MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply 2020 fourth quarter and full year conference call. All participants will be in listen-only mode. Should you need assistance, please signal in 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 telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to John Corona, Vice President of Investor Relations and Treasurer.

Thank you, Constantino, and good morning, everyone. Eric Gershwin, our Chief Executive Officer, and Kristen Actis Grande, our Chief Financial Officer, are both on the call with me. As on our last call, we are all remote, so bear with us if we encounter any technical difficulties. 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, a summary of which is on slide two of the accompanying presentation. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the U.S. securities laws, including statements about the impact of COVID-19 on our business operations, results of operations, and financial condition, expected future results, expected benefits from our investment and strategic plans and other initiatives, and expected future growth and profitability. 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 and the MD&A sections of our latest annual report on Form 10-K filed with the SEC, as well as in other SEC filings. The risk factors include our comments on the potential impact of COVID-19. These forward-looking statements are based on our current expectations, and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements. 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, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Eric.

Thank you, John. Good morning, everybody. And let me start by saying that I hope everyone remains safe and healthy. We have a pretty packed agenda this morning, so we'll get right into it. I'm going to begin with a brief overview of our fiscal fourth quarter, and I'll then turn it over to Kristen so she can review the financials with you. After that, we're going to look forward, and we're going to look forward to the next three years to discuss what is the next stage of our transformation journey. We've completed the heavy lifting of our Salesforce transformation and are now focused on accelerating market share capture, and improving profitability. This is a company-wide effort that we're calling mission critical. And mission critical is more than just a project name. It's reflective of our business strategy of serving as a mission critical partner to our customers on their plant floors. And it also reflects the fact that accelerating market share capture and improving profitability and doing so with urgency is mission critical for our organization and our stakeholders. A lot more is coming on this shortly, but I'll first turn to the quarter. And we've provided some highlights on slide three. Our fiscal fourth quarter financial results continue to reflect solid execution in a tough environment. Versus the prior year period, overall sales were down 11.3% or 12.7% on an average daily sales basis. Gross margin was down 40 basis points and operating margin was 9.8% as compared to 10.7% in the prior year. Excluding one-time adjustments, our operating margin was 11.2% down just 30 basis points from 11.5% in the prior year due to implementing effective cost controls. This all resulted in solid earnings for the quarter. As we noted in our August sales release, sales of our non-safety and non-janitorial product lines have continued to improve sequentially through the quarter. Sales of safety and janitorial products also continued growing with year-over-year growth of roughly 20% each month on average and for the quarter. Looking at our performance by customer type, national accounts declined slightly more than 20%, while our core customers declined mid-teens and CCSG was down in the low double digits. Government sales, and that's both state and federal, were up significantly due to the surge in large safety and janitorial orders, partially offsetting the declines in the other customer types. As you may have seen in our operational statistics released earlier this morning, September average daily sales declined 8.5%, and our October estimated sales declined 4.6% and benefited from some large orders. All of this shows that sales levels have continued to lift and have seen a slight increase in the rate of improvement over the past couple of months. Most manufacturing end markets, while showing sequential improvement in the quarter, are still soft. Many national accounts are running one shift as opposed to the two or three shifts they were running pre-pandemic. Our job shop and machine shop customers continue carrying smaller than normal backlogs. These customers remain cautious about spending, and they're burning off inventory as much as possible given continued uncertainty. The persistence of COVID-19 and its potential for future surges is certainly playing a role in all of this. and this caution is reflected in recent sentiment indices such as the NBI, which remains negative on a rolling 12-month average. That said, the readings have improved over the past couple of months and actually reached neutral territory in September. Should this improvement continue, it would bode well for our business and should translate into continued sequential lift in our revenues. In terms of end markets, The softness in industrial demand was broad-based, with acute weakness in heavily metalworking-centric end markets, such as aerospace and oil and gas. There are some pockets of strength in certain areas, but not in our core end markets, which remain suppressed. We continue to hear that local distributors are suffering, and the longer that the weak conditions persist, the more pressure they're coming under. This continues to create market share capture opportunities and we're focused on capitalizing on them. Moving now to gross margins, I remain pleased with our performance. In particular, we're executing well on both the pricing and the purchase cost fronts. We're seeing strong realization from our annual price increase and we're continuing to benefit from supplier programs on the purchase cost line. You'll note that our sequential drop from the third quarter to the fourth quarter in gross margin was on the higher side of the typical seasonal decline. This was strictly the result of mix, and in particular, the sale of PPE-related SKUs. Absent this headwind, we maintained underlying gross margin stability. September and October gross margins continued our recent trending. Price and cost are performing well, but we'll likely have continued PPE mix pressure in the first quarter Similar in size to that of our fourth quarter. Looking beyond the first quarter, as we move past the PPE-related mixed noise, we expect gross margins to remain at levels close to or at prior year. Cash flow in the quarter remains strong and allowed us to repay a significant amount of debt. Before I turn it over to Kristen, I want to take a moment to thank Greg Clark for his interim leadership of our finance team. He and the team did an exceptional job over the past few months, particularly during the COVID crisis. We're grateful, Greg, for your hard work, and of course, you continue to be an integral part of our future efforts. And Kristen, welcome aboard. Welcome to your first earnings call, and we're thrilled to have you. So with that, I will turn it over to you.