MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply 2022 Fiscal Second Quarter Results 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. To ask a question, you may press star and one on your telephone keypad. To withdraw your question, please press star then two. 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, Andrea, and good morning to everyone. Eric Gershwin, our Chief Executive Officer, and Kristen Actis-Grand, our Chief Financial Officer, are both on the call with me today. 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, and expected benefits from our investment and strategic plans and other initiatives. 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 or 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 and thanks for joining us today. I hope that everyone remains safe and healthy. As we cross the halfway point of our fiscal 2022, I'm excited by the growing momentum inside of our company to accelerate market share capture and improve profitability. Each passing quarter is another proof point that the extensive repositioning of MSC is now firmly taking hold. As our performance improves, we continue raising the bar on expectations across the organization, and I'm pleased to see how our team is rising to the challenge. With respect to market share capture, we're sustaining growth rates that are at or above our long-range target of growth at least 400 basis points above the Industrial Production Index. Our fiscal second quarter average daily sales growth rate of 7.9% does not do justice to the momentum that we see developing. This year included two sales days around the holidays that carried minimal sales, whereas last year we were closed due to the timing of those days. Therefore, the absolute sales growth rate of 11.4% is more indicative of underlying performance. January got off to a very slow start as a result of widespread absenteeism due to the COVID surge throughout the supply chain. In fact, our growth rate in January actually started out negative. We saw an inflection during the last two weeks of the month of January, and we've sustained double-digit growth rates since that point. February was particularly strong at nearly 18%, with a catch-up from the soft January, and March has continued our double-digit growth pace. You'll hear from Kristen that we now see double-digit growth for fiscal 22 as a likely outcome. In line with our strategy, growth is being fueled by the five growth levers that we've been describing for you. And those are metalworking, solutions, selling the portfolio, digital investments, and customer diversification with an emphasis on the public sector. Within these five levers, today I'll highlight our in-plant program, e-commerce, metalworking, and the public sector. In-plant continues its strong momentum and now represents approximately 9 percent of company sales. We're tracking ahead of plan, which targeted 10 percent of total company sales by the end of fiscal 23. Our recent investments in e-commerce are also starting to pay dividends. E-commerce reached 60.7% of total company sales, up 150 basis points from prior year, and 30 basis points from the prior quarter. This is being driven largely by improvements to MSCDirect.com. Our technical metalworking expertise, including MSC Milmax, is particularly powerful in the current environment. Our customers are experiencing rapid inflation, labor shortages, extended lead times, and more. As a result, the need for productivity on the plant floor is higher now than it's ever been. And MSC is uniquely positioned to address these challenges as the largest national metalworking distributor offering multiple brands, robust technical expertise, and the ability to document cost savings and productivity improvements on a continuous basis. A recent example demonstrates how our approach is helping customers find the needed productivity. Our technical experts were brought in to one of our aerospace customers to analyze their cutting tool consumption. We were able to save the customer over $1.2 million on an annualized basis by recommending alternate tooling that yielded faster metal removal rates, shorter lead times, and increased productivity with a more cost-effective tool. These savings are allowing our customer to bring some of the outsourced production back in-house, adding volume for our customer and leading to greater opportunities for MSC. Examples like these are happening regularly across our business, and they're fueling new customer wins as well as greater wallet share at existing customers. Finally, on the growth front is the public sector. Our team is performing well. You may have seen that we were recently awarded a five-year contract to service 10 U.S. Marine Corps bases across the continental United States, Hawaii, and Japan. Implementation across the bases is underway, and we expect to see revenue build through the balance of fiscal 22 and into fiscal 23. Turning now to profitability improvements, our long-range goal is to restore return on invested capital into the high teens by the end of fiscal 23. And we said we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of at least $100 million, helping to reduce OPEX as a percentage of sales by at least 200 basis points from our fiscal 2019 baseline. I'm encouraged by progress on each of these fronts. Let me start out with a few words about gross margin. You'll recall that we were not pleased with our gross margin performance in our fiscal first quarter. We began addressing it aggressively with countermeasures during the latter portion of Q1. As part of those countermeasures and in response to the massive purchase cost inflation coming from our suppliers, we implemented a significant price increase in late January. Price realization thus far has been strong, and as a result, Q2 gross margins came in at 42.5%. This gives us added confidence that we can keep gross margins flat or better for fiscal 22 versus prior year. We also generated strong operating expense leverage and reduced adjusted OPEX as a percentage of sales by 80 basis points versus prior year. This is largely the result of our mission critical initiative. We delivered six million of savings in the second quarter and remain on track for 25 million in expected cost savings for the fiscal year. And we remain on pace to achieve our goal of at least 100 million in total cost savings by the end of fiscal 23. All of this is translating into improving adjusted returns on capital, which is well on its way into the high teens. Turning now to the external landscape, the story remains largely unchanged. Strong underlying demand, tight supply chain constraints, even tighter labor constraints, and rapid inflation. All of this is evidenced in public indices such as IP readings, which remain at mid-single digit growth levels, sentiment surveys like the MBI, and feedback from our customers. With some very limited exceptions like automotive, the order backlog and outlook for most customer segments remains robust. Relative to last quarter, headwinds from COVID have eased dramatically. They reached a fever pitch during December and the first half of January, but have subsided considerably as the virus has waned. Like everyone, we'll watch the developments with the latest variant, of course. Here at MSC, we reopened our customer support centers in Melville and Davidson with a hybrid work environment. We've received positive feedback from our associates, and our operations are running smoothly. Angst related to COVID has been joined by broad-based concern related to the Russia-Ukraine situation. Our direct exposure to the region with respect to sales and purchasing is insignificant. The indirect impacts, though, will likely play out in the form of further inflation and more supply chain disruption. While these conditions create some challenges for us here at MSC, They also provide opportunities to take additional market share 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 capabilities enable us to service our customers at high levels when many cannot. We've used recent market conditions to accelerate share capture, and will continue doing so. Kristen will now take you through the details of our performance, the financials for the quarter, and our outlook, which includes a revised annual operating margin framework with a low double-digit sales growth scenario. Kristen, over to you.