MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply Fiscal 2022 First Quarter Earnings 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, today's event is being recorded. I would now like to turn the conference over to John Corona, Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Thank you, Rocco, 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. 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 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. 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 on our website, 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, everybody. I hope you all continue to remain safe and healthy as we enter this holiday season. We're now one quarter through our fiscal 22. and progress on our mission critical journey continues. I remain encouraged by the improving execution that I see throughout the company as we are gaining traction with each passing month. And while we are improving, we can still do better. With regards to our mission critical program, you'll recall that we outlined two multi-year goals at the start of our fiscal 21. The first was 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 23. The second goal was to restore returns on invested capital, ROIC, into the high teens also by the end of fiscal 23. We would achieve the second goal by leveraging our 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. Our fiscal first quarter demonstrated continued progress against our long-term goals. First, we sustained the recent improvement in our market share capture rate. Our 9.9% growth was once again nearly 500 basis points above the IP index. It was fueled by increasing momentum in our in-plant initiative, e-commerce investments, and our vending program. I'm equally pleased by what I see as a growing pipeline of customer wins from our new business development and government teams. Second, we generated strong operating expense leverage and reduced adjusted OPEX to sales by 70 basis points, despite a headwind from COVID cost add-backs. And this was fueled not only by leveraging growth, but also by continued execution of our mission-critical productivity pipeline. We delivered $10 million in savings for the quarter and remain on track for $25 million in expected savings for fiscal 22. We're also working aggressively to increase our fiscal 23 and beyond project pipeline. And as a result, we remain on track to reach our recently increased goal of at least $100 million in total cost savings by the end of fiscal 23. First quarter gross margins, however, came in below our expectations. While we saw continued price realization, and price costs did remain slightly positive, it was not enough to overcome our typical mixed headwind in the quarter. We're not pleased with this outcome, and we're addressing it aggressively with countermeasures. First one is that we're planning for a sizable price increase early in calendar 22 to respond to the increasing pace of inflation that we continue to see from our suppliers. And second, we've launched an initiative to improve price realization across our sales, category, and marketing teams in the coming months. And to be clear, this effort is not just about price. It's about winning customers and winning business, and doing so while capturing the value that we're delivering for our customers each and every day. We're encouraged by early results, which include an improving price realization trend late in our fiscal first quarter and that's sustained into December. As a result, we expect to achieve our goal of keeping gross margins roughly flat for the fiscal year, beginning with a bounce back in Q2. Turning to the external landscape, things are dynamic and fluid. On the one hand, demand remains strong. This is evidenced in IP readings, which, while not as high as they were several months ago, remain at mid-single-digit growth levels. It's also evidenced in strong readings for sentiment surveys such as the MBI. These demand conditions are also reflected in customer feedback where activity levels and incoming order flows are solid. Strength was seen across most segments of the industrial economy with automotive being the largest exception. On the other hand, supply chain and labor constraints remain tight creating ongoing challenges with scarcity of supply, inflation, and continuity of operations. We're hearing that supply and shipping constraints may ease in the coming quarters, although we've not seen much evidence of this ourselves to date. Labor shortages remain severe. In fact, hiring and staffing even our own operations is a challenge. And while these extreme conditions do create some challenges for MSC, they nonetheless provide a backdrop for significant market share capture from the 70% of the distribution market that's made up of local and regional distributors. MSC's broad and deep inventory, our good, better, best brand assortment, and our logistics and transportation capabilities have us well-positioned to service customers and keep plants running across North America at a time when many cannot. On the inflation front, it is as extreme as I can remember. Cost increases are coming fast and furious, setting up for a robust pricing environment. Customers remain very receptive to price increases as they understand the current environment. At the same time, many of our customers are starving for productivity and other cost savings to offset inflation. And this also plays well into MSC's strengths, as we're able to bring our technical expertise, our inventory management solutions, and other services to find productivity for our customers, which are fueling recent wins. While it's still early days with the presence of the Omicron variant and a related rise in COVID case counts, so far, customers and suppliers are working through it. There is a different tone from the early stages of the pandemic in 2020. And while we're seeing increases in the number of cases in our own facilities, those who are infected are returning to work more quickly, and between the vaccine, more proactive testing, and PPE requirements, we've not experienced challenges to the degree that we did in 2020 in the earlier stages of the pandemic. Based upon what we're seeing now, we expect most portions of the industrial economy to power through this surge without massive shutdowns or material disruptions to operations. I'll now turn things over to Kristin, who will take you through the details of our performance, our financials for the quarter, and then our outlook.