MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply Fiscal 2024 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 then one on your telephone keypad. To withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to our first quarter fiscal 2024 earnings call. Eric Ershwin, 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 data in the earnings presentation and operational statistics that accompany our comments. 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 earnings 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. security 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 GAAP measures. I will now turn the call over to Eric.

Thanks, Ryan. Good morning, everybody, and thank you for joining us today. I'll begin by wishing everyone a happy and a healthy new year. As we look back on the first quarter of our fiscal 2024, which is the first step in our next mission critical chapter, the headline that comes to mind is strong execution in a challenging environment. On today's call, I'll provide more color on both our execution and the environment. Kristen will then give more specifics on our financial results and expectations for the year. And I'll then wrap things up before we open up the call for questions. I'll now begin with the environment. On our last call, which was midway through October, we described the sequential softening of demand that began in September. The causes included reduced spending due to sustained high interest rates, the ripple effects of the UAW strikes, inventory burndown, and an overall caution among our customer base. Following our call, we experienced an even softer back half of October, resulting in another sequential step down in our growth rate. At the time of our last call, which again was roughly halfway through our fiscal month, We estimated October sales growth of 1% to 2% over prior year. As you can see on the op stats, we ended the month down over 1%, which demonstrates just how soft demand was in the back half of October versus our expectation. That softness carried into November, and as you can see on the op stats, into December as well. The root causes were largely the same as identified last quarter, along with belt tightening and inventory burndown heading into the holidays at calendar year end. While the UAW situation did resolve itself, most of our customers were slow to bring spending back online due to high finished goods inventories. December was compounded by a slightly higher than normal holiday shutdown schedule, which is typical when demand is soft. All of this has been evidenced in IP readings, distributor surveys, and most acutely in metalworking-related end markets, as demonstrated by recent MBI readings. As we look ahead to calendar 2024, the outlook on the ground from customers suppliers and our own sales team is more encouraging, particularly after the first calendar quarter. End-user demand, while light, has remained fairly stable. We've not seen the precipitous drops that many had feared. We're hearing that automotive-related customers should ramp up early in calendar 2024. At the same time, stronger end markets like aerospace and defense should remain strong. In addition, the prospect for stable or even lower interest rates is giving customers more confidence in future capital spending. All of this bodes well for a more positive view of the back half of our fiscal 2024 and into fiscal 2025. With respect to pricing, the environment has remained stable. We did see some select supplier cost increases, which go into effect early in calendar 24. As a result, we'll be taking a small price increase during our fiscal Q2 to pass these along. I'll now turn to our execution. I am pleased with our team's ability to remain focused on what's within our control and to make progress in any market scenario. Focused execution has been a theme for the past three years, with progress spanning our strategic growth pillars, our productivity initiatives, and now our sustainability efforts as well. As this progress continues, it sets us up for a strong rebound when the macro environment improves and it makes for a better world in which to operate. I'll show you what this looks like on the next few slides, and I'll start with our sustainability progress on slide five. In December, we just reaffirmed MSC's commitment to environmental, social, and governance principles with the release of our 2023 ESG report. Within this document, we demonstrate how MSC is enabling a better world and a better tomorrow. For example, we've recycled over 20,000 pounds of carbide since 2021 through our regrind services, and we've recycled 1,500 tons of corrugated packaging just in 2023 at our CFCs. We're also creating a better world by providing sustainable products and services to our customers as we reached over 20,000 environmentally preferred products within our offering. Additionally, our metalworking solutions enabled customers to reduce electricity consumption by 32 million kilowatt hours during the fiscal year. On the social and governance front, as you're aware, we strengthened MSC's corporate governance practices through the elimination of our dual class share structure. But we did more than that. Our community relations program is a vibrant part of our culture. We support many not-for-profits across the country, examples of which can be found in our ESG report. In summary, we're proud of our ESG achievements in fiscal 23, and we're focused on building on this momentum in fiscal 24. I'll now turn to progress on the three strategic pillars we outlined for this next mission critical chapter. Maintaining momentum of existing growth drivers, adding a couple of new elements to our growth formula, and driving further profit improvements through three productivity initiatives. I'll now take you through performance against each of these. First on slide six, maintaining momentum on existing growth drivers. We continue gaining traction in the public sector with high single-digit growth during the quarter. We saw a similar level of growth in our CCSG business, which primarily consists of Class C consumable products, and we did so despite a softening demand environment. Metalworking, while soft due to manufacturing conditions, made important strides for future progress with the formal launch of the machining cloud relationship. extending our reach to tooling engineers who are configuring new machining jobs. Despite our metalworking market leadership, we continue to see ample opportunities to expand in various regions across North America. Most significant was our solutions performance. During the quarter, we achieved vending signings growth of more than 25%, while our installed base grew 10% year over year. For implants, we achieved a record rate in signings and grew our program count by more than 35% compared to prior year. It's also worth noting that VMI installations were up year over year in the low teens as well. These numbers are indicative of market share gains and bode well for our future growth outlook. As a reminder, signings take roughly three months to convert to revenue generation, depending upon the solution and the size of the win. As a result, the costs associated with these wins occur before the revenues do. I'll now discuss progress on the two new elements to our growth formula, which are shown on slide seven. First is re-energizing our core customer growth. On the last call, I highlighted two foundational priorities for unlocking the growth. realigning our public facing web pricing and implementing the new product discovery functionality on our website. With respect to pricing, our goal is to provide market competitive prices to smaller core customers while remaining roughly gross margin neutral through better discounting disciplines. We are currently 30% of the way through the realignment and we're on track to achieve that goal. In addition, we're seeing encouraging early indicators such as improved web conversion rates and more favorable levels of growth compared to non-piloted SKUs. We plan to complete the balance of the portfolio by the end of our fiscal second quarter. With respect to the new product discovery platform, it's now in market in the form of a pilot program. and will be fully deployed before the end of our fiscal second quarter. Early indicators are also promising for search. We're watching conversion rates and other performance measures carefully, and we're pleased with what we're seeing. More exciting is what's yet to come in the following quarters as we build on the base functionality being launched now with significant enhancements such as new table views and schematics, customer self-service analytics, and AI-driven personalization. We will more aggressively market the pricing and the web improvements in the back half of our fiscal year after both projects are complete. The other new element to our growth strategy is building on our OEM fastener foundation of AIS and Tower. We plan to do so by capitalizing on the cross-selling blueprints that we've proven out with CCSG. While we're still in the early innings, initial indications are promising with the build out of a large funnel and several early wins. These efforts will allow us to significantly expand our share of wallet across our customers. I'll now touch on our third mission critical priority, improving profitability through productivity. And here, we highlighted three initiatives, improving category management, accelerating supply chain efficiencies, and upgrading our digital core systems and business processes. Our category management efforts, which include line reviews, portfolio optimization, and product mix and margin management, helped us to exceed our first quarter gross margin expectations. As you may recall, we shared on the last call that gross margins for the year should be flat to slightly down versus fiscal 2023's 41.0%. We also felt that Q1 and Q2 would be the most challenging due to the worst of the price-cost dynamics. So we were pleased to come out of the gate strong at 41.2%, which provides some potential upside for the year. Supply chain improvements are noteworthy and are just getting started. Martina has built a strong team with a mix of existing MSC performers and some new talent from the outside. This team is bringing a fresh perspective to many areas within supply chain. During Q1, we saw improvements in freight expenses, both in absolute terms and as a percentage of revenues, and in inventory efficiency, as inventory levels dropped $17 million despite end-of-calendar-year buying for rebate opportunities. We anticipate more improvements to come as the team is conducting a thorough review of our supply chain end-to-end. Finally, with respect to our digital core systems upgrade, the project is on time and on budget. We expect a launch sometime around the end of fiscal 2025, which will unlock further productivity gains across the order to cash and procure to pay value streams. All in all, despite the subdued growth rate in our fiscal first quarter, our execution remains at high levels and supports future profitable growth. I'll now pass things over to Kristen to discuss our first quarter performance and annual outlook in greater detail.