MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply Fiscal 2024 Fourth Quarter and Full Year 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, this 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 fourth quarter fiscal 2024 earnings call. Eric Gershwin, Chief Executive Officer, Martina McIsaac, President and Chief Operating Officer, and Kristen Actis-Grande, Chief Financial Officer, are on the call with me today. During today's call, we will refer to various financial data in the earnings presentation and operational statistics documents, both of which can be found on our investor relations website. Let me reference our safe harbor statement found 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 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 the non-GAAP reconciliations in our presentation or on our website. which contain the reconciliation of the adjusted financial measures to the most directly comparable gap measures. I'll now turn the call over to Er.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today. Before I start, I'd like to share a couple of thoughts on recent current events. Our hearts go out to all of those affected by the major hurricanes that hit the southeast in recent weeks. I'm relieved to report that our associates in the impacted areas are safe and MSC remains committed to support the disaster relief and recovery efforts through both monetary donations and by providing products on the Red Cross request list. On today's call, I'll reflect on the progress of our mission critical program and our fiscal 2024 performance. I'll also cover the current environment before passing it over to Martina who begins joining us on these calls to discuss our fiscal 2025 key initiative pipeline. Kristen will then provide more specifics on our fourth quarter financial performance and our initial expectations for fiscal 2025. And we'll then open up the line for questions. Before getting into any details, let me offer some broader perspective on our mission critical journey. Fiscal 2024 was a challenging year. We had been coming off of a strong three-year run during our first mission-critical chapter in which we met or exceeded all of our stated goals. During fiscal 24, we faced a deteriorating environment in particularly our metalworking and heavy manufacturing end markets and compounded that softness with execution challenges in the technology area. Since our last call, I've been encouraged to see how our team has rallied despite further softening in the macro. I'm seeing evidence that we are restoring the execution that had been built over the prior three years. First, we're maintaining momentum in our high touch solutions, which is our first mission critical pillar. During fiscal 24, We improved our implant program count by 29% to 342 and total installed vending machines by 9% to more than 27,000 at fiscal year end. This growth helped our national accounts average daily sales outperform the IP index by roughly 150 basis points for the full year. Large account wins continue to be powered by our ability to improve our customers' operations. In fiscal 24, we presented roughly $500 million in documented savings to our customers. These savings come from tooling recommendations, manufacturing process improvements, inventory management solutions, and more. Second, progress continues on our next mission-critical pillar, re-energizing the core customer. While core customer growth rates remain suppressed, progress is being made on the critical initiatives that are needed to turn the tide. MSCdirect.com enhancements are advancing as expected. During the last three months, we improved the overall site experience, including upgrades to our search algorithm. Shown in the op stats posted on our investor relations website, e-commerce represents a little more than 60% of total company revenues, roughly half of which is from sales on mscdirect.com. As communicated on the last call, we expect the site to be ready to support an enhanced marketing effort with the launch of these enhancements in our fiscal second quarter of 2025. Further, we completed our web pricing realignment during fiscal 24. We see opportunities to continue fine-tuning and will capitalize on those over time. As it relates to gross margins, you'll recall that our expectation was to complete the project with a roughly neutral gross margin outcome. During our fiscal third quarter, we saw an unexpected dip due to the complexity of our pricing system and discounting algorithms. We took immediate countermeasures and have restored gross margins to expected levels of performance. In fact, our fiscal fourth quarter gross margin outperformed historical sequential averages, thanks to solid execution by our team. Third, we've built a strong pipeline of productivity initiatives that will fuel our last mission critical pillar, optimizing our cost to serve. These programs begin yielding payback this quarter and are expected to build through the year and into fiscal 2026. The first of these initiatives was completed during fiscal 2024, which entailed the difficult decision to close our Columbus CFC. This project will yield savings of $5 to $7 million annually beginning in the fiscal first quarter. Martina will provide more color shortly on our broader productivity opportunity. Fourth, we made meaningful progress on working capital, resulting in $410 million of operating cash flow or 160% of net income. And lastly, during our previous call, we mentioned that other technology initiatives, including the upgrade of our back office value streams, were under review. While the work completed to date is sound, we've decided to temporarily pause this project and we'll resume in a phased approach while we reallocate our focus towards growth and the execution of the initiatives that I just outlined. I'll now move to a quick review of our results for the fiscal year on slide six. Average daily sales declined 4.7%, which includes a headwind of approximately 160 basis points from non-repeating public sector orders in fiscal 2023 and a roughly 70 basis point tailwind from acquisitions. Fiscal full-year gross margins of 41.2 percent improved 20 basis points year-over-year. This performance was mainly driven by benefits from non-repeating public sector orders in the prior year and our gross margin countermeasures, which were partially offset by negative price costs and lower margin acquisitions. As a result of lower sales and higher operating expenses driven by our strategic investments, both reported and adjusted operating margins declined 190 basis points year over year to 10.2 percent and 10.7 percent respectively, which is at the high end of our most recent guidance range. Together, this resulted in reported earnings per share of $4.58 and adjusted earnings per share of $4.81. Approximately 17 cents of the $1.48 year-over-year adjusted EPS decline was due to headwinds from higher interest and other expenses. Looking ahead to fiscal 2025, the year begins with a continuation of the challenging outlook we faced in fiscal 2024. Conditions remain soft, as evidenced by IP readings particularly for our top manufacturing end markets, the majority of which are contracting. Automotive and heavy truck, primary metals, fabricated metals, and machinery and equipment are all weak. Aerospace remained positive in the quarter, but forward-looking expectations have been tempered due in part to the recent strikes in the sector. The manufacturing and metalworking-related softness in particular are also evidenced through MBI readings, which have now been negative for 19 straight months, including the last three consecutive readings of 44, 44, and 43, respectively. This is reflected in our Q1 growth rate, as September came out of the gates down 4%, and October is trending down between 5% and 6%. The primary drivers remain the same and include the effects of sustained high interest rates, leading to reduced spending levels, along with caution from an upcoming presidential election, which is fairly typical. On top of these, we've seen more recent temporary business disruptions stemming from hurricanes. We estimate the impact from hurricanes resulted in the year over year ADS headwind of 20 to 30 basis points in September and 40 to 50 basis points in October. In addition to starting fiscal 2025 with soft conditions, we're also as previously communicated, anticipating a step up in operating expenses, primarily attributed to an expected normalization of incentive related compensation along with higher depreciation and amortization expense, due largely to our digital investments. These factors will suppress operating margins in the near term. While the start of fiscal 2025 is tempered, our outlook for fiscal 2026 is more encouraging. We are well positioned, as the majority of our sales are mixed into manufacturing and markets, whose long-term outlook remains strong. In addition, we expect continued market share capture through in-plant, vending, and other large account wins that are today subdued due to lower spending levels by our customers. We also expect to see improved performance from our core customer group as benefits from pricing, e-commerce, marketing, and enhancements in sales coverage billed over the balance of the fiscal year into 2026. We anticipate operating expenses to level out exiting fiscal 2025 through a combination of moderating depreciation and incentive compensation trends, along with increasing benefits from the current productivity pipeline. And with that, I'll now pass the call over to Martina.