Release Date: June 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Technical and high-touch portions of the business, including in-plant, vending, national accounts, public sector, and OEM, are performing well.
- Gross margin improved slightly year over year.
- Cash flow generation remained strong, with an expectation of achieving greater than 125% operating cash flow conversion for the full fiscal year.
- Public sector showed notable sequential improvement in average daily sales.
- OEM fastener business and cross-selling formula resulted in new wins and double-digit sequential ADS improvement.
Negative Points
- Average daily sales declined over 7% year over year.
- Gross margin is expected to be below second-quarter levels by approximately 60 basis points.
- Revenue growth in core customers is slower than anticipated due to delays in the rollout of the new website and search functions.
- Missed gross margin plan due to complexities in the web price realignment project.
- Lowered full-year outlook for average daily sales and adjusted operating margin due to recent performance.
Q & A Highlights
Q: Can you elaborate on the 60 basis points of negative variance in gross margin for 3Q and its impact on 4Q?
A: Kristen Actis-Grande, CFO, explained that the 30-basis-point headwind from the web price realignment should correct itself, resulting in a 30-basis-point benefit in Q4. However, there will be a step-up in product cost inflation by about 40 basis points and additional mix pressure of 10 to 20 basis points.
Q: What is the outlook for demand in the heavy manufacturing sector, particularly in auto sales?
A: Erik Gershwind, CEO, noted that 70% of their business is in manufacturing, with heavy manufacturing areas like machinery and metal fabrication being particularly soft. This softness is a significant reason for the core customer not inflecting as expected.
Q: Can you quantify the sequential impact on 4Q OpEx due to higher incentive compensation and other factors?
A: Kristen Actis-Grande, CFO, mentioned that the increase in variable compensation tied to non-repeating benefits from Q3 is around $4 million. Additionally, D&A from prior strategic investments and current strategic investments impacting the P&L could add another $2 million to $5 million.
Q: How confident are you in managing the unexpected dilution from the price realignment initiative?
A: Erik Gershwind, CEO, stated that the team has identified and addressed the anomalies that surfaced during the full rollout. Confidence comes from several weeks of not surfacing new issues and seeing positive impacts on gross margin trends.
Q: What changes have been made to the website, and what is the timeline for future enhancements?
A: Erik Gershwind, CEO, explained that most platform work is done, but the search function, crucial for user experience and revenue growth, is running late. The resignation of the Chief Digital and Information Officer does not impact the timeline. Some benefits will roll out this fiscal quarter, with the bulk in early fiscal 2025.
Q: How should we think about gross margin sequentially in the fourth quarter?
A: Kristen Actis-Grande, CFO, expects a slight improvement in gross margin due to a 30-basis-point benefit from price corrections. However, product cost inflation will step up by 40 basis points, and mix headwinds will add another 10 to 20 basis points.
Q: What are the main drivers influencing the lowered revenue improvement in the second half?
A: Kristen Actis-Grande, CFO, cited lower-than-expected macroeconomic benefits and pressure on typical seasonal uplift. The updated outlook implies a 1% step-up in ADS from the first half to the second half, compared to the previously expected 10%.
Q: What corrective actions are being taken to address the performance issues in fiscal 2024?
A: Erik Gershwind, CEO, mentioned focusing on areas delivering results, such as high-touch solutions and public sector improvements. They are also addressing website delays and web price realignment issues to improve core customer growth and gross margin.
Q: How are you planning to enhance the marketing campaign once the website improvements are in place?
A: Erik Gershwind, CEO, stated that the marketing campaign will include digital marketing, social media campaigns, search engine marketing, supplemental print materials, and personal outreach. The campaign will launch once the website improvements are ready for prime time.
Q: What is the impact of the resignation of the Chief Digital and Information Officer on the website enhancement timeline?
A: Erik Gershwind, CEO, assured that the resignation does not impact the timeline. The company is adding resources, including third-party expertise, to ensure the enhancements are completed urgently.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
