MSC Industrial Direct (MSM) Q2 2024 Earnings Call Transcript

MSM earnings call for the period ending December 31, 2023.

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MSC Industrial Direct (MSM -1.32%)
Q2 2024 Earnings Call
Mar 28, 2024, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the MSC reports fiscal second-quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, today’s event is being recorded.

And now, I’d like to turn the conference over to Ryan Mills, head of investor relations. Please go ahead, sir.

Ryan MillsHead of Investor Relations

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 the day’s call, we will refer to various financial data and the earnings presentation and operational statistics that accompany our comments, both of which can be found on our Investor Relations webpage.

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’re 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 reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Erik.

Erik GershwindChief Executive Officer

Thank you, Ryan, and good morning, everybody. Thanks 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 manufacturing end 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 two exciting additions to the portfolio. The first is KAR Industrial, a distributor supplying metalworking 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 KAR an 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 minds 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 carts convert to order. All of these metrics are showing a nice uptick over the pre-launch baseline. Moving to e-commerce, we prioritize 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 remain 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 mixed 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 four 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. Well, there are two 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 open 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 Queretaro, 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, the 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-GrandeChief Financial Officer

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 remain 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 displayed 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 a third of this expense is associated with headcount to support our solutions growth and digital initiatives. Sequentially, adjusted operating expenses increased by a couple 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 one times 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 acquisitions of KAR Industrial and the intellectual property assets from SMRT 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 two minor adjustments. D&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 GershwindChief Executive Officer

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 and supporting our customers and our mission. And we’ll now open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Today’s first question comes from David Manthey with Baird. Please go ahead.

Dave MantheyRobert W. Baird and Company — Analyst

Thank you. Erik, Kristen, good morning.

Erik GershwindChief Executive Officer

Good morning.

Kristen Actis-GrandeChief Financial Officer

Good morning, Dave.

Dave MantheyRobert W. Baird and Company — Analyst

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-GrandeChief Financial Officer

Yeah, Dave, so for the second half, I’ll give you kind of overall. We’re not expecting a significant inflection off 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 a point. So, when we look at sort of our exposure to given end markets, our top five end markets, which are roughly 50% of our revenue, four of those five 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, you know, when we think about composition of improvement in macro, we are looking particularly within those top five. And I guess just to add, the one that is growing of our top five, unsurprisingly, is aero.

Erik GershwindChief Executive Officer

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 as 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, you know, 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.

Dave MantheyRobert W. Baird and Company — Analyst

OK. 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-GrandeChief Financial Officer

Yeah, sure. So, obviously, you’re going to put in a variable opex assumption, depending on how you’re flowing revenue through the year, of 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 if you move from Q3 to Q4, what I would — 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, you know, 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 two tallest candlesticks 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.

Dave MantheyRobert W. Baird and Company — Analyst

Thank you.

Operator

Thank you. And our next question today comes from Tommy Moll with Stephens Inc. Please go ahead.

Tom MollStephens, Inc. — Analyst

Good morning, and thank you for taking my questions.

Erik GershwindChief Executive Officer

Hey, Tom.

Kristen Actis-GrandeChief Financial Officer

Morning, Tommy.

Tom MollStephens, Inc. — 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? Thank you.

Erik GershwindChief Executive Officer

Yeah, Tommy. So, let me — let me start, and then Kristen — Kristen will give you a more detailed breakout and a bridge because your numbers are exactly right. You know, 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, to 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 and how quickly things come online. But Kristen will take you through the math. And 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 two 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 — you know, 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-GrandeChief Financial Officer

Sure. Yeah, thanks, Erik. So, Tommy, the way that I would think about the 10%, to your point, on the second half, I’ll — 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 size that at about four to six 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 four — four-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 one to two-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 initiatives, which would be three points. And I’m going to put those in kind of three buckets for you. The first is around solutions which is about half of that three 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 — the next, third of that, I’d 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 — 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, you know, when we target growth for our team, we don’t say go get four 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, I touched on progress there. You know, 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.

Tom MollStephens, Inc. — 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 you’re discussing as a largely successful initiative. Complete in February, the KPIs you offered all sound pretty positive. But my — 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 surprised you? Is there some risk that the — the trends we’re seeing for the core customer are reflecting some of the — the challenges with this initiative, or is that not the case, in your mind?

Erik GershwindChief Executive Officer

So, Tommy, let me take those in reverse order. So, the challenges in the core customer do — I absolutely would not link to this, if anything, because 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 a tick better so far with — with core customers, I — 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 flick 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 — what we’re saying is I hesitate to declare anything a 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 surprises. I would say nothing, though, that rises to the level of kind of a big-picture surprise. But in in this kind of effort, the devil is in the details.

And what I mean by details is down to, you know, we’re managing this — this project at a SKU and a customer level to make constantly there’ll be fine-tuning that gets done through the balance of the fiscal — 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 — you know, we have a scorecard that, you know, 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 done.

Tom MollStephens, Inc. — Analyst

Thank you, Erik. I’ll turn it back.

Operator

Thank you. And our next question today comes from Stephen Volkmann with Jefferies. Please go ahead.

Steve VolkmannJefferies — Analyst

Great. Good morning, guys. Thanks for taking my question.

Kristen Actis-GrandeChief Financial Officer

Good morning.

Steve VolkmannJefferies — Analyst

Kristen, you gave a pretty — 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 four things?

Kristen Actis-GrandeChief Financial Officer

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

Steve VolkmannJefferies — Analyst

OK, so macro up one to two points points even with the end of a destock, maybe that’s [Inaudible]

Kristen Actis-GrandeChief Financial Officer

Yeah, and you know, I guess the other thing I’d add is, like, we have seen the last year or two, I don’t know if I’d call it just destocking, but sort of a 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 — your first half to 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 your own belt-tightening.

Steve VolkmannJefferies — Analyst

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

Kristen Actis-GrandeChief Financial Officer

Yeah. So, broadly, we still expect price costs 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 at 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.

Steve VolkmannJefferies — Analyst

All right. That’s all I got. Thank you.

Erik GershwindChief Executive Officer

Thanks, Steve.

Operator

Thank you. And our next question comes from Chris Dankert with Loop Capital. Please go ahead.

Chris DankertLoop Capital Markets — Analyst

Hey, morning. Thanks for taking the question.

Kristen Actis-GrandeChief Financial Officer

Good morning.

Erik GershwindChief Executive Officer

Good morning.

Chris DankertLoop Capital Markets — Analyst

I guess hoping to dig in a little bit more on the — 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 just give us a little bit more fleshed-out color on — on that digital rollout, that’d be great.

Erik GershwindChief Executive Officer

Yeah, you got it, Chris. So, we’re — there’s basically two fronts that we’re moving on in terms of our digital experience, our website in particular. And those two 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 two 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 two 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 rates.

So, we’re looking at customer sat numbers. And then, we’re looking at conversion rate, which is for every thousand customers — 10,000 customers that come to the website, how many convert 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 two 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 timelines 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 — 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 timeline.

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.

Chris DankertLoop Capital Markets — Analyst

That’s really helpful. Thanks so much for the color there. And then, I guess following the DC closure in Columbus, just what level of sales are the businesses currently set up for? Obviously, there’s still some more efficiency programs and adjustments going on there, but basically, general sense for, like, what level of sales can we serve today following that closure?

Erik GershwindChief Executive Officer

Yeah, Chris. So, what I would say is this — this closure, obviously a decision like this takes a lot of time with a very long time horizon in mind. The business with the four 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 two factors that had changed.

So, with those two factors, i.e. one being the mix of solutions business and two being automation, which there’s plenty of still opportunity to go on the on the automation front, that there is a lot of room for throughput — throughput capacity. The other point I would say is that, you know, we are — this network — I mentioned, in addition to Columbus, we’ve launched a network study. So, that network study really has two 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 toward, you know, mid-teens operating margins. The other part of that study, though, is how do we provide better customer service. So, we expect a productivity opportunity. We also expect opportunities to provide even better service and allow the network to support us way into the future.

So, punch line 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.

Chris DankertLoop Capital Markets — Analyst

Understood. Thanks so much, Erik.

Operator

Thank you. And our final question today comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Ken NewmanKeyBanc Capital Markets — Analyst

Thank you. Morning, guys. Thanks for squeezing me in.

Kristen Actis-GrandeChief Financial Officer

Good morning, Ken.

Ken NewmanKeyBanc Capital Markets — Analyst

Morning. You know, I just wanted to take the — the back half bridge maybe a little bit differently. You know, 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. You know, just 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, you know, 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-GrandeChief Financial Officer

Yeah, Ken. So, on the — maybe I’ll start with the second part of your question first on Good Friday, Because of our lovely fiscal calendar, Good Friday was actually in the fiscal month of March, both last year and this year. So, you know, 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 your — to — to the first part of your question, yeah, if you — 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, you know, there’s really two main buckets of things that we’re looking at improving upon that would drive that inflection differently sequentially.

First half, the second half, then the normal seasonality month over month would imply if you run that out, versus the macro recovery we talked about, kind of lump — a lump — I guess the destocking thing that Steve mentioned into that. And then, two is the growth initiatives. And again, it’s tough to — 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 times. But if you think about the core customer energy or the — reenergizing the core customer initiative and what you get on volume list from the list price repositioning and then the improvements from web, those are really the two 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 — you know, 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 two. So, it does make the second-half modeling tricky, and it’s also why we’re over-rotating on those three parts of the growth initiatives that I outlined earlier. Again, the solutions, the demand gen, and the public sector line of sight. But yeah, 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 — I know what you’re saying, run out the month-over-month production.

Ken NewmanKeyBanc Capital Markets — Analyst

Yep. OK. That’s — that’s helpful. For my follow-up, you know, obviously you — 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 impact from any supply chain friction, you know, 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, you know, maybe a non-event for you guys as of now. But how do you think about transport logistics costs kind of flowing through the income statements into the back half?

Erik GershwindChief Executive Officer

Yeah, Ken, so I’ll take it. You know, obviously, the Baltimore situation is so new and so tragic. What — too early there to say. But, you know, obviously we’re monitoring closely like events in the Middle East and some of the supply chain disruptions.

You know, I would say, so far, impact is projected to be modest. You know, obviously, that could change. But to date, the impact modest and, you know, sort of counterbalancing that 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’ve got a lot to offset it.

Ken NewmanKeyBanc Capital Markets — Analyst

Got it. Helpful. Thanks.

Operator

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

Ryan MillsHead of Investor Relations

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

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ryan MillsHead of Investor Relations

Erik GershwindChief Executive Officer

Kristen Actis-GrandeChief Financial Officer

Dave MantheyRobert W. Baird and Company — Analyst

Tom MollStephens, Inc. — Analyst

Steve VolkmannJefferies — Analyst

Chris DankertLoop Capital Markets — Analyst

Ken NewmanKeyBanc Capital Markets — Analyst

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