of candle stick in the bridge is a personnel-related expense increase of $9 million sequentially. And then to your point, that includes a few things. So it does include the merit increase you mentioned, which we have one month of incrementally in our first quarter. We also had a slight step-up from benefits inflation. And then the biggest piece, though, within that $9 million is the reset of the variable compensation program. That’s a little bit more than half of it. And then I think I heard you comment on merit increase in 2Q. Yes, you’re correct. We would see another step up sequentially in the second quarter of about $4 million.

Perfect. Then with all of the administration change and the sabre-rattling, one of the key themes we’ve heard a lot about is government efficiency. And it seems like if the govern- ment is looking at streamline or consolidating purchasing, that might be an opportunity for MSC. I know it’s kind of blue sky, but maybe you could comment on how you see that 20 opportunity, if at all.

Sure. Thanks, Dave. This is Martina. So when you think about our public sector business, about 2/3 of it is federal today. Now the majority of that is weighted towards military and defense. So we don’t see a lot of change or we don’t anticipate that the administration would drive a lot of change there. We do see that based on our own public sector re- structuring, what we have done is specialized sellers now at all levels of the government and increased our level of investment there as part of our sales effectiveness program. So I think we are poised to take advantage of any change that comes. So we don’t really see any downside risk. And as you say, we see that there might be some upside.

The next question comes from Chris Dankert with Loop Capital.

I guess just going back to the tariff conversation. I think last time around, a lot of those tariffs were treated as discrete surcharges. You mentioned in the prepared remarks the expectation you can treat that as a supplier price increase. Any reason for the shift in applicability here?

Chris, I’ll take it. No, I think – look, what we wanted to get across was that I think, first of all, there’s still a lot of uncertainty. Something is likely coming. We don’t know how much, and we don’t know when what we wanted to get across is we’re prepared. We have a playbook. We’ve dusted off the playbook. A team is ready to go. I think we’ll see how it plays out, Chris, but more or less we would follow a similar playbook. What we were trying to convey was that we would move – in whatever form, we will 21 move on price as warranted. And remember, Chris, there’s sort of like – if I think back to last time around, there’s 2 inflationary effects from the tariffs situation, the direct and then the knock-on effect. The direct effect is any imported products going up, and that’s where you’re referencing surcharges as the more likely means. The secondary effect is more broad-based industry-wide inflation. So something like 75% of our sales are through industry branded products where we’re not directly affected by a tariff, but certainly, you could imagine tariffs are going to influence list price changes from our manufacturers and there, that would trigger more broad-based pricing actions, and that’s what we’re referring to.

Got it. That’s helpful color. And then, I guess, when it comes to the enhanced marketing that’s going on in the back half of the year, I guess, are you able to kind of bucket out where that investment spend is going generally? Are we talking about keyword search. Is it more – will there be any kind of discounting addition to drive traffic? Maybe just kind of help flesh out that marketing investment that would be great.

Sure. So what I’ll do, and you can imagine this one is a little sensitive competitively, par- ticularly before we’re in market, but I’ll sort of give you the broad strokes. So the way we’re thinking about this is we’ve got 2 objectives with our marketing efforts. So I’ll talk about the 2 objectives and then give you a feel for what sort of programs are we looking at to achieve those objectives. So the objectives are basically top of – it’s not rocket sci- ence, but top of funnel and bottom of funnel, top of funnel, meaning generating more awareness and demand for MSC’s product and services and bottom of funnel would be taking customers who we already have a relationship and increasing retention rates and share of wallet, folks who already know us and come to us. 22 So you can imagine the programs to achieve those are a bit different. I’d tell you that there’s going to be a pretty healthy mix in the media used, Chris, and it will be a com- bination of digital marketing along the lines you’re suggesting. In terms of pricing and discounting, what I would say there is we already have in our arsenal promotional pro- grams and tools that we’ll use and leverage more extensively. But it’s not like we’re mak- ing them up brand new. And it will be a combination of digital, some print. As you know, some heavy focus on website improvements and merchandising and then also some per- sonal outreach between our sales force, both inside and outside and prospecting and follow-up calls. So that’s the color I’d give you. As we said, it will be beginning and don’t think of this as big bang necessarily. It will more be sort of iterative and incremental in market beginning late in Q2 or fiscal Q2.

The next question comes from Patrick Baumann with JPMorgan.

Happy New Year. A quick one on the sequential daily sales performance in the first quar- ter. It was down 1%. And I think Kristen said Core was flattish and National Account and Public Sector was down too. What surprised you within those customer groups on a se- quential basis that drove the upside versus your guidance?

Pat, I would say – I’m not sure I’m going to answer it sequentially. Overall, what I would say is if you look at the exceeding guidance and where it came from. There’s a couple of things I’d call out. Number one, clearly, Public Sector. And Public Sector looking sequen- tially is really tricky to do because their fiscal timing is all off at end of September. So the sequential view on Public Sector is not great. Look, that team is really performing well. And I give kudos to the leadership team. It’s been momentum that’s been building for 23 a while and then add on top of that, Martina touched on some of the early-stage seller effectiveness work, sales optimization work that went directly to public sector, just tur- bocharged what is already a strong team. So we feel really good about that. And back to Dave’s questions about further opportunities, we feel like strong team well positioned there. The second thing I’d call out is solutions momentum, clearly, vending and In-Plant. So look, while our National Accounts growth rate is not where we want it, and that number is nothing to write home about. I will tell you under the coverage, we feel good about execution there. And a lot of that is driven by macro softness. And then look, the third thing I’ll say about Q1, and we did mention this in the prepared re- marks is that we did benefit, November was particularly strong. And there, we had some large order activity. We do think the timing of the Thanksgiving holiday being pushed almost a week later in the month, probably boosted November and came back to buy a little in December. But I would say those are the big drivers behind the Q1 and November performance.

Helpful. And maybe, Martina, on the selling op side of things. Can you talk about that ter- ritory redesign a bit more? You mentioned I think some things about timing across Public Sector, National Accounts and Core in terms of when that redesign would be completed, maybe rehash some of that. And then the 20,000 accounts you referenced that I guess, are new because of the redesign, I guess that’s across Public Sector, and that’s – you also mentioned something about 2,700 new touches. Any color on what percentage of underlying accounts this represents for Public Sector? Like how much of an expansion is that on an account basis? And then what is the oppor- tunity across National Accounts and Core from this redesign in terms of new touches or 24 account expansion?

Sure. So there’s a lot in there. Let me unpack it. Let me kind of pull up to big picture and review what we’re doing. And thank you for the question because it’s something I’m very excited about. So we are basically – our goal in the pool redesign across all the customer segments, Public Sector, National Accounts and Core. We want to deploy our sales force as efficiently as possible. So we want to put trained people in front of the best potential. And that obviously has a slightly different flavor in each customer segment. But fundamentally, our goal is to look at growth. We believe in the equation that says growth comes from coverage and capacity, which is related to time and competency. So there are pieces of the program that touch on all 3 for all 3 segments. Public Sector was where we moved first, and it was fully deployed as we started Q1. So that’s where we’re sort of seeing the results. But I did not mean to create the impression that, that – the 20,000 accounts were particularly to Public Sector. That is so far overall what we have done as we’ve been looking at territory design. So we’re trying to design all territo- ries now to cover efficiently, maximize seller capability, maximize customer coverage and some of that results like in the time saving like I shared with you. So essentially, we believe that coverage time and touches are going to improve sales de- velopment. It’s too early yet for me to give you any kind of flavor to forecast impact. But I did want to share those specifics because we’re very encouraged with the progress. And as we implement now – fully implement to National Accounts and implement over the next sort of quarter and a half on Core, we’ll be able to share more. So design is all done in all 3 segments and implementation is starting now in the others.

So just to be clear, I just – I’m a little confused to what is the 20,000 accounts represent? 25 And what was the 2,700 new touches you mentioned?

Yes. So the 20,000 accounts have now been pulled into what I would call active coverage. They’ve been assigned to sellers. And that doesn’t mean they weren’t actively buying from MSC in the past, but we’ve designed the territories to include them. Now we haven’t maybe implemented in every case the seller change yet, but we know that, that design is coming. And on the touches that – what has been implemented already, we’ve been able to engage with new customers and new relationships, and we do keep track of customer touches. And in December, we saw that increase.

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

Thank you for joining us on today’s call. We look forward to interacting with you and seeing you guys at investor events and upcoming conferences. And our next earnings call is on April 3. Thank you. Bye.

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