MSC Industrial Direct Company, Inc.

Good morning, and welcome to the MSC Industrial Supply Fiscal 2021 Fourth Quarter and Full Year 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. And I'd 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 to everyone. Eric Gershwin, our Chief Executive Officer, and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me. We continue working remotely at MSC, so please bear with us if we encounter any technical difficulties. Like last quarter, when I highlighted our recently created microsite dedicated to corporate social responsibility, I'd like to invite you to visit our completely redesigned investor relations webpage. We have made it much easier to find information and add content we think you will find useful. 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 our investor relations webpage. 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 our 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 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 GAAP measures. I'll now turn the call over to Eric.

Thank you, John. Good morning, and thanks for joining us today. I hope that everybody remains safe and healthy. As we close the books on fiscal 21 and we kick off our fiscal 22, our transformation story is gaining steam. Several years ago, we began repositioning MSC from strictly a spot-by supplier to a mission-critical partner on the plant floor of industrial North America. Along the way, we executed several significant changes. We reimagined our value proposition, reengineered our supply chain, reshaped our sales force, and updated our technology infrastructure. The pandemic came and we used it as a catalyst to accelerate the path we were already on. We took several bold steps to rethink how we work and to redeploy capital from back office into growth. At the start of fiscal 21, we rolled out mission critical, which was our plan to translate these changes into superior financial performance. And we outlined two three-year goals. First, to accelerate market share gains. Our stated target was to reach at least 400 basis points of growth above the IP index by the end of our fiscal 2023. Our first base camp would be this past quarter, our fiscal 21 fourth quarter, where we expected to be at least 200 basis points above IP. The second goal was to restore return on invested capital, or ROIC, into the high teens by the end of fiscal 2023. And we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of $90 to $100 million helping to reduce OpEx as a percentage of sales by at least 200 basis points over that time period. We're now one year into our mission-critical journey, and I am very encouraged by progress. With respect to our first goal, market share capture, we're gaining momentum. Our Q4 performance was strong, with ADS growth of roughly 500 basis points above IP. Our growth continues to be powered by the execution of the five growth levers that we outlined at the start of the fiscal 21. And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets. We're also seeing improvement in ROIC. After adjusting out non-recurring costs, adjusted ROIC was 15.4% at the end of Q4, an improvement of approximately 60 basis points over the past year. And there's two important drivers behind this. First, profitability. We held gross margins flat on higher sales dollars and had strong price realization in a robust inflationary period to offset mix headwinds. Our structural cost takeout also helped drive profitability, and I'll speak more to that in just a minute. The second driver of improved ROIC was our balance sheet as we brought down average working capital versus prior year. I'd add that our board just approved ROIC as a metric driving long-term incentive compensation. Back to our mission-critical program. We achieved $40 million of cost savings in fiscal 21, exceeding our original target of $25 million. and we're redeploying a good portion of these savings back into growth investments that will further fuel revenue growth and hence improve operating leverage. We've redeployed field sales headcount from back office into growth drivers, including metalworking, government, and our business development program. We're approaching pre-COVID levels on our vending machine signings, and our in-plan program is gaining traction, finishing fiscal 21 at just over 7% of company sales as compared to 5% a year ago. We continue to upgrade our web infrastructure, including a new search engine, product information platform, and user experience. These have started and will continue to drive improved performance through e-commerce. We've executed all of this in the face of very challenging conditions. including severe supply chain disruptions, substantial cost inflation, and extreme labor shortages. And while we're certainly not immune to these challenges, I've been quite pleased with our team's response to navigating these choppy waters. We've increased inventory significantly and are leveraging our good, better, best product offering to offer our customers alternatives. As a result, while our service level is not yet back to pre-COVID levels, It is well above most of the industry and is fueling market share capture. On the cost side, we are seeing significant inflation in wages, freight, product costs, and more. And our team has worked hard to minimize the impact of these. Our structural cost and productivity efforts are buffering the effects on our P&L. Looking ahead to fiscal 22, our outlook is positive. We intend to build on this momentum despite the near-term challenges with supply chain disruption and inflation. With respect to revenue growth, we're aiming for at least 300 basis points of growth above IP on our way to 400 basis points or more for fiscal 2023. We'll target holding gross margins roughly flat for the third consecutive year by continuing strong price execution. On the structural cost front, we expect to deliver roughly $25 million in incremental savings on top of the $40 million in fiscal 2021. As Kristen will describe in just a bit, we expect this to yield incremental margins of 20% in the likely scenarios for the year. I'll now turn to the details of the quarter and the latest as to what we see on landscape. The demand environment remained strong during our fiscal fourth quarter. The majority of our manufacturing end markets remain robust with some isolated but acute pockets of softness like automotive. This is reflected in the IP reading that continues to show growth and in sentiment readings such as the MBI index, which remain at high levels. That said, the supply chain shortages and disruptions that we began to see in our fiscal third quarter have increased, and while hard to quantify, are certainly constraining growth across the industrial economy in the near term. Product scarcity, freight delays, and extreme labor shortages are also resulting in significant inflationary pressures. We are well positioned to navigate this 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 supply relationships, and next-day delivery capabilities are all strengths that allow us to accelerate market share capture. Turning to our performance, you can see our reported numbers on slide 4 and adjusted numbers on slide 5. Sales were up 11.1% or 12.9% on an average daily sales basis. Our non-safety and non-janitorial product lines grew 20%, while sales of safety and janitorial products declined roughly 14%. Looking at our performance by customer type, government sales declined nearly 30% due to difficult janitorial and safety comps. National accounts improved their growth rate into the mid-teens, while our core customers maintained their growth rates. DCSG grew in the low double digits. September continued the trend of a low double-digit growth rate with ADS growth of 11.1%. Our non-safety and non-janitorial growth was roughly 15%. Keep in mind that the difficult safety and janitorial prior year comparisons continue for the first half of our fiscal 22 and particularly the rest of our fiscal first quarter. before easing in the back half of the year. Kristen will speak more about our fiscal 22 assumptions when she discusses our annual operating margin framework in just a bit. With regards to the pricing environment, it remains strong as product inflation continues pretty much across the board. Supplier pricing moves led us to take another increase in August and solid realization of our June increase allowed us to post the gross margin of 42% for the quarter, down just 30 basis points from our fiscal third quarter, which is less than our typical seasonal drop. Continued price escalations from suppliers and increasing inbound freight costs will be a headwind in the coming quarters, and we'll look to offset this with further pricing actions. I'll now turn things over to Kristin, who will cover our financials, mission-critical progress, and our fiscal 2022 annual operating margin framework.