MSC Industrial (MSM) Q3 2026 Earnings Call Transcript

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DATE

Wednesday, July 1, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Martina McIsaac
• Interim Chief Financial Officer - Gregory Clark
• VP of Investor Relations and Business Development - Ryan Mills

TAKEAWAYS

• Net Sales -- $1.047 billion, an increase of 7.8% year over year, primarily driven by pricing execution.
• Adjusted Operating Margin -- 10.6%, an expansion of 160 basis points compared to the prior year.
• Adjusted Diluted EPS -- $1.43, representing a 32% increase from $1.08 in the third quarter of fiscal 2025.
• Price and Volume Contribution -- Price contributed 720 basis points to growth, while volumes contributed 50 basis points.
• Core Customer Daily Sales -- Increased approximately 8%, continuing to outperform the total company average.
• National Accounts Growth -- Approximately 7%, reflecting what management described as a noticeable improvement from the first half of the year.
• Public Sector Sales -- Improved roughly 8%, driven by increased defense activity and a lower prior-year comparison.
• Vending Solutions -- Installed base increased 7% to approximately 30,800 machines, while average daily sales through vending grew 15%.
• In-Plant Programs -- Count increased 7% to 426 programs, with sales to in-plant customers rising 16% and representing 21% of total net sales.
• Sales Per Rep Per Day -- Improved in the high-teens percentage range year over year, which management attributed to a streamlined service organization.
• Headcount Reductions -- Total full-time headcount decreased by 360 year over year, including 225 fewer positions in the field sales force.
• Adjusted Operating Expenses -- $319 million, decreasing 150 basis points as a percentage of sales due to headcount actions and a new sales commission structure.
• Payroll Costs -- Improved to 53.7% of sales compared to 56.1% in the prior year, reflecting increased employee productivity.
• Capital Allocation -- Approximately $49 million returned to shareholders in Q3 through dividends and share repurchases, totaling $160 million fiscal year-to-date.
• Net Debt -- Approximately $433 million, representing a leverage ratio of roughly 1x EBITDA.
• Free Cash Flow Conversion -- 94% fiscal year-to-date, with the full-year target updated to approximately 95%.
• Q4 ADS Growth Guidance -- Range of 6.5%-8.5%, anticipating continued volume improvement against more difficult prior-year comparisons.
• Q4 Operating Margin Outlook -- Midpoint of 10.4% on an adjusted basis, implying adjusted incremental operating margins in the mid-20s.
• Price-Cost Contribution -- Contributed 20 to 30 basis points to margin in the quarter as pricing gains offset inflation.
• Annual CapEx Guidance -- Reduced to approximately $100 million from a previous range of $100 million to $110 million.
• OEM Fastener Growth -- Exceeded 15% in the quarter, aided by improved cross-selling and new sales management processes.
• Web ADS Growth -- Increased in the double-digit range for core customers transacting through mscdirect.com.
• Sequential Sales Performance -- Average daily sales improved 12.3% compared to the fiscal second quarter, outperforming historical sequential averages.
• Fiscal Year Depreciation and Amortization -- Updated to approximately $100 million, the high end of the previous $90 million to $100 million range.

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RISKS

• McIsaac stated, "at today's revenues, we are relatively heavy by 1,000 heads," identifying a significant productivity gap compared to industry benchmarks.
• Clark noted an "unexpected year-over-year step-up of a few million dollars in bad debt expense driven by a couple of isolated customers," which impacted operating expenses.
• McIsaac stated, "Tungsten is still the largest driver of our inflation," noting that prices for the material have increased over 500% without a clear end to supply chain increases.
• Mills warned that freight "will be a bad guy year-over-year" in the fourth quarter due to elevated fuel costs impacting network optimization savings.

SUMMARY

MSC Industrial Direct Co., Inc. (NYSE:MSM) reported third-quarter results that exceeded expectations, driven by pricing execution and a return to volume growth across all customer segments. Management reported that the company has completed its sales force optimization initiative, leading to higher productivity per representative and significant headcount reductions. The company is now pivoting toward "sales excellence" strategies to capture what management characterizes as the early stages of an industrial recovery. While pricing was the primary revenue driver, volume trends inflected positively in April and continued through June. Management confirmed its commitment to restoring the business to a mid-teens operating margin through continued automation and productivity improvements.

• CEO McIsaac estimated the industrial recovery is in the "third inning," noting, "preplanned shutdowns are being canceled or not being announced," particularly in the automotive sector.
• Management identified a growth forum pipeline containing $500 million in opportunities, of which approximately 10% has been converted on an annualized basis.
• VP Mills indicated that the fourth-quarter volume comparison is approximately 300 basis points more difficult than the third quarter, though management expects volume growth to persist.
• The company established a productivity benchmark of $650,000 to $670,000 in sales per head, an increase of approximately $100,000 over current levels.
• CEO McIsaac reported that 120 new sellers have completed a redesigned onboarding program designed to reduce the time required to generate revenue.
• Management noted that summer shutdown patterns are shifting, with some customers increasing shifts or maintaining operations to restock inventory.
• The company stated that its new variable compensation design successfully aligned SG&A expenses with performance, providing a responsive benefit to operating margins during the quarter.

INDUSTRY GLOSSARY

• Average Daily Sales (ADS): Net sales divided by the number of selling days in a given period to provide a comparable daily run rate.
• MRO (Maintenance, Repair, and Operations): Supplies and equipment used in the production process that do not become part of the final product.
• Incremental Operating Margin: The percentage of each additional dollar of revenue that converts into operating income.
• Vending/In-plant Programs: On-site inventory management solutions where MSC installs equipment or personnel directly at a customer's facility.
• MBI (Manufacturing Business Index): A sentiment indicator for the metalworking industry; readings above 50 typically indicate expansion.
• IP Index (Industrial Production Index): An economic indicator that measures the real output of manufacturing, mining, and utility industries.
• OEM (Original Equipment Manufacturer): A company that produces parts or equipment that may be marketed by another manufacturer.

Full Conference Call Transcript

Operator: Good morning, and welcome to the MSC Industrial Supply Fiscal 2026 Third Quarter Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ryan Mills, VP of Investor Relations and Business Development. Please go ahead.

Ryan Mills: Thank you, and good morning, everyone. Welcome to our fiscal 2026 third quarter earnings call. Martina McIsaac, President and Chief Executive Officer, and Greg Clark, Interim Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics document, both of which can be found on our Investor Relations website. During this call, we may refer to certain adjusted financial results, which are non-GAAP measures. I will now turn the call over to Martina.

Martina McIsaac: Thank you, Ryan, and good morning, everyone. On today's call, I will briefly cover our fiscal third quarter results and provide an update on the progress of our initiatives and the current demand environment. I will then turn the call over to Greg to provide greater detail on our fiscal 3Q performance and our outlook for the fiscal fourth quarter. Starting with our results on Slide 4. Average daily sales exceeded expectations with year-over-year growth of 7.8%, underpinned by continued strength in the daily sales of our core customer and noticeable improvement in national accounts. Adjusted operating margin of 10.6% also performed better than expected, resulting in an incremental operating margin of 32% in the quarter.

Since becoming CEO earlier this year, I have spent a portion of my time getting to know our external stakeholders at conferences and roadshows. This has allowed me to ensure that the high-level KPIs we're using to drive urgency and performance in the business are aligned with the way our shareholders will evaluate our results and hold us accountable to progress. To summarize, we are focused on sales per rep per day and sales per total headcount, year-over-year volume improvement, adjusted operating margin expansion and adjusted incremental margin, and lastly ROIC, which will improve naturally when the KPIs I just mentioned are firing on all cylinders.

We are fully committed to restoring MSC to a mid-teens operating margin, a goal which is understood and driving action across the enterprise. While we aren't hitting any home runs yet with these KPIs as of the third quarter, I am encouraged by the singles and doubles we are producing. Starting with sales per rep per day. Our sales force optimization initiative was completed in December with actions taken to streamline and professionalize our service organization, which resulted in some noise in Q2. This headwind is largely behind us, as evidenced by the improving ADS of impacted customers and the inflection seen in national accounts during the quarter.

Sales per rep per day has improved high teens year-over-year, suggesting that at this point in time, we are fundamentally doing more with less. With 225 fewer heads in the field, we're targeting the right customers and meaningfully increasing customer touches through disciplined sales execution. Average daily sales to our core customer once again outperformed total company with volumes beginning to improve. A portion of this improvement is being driven by daily sales growth in the double-digit range on mscdirect.com.

Post sales force transition, there is still a gap in ADS between those customers who were least impacted by our changes — who are trending at growth levels comparable to our public peers — and those who did see greater change or vacancy where relationships are still being established. Closing that gap and accelerating volume growth across all customers is now our focus. Under the leadership of Jahida Nadi, our SVP of Sales, sales excellence continues to gain traction at MSC. We've rolled out an enhanced onboarding and training process for new sellers. We've also instituted new sales management processes throughout the selling organization.

Early benefits of this work resulted in improved cross-selling that helped contribute to OEM fastener growth of more than 15% in the quarter. We continue expanding our vending and in-plant footprint. The growth of our installed base is showing the benefits of an improving macro environment that should result in higher sales across existing locations — the coiled spring effect. We started to see early signs of this in the third quarter with daily sales trends on a per unit basis showing volume improvement. I'm also pleased that the company continues making strides to improve its cost structure as demonstrated by the 150 basis point reduction in adjusted operating expenses as a percent of sales in the quarter.

This is being driven by our headcount actions, our new sales structure eliminating duplicative commissions, and lower freight expense despite elevated fuel costs as a result of various optimization initiatives. Acting on our productivity pipeline and optimizing our cost structure will be at the forefront of our strategic focus as we progress towards our long-term targets. Our own competitive benchmarking on sales per total headcount suggests that at today's revenues, we are relatively heavy by 1,000 heads. To close the gap to that benchmark, we will have to grow and aggressively target changes in the way we work with a focus on AI and automation.

Just this month, MSC was awarded Verint's Global Customer award and accelerated insights with AI that recognizes efforts in pushing AI beyond pilots and into real-time use. We are seeing further signs of an industrial recovery taking shape with positive IP readings across most of our top manufacturing end markets and 5 consecutive months of MBI readings above 50. Average daily sales outpaced the IP Index for the fourth consecutive quarter and was above our target of 400 basis points in the fiscal third quarter. Though still primarily price-driven, I'm encouraged by the trend of volume improvement in April that has continued through June and suggests that our initiatives are beginning to take hold.

I'm confident that MSC is headed in the right direction to enhance our long-term profitable growth algorithm and create meaningful value for shareholders. I will now turn the call over to Greg.

Gregory Clark: Thank you, Martina, and good morning, everyone. Fiscal third quarter sales of $1.047 billion came in above our expectations and improved 7.8% year-over-year. Price was the primary driver of the improvement and contributed 720 basis points to growth, followed by volumes that contributed another 50 basis points. Sequentially, average daily sales outperformed historical averages and improved 12.3% compared to the fiscal second quarter. Looking at sales performance by customer type — core customer daily sales continued the trend of outperforming total company with year-over-year improvement of approximately 8% in the quarter. National accounts saw an improving trend compared to the first half of the year with growth of approximately 7% in the third quarter.

In the public sector, daily sales improved roughly 8%, primarily driven by increased defense activity and a lower prior year comparison. In solutions, we remain pleased by the continued expansion of our footprint in 3Q. In vending, the number of machines installed at quarter end increased 7% year-over-year to approximately 30,800 machines. The number of customers with an in-plant program improved 7% year-over-year to 426 programs. Signings in Q3 were higher than the sequential increase in total program count. Average daily sales through vending were up 15% year-over-year and represented approximately 20% of total company net sales. Sales to customers with an in-plant program were up 16% year-over-year and represented approximately 21% of total company net sales.

Gross margin of 41.1% came in slightly ahead of our expectations and improved 10 basis points year-over-year. Operating expenses in fiscal third quarter were approximately $324 million on a reported basis. On an adjusted basis, operating expenses of $319 million increased approximately $9 million year-over-year, however we saw a sizable improvement in adjusted operating expenses as a percentage of sales with declines of 150 basis points year-over-year and 310 basis points quarter-over-quarter. Reported operating margin for the quarter was 10.2% compared to 8.5% in the prior year. On an adjusted basis, operating margin of 10.6% exceeded the high end of our outlook and compared favorably to 9% in the prior year.

We delivered GAAP EPS of $1.44 compared to $1.02 in the prior year. On an adjusted basis, we delivered EPS of $1.43 compared to $1.08 in the prior year, an improvement of 32%. On the balance sheet and free cash flow — we continue to maintain a healthy balance sheet with net debt of approximately $433 million, representing roughly 1x EBITDA. Capital expenditures of $21 million were down slightly year-over-year, and we achieved free cash flow conversion above 100% despite the step-up in AR related to the increase in sales. This is resulting in free cash flow conversion of 94% fiscal year-to-date, keeping us on track to achieve our updated target of 95% for the fiscal year.

On capital allocation — our highest priorities remain organic investment to fuel growth and advance operational efficiencies. Returning capital to shareholders also remains a priority with approximately $49 million returned to shareholders in fiscal 3Q and $160 million fiscal year-to-date in the form of dividends and share repurchases.

For the fourth quarter outlook — to reflect quarter-to-date trends including daily sales in fiscal June expected to grow approximately 7% and more difficult comparisons with prior year, we are anticipating average daily sales improvement of 6.5% to 8.5% compared to the prior year, gross margins to follow the historical 3Q to 4Q sequential decline of 40 to 50 basis points, and continuation of profitable growth with the midpoint of our adjusted operating margin range of 10% to 10.8%, implying adjusted incremental operating margins in the mid-20s. We have updated expectations for some line items for the fiscal year. We now expect depreciation and amortization expense of approximately $100 million versus our prior expectation of $90 million to $100 million.

We're also reducing our CapEx assumption from $100 million to $110 million to approximately $100 million, resulting in free cash flow conversion expectations increasing from 90% to approximately 95% for the fiscal year. Other line items remain unchanged, including interest and other expenses of approximately $30 million and a tax rate between 24.5% to 25.5%. With that, we will open the line for Q&A.

Operator: Your first question is coming from Chris Dankert with D.A. Davidson.

Christopher Dankert: As we look at the fourth quarter guide, can you help us right size how much of that is underlying core volume improvement versus pricing? The pricing comp is a lot deeper here.

Martina McIsaac: Sure. We obviously had the beginning of some of our pricing actions impact the fourth quarter last year. But we do see continuing volume improvement. We're up against tougher comps in the fourth quarter. Ryan, maybe you want to share some color for modeling purposes.

Ryan Mills: Chris, the way I would think about volumes and price in 4Q is price was about 7.3% year-over-year in 3Q. As Martina mentioned, we'll begin lapping some of our more meaningful price actions related to tariffs in 4Q last year. We did put some price in May related to what we're seeing in metalworking and other product categories. I would think about price being in that 6.5% to 7% range but definitely implying volume improvement at the midpoint. Our volume comparison in 4Q is about 300 basis points tougher relative to Q3, so we feel good about what we're seeing.

Christopher Dankert: Got it. And on the sales force realignment — can you give us a sense for how execution tracked through the quarter to your expectations, and whether you're pleased with how sales growth and coverage have moved as we got into June?

Martina McIsaac: Absolutely, we're exactly where we thought we would be. Think about this in 2 phases. First, the structure — the analogy I use with the team is you want to get wet if it rains. You want to be in the right place at the right time with the right opportunities, with the right programs, and able to take advantage of the tailwind we're seeing in industrial trends. Proof points: vending and in-plant ADS up mid-teens in the quarter, vending per unit up high single digits — that's the coiled spring we've been waiting for. The structure piece is behind us, and we're happy with our segmentation and coverage.

The next piece, which is really more exciting, is making it rain — that's what we're talking about around the sales excellence side. We've compressed our time to hire, we've filled the vacancy, we're onboarding and training people differently, we've got new sales management processes. So now we start to drive growth and volume through day-to-day activity and sales management. We're exactly where we thought we'd be. This is a long game we're playing, and you'll start to see it as the volume improves in the next quarter and beyond.

Operator: Your next question is coming from Ken Newman with KeyBanc Capital Markets.

Kenneth Newman: Martina, could you help us level set on how to think about tracking your progress on productivity initiatives into next year? You mentioned being about 1,000 heads heavy at current revenue levels, but how do you view that evolving as volumes inflect into next year?

Martina McIsaac: That's important for us all to be on the same page on. We needed an internal benchmark to anchor ourselves against in our commitment to a mid-teens operating margin. We benchmarked to say that today, to deliver $4 billion in sales, it takes us 1,000 more people than it would take one of our public peers. If you quickly do the math, we're generating about $570,000 per head today. We want that number to be $100,000 more — that's what the 1,000 heads turns into. The team takes that target and says either I need to grow without adding heads, or I need to take heads out to make my processes more efficient.

It's a combination of both, because we want to improve associate experience, take manual work out, and build a foundation that can absorb growth without needing new headcount. We have a road map mapped out for '27 that gets us closer to that benchmark. We're not going to share a lot of details upfront for competitive reasons and to support the strong momentum and morale within the company around this benchmark. But as we log the wins, we will share them. You'll see them in those 2 numbers — absolute headcount progress on total heads less sales headcount, and the ratio.

It's not going to be linear — some projects are small, some are much bigger, some are short term, some take a little longer.

Kenneth Newman: And on operating leverage from 3Q to 4Q — the midpoint implies incremental margins in the mid-20% range versus low 30s this quarter. Why does operating leverage step down sequentially?

Ryan Mills: Not overly concerned. It's mainly driven by the timing of some actions and some moving pieces in the prior year. Freight year-over-year in 3Q was about a $3 million good guy. We will start to lap some of our network optimization savings in 4Q, which will be a bad guy year-over-year due to fuel costs. Another factor is that we'll start to anniversary headcount actions taken at the end of last fiscal year. But our profitable growth algorithm still remains intact — mid-single digits incremental margins should be at least 20%; as we near high single to low double digits, incremental margins should be at the upper end of 20%, closer to 30%.

Operator: Your next question is coming from Ryan Merkel with William Blair.

Ryan Merkel: Martina, I wanted to start on the comments you made about the industrial recovery. What inning do you think we are in? And have you seen customers adding more shifts yet to plants and restocking inventory, or might that be a future tailwind?

Martina McIsaac: I think we're probably in the third inning. We are starting to see changes in behavior. The most notable, which we haven't sized yet but are watching closely, is that summer shutdown patterns are changing significantly — particularly in automotive, preplanned shutdowns are being canceled or not being announced as they would have been. Still spotty, but it's real, and that's probably the best indicator that we have.

Ryan Mills: In 3Q, our top 5 end markets saw strong growth in 4 of them with the exception of automotive. As we headed into June, we saw automotive turn positive, which is another good sign. And looking at average daily sales in vending and in-plant on a per unit basis, we were up high single digits, which implies volume improvement — a good gauge on industrial demand.

Ryan Merkel: On pricing — 7% price was a little better than expected. Just talk about why that was. And on tungsten, are you done seeing price increases from suppliers? And how much is tungsten carbide up year-over-year in 3Q?

Martina McIsaac: We're not done. Tungsten is still the largest driver of our inflation. Suppliers' reaction depends on the nature of their own supply chain. We will plan for a price action in the fourth quarter. Tungsten overall is up over 500%, so we haven't really seen a slowdown yet. We haven't seen a lot of prebuying. Cutting tool volume is still growing for us, which is an important metric because we want to make sure there's no demand destruction. There aren't a lot of substitutes for carbide cutting tools. So we're still seeing inflation but still seeing growth, and we don't see the end of the price increases yet.

Ryan Mills: Just going back to your first question on pricing in 3Q — it came in a little bit better than anticipated. A couple of things drove that. We saw cutting tool volumes inflect positively, and the inflation there contributed. We also talked about being more strategic with pricing in certain categories and streamlining some discounting templates — that occurred more later in 3Q, so not too much of an impact in the quarter, but we're pleased with the pricing and more encouraged that we saw volume inflect positively.

Operator: Your next question is coming from Nigel Coe with Wolfe Research.

Nigel Coe: Can you comment on how the price-cost gap is trending in 3Q into 4Q? And when we look at the monthly sales performance, May was weaker and June was stronger — it looked like a possible prebuy ahead of price increases. Any comments?

Martina McIsaac: I can see how if you look at April, May, June, you'd wonder if it's going in the right direction. We had a couple of structural things impacting that — Easter moved, which inflated our April. And then June, typically for us is a 250 basis point drop because of our 5-week month and the holiday timing. Actually this year, it's about a 50 basis point increase. So we've seen some shifting, but no real concern. We're pretty happy with where sales are. And price/cost positive contributed 20 to 30 basis points to margin in the quarter.

Nigel Coe: Does that still look similar in 4Q? And could you break out SG&A between payroll, freight, et cetera? And how should we think about SG&A growth relative to sales in '27?

Martina McIsaac: The one thing I'm most happy about is what we tried to achieve with our variable compensation redesign is being felt. One of the issues that MSC struggled with in the past is that we didn't have a responsive commission program — sales might be down, but we wouldn't see the benefit in our SG&A. The new comp design, this is the first quarter we see it fully working the way it should. I'll pass it to Greg for the SG&A breakdown.

Gregory Clark: I'm encouraged to see the evidence that we're making progress on our cost structure as seen by the 150 basis points decline in operating expenses as a percentage of sales. On the $9 million step-up year-over-year in operating expenses — it was driven primarily by increases related to personnel-related expenses, continued investments in-plants and advertising, a little incremental D&A pickup, and an unexpected year-over-year step-up of a few million dollars in bad debt expense driven by a couple of isolated customers, not reflective of the current environment. Partially offsetting that was lower freight from our network initiatives, and some early benefits from our sales force optimization work eliminating duplicative commissions despite higher sales volumes.

On payroll and payroll-related costs as a percentage of sales — it's an improvement year-over-year of about 250 basis points, going to 53.7% versus 56.1% in the prior year.

Martina McIsaac: On volume, which is on everybody's mind including ours — volumes returned to growth across all customer types in April and May, and we see it again in June. We were flat on volumes in Q1, we dug ourselves to about negative 4% in Q2, and we're back to just above flat and positive in all customer types for Q3. We expect that to continue to grow. We have very weak volume comps coming up, and as we start lapping price, we're very confident we'll start to see that impact in volume. Our growth forum pipeline has $500 million in opportunities and we converted about 10% of that on an annualized basis.

The pipeline management and sales coaching will continue to drive volumes. We're optimistic. On '27 — we've got a good solutions footprint, we're starting to see ADS up mid-teens for vending and in-plant and high single digits through machines. We have to optimize the volume through machines, and the industrial recovery is the wind in those sails. Sales excellence continues to develop. I think a combination of those things will see our volumes start to accelerate — we're out of the hole that we dug.

Operator: Your next question is coming from Tommy Moll with Stephens Inc.

Thomas Moll: All the commentary around demand and volumes returning to growth sounds pretty positive. But on the guide for Q4, where the midpoint implies in July and/or August another trend above your typical month-over-month progression — June is a pretty high bar. What gives you the confidence to make that assumption?

Ryan Mills: We just feel confident in what we're seeing. Whether it's the macro or the pipeline, we're continuing to see benefits from our sales force work grow. The sales excellence program is starting to take hold. We feel like we're on good footing and feel confident that trend will continue. There might be a little more price in the quarter depending on what we see from suppliers. But as we sit here today, we don't feel like we've gotten ahead of our skis. And just to dive a little deeper on July and August — if you look at July and August ADS combined versus June, historically we're up around 50 basis points.

The midpoint of our outlook implies a little more than 1%, so we're not implying a lot more volume improvement.

Martina McIsaac: Selling for MSC today represents something very different compared to a year ago. We're still a short-cycle business and will still have limited insight into what's coming. But the pipeline management, the white space steering, the conversion on the growth forum pipeline — those are becoming very real and starting to have teeth in our planning. The change in onboarding has put about 120 sellers through a new program to get them to money faster. We're measuring that time and intervening when it's stretching out. These are muscles we're building, and I don't have all the proof points for you today that I'll have 6 months from now, but I'm very confident in the infrastructure and the ecosystem.

Thomas Moll: As a follow-up on incremental margins — you've addressed the benefits from prior restructuring actions and the internal benchmark to continue improving employee productivity. Is mid-20s a fair base case for fiscal 2027?

Martina McIsaac: We have not updated the algorithm that Ryan mentioned. So mid-single digits — 20% higher than that — we do the math. There probably will be a moment that we could sharpen that algorithm and give you a more aggressive direction. In terms of the 4Q outlook, where gross margin is entirely based on historical performance, our mix typically changes, we're starting to lap some price actions — there could be some upside there. We've also got some onetime things we're comping in Q4 in terms of some personnel actions. Otherwise, I think the incremental would be stronger for the fourth quarter.

Ryan Mills: I just want to say one more thing — it's clear we're fundamentally doing more with less. We're beginning to grow volumes. Full-time headcount is down 360 year-over-year and billed sales force is down 225. That's the one thing we're most encouraged about.

Operator: Your next question is coming from Steve Volkmann with Jefferies.

Stephen Volkmann: Just to come back to the 1,000 heads relative to volume — is that still the right number? Because you also said you were down 225 on sales heads in the field. Are we starting from 1,000 or are we already below that?

Martina McIsaac: The clock resets. Take the starting point at the beginning of the third quarter. The sales actions and previous actions that we've taken — that's not in the benchmark. The benchmark of $650,000 to $670,000 per head is based on the starting point of today.

Stephen Volkmann: And as you've gotten further into this process, if you can get back to a 15% EBIT margin, where is gross margin roughly in that scenario?

Martina McIsaac: One of the things we are convicted of is we would really not like to expand gross margin above that 40% to 41% range, because volume is our priority. We didn't mention gross margin in those KPIs on purpose — we really want to drive volume. You should think about that 40% to 41% range as a steady level, and anything that we achieve because of our own efficiencies or because of our pricing professionalization, we'd like to take those proceeds and turn them into price for our customers so that we can continue to grow volume. There's a competitiveness opportunity there as we continue to improve our gross margin.

Operator: Your next question is coming from David Manthey with Baird.

David Manthey: I'd like to discuss the 6.8% growth in manufacturing specifically. I assume pricing in manufacturing, because of tungsten, is greater than the company average of 7.2%. Are you disappointed you haven't seen a resurgence in manufacturing volume growth at this point in the cycle, or is it your expectation we'll see that next quarter and beyond?

Ryan Mills: One thing driving that is if you think about our smallest to small core customers — uncovered core customers that transact on the web — web average daily sales were up double digits. Those are characterized in the other bucket and fall into nonmanufacturing. So on a mix basis, it's showing 6.8%, but in all other purposes, I would say that number is a little depressed just because of how we characterize the smallest to small core customers.

Martina McIsaac: Are we blowing it out of the water on volume yet? We're not. We've completed Phase 1 of our restructuring. Now what we expect to see is the volume growth. There is volume underlying everything we're doing as we're covering new customers now with the new segmentation. When I see vending up high teens, that's coming from manufacturing growth. We see it across different customer segments.

David Manthey: If you strip out price, it seemed like contribution margin ex price would have been negative. Guiding Q4 lower, are there other lingering cost factors before we get to operational contribution margins in that 20% range? There seems to be an implied price-to-volume handoff upcoming, and I wonder what your confidence level is there.

Ryan Mills: If you look at 2Q, we had a 25% incremental margin, low 30s here in 3Q and then 4Q implying about 23% at the midpoint. A portion of that is driven by the timing of some of our headcount actions in the prior year and some moving pieces year-over-year — freight was a good guy in 3Q and will be a bad guy in 4Q. D&A will also step up a little year-over-year. Our long-term growth algorithm remains intact — mid-single digits, at least 20% incremental margins.

Martina McIsaac: We've been here before. When we were in the post-COVID period and there was a lot of price inflation, we had attractive numbers that weren't sustained by operational change. That's not where we are right now. Those freight savings are absolutely real. We're taking the same fuel increases as everyone else but we've optimized the network and we're paying less. We're down 360 headcount and still absorbing the volume that we need. We are finding productivity in a lot of small processes. Not all cylinders are firing yet, but there's progress everywhere, and that momentum is real.

Operator: This now concludes the question-and-answer session. I would now like to turn the floor back over to Ryan Mills for closing remarks.

Ryan Mills: Thank you, everyone, for joining today's call. Our fiscal fourth quarter earnings call will be on October 22.

Operator: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

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