MSC Industrial Direct Co Inc

NYSE:MSM

Earnings Call Analysis

Sales Decline and Margin Pressure Despite Growth

In the fiscal second quarter, the company faced a 2.7% sales dip to $935 million year-over-year. Public sector sales nudged up by 0.6%, aided by federal customer growth, while core customer sales fell sharply. Gross margin inched up by 20 basis points to 41.5%, but operating margin declined by 170 basis points to 10.5% due to increased expenses and lower sales. Adjusted EPS decreased from $1.45 to $1.18. For the full year, the firm anticipates being at the lower end of guidance, expecting flat to low single-digit sales growth .

Mixed Performance with Strong Growth Initiatives Yielding Results

As the company navigates beyond the midpoint of fiscal 2024, it treads a path of mixed signals. While on one hand, high-touch programs exceed expectations with implant programs surging by a notable 39% and the vending installed base growing by 11%, overall revenue growth has lagged. The top 100 national accounts paint a clear picture, with just under half posting growth in the last quarter, reflecting the broader sluggishness in the macroeconomic landscape. Despite this, they anticipate an uptick in revenue trajectory in the second half of the year, buoyed by improved customer sentiment, completion of a web pricing realignment, forthcoming website improvements, and increased marketing activities.

Firming Gross Margins and Cost Discipline Paving the Way for Profitability

Even with a slight decline in fiscal second quarter sales, the company showcases strong financial discipline. Gross margins edged up fractionally by 20 basis points to 41.5%, backed by strategic initiatives, even as operating margins faced pressure declining by 170 basis points owing to increased expenses related to strategic growth investments. Nevertheless, they are committed to maintaining or slightly increasing gross margins in the second half while leveraging cost efficiencies across higher volumes.

Optimization and Streamlining: Operational Shifts to Drive Future Savings

The strategic closure of the Columbus distribution center signifies a pivot towards more efficient operations, triggered by growing solution sales and technological automation investments. This restructuring is expected to produce meaningful savings of $5 million to $7 million annually by fiscal 2025, aligning with a network study aimed at boosting productivity and customer service for sustained growth.

Resilient Balance Sheet and Proactive Cash Management

The financial framework remains sturdy with a healthy balance sheet, marked by a net debt of around $530 million, equating to roughly 1x EBITDA. A proactive approach towards managing working capital resulted in approximately $25 million reduction in inventory, contributing to strong free cash flow generation of $53 million in the fiscal second quarter.

Capitalizing on Digital and Growth Initiatives Amid Macroeconomic Uncertainties

Strategic initiatives are in full swing, from enhancing the digital experience with upcoming transactional platform improvements and search functionality on their website, to relying on the momentum of growth programs. They cautiously model macro recovery and the execution of these initiatives, which together with easing public sector budget constraints and demand generation efforts, are poised to invigorate sales in the second half of the fiscal year.

Supply Chain Stability and Forward-Looking Cost Management

The management is vigilant about potential supply chain frictions, including those resulting from recent global events. Currently, the impact on logistics costs is seen as modest, but they remain prepared to address potential headwinds with offsetting strategies, as part of their broader effort to maintain cost efficiency.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the MSC Reports Fiscal Second Quarter 2024 Results Conference Call. [Operator Instructions] Please note, today's event is being recorded.

I'd now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead, sir.

[Ryan Mills, executive]

Thank you, and good morning, everyone. Welcome to our second quarter fiscal 2024 earnings call. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me today.

During today's call, we will refer to various financial data in the earnings presentation and operational statistics that accompany our comments, both of which can be found on our Investor Relations web page.

Let me reference our safe harbor statement, a summary of which is 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 is noted in our earnings press release and our other SEC filings. In addition, 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 reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I will now turn the call over to Erik.

[Erik Gershwind, executive]

Thank you, Ryan, and good morning, everybody. Thank you for joining us today. As we move past the halfway point of fiscal 2024, our performance to date has been mixed. Our high-touch programs such as vending and implant solutions continue capturing share and they're performing ahead of expectations. On the other hand, growth has not yet inflected in our core customer base in the face of a sluggish macro environment, particularly in our heavy end manufacturing markets.

This can be evidenced in the performance of our top 100 national accounts, where only 45 were growing last quarter. As a result, revenue growth to date has been below our expectations. At the same time, I'm pleased with how we've been managing the business in a challenging environment.

Gross margin performance, our productivity efforts and cash flow generation have been strong, and they're expected to continue. And while our performance to date has been mixed, my conviction in our plan is as high as ever. We expect to improve the trend in revenues during the back half of our fiscal year and into fiscal 2025.

And this belief is grounded in several factors: First, while macro conditions have not materially improved since the start of the calendar year, we continue to hear a more positive overall sentiment about the coming months from our team on the ground. Second, as I mentioned, our implant and vending signings continue to outpace our expectations. These signings should yield incremental growth through the balance of the fiscal year and beyond. Third, we successfully completed our web pricing realignment initiative as planned in late February, and the benefits are just starting to be felt. Fourth, our website improvements which are running slightly behind schedule are expected to roll out during the back half of the year and should yield further benefit. And fifth, we've increased our marketing efforts to generate awareness and demand by featuring the recent enhancements to our value proposition.

My conviction is also derived from our ongoing gross margin execution and as you'll soon hear, a growing pipeline of productivity initiatives that provide runway for operating margin expansion as the business returns to growth.

Before I turn it over to Kristen, I'll walk through our performance in more detail and provide a key initiative update along the way. And I'll begin with our first mission-critical priority, which was maintaining momentum in our high-touch programs, that mainly serve our larger customers.

We grew implant programs by 39% and our vending installed base by 11% as compared to prior year. Public Sector sales have also held up nicely with slight year-over-year growth despite temporary budget constraints.

Moving to our metalworking offering on the next slide. We strengthened our leadership position during the quarter with 2 exciting additions to the portfolio. The first is car industrial, a distributor supplying metal working and related MRO supplies into Eastern Canada. This acquisition brings in a highly technical sales force and strengthens our presence in the region which currently represents 2% of sales. We'll look to drive top line synergies by providing car and e-commerce sales channel and equipping it with MSC's large breadth of product.

The second deal is exciting from a longer-term perspective, with the just recently announced acquisition of the intellectual property assets from SMRT or S-M-R-T, which consists of technology assets developed by Dr. Tony Schmitz and his wife, Christine. This transaction brings to us one of the nation's foremost manufacturing mines in Tony, and it brings us new capabilities, such as the next generation of predictive milling technology, which underpins MSC MillMax.

I'll now turn to our second growth priority on Slide 7, which is reenergizing our core customer. And clearly, that did not happen in the fiscal second quarter as seen by core customer average daily growth rates. That said, Q2 numbers did not reflect the benefits of the initiatives being put into action.

The web pricing reset we've been describing was completed for the remaining 70% of SKUs near the end of February, with early indications boding well for future growth rates. We're seeing improvements already in customer Net Promoter Scores and improvements across several leading indicators on our website, such as how often do customers click on an item page, how often do they add to cart, and how often do those cards convert to order. All of these metrics are showing a nice uptick over the prelaunch baseline.

Moving to e-commerce, we prioritized several improvements to the platform in the second quarter to enhance the customer experience. So this delayed the full launch of the new search engine, which was planned for late in Q2 and the rollout of subsequent search enhancements which are now all expected to launch in the back half of the year. On the marketing front, as I mentioned earlier, we've launched a program, introducing customers to the exciting changes happening at the company. This initiative is aimed at generating awareness on our new web pricing and what's to come on the website.

Our final mission critical growth priority is expanding our OEM fastener offering by leveraging the successful cross-selling formula developed through CCSG. And while OEM sales remained down year-over-year due to acute customer softness, we're encouraged by early cross-selling results. For instance, during the quarter, we achieved a sizable win from an existing MSC implant customer, serving the consumer leisure market by significantly improving their ability to manage inventory. I look forward to updating you on continued success as we build on this early momentum.

I'll now switch gears to profitability and begin with gross margin. We performed well again in Q2 due to a combination of maintaining strong price discipline, realizing benefits from our category line reviews and mix management efforts. Additionally, our refreshed purchasing approach is yielding results in the form of improved inventory efficiency and reduced inbound freight expense as a percentage of sales.

With respect to operating expenses, we're taking a continuous improvement approach to increase our productivity. This is going to play a crucial role in our path to mid-teens adjusted operating margins under our new set of mission-critical objectives, and I want to highlight for you this morning 4 proof points that demonstrate how momentum inside the company is accelerating on this front.

First, on the next slide, you'll see that after extensive analysis, we made the decision to close our Columbus distribution center. While there are 2 factors that made this decision clear cut, it was nonetheless a difficult one because of our culture that places people as our top priority. The first factor was the explosion in our solutions business and that being vending, VMI and implant. That business went beyond what we could have envisioned when we opened the building just over a decade ago.

Today, customers with solutions represent nearly 60% of our revenues. The implication here is that a greater portion of our business can be staged out and planned. And as a result, the operational needs of our distribution center footprint evolved as our revenue mix shifted. The other enabler of the move was the automation investments that we've made in recent years, primarily into our Elkhart, Indiana and Harrisburg, Pennsylvania facilities.

As you can see on Slide 8, these investments not only allowed us to scale while easing the hiring burden, but they enhance efficiency and expand throughput capacity in both facilities. The closure of the Columbus facility will begin producing annualized operating savings of an expected $5 million to $7 million in fiscal '25 with upfront expenses during the back half of fiscal '24 in order to execute the plan while maintaining our highest customer service levels.

Second, on the productivity front, we've recently launched an end-to-end supply chain network study, which is analyzing the entire flow of goods through our network. We're in the process of sizing the total profit improvement target from this, and we'll return with more details on it by fiscal year-end. Third, we've opened a new shared services center in Carretero, Mexico to reduce labor costs while maintaining talent across many of our key functions. Our early hires are in place, and we're pleased with the initial progress. And fourth, during our fiscal second quarter, we offered a voluntary separation package to associates across the company.

The operating stats posted on the Investor Relations section of our website show a slight tick down in associate headcount from Q1. This is due primarily to departures from the voluntary separation, which were offset by headcount additions from the acquisition of KAR, a shared service center in Mexico, and continued support of implant growth.

Moving from our P&L. I'll now turn to our balance sheet and cash flow, which remains strong. I've been particularly pleased with our inventory reductions of $25 million during the quarter, which most importantly, was accomplished while maintaining our high customer service levels. Our balance sheet remains at low levels of leverage, providing us with plenty of flexibility to pursue the investments that I've just outlined.

I'll now turn things over to Kristen to discuss our results and our updated guidance in more detail.

[Kristen Actis-Grande, executive]

Thank you, Erik, , and good morning, everyone. Please turn to Slide 9, where you can see key metrics for the fiscal second quarter on both a reported and adjusted basis. Fiscal second quarter sales of $935 million declined 2.7% year-over-year with the same number of business days in both periods. Despite the sequential improvement in our sales within the quarter off a particularly soft December, volumes remained negative year-over-year through the quarter. This was partially offset by ongoing solutions momentum and more modest benefits from price and acquisitions.

By customer type, national accounts performed the best, with average daily sales up 1.1%, 45 of our top 100 national account customers grew in 2Q. When considering the macro challenges and significantly tougher comps in the first half of the year, I am encouraged by the resiliency despite here.

The public sector had slight year-over-year growth of 0.6%, driven by mid-single-digit growth from our federal customers. We experienced softness in the state and local portions of the public sector due to temporary budget constraints. Core and other customers, average daily sales were challenged during the quarter, declining 5.7%. From an end-market perspective, we experienced acute demand softness in heavy manufacturing verticals, including end markets and tiered suppliers that support the earlier stages of production and automotive.

From a solution standpoint, we continue to take share during the quarter despite a challenging market. In vending, Q2 average daily sales improved 6% year-over-year, and represented 17% of total company net sales. Sales through our implant program grew approximately 10% year-over-year and represented approximately 16% of total company net sales despite only 46 of our top 100 implants showing growth in 2Q.

Signing rates across both solutions remained at healthy levels during the quarter, especially in implants where fiscal year-to-date signings are exceeding our internal targets.

Moving to profitability for the quarter. Our gross margin of 41.5% improved 20 basis points year-over-year. The improvement in gross margin was largely driven by continued benefits from our countermeasure efforts, including category line reviews. These efforts were partially offset by price cost headwinds and acquisitions. Both reported and adjusted operating expenses for the quarter were approximately $291 million.

We recorded roughly $6 million in restructuring expense primarily related to the voluntary separation that Erik mentioned. On an adjusted basis, operating expenses were up $11 million compared to 2Q of last year. Combined with lower sales year-over-year, this resulted in a 200 basis point increase in adjusted operating expense as a percentage of sales.

The year-over-year step-up in operating expenses was largely driven by merit of $6 million and approximately $10 million of costs associated with our strategic investments. Roughly 1/3 of this expense is associated with headcount to support our solutions growth and digital initiatives.

Sequentially, adjusted operating expenses increased by a couple of million dollars as expected due to a full quarter of merit. Reported operating margin for the quarter was 9.7% compared to 11.9% in the prior year. On an adjusted basis, operating margin was 10.5%, a decline of 170 basis points compared to the prior year.

The previously mentioned step-up in operating expenses combined with lower sales were the largest contributing factors to the year-over-year decline. GAAP earnings per share was $1.10 compared to $1.41 in the prior year period. On an adjusted basis, EPS was $1.18 versus $1.45 in the prior year.

Turning to Slide 10 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $530 million representing roughly 1x EBITDA.

We made progress on our working capital during the quarter, including roughly $25 million in inventory reductions. This resulted in second quarter operating cash flow conversion of 128%, and 122% fiscal year-to-date, keeping us on track to achieve our target of greater than 125% for the full year.

Capital expenditures during the quarter of $25 million increased approximately $10 million year-over-year, primarily driven by investments tied to digital and ongoing solutions growth. Together, this drove strong free cash flow generation of approximately $53 million in fiscal 2Q and $116 million fiscal year-to-date.

Our balance sheet and cash generation remains strong and continues to fuel our capital allocation priorities shown on Slide 11. We deployed cash in several of these buckets during the quarter, including the strategic acquisition of KAR Industrial and the intellectual property assets from SMART that Erik alluded to earlier. We also repurchased $16 million of shares in the second quarter.

Moving to our full year outlook on Slide 12. Given our performance halfway through the fiscal year, it is likely we will be at the bottom end of the range in both average daily sales and adjusted operating margin. There is some downside risk if the expectations for the remainder of the year, which I am about to outline, provide benefits later than anticipated.

Starting with revenue. To achieve the lower end of our outlook, it would imply ADS improves meaningfully throughout the remainder of the year. This confidence is based on the following assumptions: Starting with what's not in our control is macro conditions, which we expect will begin to improve off of fiscal 2Q levels, particularly in heavy manufacturing verticals.

Additionally, we expect budget constraints in the public sector to ease as we progress through the fiscal year. Within our control, there are several factors driving expectations of improvement. First is the rate of signings for our solutions, especially in implants where momentum is particularly strong. This should drive growth in the second half as our recent wins ramp in revenue.

Second, our benefits from our strategic investments as they begin rolling out in the second half. As Erik previously mentioned, our new web price strategy went into full effect at the end of February and is yielding favorable early results.

Additionally, our enhanced product discovery platform will be fully launched in the second half. The effectiveness of both will be supported by our marketing campaign that kicked off this month.

On the profitability side, our gross margin performance during the first half was better than expected and above our annual assumption. We expect second half gross margin to continue at or be slightly above 2Q levels. As it relates to operating expenses, we see benefits from our fixed costs and productivity being leveraged on higher volumes, driving improved profitability in the second half.

Before I move on to expectations on other line items, the effectiveness of some of these second half drivers will increase throughout the remainder of the year. As a result, it will likely be the case that our second half doesn't follow historical patterns and will instead be more weighted on the fourth quarter. As it relates to the relationship between sales growth and profitability, the way that we're thinking about fiscal '24 is that every point of revenue growth is worth approximately 20 basis points of adjusted operating margin.

Regarding other assumptions in our updated outlook, I will highlight 2 minor adjustments. G&A expense will likely come in at the lower end of prior guidance of approximately $85 million. And lastly, our tax rate is now expected to be 24% to 24.5%.

With that, I will now turn the call over to Erik for closing remarks.

[Erik Gershwind, executive]

Thank you, Kristen. Our performance thus far in fiscal 2024 is mixed, both not yet meeting our expectations. Despite this, I remain confident. I see evidence of solid execution across our mission-critical initiatives, providing optimism for the back half of fiscal 2024. And longer term, we remain squarely focused on our objectives of 400 basis points or more of outgrowth above IP and operating margins in the mid-teens.

I want to thank our entire team for their dedication in supporting our customers and our mission. And we'll now open up the line for questions.

[Operator]

[Operator Instructions] Today's first question comes from David Manthey with Baird.

[David Manthey, analyst]

Erik, Kristen, first question is on your outlook. What is the IP growth that you're assuming as you say, the acceleration into the back half? What's the underlying assumption for second half IP growth?

[Kristen Actis-Grande, executive]

Yes, Dave. So for the second half, I'll give you kind of overall, we're not expecting a significant inflection of where we've seen IP, some steady improvement, but the more meaningful thing to note is expected IP improvement particularly in machinery and equipment and fabricated metals.

In 2Q, machinery and equipment was down about 5%, the subindex of IP and fabricated metals was down a little bit over 1 point. So when we look at sort of our exposure to given end markets, our top 5 end markets, which are roughly 50% of our revenue, 4 of those 5 were declining. Their IP index declined in our fiscal second quarter. And then if you think about how the IP index is weighted, while that's 50% of our revenue, it only makes up about 10% to 20% of the IP index.

So when we think about composition of improvement in macro, we are looking particularly within those top 5. And I guess just to add the one that is growing of our top 5 unsurprisingly is [indiscernible].

[Erik Gershwind, executive]

Dave, I'll add -- Kristen summarized it beautifully. Just one other point to add, which is beyond the IP assumption. I'd say another factor going on is inventory burn and that we do expect that to be easing through the back half of the year. We've seen evidence of that, particularly in our national accounts area. And when we win accounts, for instance, a little bit of a slower ramp on implants that we expect to accelerate in the back half as inventory burning eases.

[David Manthey, analyst]

Okay. Can you also help us bridge OpEx from where you sit today in the second quarter into the second half? You mentioned benefits from leverage, but there's a lot of moving parts here. You talked about the Columbus DC, voluntary separation, acquisitions, merit, other investments. I mean from the level we're at right now, can you sort of bridge us into the back half with the puts and takes.

[Kristen Actis-Grande, executive]

Yes, sure. So obviously, you're going to put in a variable OpEx assumption depending on how you're flowing revenue through the year, roughly, let's call it, 8% to 10%, and then if you're -- I'm not going to give quarterly OpEx guidance, but I will give a little guidance on how we're thinking about the cadence throughout the year because there are some differences there, too.

As you mentioned, there are a lot of things that are happening in OpEx. So as we think about moving into the third quarter, we are going to be a little bit more weighted on investments in 3Q. Some of that is due to timing of expenses associated with the Columbus shutdown, which are not technically qualified restructuring expenses, and then there's also a heavier investment lift in 3Q tied to some of the efforts around advertising and the solutions growth.

Q4, if you move from Q3 to Q4, what I would tell you to think about is you'll have obviously a step-up in variable expense, will offset a good chunk of that sequentially based on investments that don't repeat in the fourth quarter, and we have a bigger productivity target in 4Q. So if I step back broadly and think about expectations on OpEx on a year-over-year basis for the full year, to your point, there are a lot of moving pieces. The way that I would try to simplify the explanation, the 2 tallest candle sticks are merit, which is about half of the increase and strategic investments, which is the other half.

To your point, a lot of moving pieces on D&A, on acquisitions. We're covering those with productivity, so to simplify the story, the things that emerge are merit and strategic investments that make up the year-over-year lift.

[Operator]

And our next question today comes from Tommy Moll with Stephens Inc.

[Thomas Moll, analyst]

I wanted to drill down a bit on the revenue progression or more precisely the average daily sales progression you expect for the second half versus the first half. And as you mentioned, it does imply a pretty significant step-up on our math, it's approaching 10%, second half versus first half. So if there's anything you can quantify for us for that bridge or even just again, run through qualitatively the drivers there? And in particular, on the macro part of that bridge, what more can you tell us that gives you reason to be optimistic that you're going to see some improvement there, particularly given the March trend?

[Erik Gershwind, executive]

Yes, Tommy. So let me start and then Kristen will give you a more detailed breakout and a bridge because your numbers are exactly right. Our confidence, obviously, Q2 came in softer than we expected, primarily weighed down by macro. But clearly, you could see it in the core customer number. I mean the numbers came down across the board, which taught us was mostly macro. But obviously, we're not satisfied with what we're seeing in the core customer.

I think the confidence is coming from, certainly, we'll touch on, and Kristen mentioned the assumptions behind some moderate improvements in the macro, but also the execution of the growth initiatives that we have that are tracking to plan. So we do have confidence that they're going to work. Obviously, there's a timing element on how quickly things come online. But Chris will take you through the math.

The one other thing I'll say, Tommy, just a little color on March because obviously, the March number thus far is not a great data point. But a couple of things. One is, obviously, there's still just a reminder that we have through next week. So we're giving you an estimate with still a pretty good ways to go in the month.

The color that I give on March is a couple of things. One is it started out slower than it's been in the last part of the month. Obviously, again, we still have another week, but it started out slower and did pick up some momentum would be one.

Two was interestingly, what we saw in March was actually a bit of an improvement in our core customer base performance. And where we saw the step-down was national accounts and public sector, I would say those are the 2 areas where our confidence is greatest, given performance and given our ability to sort of clearly size market share and what's going on. So we don't -- we're not concerned about either of those areas, but they did come down in March, whereas the core got a little bit better. So that is a little -- yes, obviously, it's early but a little sign of life there. I think I'm going to turn it over to Kristen who can do the math for you on the walk.

[Kristen Actis-Grande, executive]

Sure. Yes. Thanks, Erik. So Tommy, the way that I would think about the 10%, to your point on the second half, I'll walk you through some of the big buckets and then elaborate a little bit on the growth side. So seasonality, we typically do have a stronger second half. I think last time we talked, we sized that at about 4 to 6 points of inflection. Based on what we're seeing in March, we certainly think that's going to be on the lower end. So apply about a 4-point assumption there.

On the macro side, what we're thinking about there, we touched a little bit on this with Dave's earlier question on the IP indices. But what we're looking at there is a 1- to 2-point improvement. On pricing, we do get a small benefit on price in the second half. Again, that's tied to the increase that we took in early 2Q. That's about a point, so the balance becomes the growth initiative, which would be 3 points, and I'm going to put those in kind of 3 buckets for you. The first is around solutions, which is about half of that 3 points. So if you look at our signings that we've had in FY '23 and FY '24, and we look at the maturity that is yet to come on those accounts, that would have contributed roughly $20 million more in Q2 if they were fully ramped up.

So when we think of kind of progression around solutions, we're looking at benefits still to come on more recent signings as well as things that were signed in the first half of '24 and not yet implemented and those that we expect to sign in the second half of '24 that would have some in-year benefit still.

The next 1/3 of that, I put on the demand generation efforts that Erik spoke about in the prepared remarks. And that's highlighting all the things that we're doing around web pricing, around the enhancements of the website. And then the balance of that is based on things that we have line of sight to within public sector, both kind of things that we do have that we're able to track in the pipeline and then expectations around some improvements on those state and local budgets.

But what I want to be clear on, too, is it's not like we're sitting here waiting for the macro to improve or like relying on seasonality. Internally, when we target growth for our team, we don't say, go get 4 points of seasonality, everything that we're doing internally is based on a set of initiatives. So the ones I've given you are the ones that we have the highest degree of confidence on, but there are a lot of other great things happening inside the company that have inflection targets like OEM fasteners, for example, are touched on progress there. I just don't want to leave you with the idea that we're sitting here waiting on the economy to improve and not doing anything else from a countermeasure perspective on growth.

[Thomas Moll, analyst]

Thank you for the comprehensive answer there. As a follow-up, I wanted to ask about the web pricing realignment, which it seems like you're discussing as a largely successful initiative completed in February. The KPIs you offered all sound pretty positive. But my question is just to drill a little bit deeper because there's often more than meets the eye in these kinds of initiatives and execution is not easy. So has there been anything that surprise you, is there some risk that the trends we're seeing for the core customer are reflecting some of the challenges with this initiative? Or is that not the case in your mind?

[Erik Gershwind, executive]

So Tommy, let me take those in reverse order. So the challenges in the core customer, I absolutely would not link to this, if anything, because we realize that the bulk of the SKUs and the awareness campaign hit at the very end of Q2. If anything, early signs given that March got to tick better so far with core customers, we see it as a net positive.

Look, you're right to drill in here. It's easy for us sitting on a call to let this roll off the tongue, and it sounds like it's the click of a switch. It is a heavy effort inside the company. It was led by Martina and her team, I mean there are twice-a-day stand-ups on this. This has gotten a heck of a lot of attention. I think what we're saying is, I hesitate to declare anything of success because it is such early days.

We are clearly encouraged by what we're seeing. And I think the execution has been really good. Have there been any surprises? Sure, there's always going to be surprised. I would say nothing though that rises to the level of kind of a big picture surprise. But in this kind of effort, the devil is in the details. And what I mean by details is down to -- we're managing this project at a SKU, at a customer level to make constantly there'll be fine-tuning that gets done through the balance of the fiscal year.

So again, this is not a light switch that goes on and it's done. This is an ongoing effort of refinement. But what you're hearing from us is early encouragement when we look across -- we have a scorecard that goes into a lot of detail, but gives us a very clear dashboard of how we're doing in terms of growth prospects, profitability measures, leading indicators like I talked about in terms of early customer behavior and voice of customer and what they're telling us, what you're hearing is encouragement that early signs are good, but by no means saying it's not.

[Operator]

And our next question today comes from Stephen Volkmann from Jefferies.

[Stephen Volkmann, analyst]

Kristen, you gave a pretty long laundry list of sort of what the inflection might be in the second half. But I was curious because you didn't mention the destock that Erik kind of called out. So is that part of the -- is that a fifth thing? Or is that part of the 4 things?

[Kristen Actis-Grande, executive]

No, I'd say we're putting that in with macro, Steve.

[Stephen Volkmann, analyst]

Okay. So macro up 1 to 2 points, even with the end of the destock. Maybe that's...

[Kristen Actis-Grande, executive]

Yes. And I guess the other thing I'd add is like we have seen the last year or 2, I don't know if I'd call it just destocking, but sort of an end of calendar year sales pattern that it seems like it's sort of becoming the new normal. So I suppose if that's in your first half, the second half seasonality assumption, like when we calculate that, looking back at prior years, you probably are inherently picking up some of that in the seasonality number, too. It's probably just not destocking necessarily in prior years as much as just like year-end belt tightening.

[Stephen Volkmann, analyst]

Got it. Okay. Great. And then slightly differently, just any evolution in how you're thinking about price cost for the rest of the year?

[Kristen Actis-Grande, executive]

Yes. So broadly, we still expect price cost to be more favorable in the second half of the year. Feeling really good about pricing assumptions in the second half. And then if you kind of run out gross margin for the full year, which we now expect to be at Q2 levels or slightly above the -- really, with the countermeasures that we've had in place we've been largely successful in offsetting the transactional price cost headwind. So certainly happy that the worst of that headwind is behind us, but then broadly, just really pleased with how the countermeasures have been performing.

[Operator]

And our next question comes from Chris Dankert with Loop Capital.

[Christopher Dankert, analyst]

I guess hoping to dig in a little bit more on the product discovery and that digital revamp here. I mean any -- and you highlighted what the overall benefit is, I guess, but just what gives you confidence in that expected benefit into the back half and '25? Maybe what's been driving some of the delays there? If you could just give us a little bit more fleshed out color on that digital rollout, that would be great.

[Erik Gershwind, executive]

Yes, you got it, Chris. So we're -- there's basically 2 fronts that we're moving on in terms of our digital experience, our website, in particular. And those 2 fronts are the platform, meaning the transactional engine that customers go through and the search or product discovery function. And we have improvements lined up on both.

They're really aimed and anchored in 2 overarching principles. One is continuing to make the website the customer experience more frictionless, more seamless and just a great -- better and better experience as time goes on. And the second thing is to make it more personalized for the customer. Those are the overarching principles and those are the 2 areas in which we're moving.

On the platform front, we actually got a bunch of stuff over the finish line this month through Q2 and into this month. What we're tracking there Chris is metrics such as we're looking at basically conversion rate. So we're looking at customer sat numbers and then we're looking at conversion rate, which is for every 1,000 customers, 10,000 customers that come to the website, how many converts to an order, which is a good barometer for us, that ultimately leads to revenue improvements.

On search, we are slightly delayed. We had expected all of the search changes or the bulk of the search changes to be in by Q2. Those are pushed out and will be done basically over the next quarter and into Q4, it's going to be a series of improvements. I would say there really 2 principles, Chris, first was we focused -- we saw some opportunities on the platform to make the experience better, wanted to nail those first. And the second kind of overarching principle that we have, while time lines are important, quality is more important. We've always felt that way. And what we found with search is the architecture is good. We're confident in the new platform, but there were refinements that we could do to make it better.

And so we went with the mantra of quality over time line. And so that will be rolling out in the back half. What we're going to be looking for internally there is we're going to be looking at the conversion metrics because we can get close line of sight, Chris, from conversion metrics into revenue performance?

[Christopher Dankert, analyst]

That's really helpful. And then I guess, following the DC closure in Columbus, just what level of sales of the business currently set up for us is there's still some more efficiency programs and adjustments going on there. But make just a general sense for like what level of sales can we serve today following that closure?

[Erik Gershwind, executive]

Yes, Chris. So what I would say is this closure, obviously, a decision like this takes a lot of time with a very long time horizon in mind. The business with the 4 primary distribution centers that will remain post Columbus plus the rest of the network can support substantial growth, and really, we had already had from a geographic coverage standpoint, a pretty good situation.

Columbus was around throughput. And I mentioned the 2 factors that had changed. So with those 2 factors, i.e., 1 being the mix of solutions business and 2 being automation, which there's plenty of still opportunity to go on the automation front that there is a lot of room for throughput capacity.

The other point I would say is that we are -- this networks, I mentioned in addition to Columbus, we've launched a network study. So that network study really has 2 goals in mind. One is going to be around productivity. So you can expect us to come back with productivity targets and go gets that will be part of our self-help story here towards mid-teens operating margins.

The other part of that study though is how do we provide better customer service. So we expect the productivity opportunity. We also expect opportunities to provide even better service and allow the network to support us way into the future. So punchline is, we feel good about where we are now to support continued growth, and I think we're going to get more opportunities coming out of the network study.

[Operator]

And our final question today comes from Ken Newman with KeyBanc Capital Markets.

[Kenneth Newman, analyst]

Good morning. I just wanted to take the back half bridge maybe a little bit differently. If you look in the operational statistics deck, you do have that historical monthly seasonality table in there. And I think if you just follow it from where you've got the preliminary March numbers, it does take you below the low end of your full year guide.

Outside of the stuff that you kind of highlighted from first half to second half, I'm just curious if there's anything else in there that we should kind of be aware of, whether it's just timing of holidays. I think Good Friday is going to be here in March versus April typically. I don't know if there's a way you can help us quantify that impact? Or if there's anything else there that we should be aware of from a monthly seasonality perspective?

[Kristen Actis-Grande, executive]

Yes, Ken. So on the -- maybe I'll start with the second part of your question first on Good Friday. Because of our lovely since calendar, Good Friday was actually in the fiscal month of March, both last year and this year. So there's always a little bit of noise depending on whether that's the last day of the month or not, but I'd say largely a nonevent with March.

To the first part of your question, yes, if you run out like the seasonality, kind of normal average seasonality for the year, to your point, you would end up at a number that's below the bottom of the guidance. And there's really 2 main buckets of things that we are looking at improving upon that would drive that inflection differently, sequentially, first half to second half than the normal seasonality month-over-month would imply if you run that out.

First is the macro recovery we talked about kind of lumpy, I guess, the destocking thing that Steve mentioned into that. And then 2 is the growth initiatives. And again, it's tough to peg exactly when -- which month they come online. If you think about all the items we outlined, solutions, good line of sight to public sector, pretty good line of sight to demand gen, we obviously have some assumptions on when that time, but if you think about the core customer energy or the reenergizing the core customer initiative and what you get on volume lift from the list price repositioning and then the improvements from web, those are really the 2 toughest to model from an inflection perspective because we don't have anything in our historical baseline that tells us how to think about those.

So when you think about modeling kind of range of assumptions that you're putting on different initiatives, we have to make a pretty wide set of assumptions about those 2. So it does make the second half modeling tricky, and it's also why we're over-rotating on the 3 parts of the growth initiatives that I outlined earlier, again, the solutions, the demand gen, and the public sector line of sight. But yes, you absolutely have to have macro improvement and the inflection from the growth initiatives to drive a different expectation if you were to just -- I know what you're saying run out the month-over-month projection.

[Kenneth Newman, analyst]

Yes. Okay. That's helpful. From a follow-up, obviously, others have touched on it earlier in the call, but obviously, you've got a lot of things going on in the OpEx line. I am curious if there's any expected impacts from any supply chain friction, whether that's from shipping lane dynamics, from stuff coming over the water or maybe even this Baltimore bridge, which I'm guessing is still maybe a nonevent for you guys as of now. But how do you think about transport logistic cost kind of flowing through the income statement into the back half?

[Erik Gershwind, executive]

Yes, Ken, it's -- so I'll take it. Obviously, the Baltimore situation is so new and so tragic, too early there to say. But obviously, we're monitoring closely like events in the Middle East and some of the supply chain disruptions. I would say so far, impact is projected to be modest.

Obviously, that could change. But to date, the impact modest and sort of counterbalancing now, we have a lot of focus on freight. You heard us talk about some of the performance improvements there, the network study, we see a lot of opportunity on freight.

So it's possible that the headwinds could grow at this point, it's sort of modest in size, but we got a lot to offset it.

[Operator]

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

[Ryan Mills, executive]

Thank you, everybody, for joining us today. Our next earnings call will be on July 2, and I look forward to seeing you at the upcoming conferences this quarter. Goodbye.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.