MSC Industrial Direct Company, Inc.

Good morning, everyone, and welcome to the MSC Industrial Supply 2021 third 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 and then one. To withdraw your questions, you may press star and two. Just a note, today's event is being recorded. At this time, I'd like to turn the conference call over to John Corona, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

Thank you, Jamie, and good morning to everyone. Eric Gershwin, our Chief Executive Officer, and Kristen Actis Grande, our Chief Financial Officer, are both on the call with me. As we continue working remotely at MSC, please bear with us if we encounter any technical difficulties. And before I get into our cautionary language, I wanted to highlight that we recently created a microsite dedicated to corporate social responsibility. For many years, the concept of doing the right thing has driven everything we do and all of our stakeholder interactions at MSC. I invite you to learn more about our community relations, diversity and inclusion, corporate governance, and environment and sustainability efforts by visiting our website. This is only the very beginning of our ESG journey, but we are committed to progress and continually striving for excellence. 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, excuse me, 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 our 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 except as required by applicable law. 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 reconciliations 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 thank you everyone for joining us. I hope you enjoyed your holiday weekend. I'm excited to update you today on our progress this quarter. We are seeing the benefits of the strategic pivot that's been made by our company over the past few years. We made significant investments across the organization, to transition from a leading spot by provider to a mission critical partner on the plant floor augmented by our spot by capabilities. With the bulk of the less visible changes completed, we outlined our plan to return to historic levels of revenue and earnings growth consistent with the legacy of our company. Mission critical is our program to translate those investments into superior financial performance. And we shared with you two goals that underpin our efforts. First, to accelerate market share capture with a target growth rate of at least 400 basis points above IP by the end of our fiscal 2023. Second, to return ROIC into the high teens, powered not only by leveraging growth, but also by structural cost takeout of 90 to $100 million, also by the end of fiscal 2023. This year, our fiscal 2021 began our proof of concept with our fiscal third quarter serving as the latest encouraging data point. With respect to revenues, we committed to achieve a minimum of 200 basis points of positive spread versus the IP by our fiscal fourth quarter. Q3 is muted by PPE comps, but the non-safety and non-janitorial business grew about 21% year over year, and we expect our total company growth to meet or exceed our fiscal Q4 commitment. This year, with the help of numerous structural cost reductions, we increased our customer-facing sales headcount and will continue doing so into fiscal 2022. We've grown share in metalworking through investment and innovation that improve our customers' businesses. At the tail end of fiscal 2021 and into fiscal 22, we're implementing improvements in e-commerce. We started with a new production information system earlier this year and are now rolling out enhanced search capabilities, new user interfaces for both desktop and mobile, a new transactional engine, and overall improved functionality. We've committed to maintaining our gross margin through a series of initiatives and excluding the write-down for PPE, we have done so. The macro environment is driving price increases, and given our inventory turns and innovative merchandising and pricing programs, we expect strong realization to continue. Finally, we've picked up the pace on structural cost takeout. We've already exceeded our $25 million cost takeout goal for fiscal 2021 for the full year. Looking ahead, fiscal 2022 is setting up even better than the current year. We will build on our momentum and continue making progress towards our goal of 400 basis points or more of market outgrowth as measured against the IP index. On the gross margin line, we expect inflationary pressures to continue. While purchase cost increases are beginning to make their way into our P&L, they will be offset by ongoing price realization, yielding a stable gross margin outlook year over year. On the structural cost front, we'll deliver roughly $20 million of incremental savings on top of that which has been achieved over the past two years. And that will include benefits from existing initiatives, which will deliver incremental savings during the first half of 22, plus benefits in the second half from new initiatives that we have yet to execute, along with a handful of more transformational projects that will deliver additional savings in 23 and beyond. We will once again reinvest a portion of these incremental savings into our five growth initiatives to build upon market share capture. Nonetheless, we expect incremental margins at or above 20%. How far north they go will be a function of how high we can get revenue growth and how much price realization we see. With all of this as the backdrop, I'll now turn to the specifics of the quarter, beginning with the external landscape. The economic environment improved significantly. Most of our manufacturing and markets turned positive during the quarter, and this evidenced itself in IP readings that turned to double-digit growth in April and May, and in sentiment readings, such as the MBI index, which are at very high levels. All of this is supported by our customers' outlooks, which are robust. At the same time, the industrial economy is experiencing very real supply chain shortages and disruptions. These disruptions are evidencing themselves in product scarcity, freight delays, and extreme labor shortages. that are resulting in significant availability and inflationary pressures. And we are certainly not immune to these challenges. And in fact, we're seeing them play out. That said, we are very well positioned to navigate the current environment, particularly when compared to the local and regional distributors who make up 70% of our market. MSC's broad multi-brand product assortment, our high inventory levels, strong supplier relationships, and next day delivery capabilities position us well to accelerate market share capture. Additionally, the supply chain challenges are resulting in significant and growing inflation that is producing the most robust pricing environment we've seen in years. Turning now to our performance, you can see our reported numbers on slide four and adjusted numbers on slide five. Revenues were up 2.2% on an average daily sales basis, as we're seeing continued sequential improvement in our sales levels. Most notably, non-safety and non-janitorial product lines improved through the quarter from mid single digit declines in our second quarter to 21% growth in our third quarter. Sales of safety and janitorial products as expected, given the significant surge during the pandemic last year, declined just over 40% for the quarter. Looking at our performance by customer type and excluding for a moment the safety and janitorial product lines, all of our customers, all types, were up strong double digits. However, including all product lines and given the extremely difficult comparisons, government sales declined nearly 40%. National accounts returned to growth by posting a low single-digit increase. while our core customers improved and grew in the mid-teens. CCSG grew mid-single digits. June showed continued improvement, with total company year-over-year growth estimated at 15.4%. Our non-safety and non-janitorial growth is estimated at roughly 20%, while safety and janitorial are estimated to be down roughly 10% against last year's continued PPE surge. We expect strong growth rates in non-safety and non-genitorial products for the balance of the fiscal year. On the pricing front, we've seen solid realization of the March price increase that we mentioned last quarter. And as a result, we saw a sequential lift in gross margin from our fiscal second quarter's adjusted rate of 42.0%. Since that last call, we've seen continued significant pricing activity from our suppliers. And as a result, we've implemented a June price increase. This is earlier than normal, but certainly warranted given the environment. We will not hesitate to move again if suppliers continue raising their prices. Beyond the numbers, we had a couple of positive developments during the quarter. One was the recovery of the nitroglove impairment, which Kristen will touch on in just a bit. The other was the acquisition of a majority stake in the William Hearst company in June. Hearst is a metalworking distributor based in Wichita, Kansas with a heavy focus on the aerospace sector. And this deal is meaningful to MSC in several ways. Hearst goes to market with a highly specialized and highly technical sales force. It fills out a geography in which MSC was under penetrated. And more importantly, brings technical capabilities that we can leverage across the entire MSC business. Aerospace is roughly 10% of total MSC sales today. It's an industry that is poised for strong growth coming out of the pandemic. And the Hearst platform will considerably enhance our effectiveness in serving and growing that portion of our business. Hearst has been led by CEO John Mullen, who remains at the helm, and retains a meaningful ownership stake in the business. I'll now turn things over to Kristen to cover the financials and our mission critical progress.