MSC Industrial Direct Company, Inc.

Good day and welcome to the MSC Industrial Supply Company's second quarter 2023 earnings 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 then one on a touch-tone 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 of Investor Relations and Treasurer. Please go ahead.

Thank you, and good morning, everyone. Eric Gershwin, our Chief Executive Officer, and Kristen Octus-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.

Thanks, John. Good morning, everybody, and thank you for joining us. On today's call, I'll begin with some perspective on our recent performance and our longer-term outlook. I'll then provide color on the current environment. Kristen will provide more specifics on our fiscal second quarter mission-critical accomplishments and our financial performance, and then she'll share our expectations for the back half of our fiscal year. I'll wrap things up and then we'll open up the line for questions. As we move into the back half of our fiscal 2023, there is a growing momentum inside of MSC and it has me encouraged about our future. Let me provide you with some color so that you can see from the outside what we see on the inside. First, We continue outgrowing IP or industrial production by numbers in excess of our long range targets. We're seeing the strongest contribution from the programs most closely tied to the repositioning of MSC to a mission critical partner on the plant floor. In plant, vending, and vendor managed inventory are all examples of high touch, high retention programs that are growing ahead of company average. I'm equally encouraged by the momentum on new account wins that we see developing through our national accounts and our public sector teams. And while a portion of our performance above IP is price driven, we're excited by the trajectory of these market share capture programs. On the M&A front, we continue to bolster our technical and high touch product categories. Our recent acquisitions are living up to our high expectations in their early days and are fortifying our position within metalworking and OEM fasteners, areas where we continue to see significant opportunity for long-term growth. Most recently in January, we completed an acquisition that fits nicely into our core metalworking business. Buckeye Industrial Supply Company is a metalworking distributor located in Ohio and that serves planned production needs of manufacturing businesses in the area. True Edge Grinding, also located in Ohio, brings us new capabilities in the way of custom tool manufacturing and regrinding. True Edge, along with our existing regrinding business, represents an adjacent value-added service to our core cutting tool business, and it therefore creates a new growth path for us, It also supports our company's effort to drive cost savings for our customers. Second, on the gross margin line, our success over the past couple of years has come largely from achieving strong price realization during historic levels of inflation. As the market settles, we have reoriented our focus towards improved product assortment, supplier portfolio, and cost position. The category line reviews that we announced last quarter have kicked off with our first wave in full gear. Wave two has been launched as we will roll through our entire product offering over the next several months. We expect to see a slight gross margin benefit in our fiscal fourth quarter, and then more substantial savings will come in fiscal 2024. Third, our productivity efforts remain in full force and continue to yield strong operating leverage in the form of lower OPEX to sales ratios. As we move towards the close of our three-year targets, our mission-critical program, under the leadership of Kristen and Martina, is transitioning from a one-time program to an ongoing way of life or continual improvement. Beyond the numbers, there are four other important elements to our story. First, strategy. The repositioning of MSC into a high touch mission critical partner is taking hold. Customer reception to our enhanced role is high. And this is evidenced in the growth rates of our high touch programs and the rate of new customer wins. The plan is working. Second, culture. MSC has always had a strong culture. one that's grounded in respect for people and an intense focus on the customer. Our new management team is building on that strong foundation. We're adding new elements, including more aspirational target setting, a more robust execution model, and more extensive collaboration across functions. In other words, thinking end-to-end about our business. Third, technology. It's been nearly a year since John Hill joined us as MFC's first Chief Digital and Information Officer, and progress with our technology function is encouraging. We are enhancing our e-commerce functionality and expect to see incremental benefits in the coming quarters. We are improving our product information and customer data, making for a better customer service experience and a more efficient business. We're eliminating inefficiencies as part of mission critical, where older systems inhibit productivity or where improvements can unlock further value. And fourth, the market. We continue to operate in a marketplace with attractive dynamics that support continued growth. The North American distribution market is over $200 billion and remains highly fragmented, with the top 50 distributors still holding just over 30% of the market. The opportunity for organic and inorganic share capture remains vast. In addition, MSC's concentrated manufacturing exposure sets us up well for the next decade. The reshoring trend that we've all heard about is moving from idea to action, as we are seeing an increased number of new plant construction projects. And while our participation in the early stages of construction is minimal, this bodes well for growth in our end markets over time and should serve as a further growth tailwind. Before turning it over to Kristin to discuss our second quarter performance, I want to spend a few moments discussing the environment. While sentiment and IP readings continue moderating, the tone on the ground is stable. most of our customers continue to see solid order levels and demand activity. Of course, we're watching the banking situation closely to monitor any potential ripple effect on the broader industrial economy. At this time, though, our overall read on the environment remains constructive. With respect to pricing, the situation is pretty much the same as we reported last quarter. We continue seeing increases from our suppliers albeit not at the rate or level of the past two years. As such, we're passing those along as warranted, and we continue seeing strong realization. All of this means that the need for our customers to find productivity that offsets their own cost headwinds remains as strong as ever. And this plays very nicely into our value proposition. So we remain focused on delivering that productivity for our customers. Kristen will now take you through our quarterly performance, capital allocation priorities, balance sheet, and our reaffirmed fiscal 23 guidance.