MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply 2021 First Quarter Conference Call. All participants will be in 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. 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, Jason, 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 today. 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 in the MD&A sections of our latest annual report on Form 10-K filed with the SEC, as well as in other SEC filings. These 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 gap measures. I'll now turn the call over to Eric.

Thank you, John, and good morning, everybody. Thanks for joining us. I'll begin by wishing each of you a happy, a healthy, and especially a safe new year. I'll start the call this morning with some perspective on our journey and our recent progress. I'll then review first quarter results and take a deeper dive into our growth initiatives. From there, Kristen will review the financials in more detail and provide color on our structural cost program. I'll then wrap up before we open up the line for questions. As we enter the middle of fiscal 2021, momentum on our mission critical initiative is building. This is evidenced in part by improving numbers, but more importantly, by progress against our key initiatives and by the increasing pace with which we're operating the business. As a reminder, several years ago, we decided to reposition MSC from a spot-by supplier to a mission-critical partner. We captured this in our new brand promise, Built to Make You Better, and we did so in order to secure the next decade-plus of MSC's success and to deepen the moat around our business. Since that time, we have recreated MSC's value proposition, remodeled our supply chain with an elevated presence on the plant floor, reshaped MSC's sales force, built new platforms for growth such as CCSG, and we've accelerated the pace of innovation with advancements like MSC Milmax. We've built new digital capabilities like e-commerce to improve customer retention and loyalty and a new pricing function to improve price execution and realization. And finally, we've taken steps to create a more agile culture in order to drive change faster. On our last call, we outlined mission critical were our pathway to translate these changes into improved performance. We shared two three-year targets, and those were accelerated market share capture and improving ROIC. We shared five growth levers that will deliver at least 400 basis points of outgrowth above IP by our fiscal 2023. We also shared a structural cost initiative that would yield at least 200 basis points in operating expense to sales ratio improvements by fiscal 2023, powering ROIC back into the high teens during that time. While we're encouraged by progress, we have our sights set high and we're just getting started. We're making inroads on the five growth levers and we're moving aggressively on the structural cost front to achieve our one-year and three-year targets with a robust project pipeline and a steady drumbeat of changes being implemented across the company. Looking outside of our company, all of this is happening against the backdrop that remains challenging but is showing some positive indicators. The good news on the vaccine front and the recently passed stimulus package will likely improve the outlook over the coming quarters. I'll now turn to our fiscal first quarter financial results, which you can see on slide four. Overall sales were down 6.3%, and gross margin was down 30 basis points versus the prior year period. Our operating margin on a GAAP basis was 7% and was significantly influenced by a non-recurring asset impairment charge, which I'll describe in greater detail shortly. As you can see on slide five, excluding this impairment charge and adjustments related to severance and costs associated with mission critical, our adjusted operating margin was 11.0%, down 30 basis points from the prior year despite lower sales and supported by Mission Critical. All of this resulted in earnings per share of 69 cents for the quarter or $1.10 on an adjusted basis. We're seeing continued sequential improvement in our sales levels. Most notably, our non-safety and non-janitorial product lines improved through the quarter and declined low double digits. Sales of safety and janitorial products anchored by our PPE program continued growing at over 20% for the quarter. The improving trends extended into December with total company sales growth estimated at 2.4%. While aided by some large PPE orders, December is nonetheless encouraging as the rest of the business, excluding safety and janitorial, was down in the low single digits year over year. Looking at our performance by customer type, government sales continued to grow significantly year over year due to the surge in large safety and janitorial orders. National accounts declined in the low teens, while our core customers declined low double digits, and CCSG was down mid single digits. As you can see on slide six, industrial production remained in the negative single digits range, but did improve over the prior quarter. Most manufacturing end markets behaved consistent with this trend, although metalworking-centric end markets did continue to lag the broader IP index. More importantly, we have seen the gap between IP and our growth rate begin to compress as expected. We plan to build on that momentum. And as a reminder, we target exiting fiscal 2021 with at least the 200 basis point positive gap above IP for our fourth quarter. I'll now turn to our growth initiatives. On the last call, I outlined five levers that will drive our improved growth over the next three years. And those are metalworking, Solutions, Selling Our Portfolio, Digital, and Diversified End Markets. Today I'll discuss and focus on a couple of them. First, metalworking. We're investing heavily in our core business in order to widen our lead. One way we do so is by capturing new customers from local distributors who are under tremendous pressure in the current environment. We track our funnel of opportunities and win rate by market, and both are progressing according to plan. We expect that progress to build as the locals come under more and more pressure with each passing month. MSC Millmax is aiding our efforts to capture market share. Milling is one of the most significant cutting tool applications. Cutting tools represent roughly 30 to 40 percent of the $12 to $15 billion metalworking market. MSC MilMax not only provides opportunities to capture share within cutting tools, but it opens up access to our customers' broader MRO purchases, which are multiple times the size of their cutting tool spend. We're seeing strong early reception to the new technology. Our funnel of opportunities is building quickly and is starting to produce new wins. As we do with vending, we're offering MSC Milmax as a service in exchange for incremental share of wallet. The second initiative I'll feature is government, which is right now our largest diversification play. We've been working hard over the past two years to turn our government business from an underperformer to an outperformer. And while we're benefiting from a PPE tailwind, We are nonetheless pleased with our progress in the fiscal first quarter as the business grew over 35%. Beyond the current momentum, we're investing in this area to build for the future, including adding hunter roles dedicated to creating new opportunities for us. Third, I'll highlight our Salesforce build-out. Growing and reshaping our Salesforce is an important enabler that powers each of the five initiatives. In recent years, we've taken sales headcount down in order to reshape the sales force consistent with our new strategy. For the first time in several years, we're now poised to expand the sales force. We had a delay due to the pandemic, but we've now restarted those efforts. In our fiscal first quarter, we increased our sales headcount by 50, including roles such as business development or hunting, metalworking specialists, and government. This effort has been aided by the redesign and outsourcing of our talent acquisition function, which was one of the mission critical projects that Kristin mentioned on the last call. We are hiring faster and at a lower cost. Before turning things over to Kristin, I'll now discuss our PPE program and the related impairment charge for the nitrile gloves. From the outset of the pandemic, we have worked hard to source critical PPE supplies to support our customers in need and to keep the front lines of industry and government workers safe. Despite the widespread scarcity of certain products and well-documented supply chain issues, we've been successful in this effort across a wide range of items. Nitrile Gloves have proven to be more challenging. Over the past several months, a number of our large customers approached us in dire need of this scarce product. Our normal channels of supply could not produce sufficient quantities as the Nitrile Glove global supply chain is under extreme pressure right now. As a result, in September, our team turned to new sources of supply. We used prepayments to secure priority status, which has been a standard market practice through the pandemic and has been an effective tool for us in securing scarce product during this time. As of today, we've not yet received the gloves, and in light of the growing uncertainty over our ability to secure deliveries, we recorded an impairment charge for the full amount of the prepayments. We are, of course, pursuing all possible paths to either secure the gloves or a refund of our prepayments. Pulling back from this specific issue, we're quite pleased with our PPE program, which has consisted of hundreds of global supply transactions leading to substantial revenues and, most importantly, the ability to keep our customers safe. I'll now pass it over to Krista.