MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply 2020 Second Quarter Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Corona, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you and good morning, everyone. Eric Gershwin, our Chief Executive Officer, is on the call with me. We are remote, so bear with us. If the call drops, we will dial back in, of course. During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments, as well as our operational statistics, Both of which can be found on the investor relations section of our website. Let me reference our safe harbor statement under the Private Securities Litigation Reform Act of 1995. 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, including guidance about expected future results, expectations regarding our ability to gain market share, and expected benefits from our investment and strategic plans, including expected results from acquisitions. 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 the risk factors in the MD&A sections of our latest annual report on Form 10-K filed with the SEC as well as in our other SEC filings. Thank you, John. Good morning, everybody, and thank you for joining us today during these unprecedented times.

Let me begin by expressing my best wishes to you and to your families to stay safe and healthy. COVID-19 is no doubt top of mind for all of us right now. So before we get into the quarter, let me start by sharing with you an overview of how we're dealing with this issue. We've launched a company-wide business continuity effort to help us navigate the business through this period of uncertainty. As you can imagine, this is getting our leadership teams full attention right now, and we are in constant communication with our stakeholders, our associates, our customers, our suppliers, as we contingency plan for what is likely to be an extended disruption to the economy. Our number one priority is the health and safety of our associates and their families, our customers, and our other partners. So those associates who can do so are working from home, particularly in our corporate functions. As we are an essential business, we are continuing to operate our customer fulfillment centers or distribution centers. So those associates continue to be on premises, serving our customers. This is particularly important because with timely shipping and some creative sourcing, we are helping to keep the nation's front lines running while we all battle this outbreak. We've instituted enhanced safety procedures to safeguard the health and safety of our team, including the use of additional protective equipment and frequent cleanings of our facilities. Given that we're providing essential services to many organizations on the front lines of the response to COVID-19, we do not have any plans at this time to shut down our customer fulfillment centers. However, we will of course follow the guidance of health officials and we're in close contact with them across our operating footprint. We have eliminated essentially all travel in order to ensure health and safety. We are also reducing spending more broadly across the company, only moving ahead on operating and capital spending that is deemed critical. We have ceased all hiring, cut expenses on items like outside resources, including consulting and more. Looking ahead, we have well-developed contingency plans to reduce costs further if the situation deteriorates from here, as it very well may. I am proud of how our associates have stepped up during this time of unprecedented uncertainty. Our warehouse associates continue getting product out the door every day, Our sales and service teams remain the face of the company on the front lines with our customers. Our category management team is coming up with miracles to find scarce safety and janitorial products that are keeping our customers going. And our IT team has moved in warp speed to enable nearly the entire company with remote access. We'll share some more detail on our actions later in the call. but I'll now turn to our fiscal second quarter that we closed at the end of February. During the quarter, we continued to progress on our journey to reposition MSC as a mission-critical partner on the plant floor of manufacturing and industrial customers. We remained focused on the three initiatives that we've discussed over the last couple of calls to restore operating margin stability and ultimately expansion. And those are Refining the sales effectiveness plan, improving the profitability of our supplier programs, and improving productivity by reducing operating expenses. First, we continued refining the sales force and preparing to accelerate growth. Sales headcount was roughly flat during our fiscal second quarter. Importantly, though, we increased headcount in the growth areas. such as business development or the hunter roles that we've talked about into CCSG and a couple of other investment priorities. Our new business wins continued at a strong pace and remained on plan. While encouraging, we realized that the ultimate measure will be our growth gap above market. Our second initiative is improving the profitability of our supplier programs. recall that we have negotiated roughly $20 million in annualized profit improvements, split about equally between the back half of our fiscal 20 and our fiscal 2021. The overall program remains on track. We do expect, however, that COVID-19 and the resulting economic ripple could mute some of the benefit in the near term as purchase levels and hence rebate payouts come down. The third fiscal 2020 initiative is realigning our operating model to reduce expenses and improve productivity. You'll recall that some of this began at the end of our fiscal 2019 with offering voluntary early retirement to some associates and ratcheting up performance management intensity for others. We also selectively eliminated positions where our focus was changing. All of that continued into our fiscal second quarter and we began selectively hiring in certain customer facing roles as I mentioned. We also continued our assessment of additional opportunities to align our operating model to the new strategy. That exercise confirmed our hypothesis that we see the path to a couple of hundred basis points in improved productivity as measured by the OPEX to sales ratio. Many of the identified initiatives require travel and team meetings So as you could imagine, they're on pause until things settle down. However, there are other initiatives such as some contract improvements and indirect procurement savings that are moving forward as we speak. Our transformation effort is being led by Carrie Hurt. I'll now turn to our fiscal second quarter financial results before providing an update on the environment and then turning it over to John to review the details of the quarter. Greg Clark, our interim CFO, is under the weather right now and out of an abundance of caution, staying home. I would note that he and his team have been doing a great job in finance as expected. We'll then wrap up and open things up for questions. Our fiscal second quarter results reflected solid execution in an uncertain environment. Both sales and gross margins came within our guidance ranges, with sales falling below the midpoint while gross margin was above it. Operating expenses were also better than the guidance midpoint, and this was despite an extra roughly $1 million of consulting fees related to the acceleration of the review of our operating model that I mentioned earlier. All told, both our operating margin and earnings per share came in at the midpoint of our guidance range. Turning to the environment, Industrial demand trends overall for the quarter remained relatively soft. We did start to see a couple of encouraging data points, with January and February MBI readings improving to 50.2. But this was, of course, quickly erased by what unfolded with the COVID-19 outbreak, and you no doubt saw the March reading of 41.0, which did not surprise us. In terms of end markets, The weakness in industrial demand brought in further, with pockets of softness in areas like automotive, heavy truck, oil and gas, and agriculture. Aerospace has also weakened due to the Boeing developments and the building concerns around COVID-19. With regard to the pricing environment, we continued to see list price movements from our suppliers, and we took a mid-year price increase at the beginning of our fiscal third quarter or the beginning of March. Realization has been quite good. In fact, as good as anything we've seen over the past several years. Turning to our performance by customer type, national accounts declined in the low single digits, while core customers declined in the mid single digits, as this is the portion of our business most heavily levered to metalworking, so no surprise. Government sales growth levels deteriorated to down low teens, which weighed down the overall growth. CCSG remained a bright spot, growing in the low single digits. To be honest, though, all of that feels like ancient history. I'll now turn to March, our fiscal March, because it is more reflective of what we're seeing since the acceleration of COVID-19. While our fiscal March's sales estimate came in at negative 5.8% overall, there are a few important trends to note under the surface. First, there's a big discrepancy between the first three weeks and the last two. Through three weeks, our revenues were up low single digits over prior year. We then saw a big drop off in the last two weeks as customer shutdowns spread rapidly across the nation. This began with the big three auto shutdowns and accelerated from there. And I'll just remind you that our last week of March actually runs, given the fiscal calendar, runs into April, so included the first three days of April. The second point I'd note is that we saw a big discrepancy in product line performance. Large orders and sales of safety and janitorial products not surprisingly surged over prior year, particularly with our government customers. At the same time, other product lines saw a substantial drop through the month with double-digit sales declines in the last two weeks. Once again, neither is surprising given the shutdowns and worldwide efforts to control COVID-19. Third thing I'll note, we saw an unusually big gap between our bookings or orders and what we invoiced. Normally on these calls we only discuss revenues, but these are not normal times. Our bookings or orders for March were up high single digits over the prior year. In fact, our bookings were up over prior year even during the last two weeks of our fiscal March. This gap in bookings versus revenues actually began in February where we also saw bookings growth over prior year. The unusually large gap in bookings to revenues is a function of the surge in large safety and janitorial orders, scarcity of some of that product, longer supplier lead times, and a larger than normal backlog in our own warehouses. We anticipate the majority of these bookings to invoice during the months of April, May, and June, which would offer us a growth tailwind to buffer any additional softness that may be yet to come. I'll now turn things over to John, and I'll then come back with some concluding remarks.