MSC Industrial Direct Company, Inc.

Good day and welcome to the MSC Industrial Supply fiscal 2023 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. To ask a question, you may press star and then one on a touch-tone phone. And 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, Alison, and good morning to everyone. Happy New Year as well. Eric Gershman, our Chief Executive Officer, and Kristen Actis-Grande, 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, 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. 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 our other SEC filings. 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 gap measures. I'll now turn the call over to Eric.

Thank you, John. Good morning, everybody, and thanks for joining us today. I'll start by wishing everyone a happy new year, and I hope you had a restful and a happy holiday season. On today's call, I'm going to reflect on our first quarter performance. I'll offer my perspective on the current demand environment. and update you on our accomplishments against our mission critical initiatives. Kristen will then provide more specifics on the quarter and our reaffirmed fiscal 2023 framework. And I'll then wrap things up and we'll open up the line for questions. Before I get into Q1, I'm excited to announce that we produced our first ever ESG report at the start of our fiscal year in November actually. You can view this report in the investor relations section of mscdirect.com. Our ESG journey has been one of continual improvement, and we look forward to receiving your feedback as we enhance our reporting each year. On a related front, we continue to make progress on our DE&I journey by adding diversity to our senior management and our board of directors. Most recently, we welcomed Raquel Purcell as our newest board member, and she brings with her more than 30 years of supply chain, strategy, and digital experience, and we're very happy to have her on board. This is the latest in what has been a series of moves to infuse new energy and new excitement and intensity into our company's leadership. Turning to our performance, I'm pleased with another strong quarter that continues our string of success in the face of uncertain conditions. Our primary goals for fiscal 2023 are gaining market share, expanding adjusted operating margins, and improving adjusted return on invested capital, or ROIC. Our fiscal Q1 demonstrated success on all of those dimensions. Looking beyond the quarter, Our five growth levers and the productivity momentum that we're seeing have us set up to continue achieving our mission critical targets. Our manufacturing centric and market exposure also provides us with strong resiliency in the event of economic softening. Manufacturing verticals like aerospace are not yet back to pre-COVID levels and therefore have plenty of room for continued growth. Additionally, We stand to benefit from reshoring in the future as we are just beginning to see the positive impacts from those activities. In addition to our focus on market share capture and productivity, we are pivoting our emphasis within category management. Since COVID began, our priorities were securing product availability for our customers and staying ahead of the rapid cost inflation that we all experienced. and I'm proud of our team's efforts on both fronts. Our inventory position allowed us to service customers, keep plants running, and drive revenue growth. And thanks to our strong value proposition, we were able to keep pricing ahead of purchase costs and improve gross margins during a challenging time. As the world now returns to a more normalized state of moderating inflation and stabilizing supply chains, we are initiating a fresh look at our supplier and assortment strategy. Our priorities will migrate towards reducing purchase costs, streamlining operational efficiencies, improving the customer shopping experience, and channeling more market share to those suppliers who partner with us. We will accomplish these objectives through a formalized category line review process that will begin over the next couple of months led by our new COO, Martina McIsaac. It will cycle through our product lines in waves, spanning the better part of the next year. We expect most of the benefits to accrue in fiscal 24 and beyond, with some benefit hitting the latter portion of fiscal 23. I'll now turn to the specifics of the quarter. Results continue to be aided by strong pricing contribution, our recent bolt-on acquisitions, and execution of our growth drivers. We achieved average daily revenue growth of 12.9%, well above the IP index. We expanded operating margins by 140 basis points over prior year, or 100 basis points on an adjusted basis, driven by the continuation of our mission-critical initiatives, which yielded additional savings of $6 million in the quarter. We remain on track to achieve our goal of at least $100 million of savings by the end of fiscal 23. Our mission critical initiatives and efforts of our entire team on cost containment and productivity has also boosted our adjusted ROIC into the high teens and now stands at 18.3%. We've now already reached our original fiscal 2023 goal, and we aim to continue improving that number over time. Our growth formula remains anchored in the five priorities that we've discussed as part of mission critical. Solidify metalworking, expand solutions, leverage the portfolio strength, grow e-commerce, and diversify customers in end markets with an emphasis on public sector. I'll now update you on each one of those. Our expertise in metalworking remains the cornerstone of our value proposition. driven by the depth and breadth of our product portfolio, our large network of technical metalworking experts, and our focus on innovation as a tool to elevate productivity and lower costs for customers. In many cases, we also help our customers to reduce waste and energy consumption. Here's a recent example from the aerospace end market. One of our customers, who is a Fortune 500 company, was using a four-step drilling process that took them two and a half to three minutes to machine a certain part that goes into an airplane. After an in-depth review by our metalworking experts, we were able to take that four-step process and bring it to one step and reduce cycle time from the two and a half to three minutes to just 10 seconds. We also improved quality along the way, and by the customer's own calculation, They're now expecting to save over $4 million annually. Our solutions growth driver is anchored by our vending and implant programs, both of which have been fueling market share capture over the past several quarters. Vending signings remain strong, with Q1 signings comparable to Q4. Vending machine revenues grew in the mid-teens and now represent over 15% of total company sales. In-plant signings also remain strong, with Q1 again running at a similar pace to Q4. In-plant customer revenues were up over 20% year-over-year and now represent 12% of total sales, up 100 basis points from the prior quarter. We will continue to push on this growth driver and would expect in-plant to be at 15% of total sales by the second quarter of fiscal 24. Sales to customers with our solutions offering now represent 56% of the company's total sales, up over 200 basis points from prior year. Importantly, our solutions capabilities are also bringing us into diversified end markets, with recent wins coming in industries spanning from medical manufacturing, packaging, and even the hospitality sector. The third priority is selling the portfolio. which is about increasing share of wallet through ancillary products, especially our CCSG business. Here we provide an outsourced vendor-managed inventory service for the high-margin C-part consumables that keep plants running. Momentum in this business continues building with Q1 ADS growth in the mid-teens. Our fourth priority is digital. which includes all aspects of MSC's digital engagement with customers, suppliers, and associates. John Hill and his team have completed a comprehensive review of our entire digital offering and have built a roadmap for evolution in the space. For example, in e-commerce, recent work is focused on improving the customer experience on our website by enhancing product discovery and enriching product data. This investment is producing early returns as e-commerce sales grew mid-teens in the first quarter. On an ADS basis, we reached 61.9% as a percent of total company sales, up roughly 150 basis points compared to prior year. Our fifth growth driver is customer diversification through our public sector business. Over the past few quarters, I've described significant contract wins such as the 4PL contract serving the U.S. Marines base. But we've supplemented that win with others at the state and federal level. And these have helped to produce continued strong growth with Q1 ADS coming in over 20%. And we expect that momentum to continue throughout fiscal 23. Each of our five growth levers are not only powering growth, but they're positioning MSC as a productivity partner to our customers, expanding our historic role as spot-buy supplier. In Q4 of fiscal 22, we expanded our portfolio through two acquisitions in areas that we consider important to our business. In June, we acquired Engman Taylor, a premier metalworking distributor in the Midwest that expands our network of technical experts. We also bolstered our OEM fastener distribution business through the acquisition of tower fasteners in August, which broadens our end market exposure and increases our geographic footprint in the high touch VMI inventory category. Both businesses are running ahead of their original case in their early days. We expect both to produce ROIC above our weighted average cost of capital by the end of their first full year of operations. Kristen will discuss our capital allocation priorities in more detail, but we remain committed to seeking out bolt-on acquisitions that fit our strategic, financial, and cultural filters. Turning to the external environment, the picture remains similar to last quarter, with sentiment readings declining and IP readings moderating. the majority of our customers are seeing stable order levels, demand, and general activity. We are hearing, though, continued talk of softening among a portion of our customers. More recently, we experienced a higher prevalence of extended holiday shutdowns along with weather disruptions during the second half of December. As Kristen will describe, this resulted in a strong start to the month but a slow finish as activity saw a sharper decline than in the last two weeks of prior year. Zooming out though, the need for our customers to find productivity to offset their cost headwinds is as strong as it's ever been. And this plays nicely into our value proposition. So we remain focused on delivering that productivity for our customers. I'm going to now turn things over to Kristin.