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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.
We continue to work remotely at MSC.
So please bear with us if we encounter any technical difficulties.
Like last quarter, when I highlighted our recently created micro site dedicated to corporate social responsibility, I'd like to invite you to visit our completely redesigned investor relations web page.
We have made it much easier to find information and add content we think you will find useful.
These risk factors include our comments on the potential impact of COVID-19.
I hope that everybody remains safe and healthy.
As we close the books on fiscal '21 and we kick off our fiscal '22, our transformation story is gaining steam.
Several years ago, we began repositioning MSC from strictly a spot-buy supplier to a mission-critical partner on the plant floor of Industrial North America.
Along the way, we execute several significant changes.
We reimagined our value proposition, reengineered our supply chain, reshaped our sales force, and updated our technology infrastructure.
The pandemic came, and we used it as a catalyst to accelerate the path we were already on.
We took several bold steps to rethink how we work and to redeploy capital from back office into growth.
At the start of fiscal '21, we rolled out Mission Critical, which was our plan to translate these changes into superior financial performance, and we outlined two, three-year goals.
First, to accelerate market share gains.
Our stated target was to reach at least 400 basis points of growth above the IP index by the end of our fiscal 2023.
Our first base camp would be this past quarter, our fiscal '21 fourth quarter, where we expect it to be at least 200 basis points above IP.
The second goal was to restore return on invested capital, or ROIC, into the high teens by the end of fiscal 2023.
And we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of 90 to $100 million, helping to reduce opex as a percentage of sales by at least 200 basis points over that time period.
We're now one year into our Mission Critical journey, and I am very encouraged by progress.
With respect to our first goal market share capture, we're gaining momentum.
Our Q4 performance was strong, with ADS growth of roughly 500 basis points above IP.
Our growth continues to be powered by the execution of the five growth levers that we outlined at the start of the fiscal '21.
And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets.
We're also seeing improvement in ROIC.
After adjusting out nonrecurring costs, adjusted ROIC was 15.4% at the end of Q4, an improvement of approximately 60 basis points over the past year.
And there's two important drivers behind this.
We held gross margins flat on higher sales dollars and had strong price realization in a robust inflationary period to offset mix headwinds.
Our structural cost takeout also helped drive profitability, and I'll speak more to that in just a minute.
The second driver of improved ROIC was our balance sheet, as we brought down average working capital versus prior year.
I'd add that our board just approved ROIC as a metric driving long-term incentive compensation.
Back to our Mission Critical program.
We achieved $40 million of cost savings in fiscal '21, exceeding our original target of 25 million.
And we're redeploying a good portion of these savings back into growth investments that will further fuel revenue growth, and hence, improve operating leverage.
We've redeployed field sales headcount from back-office into growth drivers, including metalworking, government, and our business development program.
We're approaching pre-COVID levels on our vending machine signings and our implant program is gaining traction, finishing fiscal '21 at just over 7% of company sales, as compared to 5% a year ago.
We continue to upgrade our web infrastructure, including a new search engine, product information platform, and user experience.
These have started, and it will continue to drive improved performance through e-commerce.
We've executed all of this in the face of very challenging conditions, including severe supply chain disruptions, substantial cost inflation, and extreme labor shortages.
And while we're certainly not immune to these challenges, I've been quite pleased with our team's response to navigating these choppy waters.
We've increased inventory significantly and are leveraging our good, better, best product offering to offer our customers alternatives.
As a result, while our service level is not yet back to pre-COVID levels, it is well above most of the industry and is fueling market share capture.
On the cost side, we are seeing significant inflation in wages, freight, product costs, and more, and our team has worked hard to minimize the impact of these.
Our structural cost and productivity efforts are buffering the effects on our P&L.
Looking ahead to fiscal '22, our outlook is positive.
We intend to build on this momentum despite the near-term challenges with supply chain disruption and inflation.
With respect to revenue growth, we're aiming for at least 300 basis points of growth above IP, on our way to 400 basis points or more for fiscal 2023.
We'll target holding gross margins roughly flat for the third consecutive year by continuing strong price execution.
On the structural cost front, we expect to deliver roughly $25 million in incremental savings on top of the 40 million in fiscal 2021.
As Kristen will describe in just a bit, we expect this to yield incremental margins of 20% in the likely scenarios for the year.
I'll now turn to the details of the quarter and the latest test to what we see on landscape.
The demand environment remained strong during our fiscal fourth quarter.
The majority of our manufacturing end markets remain robust, with some isolated but acute pockets of softness like automotive.
This is reflected in the IP reading that continues to show growth and in sentiment reading such as the MBI index, which remain at high levels.
That said, the supply chain shortages and disruptions that we began to see in our fiscal third quarter have increased.
And while hard to quantify, are certainly constraining growth across the industrial economy in the near term.
Product scarcity, freight delays and extreme labor shortages are also resulting in significant inflationary pressures.
We are well positioned to navigate this environment, particularly when compared to the local and regional distributors who make up 70% of our market.
MSC's broad multi-brand product assortment, our high inventory levels, strong supplier relationships, and next-day delivery capabilities are all strengths that allow us to accelerate market share capture.
Turning to our performance.
You can see our reported numbers on Slide 4 and adjusted numbers on Slide 5.
Sales were up 11.1%, or 12.9% on an average daily sales basis.
Our non-safety and non-janitorial product lines grew 20%, while sales of safety and janitorial products declined roughly 14%.
Looking at our performance by customer type.
Government sales declined nearly 30% due to difficult janitorial and safety comps.
National Accounts improved their growth rate into the mid-teens, while our core customers maintained their growth rates.
DCSG grew in the low double digits.
September continued the trend of a low double-digit growth rate with ADS growth of 11.1%.
Our non-safety and non-janitorial growth was roughly 15% [Inaudible] 11%.
Keep in mind that the difficult safety and janitorial prior-year comparisons continue for the first half of our fiscal '22 and particularly the rest of our fiscal first quarter before easing in the back half of the year.
Kristen will speak more about our fiscal '22 assumptions when she discusses our annual operating margin framework in just a bit.
With regards to the pricing environment, it remains strong as product inflation continues pretty much across the board.
Supplier pricing moves led us to take another increase in August, and solid realization of our June increase allowed us to post the gross margin of 42% for the quarter, down just 30 basis points from our fiscal third quarter, which is less than our typical seasonal drop.
Continued price escalations from suppliers and increasing inbound freight costs will be a headwind in the coming quarters, and we'll look to offset this with further pricing actions.
I'll now turn things over to Kristen, who will cover our financials, Mission Critical progress, and our fiscal '22 annual operating margin framework.
I'll begin with a review of our fiscal fourth quarter and then update you on the progress of our Mission Critical initiative.
Our fourth-quarter sales were 831 million, up 11.1% versus the same quarter last year.
We had one less selling day this year in our fourth quarter.
So on an average daily sales basis, net sales increased 12.9%.
Erik gave some details on our sales growth, but I'll just reiterate that the non-safety and non-janitorial ADS sales grew 20% in the quarter, while our safety and janitorial sales declined 14%.
Our gross margin for fiscal Q4 was 42%.
And as Erik mentioned, was down 30 basis points from our third quarter and up 40 basis points from last year.
Operating expenses in the fourth quarter were 253.3 million or 30.5% of sales, versus 227 million or 30.4% of sales in the prior year.
It's worth noting that our fourth quarter operating expenses include nearly 8 million of expense add-back from prior year COVID cost containment measures.
Opex also increased as inflation challenges began in the fourth quarter.
Excluding approximately $1 million of acquisition-related costs, adjusted opex was 252.1 million or 30.3 as a percent of sales.
As expected, our adjusted operating expenses came down sequentially from Q3 due to volume-based expenses from sequentially lower sales dollars and lower incentive compensation.
We also incurred approximately 4.4 million of restructuring and other related charges in the quarter.
Our operating margin was 11%, compared to 9.8% in the same period last year.
Excluding the acquisition-related costs, as well as the restructuring and other related costs, our adjusted operating margin was 11.7%, versus an adjusted 11.2% in the prior year.
Adjusted incremental margin for our fiscal fourth quarter was 15.3%.
GAAP earnings per share were $1.18, as compared to $0.94 in the same prior-year period.
Adjusted for the acquisition-related costs, as well as restructuring and other charges, adjusted earnings per share were $1.26 as compared to adjusted earnings per share of $1.09 in the prior-year period, an increase of 15.6%.
Turning to the balance sheet and moving ahead to Slide 9.
Our free cash flow was 69 million in the fourth quarter, as compared to 171 million in the prior year.
The largest contributor to the decline were increasing inventory and accounts receivable balances relating to our year-over-year sales lift.
I would also note that we repurchased 20 million of stock during the quarter or about 231,000 shares at an average price of 89.08 per share.
As of the end of the fiscal fourth quarter, we were carrying 624 million of inventory, up 26 million from last quarter.
We're actively managing inventory levels to support our customers as sales continue accelerating and in light of the ongoing supply chain disruptions.
Our capital expenditures were 16 million in the fourth quarter and for the full year, were 54 million, within our expected range of 50 to 60 million.
In addition, our fiscal year 2021 annual cash flow conversion or operating cash flow divided by net income was strong at 103%.
Our total debt at the end of the fiscal fourth quarter was 786 million, reflecting a 27 million increase from our third quarter.
As for the composition of our debt, 234 million was on our revolving credit facility, about 200 million was under our uncommitted facilities, and approximately 350 million was long-term fixed rate borrowings.
Cash and cash equivalents were 40 million, resulting in net debt of 746 million at the end of the quarter.
As of the end of September, our net debt was down to 728 million.
Let me now provide an update on our Mission Critical productivity goals.
Our original program goal was to deliver 90 to 100 million of cost takeout through fiscal 2023, and that is versus fiscal 2019.
As you can see on Slide 10, our cumulative savings for fiscal year 2021 were 40 million against our original goal of 25 million and our revised goal of 40 million.
We also invested roughly 23 million in fiscal 2021, which compares to our revised full-year target of 25 million.
As we have already begun our fiscal '22, I'll give you our expectations for this year.
We expect additional gross savings in fiscal '22 of 25 million and additional investments of 15 million.
These investments will continue to fuel share gains by building out our digital platform and expanding our sales force.
That will result in additional net savings for Mission Critical initiatives of roughly 10 million.
As a result of our strong progress on Mission Critical savings, we are increasing our total savings target to a minimum of 100 million through the end of fiscal '23, as compared to our fiscal '19 baseline.
Now let's turn to the fiscal year 2022 adjusted operating margin framework, which is shown on Slide 11.
Operating margins will naturally vary based on our sales levels.
The punchline is that, on an average daily sales basis, sales are up high single digits.
We would expect adjusted operating margin to be in the range of 12.3%, plus or minus 30 basis points.
And if sales are up mid-single digits, we would expect adjusted operating margin to be in the range of 12%, also plus or minus 30 basis points.
This means we expect to achieve 20% adjusted incremental margins at our likely revenue growth range of mid to high single-digit growth.
Let me cover some of our assumptions behind the framework.
With regard to sales levels, we are assuming an IP index somewhere between low to mid-single-digit growth, and we are targeting market outgrowth of roughly 300 basis points.
That yields company growth on an ADS basis in the mid to high single digits.
We're optimistic about our growth runway as most of our end markets are still in the early stages of recovery.
We aim to hold gross margins roughly flat with fiscal '21.
It's worth noting that in addition to volume-related expenses, we will face several challenging headwinds, such as labor and freight inflation of nearly 25 million, as well as COVID cost add-backs and additional COVID-related costs of more than 13 million.
I would point out that 3 million of those costs are for an incentive and marketing campaign to help us achieve compliance with the federal contractor vaccination mandate.
These costs will likely occur in our first quarter.
Please note that the quarterly progression, whether we're talking about sales growth or profitability levels, will not be a straight line.
For example, we expect our fiscal first-quarter sales to face more difficult comparisons due to safety, janitorial, and government sales.
Likewise, operating expenses will also face difficult comparisons in the first half of fiscal '22 as COVID-related cost-saving measures were still in place in the first half of fiscal 2021.
Finally, keep in mind that our fiscal year '22 includes a 53rd week, and you can find our fiscal calendar on our IR website.
Our Mission Critical transformation is gaining speed.
With our recent Q4 performance as another strong data point, our market share capture rate is growing.
Our efforts around gross margin and productivity improvements are beginning to lift ROIC toward our FY fiscal '23 goal of high teens.
Looking to fiscal '22, we're set up for a strong year, including 20% incremental margins in our likely growth range.
And we're accomplishing all of this in the face of difficult conditions.
Your work is allowing MSC to stand out from competition and delight our customers.

user
compname posts q4 adjusted earnings per share $1.26.
q4 adjusted earnings per share $1.26.
q4 earnings per share $1.18.
qtrly net sales of $831.0 million, an increase of 11.1%.

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