MSC Industrial Direct Company, Inc.

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

Thank you, and good morning, everyone. Welcome to our second quarter fiscal 2024 earnings call. Eric Gershwin, 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 gap measures. I will now turn the call over to Eric.

Thank you, Ryan, and good morning, everybody. Thanks for joining us today. As we move past the halfway point of fiscal 2024, our performance to date has been mixed. Our high-touch programs, such as vending and implant solutions, continue capturing share, and they're performing ahead of expectations. On the other hand, Growth has not yet inflected in our core customer base in the face of a sluggish macro environment, particularly in our heavy manufacturing end markets. This can be evidenced in the performance of our top 100 national accounts, where only 45 were growing last quarter. As a result, revenue growth to date has been below our expectations. At the same time, I'm pleased with how we've been managing the business in a challenging environment. Gross margin performance, our productivity efforts, and cash flow generation have been strong and they're expected to continue. And while our performance to date has been mixed, my conviction in our plan is as high as ever. We expect to improve the trend in revenues during the back half of our fiscal year and into fiscal 2025. And this belief is grounded in several factors. First, While macro conditions have not materially improved since the start of the calendar year, we continue to hear a more positive overall sentiment about the coming months from our team on the ground. Second, as I mentioned, our in-plant and vending signings continue to outpace our expectations. These signings should yield incremental growth through the balance of the fiscal year and beyond. Third, we successfully completed our web pricing realignment initiative as planned in late February. and the benefits are just starting to be felt. Fourth, our website improvements, which are running slightly behind schedule, are expected to roll out during the back half of the year and should yield further benefit. And fifth, we've increased our marketing efforts to generate awareness and demand by featuring the recent enhancements to our value proposition. My conviction is also derived from our ongoing gross margin execution And as you'll soon hear, a growing pipeline of productivity initiatives that provide runway for operating margin expansion as the business returns to growth. Before I turn it over to Kristin, I'll walk through our performance in more detail and provide a key initiative update along the way. And I'll begin with our first mission critical priority, which was maintaining momentum in our high touch programs that mainly serve our larger customers. We grew in-plan programs by 39% and our vending installed base by 11% as compared to prior year. Public sector sales have also held up nicely with slight year-over-year growth despite temporary budget constraints. Moving to our metalworking offering on the next slide, we strengthened our leadership position during the quarter with two exciting additions to the portfolio. The first is car industrial. a distributor supplying metalworking and related MRO supplies into Eastern Canada. This acquisition brings in a highly technical sales force and strengthens our presence in the region, which currently represents 2% of sales. We'll look to drive top-line synergies by providing CAR an e-commerce sales channel and equipping it with MSC's large breadth of product. The second deal is exciting from a longer-term perspective, with the just recently announced acquisition of the intellectual property assets from Smart, or SMRT, which consists of technology assets developed by Dr. Tony Schmitz and his wife, Christine. This transaction brings to us one of the nation's foremost manufacturing minds in Tony, and it brings us new capabilities, such as the next generation of predictive milling technology, which underpins MSC Millmax. I'll now turn to our second growth priority on slide seven, which is re-energizing our core customer. And clearly that did not happen in the fiscal second quarter as seen by core customer average daily growth rates. That said, Q2 numbers did not reflect the benefits of the initiatives being put into action. The web pricing reset we've been describing was completed for the remaining 70% of SKUs near the end of February with early indications voting well for future growth rates. We're seeing improvements already in customer net promoter scores and improvements across several leading indicators on our website, such as how often do customers click on an item page, how often do they add to cart, and how often do those carts convert to order. All of these metrics are showing a nice uptick over the pre-launch baseline. Moving to e-commerce, we prioritized several improvements to the platform in the second quarter to enhance the customer experience. So this delayed the full launch of the new search engine, which was planned for late in Q2, and the rollout of subsequent search enhancements, which are now all expected to launch in the back half of the year. On the marketing front, as I mentioned earlier, we've launched a program introducing customers to the exciting changes happening at the company. This initiative is aimed at generating awareness on our new web pricing and what's to come on the website. Our final mission critical growth priority is expanding our OEM fastener offering by leveraging the successful cross-selling formula developed through CCSG. And while OEM sales remain down year over year due to acute customer softness, we're encouraged by early cross-selling results. For instance, during the quarter, we achieved the sizable win from an existing MSC in-plant customer serving the consumer leisure market by significantly improving their ability to manage inventory. I look forward to updating you on continued success as we build on this early momentum. I'll now switch gears to profitability and begin with gross margin. We performed well again in Q2 due to a combination of maintaining strong price discipline, realizing benefits from our category line reviews, and mixed management efforts. Additionally, our refreshed purchasing approach is yielding results in the form of improved inventory efficiency and reduced inbound freight expense as a percentage of sales. With respect to operating expenses, we're taking a continuous improvement approach to increase our productivity. This is going to play a crucial role in our path to mid-teens adjusted operating margins under our new set of mission critical objectives. And I want to highlight for you this morning four proof points that demonstrate how momentum inside the company is accelerating on this front. First, on the next slide, you'll see that after extensive analysis, we made the decision to close our Columbus Distribution Center. While there are two factors that made this decision clear cut, it was nonetheless a difficult one because of our culture that places people as our top priority. The first factor was the explosion in our solutions business, and that being vending VMI and in-plant. That business went beyond what we could have envisioned when we opened the building just over a decade ago. Today, customers with solutions represent nearly 60% of our revenues. The implication here is that a greater portion of our business can be staged out and planned, and as a result, the operational needs of our distribution center footprint evolved as our revenue mix shifted. The other enabler of the move was the automation investments that we've made in recent years, primarily into our Elkhart, Indiana and Harrisburg, Pennsylvania facilities. As you can see on slide eight, these investments not only allowed us to scale while easing the hiring burden, but they enhance efficiency and expand throughput capacity in both facilities. The closure of the Columbus facility will begin producing annualized operating savings of an expected $5 to $7 million in fiscal 25 with upfront expenses during the back half of fiscal 24 in order to execute the plan while maintaining our highest customer service levels. Second, on the productivity front, we've recently launched an end-to-end supply chain network study, which is analyzing the entire flow of goods through our network. We're in the process of sizing the total profit improvement target from this, and we'll return with more details on it by fiscal year end. Third, we've opened a new shared services center in Querétaro, Mexico, to reduce labor costs while maintaining talent across many of our key functions. Our early hires are in place, and we're pleased with initial progress. And fourth, during our fiscal second quarter, we offered a voluntary separation package to associates across the company. The operating stats posted on the investor relations section of our website show a slight tick down in associate headcount from Q1. This is due primarily to departures from the voluntary separation, which were offset by headcount additions from the acquisition of CAR, the Shared Service Center in Mexico, and continued support of implant growth. Moving from our P&L, I'll now turn to our balance sheet and cash flow, which remains strong. I've been particularly pleased with our inventory reductions of $25 million during the quarter, which most importantly was accomplished while maintaining our high customer service levels. Our balance sheet remains at low levels of leverage, providing us with plenty of flexibility to pursue the investments that I've just outlined. I'll now turn things over to Kristin. to discuss our results and our updated guidance in more detail.