MSC Industrial Direct at Raymond James Conference: Strategic Growth Plans

On Tuesday, 04 March 2025, MSC Industrial Direct (NYSE: MSM) presented at the Raymond James & Associates’ 46th Annual Institutional Investors Conference. CEO Eric Gershwin outlined the company’s strategic focus on growth through pricing enhancements and e-commerce, despite challenges in the heavy manufacturing sector. The company is optimistic about achieving significant outgrowth above the industrial production index while also addressing tariff impacts transparently.

Key Takeaways

• MSC aims for 400 basis points of growth above the industrial production index and incremental margins of at least 20%.
• The company expects $10 million to $15 million in annualized savings through network optimization by fiscal year 2026.
• A strong balance sheet with a net debt to EBITDA ratio of roughly one times supports MSC’s growth initiatives.
• E-commerce improvements have led to increased customer engagement and positive initial results.
• MSC has returned approximately $800 million to shareholders over the past three years.

Financial Results

• Annual revenue is nearly $4 billion, with metalworking accounting for about 45% of total revenues.
• Free cash flow conversion was 180% in the first fiscal quarter and is projected at 120% for fiscal year 2024.
• The company has a net debt to EBITDA ratio of roughly one times, maintaining financial flexibility for future investments.

Operational Updates

• MSC offers about 2.5 million SKUs from over 3,000 suppliers, supported by a workforce of over 7,000 associates.
• The distribution network includes four primary hubs and 43 locations, with the implant program up 29% year-over-year.
• The vending program, featuring over 27,000 machines, saw a 10% increase year-on-year.
• The public sector business experienced double-digit growth in the most recent quarter.

Future Outlook

• MSC targets mid-teens operating margins and returns on capital of 20% or better.
• The company anticipates continued growth in the OEM sector, with mid-single-digit growth last quarter.
• Completion of work on the core customer base and field sales force is expected by the fiscal third quarter.

Q&A Highlights

• The Metalworking Business Index (MBI) shows encouraging signs, despite not yet turning positive, with optimism for a post-election recovery.
• MSC emphasizes tariff transparency, with only 10% of its business affected by China-related tariffs.
• There are early signs of capacity expansion in the U.S., continuing a trend that began post-COVID.
• The company is cautious about increasing debt leverage due to high interest rates, prioritizing flexibility for future growth opportunities.

Readers are encouraged to refer to the full transcript for a detailed insight into MSC Industrial Direct’s strategic plans and financial performance.

Full transcript - Raymond James & Associates’ 46th Annual Institutional Investors Conference 2025:

Sam Darcach, Raymond James: Good morning. I’m Sam Darcach, and on behalf of Raymond James, we’d like to welcome you to the MSC Industrial Supply presentation for today. With us today from MSC is Eric Gershwin, chief executive officer, as well as Martina MacIsaac, president and chief op chief operating officer, and Ryan Mills, head of investor relations. Eric will be doing the presenting.

Eric, I think you mentioned that there’ll be about twenty, twenty five minutes or so of prepared remarks, which will allow for maybe five, ten minutes of Q and A, but the real meat and potatoes of the Q and A will be at the breakout session following. And with that, Eric, welcome back.

Eric Gershwin, chief executive officer, MSC Industrial Supply: Thank you, Sam. Good morning, everybody. Sam, you’ll keep me honest if, I’m running over twenty minutes, so we do have time for q and a. Nice to see everybody this morning. Hope, the conference is off to a good start.

It’s a good thing there’s nothing in the news these days to keep us occupied. So as Sam mentioned, we’ll spend twenty minutes or so giving you a high level overview on the company. Before I get started, I’ll reference the safe harbor statement relating to anything that’s forward looking. And, let me let me get into a brief overview of the company in terms of its operations and financials. So MSC is an industrial distributor primarily focused on North America with nearly $4,000,000,000 in annual revenues.

We have a strong presence in four primary product categories or what we refer to as the four lanes of our business. And those include metalworking, MRO or maintenance, repair, and operations, which is the spot by portion of the company’s revenue base, Class C consumable parts, so think small parts that keep plants running like fasteners, fittings, fuses, and so forth. And the final category is our OEM business, which is primarily made up of fasteners, but also other components and clamps that actually become part of the finished product. We have a long history dating back to 1941 when the company was founded. And, over the years of those four businesses, we’ve achieved particular leadership in the metalworking space.

So So metalworking represents roughly 45% of total company revenues and is supported by a large national network of technical experts. And we think this is important because metalworking is particularly strategic to our customers. And what we mean by strategic is that metalworking products actually influence the customer’s finished product and influence their overall productivity. So metalworking places us inside of our customers’ operations more so than anything else. And as we commonly refer to it is we are at the spindle with our customer where we play a big role in helping them optimize their production process, not just their tooling.

And, this is becoming particularly important here in The US for a number of reasons. First and foremost is the growing challenges related to an aging workforce and a a larger and larger skills gap that our customers see building. I’ll look through our operations at a high level. We serve customers through a broad product offering, which is made up of roughly two and a half nearly two and a half million SKUs coming from over 3,000 suppliers. And, that product offering is supported by over 7,000 MSC associates and a distribution network that consists of four primary distribution hubs, which range anywhere between 500,000 and a million square feet, and a total network of 43 locations, which includes some other regional inventory centers and some small light value added manufacturing sites.

Move on to the market and begin with the competitive landscape. So I think one of the key points about this story is the competitive landscape. Our market is very large, and it’s highly fragmented. So for reference, the North American MRO market is over $200,000,000,000 in size, and the top 50 distributors have only about a third of that volume. So the remaining two thirds lies with local and regional distributors.

Additionally, what you see on the right side of the slide is the fact that there’s revenue potential across all customer sizes ranging from small customers who transact in a simple manner to our larger national account customers who require more sophisticated support and solutions. And, the nice thing is the MSC value proposition really can play in all ranges. So that total addressable market, we believe, is available to us. I’ll move on to slide five to talk about the company’s strategic direction. So following a strong three year run of our first mission critical chapter, and that’s our performance program.

The first one ran from fiscal years twenty one to ’23. And I should reference, by the way, our fiscal year runs from September through August. So we’re right now at about the halfway point of our fiscal twenty five. The next mission critical chapter, which we launched about eighteen months ago, consisted of a few priorities. First is maintaining momentum in our high touch solutions, and, I’ll spend a little more time on that in a moment describing what those are.

The second priority is creating a couple of new elements of growth to add into our formula. And the third is improving our cost to serve in order to help expand operating margins and leverage growth. This next chapter began in a very challenging operating environment that still continues up through our most recent quarter driven by particular weakness in our primary end markets, which are heavy manufacturing. Manufacturing. So manufacturing overall is roughly 70% of company’s revenues, and the bulk of that is into heavy manufacturing and metalworking manufacturing in particular.

We also, during the first eighteen last eighteen months, I should say, had a couple of our own self inflicted issues primarily in the technology area that we’ve since rectified, and I’ll touch on some of the progress we’ve made there in just a bit. Overall, though, I am very encouraged and excited by the resiliency and the resolve that’s been displayed by our team and, the building momentum I see inside of our company. So let me dive a little deeper into those priorities. I mentioned that we’re maintaining momentum in our high touch solutions that enabled us to significantly outpace the market during our first mission critical chapter. And, a couple of proof points to show that momentum is continuing there is our implant program in which MSC is placing our own associates inside of our customers’ operations.

Our count there is up 29% year over year in our most recent quarter. And our vending program in which we’re placing industrial grade vending machines to dispense tooling and other of our products, continues to grow at a rapid pace. The installed base there is over 27,000 machines, and vending count is up 10% year on year in the most recent quarter. The second priority, which I mentioned before, was creating new elements of growth, and there’s really two of them that I’ll highlight. The first and the biggest priority is reenergizing our core customer base.

The core customer is our most profitable customer, and it’s made up of small and medium sized machine shops and manufacturing operations and represents roughly half of our business. We see a big opportunity to unlock growth in this area, and really a couple of priorities we’ve been focused on. One is bringing a more competitive list or web price, public facing price to this customer set, and, the second is upgrading our ecommerce experience and providing a richer, stickier experience to this customer base. With respect to pricing, we completed the body of work during our last fiscal year, so that one is behind us. And regarding ecommerce, we’ve launched a series of enhancements over the past two quarters with notable improvements happening really over the last thirty days.

So I’ll provide more color on some of those improvements in a bit. But between pricing and e commerce, we feel like a strong foundation is now in place to grow from. A second new growth priority that we’ve highlighted is the OEM business and OEM fastener business in particular that I mentioned as one of the four lanes. It’s the newest one for the company. It was built out primarily to start by acquisition.

And with the base now solid, what we’re really focusing on is taking the cross selling blueprint that we’ve developed from other adjacencies that we’ve been in and leveraging it across this business. And, we’re really excited with progress here. So while it’s still relatively early, we see our cross selling pipeline building weekly, and net powered OEM growth, last quarter in the mid single digits in what was a pretty challenging operating environment. And we do expect momentum to continue building. Third, I mentioned a pipeline of productivity opportunities aimed at driving efficiency across our supply chain.

The first one there is network optimization. We ran a recent study, identified a number of priorities. We’ve started executing on those priorities, and, we expect those to drive between $10,000,000 and $15,000,000 in annualized savings during this fiscal year that’ll reach full run rate in our fiscal ’twenty six, which again begins in September. Moving to our selling operations, that’s another area where we’re really focused on productivity and effectiveness. We’ve launched a series of initiatives under Martina’s leadership to maximize coverage and effectiveness of our sellers.

We we’ve and basically deployed this program in waves by our customer type. We began in our public sector, which is roughly 10% of our revenues, and we completed that work at the end of our fiscal twenty four. That work is helping is really starting to bear fruit. So our public sector business in our most recent quarter was up double digits. We just completed a similar set of actions for our national accounts business.

We expect to see similar kinds of trajectory improvements and expect the work done to our core customer base and our field sales force to be completed by our fiscal third quarter, which began yesterday and will end in May. As we execute across all these initiatives, our primary objectives here, which you see on the right hand side of the slide, 400 basis points or more of outgrowth above the industrial production index on the top line and incremental margins of at least 20% over the cycle yielding operating margins, which we see a path over time to mid teens to restore mid teens operating and 20% or better returns on capital. Speaking of financials, just briefly, we have a very healthy balance sheet with a net debt to EBITDA ratio of roughly one times. We generate strong cash, particularly in in difficult or soft periods as we’ve seen recently. So as a proof point, our first fiscal quarter, we saw free cash flow conversion of roughly 180%, and that followed a fiscal year twenty four free cash flow conversion of 120%.

This cash flow, really allows us to fuel our capital allocation priorities. So first and foremost, those are reinvestments into organic growth and productivity along the lines of what I described along with some tuck in acquisitions. And, then we we look to return cash to shareholders. So we have returned roughly $800,000,000 in cash over the past three years, and that’s been both in the form of dividends and share repurchase. And we do have a history of consistently increasing the annual ordinary dividend and and now are at the higher end of our our peer set in terms of dividend yield.

So doing okay, Sam? Okay. I mentioned earlier that, one of our pry our top priorities on the growth front was reenergizing our core customer. We had done work last year around pricing, and the focus has really been our ecommerce experience, which is a key enabler and particularly relevant to our smaller customer who purchases more transactionally than our larger customers. So I’ll spend a few minutes covering, because these are fresh and in market over the past few weeks, that we’ve made.

And and, really, the themes behind them are the following. Number one is making MSC faster and easy to do business with. Most of our customers lack time, and they wanna get on and off really quickly, which sounds easier said than done. Number two is improving our product discovery, our search platform, which sounds basic. But when you’re dealing in a space in which we saw 2,500,000 active SKUs and a total, including what we source, 4,000,000 SKUs in a year, Again, easier said than done.

The third priority is to increase personalization. We want every user that’s coming to the site to feel like that site when they log in is catered to them and is targeted at them. So I’ll begin here. You see the home page, and, I won’t go through all the details. But just to note, we’ve made changes which you could see listed out here, and the idea is reduce clicks and make things more intuitive.

We enhanced the search bar. Our search engine is internally developed. We gave it more prominent placement. What we also did was give customers better and easy access to our marketing content. So we have promotional specials, special products that we’re running all the time.

We wanted our customers to be able to access those with just one click, and, we’re seeing the improvements already in a short period of time starting to pay off. So I’ll give you one example. We have a series of case studies where we’ll go in and feature highlights that we’ve done with customers. We’ve put some new content software around it, upgraded the experience. And in the three months leading up to the change, we saw seven fifty views by our customers of those case studies.

That change went in three months ago. The last three months, that number is now at 21,000. So those are that’s indicative or illustrative of the kind of changes that we’re looking to make across the site. I mentioned a top priority for us is personalizing the experience, which is really only possible when customers log in. So we’re making it easier, clearer for our customers to log in every single time.

And then once a customer logs in, they’re gonna get an experience. They’re gonna get, product navigation that’s tailored to them based upon their purchase patterns and then based on intelligence of based on their purchase patterns, what they’re likely to wanna see. Our next priority I mentioned is search or product discovery, meaning can you find stuff easily? And, so we’re we’re looking to make it easier. And, it certainly sounds intuitive and obvious, but but in the industrial space, it’s anything but.

So some of our cutting tools, for instance, have over 200 attributes on a single item. So you can imagine that making those attributes digestible, prioritizing the ones that a machinist is gonna think about is not so easy. You take an item like a jobber drill or an end mill, which are two of our bread and butter products, and you type that into MSCdirect.com, you are going to get thousands. And And that’s part of the beauty of MSC with our good, better, best product assortment, but you’re gonna get thousands of returns, which is not really digestible. So we really needed to create a search platform that was built by technical experts who understand the product and who you know, it’s still early, but based on customer sentiment and some leading indicators, we think we’re off to a really good start.

We’re also looking to make the experience on mscdirect.com more visual. So for years, MSC was known by our big book catalog, our print catalog, which was known as the big book, and that was a very visual experience for the customer. So what we’ve tried to do is is recreate that experience and actually enhance it online. So what you see here is something we call table view. So a customer for our categories where there is huge assortment, lots of brand choices, and looking at a long list could be overwhelming.

We’re giving customers the option to toggle back and forth between looking at a list or looking at a table in which what they can see is a colonized experience. And what’s unique about MSC here is in almost every one of our product categories, we carry multiple brand choices at multiple price points. So it’s giving the customer a lot of choice and an easy visual experience. So this table view, has been rolled out across our top categories representing a portion of revenue, where we have a good, better, best assortment, and other categories are gonna soon follow. Other search enhancements include a richer and more robust type ahead, better relevant sorting, and, we think we’re off to a good start.

The last one on the website, and then I’ll close and wrap things up, Sam, is, the checkout experience. So so back to the idea that customers don’t have time, they wanna get on and off fast, is we’ve created, what we try to to mimic as a b to c quality checkout buying experience where everything can now be done from one page. And and what’s significant about this is it’s reducing the clicks for customers by roughly 50% versus our last search. And, again, here, we’re seeing this was launched several weeks ago and immediately saw, just fantastic feedback from from our customers. So I’m gonna wrap so we do have time for questions and just sort of zoom back out.

We think we’re building on some real strengths here, with some of the high touch solutions that powered our momentum over the past few years. We are quickly executing and adding new elements to growth, reenergizing the core customer, and building out our OEM business. We think we’ve been weighed down over the past eighteen months by pretty acute softness in the heavy manufacturing sector that showing some promise that, you know, that we’re closer to the end than the beginning there. And, we’re positioned with a strong balance sheet, good cash flow to continue investing as long as we see smart opportunities to do so. So I’ll remind you, our goals, 400 basis points or more growth above IP on the top line, 20% or better incremental margins over the cycle to restore operating margins back to where we had had them pre mission critical in their mid teens.

And I think with that, I will Sam, I’ll turn it back to you. Great. Martini, do you guys want to come up?

Sam Darcach, Raymond James: I’ll start with the question since you just brought it up. So you were talking or at least you intimated, Eric, that there might be some green shoots in terms of the end market activity. I know the Gartner Metalworking Business Index last month was encouraging, although there’s also been some mixed data with rail data or ISM, PMI, IP, what have you. Can you give a little bit more color in terms of what you’re seeing out there or perhaps the KPIs that you’re really tracking?

Eric Gershwin, chief executive officer, MSC Industrial Supply: I can, and Martina can certainly fill in anything. And I’ll just reference, I know Ryan will tell me. I’ve got to go back to our last earnings call in terms of any specific company commentary, but we’ll also talk to, public metrics. So you mentioned one, which was the MDI, Metalworking Business Index, is published by the Gartner Group, and it’s fashioned like the PMI survey, but it’s specific to the metalworking industry. It’s been, I mean, Sam could tell you, remarkably correlated to MSM over long periods of time.

And, I asked my team recently, can you tell me when the last time we’ve had 23 consecutive negative months for the MBI? And they look back in history and they said, never. So right there, one would think, as I said, closer to the end of the beginning. And while the MBI has not yet turned positive, certainly the last two readings are more encouraging. And and I would say that does jive, Sam, with what we heard and reported on our last earnings call that, you know, post election, there was there is a a sentiment from our customer base of not near term necessarily, but looking out, I think, more optimism over time, that we are closer to a

Sam Darcach, Raymond James: recovery. Questions from the audience? I’ll just do the perfunctory tariff question. First and second order effects as you see them and whether it’s steel, aluminum, heck, tungsten. Talk about what your vendors are telling you, what they’re potentially talking about from a pricing standpoint and how it might affect you going forward?

Eric Gershwin, chief executive officer, MSC Industrial Supply: Okay. I’ll start by saying that over time, through all other cycles that I’ve seen, so I’ve been in the business nearly thirty years, generally inflation is a distributor’s friend if they handle it properly. And that’s because like particularly for MSC, our we run our on an average costing system. So if there’s inflation, we will generally and our suppliers come to us with an increase, we will generally pass that increase along to our customers as soon as we receive it. And by the time that purchase elevated purchasing levels hits our warehouses and then works its way through our P and L, there is generally a price cost spread.

And then even over time as it normalizes, the same margin at higher dollars is more dollars per pick. So it’s generally been a good thing as long as the inflation is not so severe as to really dampen demand. We’ll have to see how that goes. But I think that’s over time it’s been a good thing. And I’ll let Martina touch on what we’re hearing now.

Martina MacIsaac, president and chief operating officer, MSC Industrial Supply: So specifically, we have let’s call it a portfolio of industry brands and then own brands or exclusive brands. So exclusive brands, we would source directly and we have relatively low exposure now outside of The U. S. We only have 10% of our business that is coming from China. So that’s a very different position than we were the last time we were seeing increases in steel tariffs.

We have increased our made in America percentage. So we actually have a fairly strong portfolio there on that, on our own brands. On the industry brand side, it’s still very much a moving target. We’re starting to get some early signals of price. And as Eric said, we will treat those just as the same way we treat any supplier increase and we will pass that on to our customers.

Some changes to our playbook or let’s say enhancements to our playbook, we’ve made a big commitment, one of the website enhancements Eric didn’t mention, we’ve made a big commitment to tariff transparency to our customers. So if you go on our website, you’ll be able to see a flag on anything that has been impacted by tariffs so customers can see where their prices are being impacted. And then part of our high touch offering is what we call a business needs analysis. So we will actually go in and do sort of a lean assessment of our customers’ business and help them manage their portfolio. So right now, in addition to transparency, we’re also helping them rationalize their spend to minimize the impact of tariffs on their business.

So like everybody else, we just keep watching what’s happening, but we feel we a pretty strong playbook and much less exposure than we had the last time.

Sam Darcach, Raymond James: Question here.

Eric Gershwin, chief executive officer, MSC Industrial Supply: Any indication that your customers are adding capacity in The U. S.

Sam Darcach, Raymond James: As a result of the tariffs if you pull it out of other countries?

Martina MacIsaac, president and chief operating officer, MSC Industrial Supply: It’s still very early. Yes, Yeah.

Eric Gershwin, chief executive officer, MSC Industrial Supply: But I would say sentiment is yes. The question will be and that’s it’s building on even pre tariffs post COVID. We’ve seen real tangible evidence of new site openings post COVID. Your question is have tariffs enhanced that? I think to Martina’s point, it’s early to see the proof, but the words are there.

Sam Darcach, Raymond James: Question here. Yes.

Eric Gershwin, chief executive officer, MSC Industrial Supply: Over the last pricing trajectory? Trying to work out where we are to the pre this is pre pandemic. So so we saw I mean, pretty similar to most businesses post COVID, massive inflation. It’s leveled. So, one interesting thing about our business over the years, I I’d knock on wood here if I could, we’ve never had deflation in our business, and that’s because for pretty much everything we sell with a couple of exceptions, raw materials are not an overwhelming percentage of the finished good cost.

So we’ve never had deflation. So what happens to us at the end of an inflation cycle, which we’ve been living with for the last eighteen months or so, is price level it doesn’t drop it at levels and the higher purchase costs are still in the system. So for the last few quarters, we’ve talked about negative price cost because price leveled but didn’t go backwards.

Sam Darcach, Raymond James: You mentioned your debt leverage is about a turn. Optimally, maybe you add a half turn or a full turn for a capital structure standpoint. What would you need to see either in your business conditions or in your stock valuation for you to lever up? And I don’t want to intimate a full recap, but certainly be a little bit more aggressive on the share repo.

Eric Gershwin, chief executive officer, MSC Industrial Supply: Yes, Sam, so we over the year, we’re very comfortable at one times. We really like optionality and flexibility. So I think the answer is it would have to we’d have to see whether it were a buyback, a big internal investment and acquisition, a really, really strong compelling reason to do it. I think part of the hesitancy now, because obviously the stock has been hurt, is number one, interest rates really high. Number two, one of the things we’re mindful of, I mean, the business has been down so long when we when it flips and I do at some point, this is going to flip when it does.

If we follow historic patterns, we get an outsized bounce back in revenue growth. We start to consume a lot of cash. So what I want to make sure we don’t do is hamstring our sell. I want to be really when this thing turns, we feel like we’ve done a lot of heavy lifting, Sam, and we’re poised for some major share capture. And I don’t want to be at a point where we’re hamstrung in terms of inventory investment, credit like things we need to do to achieve the two goals I mentioned.

So that’s the limiter.

Sam Darcach, Raymond James: We got about thirty more seconds. Any more final questions before we move to breakout? Then we’ll move to breakout. Thank you all. Appreciate it.

Eric Gershwin, chief executive officer, MSC Industrial Supply: Thanks, Sam.

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