MSC Industrial Direct Company, Inc.

Good morning and welcome to the MSC Industrial Supply Fiscal 2025 Fourth Quarter and Full Year Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations.

Thank you and good morning, everyone. Welcome to our fourth quarter and fiscal year 2025 earnings call. Eric Hirschwind, Chief Executive Officer, Martina McIsaac, President and Chief Operating Officer, and Greg Clark, Interim 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. 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 are noted in our earnings press release and other SEC filings. Lastly, 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 for the most directly comparable gap measures. I'll now turn the call over to Eric.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today. I'll begin the call with some perspective on our recent performance and a view into our mission-critical path forward. I'll then offer some commentary on our end markets and overall economic conditions. Greg will cover our results for the fiscal year before passing it over to Martina to provide her perspective on our recent performance and our expectations for fiscal year 2026. I'll then wrap things up by providing some additional color on today's announcement regarding our upcoming leadership transition. As we turn the page on fiscal 2025, I am encouraged by the progress that's happening inside of our company. We entered the year with three top priorities. and those were to maintain momentum in our high-touch solutions, to re-energize our core customer, and to optimize our cost to serve. We're making strides on all three fronts and are doing so in the face of an uncertain environment. While there's still plenty of work to be done, our recent progress is beginning to evidence itself in our financial performance. As we return to daily sales growth, and we're poised for operating margin expansion once again. First, our high touch solutions, including vending and implant, continue the strong track record that we've seen all year long. Martina will provide more details shortly. Second, and most notably, we've begun to see our core customer average daily sales growth rate inflect and turn positive. As you recall, we launched four initiatives aimed at re-energizing our core customer base. And those were realigning our public-facing web pricing, which was completed during our fiscal 2024, upgrading our e-commerce experience, accelerating our marketing efforts, and optimizing seller coverage. The largest milestones occurred at the end of our fiscal second quarter as we launched our upgraded website, and our enhanced marketing efforts. Since that time, we've seen a steady improvement in core customer performance. Third, we've made progress in optimizing our cost to serve. We're on track with the supply chain productivity improvements that are yielding between $10 to $15 million in annualized savings. We improved seller coverage and effectiveness by leveraging an enhanced data-driven territory model, and tools that help reps more easily identify white space opportunity. And we have a growing pipeline of additional productivity programs that we expect to fuel more gains in fiscal 2026. I'll now turn to the specifics of our fiscal fourth quarter on slide four, where you can see average daily sales perform better than expected and improve 2.7% year over year. The return to growth in our core customer base, along with continued strength in the public sector, resulted in better than expected volumes and was the primary driver of the beat. Benefits from price came in as expected during the quarter, contributing 170 basis points to growth year over year and 90 basis points sequentially. As a reminder, we took a broad-based, low single-digit pricing action towards the end of our fiscal June. That said, gross margin came in below our expectations at 40.4%, declining 60 basis points both year over year and sequentially. The primary driver here was tariff-driven purchase cost escalation, which came in faster and hotter than we expected during July and August. we also saw some other headwinds, such as public sector-related customer mix. We have since taken action with pricing moves in the fiscal first quarter and have begun to see gross margins improve. Operating expenses in the quarter were approximately $306 million on a reported basis, and on an adjusted basis, operating expenses stepped up approximately $8 million year over year, to $305 million for the quarter, but remained flat on a percentage of sales basis. The primary drivers of the year-over-year increase were driven by higher personnel-related costs and depreciation expense. Sequentially, adjusted operating expenses performed slightly ahead of expectations and declined approximately $6 million compared to the fiscal third quarter. Reported operating margin for the quarter was 8.6% compared to 9.5% in the prior year. An adjusted operating margin of 9.2% declined 70 basis points compared to the prior year. This did, however, exceed the high end of our outlook by 20 basis points. We delivered GAAP EPS or earnings per share of $1.01 compared to 99 cents in the prior year's quarter. And we also saw year-over-year improvement on an adjusted basis, with EPS growing nearly 6%, coming in at $1.09 compared to $1.03 in the prior year. The positive trend we saw in the fiscal fourth quarter has continued into the first couple of months of fiscal 2026, as our daily sales growth rate ticked up further to 5% in September and and we're expecting to grow between 4% and 5% in October, despite impacts from the government shutdown. As we look ahead, we expect to step up in operating expense to moderate and productivity to build. All of this positions us well in our efforts to restore profitable growth and operating margin expansion in fiscal 2026 and beyond. Turning to the environment, we characterize conditions as stable with some pockets of improvement while the ongoing overhang of uncertainty remains. Tariffs have moved from a possibility to a reality as we're now experiencing meaningful price inflation across many areas of the business. Customers are generally understanding of price increases as long as we provide sufficient transparency into tariff-related impacts. That said, the need to provide customers with offsetting cost savings measures is very real. And this plays well into our high touch and technical value proposition. Our suppliers are describing continued cost pressures on certain raw materials that are heavily China-based or influenced. And if this sustains, it could lead to further price inflation in the coming months. From an end market perspective, we've seen stabilization and even firming up in some of our larger verticals. Aerospace remains strong, while end markets such as heavy equipment and agriculture, which have been particularly weak over the past two years, are at least stabilizing. Some areas of acute softness do remain, such as heavy truck. Looking at slide five, I'm encouraged to see how MSC is faring in this environment. Average daily sales in the quarter began to outpace the Industrial Production Index once again, supported by our improved core customer performance and continued strength in the public sector. With that, I'll now pass things over to Greg for an overview of our financial results for the fiscal year.