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Text: Erik Gershwind, our chief executive officer; and Kristen Actis-Grande, our chief financial officer, are both on the call with me.
As on our last call, we are all remote, so bear with us if we encounter any technical difficulties.
The risk factors include our comments on the potential impact of COVID-19.
And let me start by saying that I hope everyone remains safe and healthy.
After that, we're going to look forward and we're going to look forward to the next three years to discuss what is the next stage of our transformation journey.
We've completed the heavy lifting of our sales force transformation and are now focused on accelerating market share capture and improving profitability.
This is a companywide effort that we're calling Mission Critical.
And Mission Critical is more than just a project name, it's reflective of our business strategy of serving as a mission-critical partner to our customers on their plant floors.
And it also reflects the fact that accelerating market share capture and improving profitability and doing so with urgency is mission critical for our organization and our stakeholders.
A lot more is coming on this shortly, but I'll first turn to the quarter, and we've provided some highlights on Slide 3.
Our fiscal fourth-quarter financial results continue to reflect solid execution in a tough environment.
Versus the prior year period, overall sales were down 11.3% or 12.7% on an average daily sales basis.
Gross margin was down 40 basis points and operating margin was 9.8% as compared to 10.7% in the prior year.
Excluding one-time adjustments, our operating margin was 11.2%, down just 30 basis points from 11.5% in the prior year due to implementing effective cost controls.
This all resulted in solid earnings for the quarter.
As we noted in our August sales release, sales of our nonsafety and nonjanitorial product lines have continued to improve sequentially through the quarter.
Sales of safety and janitorial products also continued growing, with year-over-year growth of roughly 20% each month on average and for the quarter.
Looking at our performance by customer type.
National Accounts declined slightly more than 20%, while our core customers declined mid-teens and CCSG was down in the low double-digits.
Government sales and that's both state and federal, were up significantly due to the surge in large safety and janitorial orders, partially offsetting the declines in the other customer types.
All of this shows that sales levels have continued to lift and have seen a slight increase in the rate of improvement over the past couple of months.
Most manufacturing end markets, while showing sequential improvements in the quarter, are still soft.
Many national accounts are running one shift as opposed to the two or three shifts they were running pre-pandemic.
Our job shop and machine shop customers continue carrying smaller-than-normal backlogs.
These customers remain cautious about spending and they're burning off inventory as much as possible, given continued uncertainty.
The persistence of COVID-19 and its potential for future surge is certainly playing a role in all of this.
And this caution is reflected in recent sentiment indices, such as the MBI, which remains negative on a rolling 12-month average.
That said, the readings have improved over the past couple of months and actually reached neutral territory in September.
Should this improvement continue, it would bode well for our business and should translate into continued sequential lift in our revenues.
In terms of end markets, the softness in industrial demand was broad-based, with acute weakness in heavily metalworking-centric end markets such as aerospace and oil and gas.
There are some pockets of strength in certain areas, but not in our core end markets which remain suppressed.
We continue to hear that local distributors are suffering.
And the longer that the weak conditions persist, the more pressure they're coming under.
This continues to create market share capture opportunities and we are focused on capitalizing on them.
Moving now to gross margins.
I remain pleased with our performance.
In particular, we're executing well on both the pricing and the purchase cost fronts.
We're seeing strong realization from our annual price increase and we're continuing to benefit from supplier programs on the purchase cost line.
You'll note that our sequential drop from the third quarter to the fourth quarter in gross margin was on the higher side of the typical seasonal decline.
This was strictly the result of mix and, in particular, the sale of PPE-related SKUs.
Absent this headwind, we maintained underlying gross margin stability.
September and October gross margins continued our recent trending.
Price and costs are performing well, but will likely have continued PPE mix pressure in the first quarter, similar in size to that of our fourth quarter.
Looking beyond the first quarter, as we move past the PPE-related mix noise, we expect gross margins to remain at levels close to or at prior year.
Cash flow in the quarter remained strong and allowed us to repay a significant amount of debt.
He and the team did an exceptional job over the past few months, particularly during the COVID crisis.
We're grateful, Greg, for your hard work.
And of course, you continue to be an integral part of our future efforts.
It's great to be here, and I am looking forward to the work ahead of us.
Over the coming months, hopefully, I'll have an opportunity to meet those of you on the phone who I haven't met already, although that will probably be virtual, of course.
As Erik mentioned, I'm going to run us quickly through the numbers for our fiscal fourth quarter and then, we'll devote time to discussing Mission Critical.
Our fourth-quarter sales were $748 million, a decline of 11.3% versus the same quarter last year.
Our average daily sales in the fiscal fourth quarter were $11.7 million, a decrease of 12.7% on an ADS basis versus the same quarter last year.
Our operating margin was 9.8% compared to 10.7% in the same period last year.
Excluding severance and other costs, our adjusted operating margin was 11.2% versus an adjusted 11.5% in the prior year.
Within our operating profits, Erik touched on the items impacting our gross margin, which was 41.6% or 40 basis points below the prior year.
So I'll go a little deeper now into our operating expenses.
Total operating expenses in the fourth quarter were $238 million or 31.9% of sales versus $263 million or 31.2% of sales in the prior year.
This also includes about $11.2 million of costs related to severance and the review of our operating model mentioned on previous calls.
You'll see a sizable drop in our total company headcount in our operating statistics.
This was the result of actions tied to our structural cost initiative and explains the severance costs in the quarter, which were $8.1 million of the $11.2 million.
Excluding those costs, operating expenses as a percent of sales were 30.4% in the prior year, excluding $6.7 million of costs related to severance, operating expenses were also 30.4% of sales.
Our results for the quarter reflect the swift cost containment measures we implemented due to COVID-19, including temporary reductions in variable hours, in executive and management salaries, temporary suspension of our 401(k) match, a hiring freeze, and virus-related travel restrictions.
We've now reversed some, but not all of these temporary actions.
For example, in our fiscal first quarter, we restored our 401(k) match.
All of this resulted in earnings per share of $0.94.
And adjusted for severance and other costs, earnings per share was $1.09.
Turning to the balance sheet on Slide 7.
We achieved strong free cash flow of $171 million in the fourth quarter.
A key driver was the $32 million decrease in inventory from last quarter to $543 million.
This reflects typical contraction in a soft environment, but also maintains levels that support share capture.
We also benefited from a large reduction in receivables.
We continue to manage our liquidity very closely.
Given the stabilizing environment, we paid down over $300 million of our revolving credit facility in August, as well as, $20 million of maturing private placement debt.
Our total debt as of the end of the fourth quarter was $619 million, comprised primarily of a $250 million balance on our revolving credit facility, $20 million of short-term fixed rate borrowings, and $345 million of long-term, fixed-rate borrowings.
Cash and cash equivalents were $125 million, so our net debt was $494 million.
In September and October, we deployed our strong cash flow by paying down another $120 million of our revolving debt.
Overall, our balance sheet and liquidity remain very healthy.
Turning to Slide 8.
Many of you know that over the past couple of years, we've been working hard to reposition MSC from a spot-buy supplier to a mission-critical partner on the plant floor of our industrial customers.
Our focus now turns to implementing Mission Critical to deliver reaccelerated market share capture and a step change in improving profitability over the next three years.
We plan to do so with the same sense of urgency that we demonstrated during the pandemic.
I'll start with reaccelerating market share capture, which is on Slide 9.
Our target is to outgrow the markets in which we compete by at least 400 basis points over the cycle.
This market share growth capture is indexed against industrial production or the IP Index.
Our analysis shows that IP is highly correlated with our growth rate over a cycle and it's a good proxy for the relative health and performance of the end markets that we serve.
This is shown on Slide 10.
IP is not perfect over shorter timeframes as the aggregate IP Index includes some of our noncore end markets as well.
Nonetheless, we're going to use it going forward as our primary benchmark, as it gives us the opportunity to better measure our performance over time.
This does not mean that sentiment indices, such as the MBI, are no longer important indicators to gauge the state of our markets.
They are, but they're less indicative of outgrowth or share capture since they're purely sentiment service.
Competitor and supplier growth rates also remain relevant, but differences in end market and product line exposure result in different levels of market growth for each of us.
Spread above IP over a cycle is, we believe, the best gauge for outgrowth of our markets.
Looking over extended periods of time, average IP growth is in the 2% to 3% range.
So this implies MSC growth of at least 6% to 7% over a cycle.
We believe that the actions we've taken recently, and those that we're taking now and into the near future, build to this level of outperformance over time.
At the same time, we think that we can outgrow the market over the nearer term as well.
And so our goal is to exit fiscal 2021 at roughly 200 basis points above IP.
Most forecasts indicate a return to low single-digit positive growth for IP and during calendar 2021.
Adjusting for our fiscal calendar, and assuming that these forecasts are accurate, it would mean that we would expect to be growing in the mid single-digits in our fiscal fourth quarter.
But that would still be slightly down for the full fiscal '21, taking into account the PPE headwind that we will face primarily in our fiscal third quarter.
There are five growth priorities that will deliver this above-market growth.
And none of these should surprise you, given that they're aligned with the work that I've spoken about pre -- previously.
What you should take away from this discussion, though, is the details within each and the specific actions and investments that we're making to produce measurable returns.
Let me spend a moment on each one.
This is the core of our business, a position where we have leadership today and where we think we can widen our lead.
We will do this by building on our talented team of metalworking specialists through hiring and training.
We've begun this effort in earnest and plan to add about 25% to our metalworking specialist team over the course of the year.
We'll also continue adding to our industry-leading product and supplier portfolio, and we'll introduce value-added services to our customers such as MSC MillMax, an exclusive technology that we just brought to market.
It's a proprietary product that, with a simple tap on a machine, uses data and analytics to optimize our customers' machining operations.
Early customer response has been very good.
And more importantly, MSC MillMax is delivering improvements to their operations.
We're now making it available to all of our customers.
The second lever, selling the strength of our broad portfolio.
This encompasses investing in our CCSG or Class C consumables business, leveraging the cross-selling that results from it, and leveraging the programs that we've put in place with those supplier partners who have recently invested with MSC and stepped-up programs.
Our joint opportunity funnels are growing nicely along each of these dimensions and we are focused on converting those into new business.
The third lever, expanding our solutions footprint and that includes: vending, VMI, and our growing implant solutions program.
We're finding that bringing these solutions to our customers consistently produces higher growth, better retention rates, and stronger lifetime value.
As a result, we're increasing investments into each of them and we're raising our performance expectations.
Our goal for implant solutions program sales is to double them over the next three years.
Our fourth lever is digital.
E-commerce has long been a strength of ours and represents roughly 60% of our sales today.
However, standing still is not an option and so we're raising the bar on ourselves to produce a better experience for our customers.
We have hired a new leader, who is staffing a new team with deep digital expertise.
Their focus will be on our website and on other digital tools that bring us closer to our customers and build higher levels of loyalty and retention.
This will include a new product information system, a new search engine, a new user experience, and the new front-end transactional engine.
The fifth lever is diversified customer end markets.
While the core of the business is selling into durable metal-cutting manufacturers, we're also focused on building scale in other areas that are countercyclical and that still leverage many of our strengths.
Government is a good example of this.
It's no secret that we had some execution issues there a couple of years back.
We've worked hard to rebuild our team and our business, and we're seeing the payoff in the form of accelerated growth rates, which of course, have been aided by COVID relief.
We plan to continue building on this momentum.
Towards that end, we'll be adding hunter roles that are specific just to government.
I'll now turn to our second goal, as summarized on Slide 11, to deliver ROIC, return on invested capital, in the high teens within the next three years.
This would imply profit growth of at least the high single digits and it would also imply incremental margins in the high teens.
Again, all of this assumes that IP grows in the ranges that I mentioned earlier on.
We launched an operational cost and productivity initiative to deliver on this goal back in fiscal 2020.
As you've heard me mention, we expect this initiative to deliver about 200 basis points in cost down on an operating expense-to-sales ratio basis over the next three years.
I'm going to now turn things over to Kristen, who will give you more details on the actions that will define our productivity runway.
As Erik mentioned, a significant part of the Mission Critical program is to reduce operating expenses as a percent of sales.
The cost takeout is going to come from an assortment of programs aligned to three separate tracks.
So the first is sales and service, the second is supply chain, and the third is general and administrative costs.
Erik covered some of the sales and service initiatives, so I'll elaborate a little bit more on supply chain and the G&A tracks.
Let me first say that the productivity comes from a number of projects and we are tracking each of them closely, with several already announced or even executed.
For example, under supply chain, we recently announced that we will be closing one of our smaller distribution centers located in Dallas and moving the service to the remainder of our distribution network.
We are also stepping up our use of automation and robotics at several of our customer fulfillment centers for packaging.
This was started last year in Harrisburg and is now being expanded to Elkhart.
These moves will improve our productivity and allow associates to perform greater value-added services.
We have also renegotiated our freight contracts and will realize significant savings over the next three years.
When it comes to G&A, in our fiscal fourth quarter, we completed a process redesign of our talent acquisition function, which resulted in outsourcing that function.
This is allowing us to find talent at a faster pace and reduced cost.
Another example is the voluntary retirement program we offered in our fourth quarter.
The take-up on the program was very good, as is evidenced by the significant headcount drop in our fiscal fourth quarter.
While we will likely reinvest some of these cost savings over time into the five growth initiatives that Erik mentioned earlier, the program will still produce meaningful overall cost reduction.
We've also revised our travel policy such that a significant portion of the COVID-related temporary travel cost savings will become permanent.
And finally, we're renegotiating indirect spend contracts, where we'll see an opportunity for further savings.
Stepping back from these examples, just kind of thinking about the overall operating expense dollars.
In fiscal '20, we reported operating expenses of $993 million.
In fiscal '21, the add-back of costs associated with the temporary cost reduction measures roughly offsets the reduction in variable costs from slightly lower sales.
As Erik mentioned, Mission Critical includes growth investment, and that will be in the range of about $15 million in our first year of the growth program which is 2021.
This will be more than offset by total structural Mission Critical savings in 2021 in the range of $25 million.
And by the way, this is in addition to approximately $20 million of savings that we've already achieved in 2020.
Putting all of this together means that we would expect operating expenses to be slightly down if sales are flat to slightly down in fiscal '21.
Now let's dig into 2021 a little bit more to supplement what Erik mentioned earlier on the growth line.
On gross margin, we expect the full year to be flat to down 50 basis points year over year.
An operating margin framework is shown on Slide 13 for GAAP and 14 for adjusted figures.
Operating margins will naturally vary based on the sales level.
If sales are down slightly on an adjusted basis, we would expect operating margin to be in the range of 11.2%, plus or minus 20 basis points.
If sales are flat, we would expect operating margin to be in the range of 11.4%, plus or minus 20 basis points.
And finally, if sales are slightly up, we would expect operating margin to be in the range of 11.7%, plus or minus 20 basis points.
Over the next three years, we are implementing a change equation that we believe will accelerate market share capture and improve profitability.
On the growth side of that equation, we're targeting growth rates of at least 400 basis points above market over the cycle by investing in the five growth levers I described earlier.
Our investments will be funded by costs being taken out of the business and we're looking to grow profits faster than sales.
This will enable us to improve returns on invested capital into the high teens.
All of this is aligned with our ongoing work to reposition MSC from a spot-buy supplier to a mission-critical partner on the plant floor of our industrial customers.
The results will not come overnight, particularly, given that we're still dealing with the uncertainty being driven by COVID-19.
However, you saw some early actions being taken in the fiscal fourth quarter and more is to come.
As we move into fiscal 2021, despite the uncertain environment, we're going to press ahead with urgency.
This is going to be a year of taking measurable action to change the course of this business over the long-term.
It will be a year of investment, investment that will be more than funded through cost savings.
2021 is also going to be a year about recommitting to our values: doing the right thing, being humble, putting our customers first, embracing differences, being transparent, transforming, and most importantly, delivering results.

user
compname reports q4 adjusted earnings per share $1.09.
q4 adjusted earnings per share $1.09.
q4 earnings per share $0.94.
quarterly net sales of $747.7 million, decrease of 11.3% yoy.

assistant