Good morning. And welcome to the MSC Industrial Supply Fiscal 2021 Fourth Quarter and Full Year Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I’d now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead..

Thank you, Jason, and good morning to everyone. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer are both on the call with me. We continue working remotely at MSC, so please bear with us if we encounter any technical difficulties.

Like last quarter when I highlighted our recently created macro site dedicated to corporate social responsibility, I’d like to invite you to visit our completely redesigned Investor Relations webpage. We have made it much easier to find information and add content we think you will find useful.

During today’s call, we will refer to various financial and management data in the presentation slides that accompany our comments, as well as our operational statistics, both of which can be found on our Investor Relations webpage.

Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, a summary of which is on slide two of the accompanying 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, including statements about the impact of COVID-19 on our business operations, results of operations and financial condition, expected future results, expected benefits from our investment and strategic plans and other initiatives, and expected future growth and profitability.

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 the risk factors in MD&A sections of our latest annual report on Form 10-K filed with the SEC, as well as in our other SEC filings. These risk factors include our comments on the potential impact of COVID-19.

These forward-looking statements are based on our current expectations and the company assumes no obligation to update these statements, except as required by applicable law. Investors are cautioned not to place undue reliance on these forward-looking statements.

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, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to Erik..

Thank you, John. Good morning and thanks for joining us today. I hope that everybody remains safe and healthy. As we closed the books on fiscal 2021 and we kick off on fiscal 2022, 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 executed several significant changes. We re-imagined our value proposition, reengineered our supply chain, reshaped our sales force and updated our technology infrastructure.

The pandemic came and we used this 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 2021, 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 2021 fourth quarter, where we expected 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 million 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 fiscal 2021 and those are metalworking, solutions, selling our portfolio, digital and diversified end markets. We’re also seeing improvements in ROIC.

After adjusting out non-recurring costs, adjusted ROIC was 15.4% at the end of Q4, an improvement of approximately 60 basis points over the past year and there is two important drivers behind this.

First, profitability, 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 will 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 2021, 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 2021 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 to 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 offerings 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 cost 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 2022, 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 will 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 will now turn to the details of the quarter and the latest stats to what we see on landscape. The demand environment remained strong during our fiscal fourth quarter.

The majority of our manufacturing end markets remained robust, with some isolated but a few pockets of softness like automotive. This is reflected in the IP reading that continues to show growth, an incentive reading such as the MBI Index, which remained at high levels.

With 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 four and adjusted numbers on slide five. 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 a difficult janitorial and safety comps.

National accounts improved their growth rate into the mid-teens, while our core customers maintained their growth rates. CCSG grew in the low-double digits. September continued the trend of a low double-digit growth rate, with ADF -- ADS growth of 11.1%. Our non-safety and non-janitorial growth was roughly 15%, while non-safety and 11%.

Keep in mind that the difficult safety and janitorial prior year comparisons continue for the first half of our fiscal 2022 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 2022 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 accelerations from suppliers and increasing inbound freight cost will be a headwind in the coming quarters and we will look to offset this with further pricing actions. I will now turn things over to Kristen, who will cover our financials, Mission Critical progress and our fiscal 2022 annual operating margin framework..

Thank you, Erik. I will begin with a review of our fiscal fourth quarter and then update you on our progress of our Mission Critical initiatives. Before I turn it back over to Erik, I will close with our thoughts on fiscal 2022 and our annual operating margin framework.

On slide four of our presentation, you can see key metrics for the fiscal fourth quarter and full year on a reported basis. Slide five reflects the adjusted results, which will be my primary focus this morning. 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 the sales growth, so I will 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 billion of acquisition-related cost, 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 nine, our free cash flow was $69 million in the fourth quarter, as compared to $171 million in the prior year. The largest contributors 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 sale 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 million 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 million to $100 million of cost take out 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 2022, I will give you our expectations for this year. We expect additional gross savings in fiscal 2022 of $25 million and additional investments of $15 million. These investments will continue to fuel share gains by building our digital platform and expanding our sales force.

That will result an additional net savings for Mission Critical initiatives of roughly $10 million. As a result of her strong progress on Mission Critical savings, we’re increasing our total savings target to a minimum of $100 million through the end of fiscal 2023 as compared to our fiscal 2019 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 punch line is that on an average daily sales basis sales are up high-single digits, we would expect adjusted operating margins 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 a 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’re assuming an IP Index somewhere between low-to-mid single-digit growth and we’re 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 2021.

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 cost of more than $13 million.

I would point out that $3 million of these cost are for 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 were 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 2022, 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 2022 includes the 53rd week and you can find our fiscal calendar on our IR website. I will now turn it back to Erik..

Thanks Kristen. Our Mission Critical transformation is gaining speed, as our recent Q4 performance has another strong data point. Our market share capture rate is growing. Our efforts around gross margin and productivity improvements are beginning to lift ROIC towards our fiscal 2023 goal of high-teens.

Looking to fiscal 2022, 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. I would like to thank our entire team of MSC associates for their hard work during challenging times.

Your work is allowing MSC to stand out from competition and delight our customers. Thanks and we will now open up the line for questions..

Our first question comes from Tommy Moll from Stephens. Please go ahead..

Good morning and thanks for taking my questions..

Hey, Tommy..

Hi, Tommy..

Hey, Tommy..

Erik, I wanted to start on price cost, what inning does it feel like we’re in to you in terms of this inflationary cycle and more specifically to 2022, fair to discern that you are assuming roughly neutral price cost in that gross margin outlook for the year?.

So, Tommy, I would say that, generally what happens as you know, just as a little sort of background.

Early stage inflationary cycle distributors like us see positive price cost spread and that’s what we saw in fiscal 2021 that allowed us to realize for us particularly with where we have the growth engine pointed, there is a mix headwind that we have talked about in the business of 30 bps to 50 bps depending upon how things move around.

So to achieve a flat gross margin we have done two years in a row, the goal would be to make it three years in a row, plus or minus flat that requires a positive price cost spread. That was the case in 2021 that would be the aim again in 2022. So to answer your question, Tommy, look at some point we’re starting to see it now.

We’re starting to see the purchase cost escalation hit the P&L, right, which limits the upside. But it does feel like there is a lot of legs to this inflation story.

I always hesitate to predict the macro, but in terms of innings it still feels like relative early innings, and I say that, because of product scarcity, with what’s happening with freight and with -- what’s happening with labor the extreme shortages. It just seems like there is still ways to go and that’s consistent with most folks that I talked to.

So I would say still relatively early innings of the story, and hopefully, that can continue to fuel more price and positive price cost spread even as cost creep in..

Thanks, Erik. That’s helpful. Kristen, maybe one for you on the Mission Critical execution you have planned for….

Sure..

… 2022, timing of the savings versus the investments as always an important issue.

So as we progress through the quarters, are there any that you would point out where savings would significantly be ahead of investment or vice versa?.

Yeah. So, Tommy, it is going to be a bit narrower on the spread in the first half of the year, widening in the back half of the year and you can kind of see if you look at what happened Q3 to Q4 sequentially in 2021 that net savings spread narrowed, it’s going to stay a little narrow in Q1 and Q2, and then widen out again in the second half..

Great. Appreciate that..

I should say, based on current expectation, but I think, as I articulated you guys before, we have a pretty good pipeline of what projects are in there and we had definitely shuffle timing on things as we progress through the year. So if we expect that to be significantly different, I will make sure to signal that all of you in the next call..

Fair to say though, Kristen that, in any given quarter the expectation would be there is still a net savings spread, it just a matter of….

Yeah..

… the degree to which, yeah. Okay..

Correct. Correct..

That’s helpful. Thank you. I will turn back...

Tommy and Kristen, one thing I did want to add in was, that’s related to Mission Critical, other cost factors like, Tommy, if we think about modeling out the quarter. So, for instance Q1, like we had in this fourth quarter, we’re facing the prior year comp where there will be COVID cost measure add-backs.

So if you’re thinking about like incrementals or cost, it will likely be muted in Q1, we have got stuff going on early in the fiscal year, the COVID cost add-back comps is one. Two, Kristen mentioned the vaccine incentive and marketing programs.

Those will both be first half of year events that will mute incrementals relative to what we see in the back half of the year..

Got it. Appreciate it Erik. I will turn it back..

The next question comes from Ryan Merkel from William Blair. Please go ahead. .

Hey, everyone. Congrats on a good year of execution..

Hey. Thanks Ryan.

How are you?.

Thanks..

Good. So my first question is on fiscal 2022 sales outlook.

So what is your forecast for price inflation? And then is it fair to assume that there is some pent up demand at your customers, Erik, as supply chain issues get solved?.

Yeah. I think, Ryan, so two points, on price inflation, look, tough to forecast precisely, but what I would say is, implicit in our assumption is a continued cadence. This has been a very different year and I expect the next fiscal year to be a very different year from kind of our typical cadence, Ryan.

And what I mean by that is, you have been following us for a long time. Typically we will have one big price increase late summer into -- that takes us into the early full fall and then we are midyear sometime early in the calendar year that’s usually of a lesser amount. What we’re seeing now is a more consistent cadence.

Price increases that aren’t necessarily quite as big on a relative basis, but are more frequent given just a rapid fire inflation we’re seeing. So that sort of continuing that drumbeat and that cadence is begged in. Your second question had to do with pent-up demand.

I think it’s a really good point Ryan and it was one we tried to get across in the prepared comments and tough to know precisely when. But it does feel like particularly for MSC, we’re heavily leveraged towards heavy manufacturing sectors.

I mean the supply chain right now is really severe and I am sure you’re hearing this everywhere no surprise, no question it is constraining growth.

I think the good news is the fundamentals and the demand outlook seems solid, but we do believe that, what this is essentially doing is extending the growth runway and the recovery runway for 2022 and maybe into 2023..

Got it. Okay. That’s helpful. And then, second, just how you are you thinking about the cadence of gross margin through 2022.

Should gross margins be higher year-over-year in the first half and then bleed down a little bit in the second half?.

Yeah. So, the way I think about gross margin, what you have typically seen from us in the past two years, Q4 to Q1 sequentially is we tend to have a bump up. Q4, Q1 sequentially, I would not expect that this year, and as Erik articulated, we have really different timing happening right now related to the price increases.

And it’s definitely going to look more even throughout the year that our margin patents typically look. They are kind of tends to be like a little bit of arc in Q2, Q3 and then comes back down in Q4 with our seasonal decline. You will still see that in the fourth quarter, just not the same extent that we would typically see.

So everything is based in a little more even then it would, if you look at sort of our historical sequential trending in margin. And again, its horse based and what we know today about the pricing environment, cost coming online, and as Erik articulated, everything there is pretty dynamic right now.

But I think that’s how I would tell you to think about the year shaping up at the moment..

Got it. That’s helpful. I will pass it on. Thanks..

Thanks Ryan..

Thank you..

The next question comes from Michael McGinn from Wells Fargo. Please go ahead..

Hey. Good morning, everybody..

Hi, Mike..

I can -- I wanted to get a metals update from you. Alcoa had some interesting comments about magnesium shortages and there is a lot of concerns in China regarding the energy, net-gas prices and what the impact is having on the mills.

Can you give us like an impact on what potential lag would be from a tungsten or alloys or any sort of commentary you hearing from rising raws there?.

Yeah. Mike, look, I would say, I don’t have any specific commentary to share on our primary metal segment, which for us is meaningful, it’s not the biggest but it’s a meaningful segment.

Look, I think, overall, we’re hearing a very consistent pattern and I think we’re feeling the effect now and will continue certainly through the remainder of the calendar year, likely into 2022. I don’t know, I am not hearing from our customer base, Mike, that it necessarily get way worse from here.

But in terms of material shortages leading to product scarcity, leading to higher prices longer lead time. We’re leaving it now. We’re feeling good now. I have not heard anything of late and we pulse check our field and our customer base regularly that would be a material step change from where we are now.

That said, what I would say, it’s pretty severe now..

Got it. And one of the major suppliers cutting throws out there is, doing some acquisitions in the software space CAT.

I was just wondering your take on how well-positioned you are, you think grow with those suppliers from a digital footprint standpoint and just emerging platforms out there like kind of like raw material and things of that nature?.

Yeah. Mike, look, what I would say there is, we -- our whole we’ve sort of anchored the MSC value proposition around helping our customers find productivity on the plant floor, speeding up throughput, finding cost out, getting their products out to their customers faster and solving labor challenges.

That’s where we have sort of our entire machine aimed and that includes our people and the analog and like getting product in and getting people on the plant floor, but it also includes digital technology. We are doing some of it ourselves. We’ve talked about some of our own innovation.

There is a lot of disruptive new technologies out there, many of -- some of whom we’ve mentioned, some of whom have been acquired by suppliers. Certainly, we see if anything technology as an accelerator for us to help us do more faster.

Ultimately, what this all comes back to though is finding productivity for customers on the plant floor, that’s where it’s all aimed and that’s. So using many of the ones, you’re speaking of in the supply, you’re thinking of certainly as a critical partner in helping us doing that..

Got it. Appreciate the time. Best of luck..

Thank you, Mike..

Thank you..

The next question comes from Hamzah Mazari from Jefferies. Please go ahead..

Hey. Good morning. Thank you. I -- my first question is just around -- just free cash flow conversion. How you think about that metric as you sort of hit these goals of 400 bps performance, ROIC high-teens.

What does the free cash flow conversion look like relative to today? Is there room to optimize that?.

Yeah. Good morning, Hamzah. Yeah. I will say there is definitely room to optimize free cash flow. You probably heard us articulate before we’ve got different initiatives that we want to focus on specific to the balance sheet as we progress with Mission Critical.

Hasn’t been a big focus area for us so far in fiscal 2021, but definitely an area we’re more aggressively turning our sides to here coming into fiscal 2022. And then, if you just think about kind of cash utilization in general. In the first half of 2021, we were generating a lot of cash, things were still kind of sluggish.

Second half of 2021, we’ve been utilizing a lot of more cash as our sales pick back up, as we built up our inventory to support our customers.

So I would also expect kind of more of a stabilization of our free cash flow once we get through this kind of inventory build and settled into a little more of a kind of a stable working capital pattern for us..

Got it. Very helpful. And just my follow up question, I will turn it over, could you just remind us how much of the portfolio today is levered to the production cycle, the OEM production cycle, factory floor, relative to sort of just pure MRO facility maintenance type product.

Just give us a sense of that? I know you flagged automotive as seeing some supply chain issues.

But just trying to get a sense of how much of the business today is purely MRO, which maybe a little more resilient to supply chains issues?.

Yeah. That’s fair, Hamzah. And one thing I would say is that, the supply chain issues we’re seeing are across, I think, they are acute and heavy manufacturing, but they are across the Board and I think you will probably if you’ve pulse checked the portfolio of distributors, you will see it across the Board, not just in heavy manufacturing.

But to help you size it for us, I will sort of give you a couple of cuts in end market view and a product view.

What we’ve talked about is metalworking products, which obviously tend to be mostly heavily levered to a production environment are little under half of revenues and the balance would be made up of the rest of our portfolio of the Class C parts and things like fittings and fuses and fasteners, safety and janitorial and other MRO.

From an end market standpoint would be another way to sort of get at that and we’ve talked about kind of the five big heavy manufacturing end markets also around 50% of company revenues. So that sort of gives you hopefully a little bit of a field for our exposure..

Great. Thank you so much..

The next question comes from David Manthey from Baird. Please go ahead..

Yeah. Thank you. Good morning..

Good morning, David..

Good morning..

First off, yeah, you’re -- in your comments you are seeing 20% contribution margins in your likely growth scenarios, but as I am calculating this out, because of the seven extra days you have in 2022 that means reported growth is going to be through 2% or 3% above ADS I believe and then under that scenario your framework sort of implies 15% to 20%.

So I am just -- I am hoping you can help me understand where the disconnect is or what am I not understanding there?.

Yeah. So, Dave, the framework that we put in the presentation and commented on is ADS framework.

You are right, we do have the 53rd week and the way you can roughly size that is probably $70 million on sales rough numbers and add a $0.15 on EPS and because of the flip flop we have between 22 and 23 on the extra week, we’re very focused on working within the ADS framework because of that change..

Okay. Okay. And then, as we are thinking about contribution margins, if price is a bigger component of growth here and you’re picking up 30 basis points for Mission Critical and gross margins are assumed to be roughly flat, there too. I am just trying to gauge the teens of the 20% contribution margin.

I know there is other cost pressures here, but with all of those positives lining up right now, why wouldn’t you see higher than normal contribution margins at this point of cycle?.

Yeah. A few thoughts on that, I think, the first thing, Dave, is, we’re really optimistic about how 2022 is setting up generally. The pricing environment is favorable. We’ve seen early favorable results on price realization, feeling really good about Mission Critical. I think it’s a fair question.

We’re giving ourselves a bit of a wiggle room in the range here, because there is a lot of sort of macro thing that play in 2022 that may require us to respond differently.

We feel like we’ve got inflation pegged pretty well based on what we know right now, but we’ve already taken our inflation assumptions up a couple of times even in the second half of 2021 here. And then the other thing I would add around why we may not be getting more aggressive money incremental, it’s really around our investment expectations.

So we’ve been really thoughtfully prioritizing investment as part of the Mission Critical initiative and if there is an opportunity for us to potentially do more investment depending on how 2022 plays out, that’s something that we’re going to be keeping an eye on and looking for opportunity to invest to have early payback that will help us drive additional growth in 2023..

Okay. Thank you..

I will add just and Kristen laid it out in the framework.

I think there is a massive inflation happening right now across the -- certainly, if you just combine the inflation number we gave a $25 million, which is significantly greater than we would see in a normal year on OpEx, plus $13 million in COVID related add-back and then the vaccine incentive marketing program and that’s $38 million right there out of the gate that has to be overcome.

So we -- look, we feel pretty good like in this environment to produce 20% plus incrementals in light of what we’re seeing in cost inflation we feel pretty good about..

Okay. Thank you..

The next question comes from Adam Uhlman from Cleveland Research. Please go ahead..

Hi, everybody. Good morning..

Hey, Adam..

Hi. .

Couple of clarifications, I might have missed this earlier, but when we were talking about the mid-to-high single-digit revenue growth forecast. How much of that is price? I think you said that it’s going to be building a little bit through the year.

So is that likely go from 3% to like 3.25%, 3.5% or is that like 3%, 4%, 5%, could you just help me?.

We have -- let’s put it this way. Yeah, and I didn’t put -- we’re not disclosing a specific number, Adam. But what I said is that, it would be basically what’s implied for fiscal 2022 is a continuation of the pattern that we’re seeing over the past two, three quarters, which has been a more steady drumbeat of increases.

So we didn’t break out a specific number, and obviously, as you can imagine, the price contribution varies in a mid single-digit or high single-digit range, it’s a different number. We didn’t break it out. But suffice it to say, the implied assumption is that, we’re continuing to see steady price increases of moderate size throughout the fiscal year..

Okay. Yeah. I am just trying to put into context the labor and freight inflation at $25 million. It’s like a lot. As I understand, I think, some of your shipping costs have been, you’ve done a good job with contracts.

Is it fair to say that most of that is labor and then could you share any thoughts on, is hiring folks for the fulfillment centers, getting any easier with enhanced federal benefits falling off?.

Yeah. Maybe I will take the first part and I will let Erik chime in on the second part of your question. So on the $25 million, the way that I would kind of think about that, it is more labor. I would say roughly the break down would be a bit more than half of that is labor.

Freight works that been to go up about 20 bps and then we’ve got some sort of inflation backed down on kind of other areas of operating expense. But, yeah, the labor is the biggest piece of that to your point. And then, I think, on the second part of your question on the CST staffing.

Erik, do you want to chime in on that one?.

Yeah. Sure. Adam, what I would say is, I think, it’s been quite a challenge across the economy. In several of our locations, we have already made some adjustments to wages, sign on bonuses, et cetera, to respond to what’s going on. That is all implicit in our 2022 and sort of captured in our 2022 framework.

What I would say is, we are starting to see some benefit there from some of the moves made. The staffing is trending in the right direction. But obviously we’re nowhere near out of the woods and I think that codes not just for us but for the entire economy right now..

Okay. Got you.

Erik, could you share any stats on the wins that you guys are having with Mission Critical in terms of anything you could share on like new markets where you’re getting more traction with the sales guys or active customer accounts or anything along those lines?.

Yeah. Sure. So maybe what I will do Adam and look, I think, sort of pulling back up for a second and I will give you some few things that we’re tracking carefully. Look, I feel like momentum is picking up here. And this transformation story that we’ve had underway for a while is starting to yield results.

On the topline we talked about, we had said, hey, we though IP was the best proxy over a long period of time for market share capture. We are seeing that spread start to widen. We feel like in this environment product availability and solving customers labor challenges really set up nicely for us to accelerate share gains.

So, I think, overall, we’re picking up steam. And I think what I would point to is, really the five key growth levers. That’s where we’re hedged down focus. So metalworking being the first. We’ve expanded the size of the team. We are approaching 10% share in metalworking. We still feel that we’ve got plenty of room.

We’ve got a new technology in mill that’s being rolled out. Still early stages should fuel that. On the selling on the portfolio front, our big focus has been CCSG and our VMI business, which we’re seeing that business return to double digits.

Solutions is another big area for us, and if you will recall, solutions include vending, it includes VMI and it includes implant. So on implant in particular we had talking that proportion of the business, which by the way right now is really resonating with customers, because they need help. It’s helping them close the labor gap.

But what we had talked about is moving that business from 5% to 10% of sales. That’s at 7%. So we saw a nice healthy jump in a year. We also -- VMI and vending the other portions of Solutions, we definitely saw a dip during COVID. Signings are pretty much getting back this past month in September. It got back to pre-COVID levels.

And so, all-in, we’re seeing Solutions, revenues as a percentage of total from customers with Solutions that’s implant VMI vending in the mid-50s as a percentage of total sales. So we feel good about that. The fourth area is digital. So we talked about within digital.

The primary focus for the last couple of quarters into 2022 was going to be on MSCdirect.com. So you will recall our e-commerce as a percentage of total revenues hovers around 60.

It dropped a little bit during the pandemic, primarily because of some of the large PPE sales that did not go through the e-comm, but that number is back to the high watermark of around 60. I think more significantly though, Adam, under the covers, we look specifically at MSCdirect.com to say are we getting payback.

We’re seeing MSCdirect.com revenues as a percentage of sales actually hit our high watermark, greater than 50% of that total e-commerce number, but it actually hit our high watermark in Q4. And then last but not least is Government, where we’re feeling really good about our competitive position in Government and it sounds ironic.

I am not talking coming off of a quarter with a minus 30% growth number. But that really is about safety and janitorial comps. There we’re looking specifically at total customer count and new customer wins. We feel quite good about our position in Government.

So that’s a rundown of the big five as we call it, which is the five levers that we’re focused on providing to widen the market share spread..

Thanks Erik..

The next question comes from Steve Barger from Keybanc Capital Markets. Please go ahead..

Hey. Thanks. Good morning, guys..

Hi..

Hi..

Erik, in the pandemic there was a lot of concern about double ordering of safety equipment.

Now that we’re seeing these supply chain constraints, are there concerns about double ordering or unusual inventory build to customers for traditional products?.

Yeah. Steve, it’s actually a great question. It’s something we monitor carefully. What I would say is, first of all, we’re still watching safety and janitorial, which tends to ebb and flow a bit. Overall, what I would say is, we’re not seeing a significant change in our camps.

Where we would see that play out is our order cancellation rate and significant change there. So we are monitoring it carefully. But to-date, I would say, nothing I would call out like we were talking about last year with safety supplies..

Got it. And I know you have a lot of diverse products across categories like, good, better, best exposure.

But are there any categories where they’re really pinch points and you just can’t get stuff right now or what’s the -- where are you having the most trouble sourcing?.

Yeah. Steve, so I would say, yeah, issue number one is overseas is really. Just to put it bluntly, isn’t -- the oversea supply chain right now globally is a mess. So I think the fortunate position for MSC is, I think percentage of our total purchases and our total sales. Global sourcing is relatively low for us.

So I think that buffers us somewhat and gives us a competitive advantage with customers. But that -- where that happens that is the most acute. I think the other thing is an advantage for MSC is even where we global source. As you said, most of the lines where we offer an imported product we have domestic alternatives.

Beyond the imports, what I would say is, look, there is a few branded industry suppliers and without getting into names, but there is a few that has been hit acutely hard, whether its micro company specific issues or the sector that they’re in. So we have some pain points with specific supplies.

I wouldn’t necessarily call it a product line or two more so specifics suppliers.

And again the nice thing is with the multiple brand choices, we’re able to offer customers alternatives, and at the same time is, why we’re seeing our inventory go up is to make sure that our lead times extend, we’re in a position to be for our customers, because right now, Steve, I will tell you availability wins out nearly all the time at the moment..

Yeah.

And just as a follow-up, what kind of products do you get most from overseas, is that hand tools or gloves or whatever, just what are you sourcing from over there?.

So we actually, it’s somewhat across the Board. So, I mean, we have some of our cutting tool, metalworking offering is sourced overseas. Certainly some of our Class C offering is sourced overseas. We do to some degree some of the lines like you mentioned like your hand tools where we do some private branding.

But again as a percentage of total, I think, for us, well, it’s appears not that great..

Got you. Thank you..

The next question comes from Chris Dankert from Loop Capital. Please go ahead..

Hey. Good morning, everyone..

Good morning, Chris..

I guess, first off, you touched on it earlier on the Government side, but what the large account growth look like if you pulled that kind of big comp headwinds out of their house? How does the rest of the market is trending on national accounts?.

So we had said, I think, our national accounts number was mid-teens, Chris. There is some, and I don’t have the number off-hand, I am sure there is some safety janitorial comp that number, because some of our -- a lot was the Government, but there was some to large accounts.

Look, what I would say, probably, it’s a good proxy, Chris, would be if you just look total company and say total company sales without the safety janitorial at 20% sort of gives you fields of how the underlying business is performing. What I would say is on the large accounts, the national account side, we’re encouraged by progress there.

And what I call out that’s more specific to that area is we did have a leadership change a couple of quarters back. We put some VN who is a strong long-term MSC sales leader who has a great tracker and moved in large accounts. We’re seeing him move the needle relatively quickly there..

Got it. Got it.

And then I guess please remind us what percent of national accounts contracts can be up for renegotiations within the next 12 months versus those are kind of on a more multiyear cycle, just trying to size the ability to really keep pace with inflation of things keep heating up here?.

Yeah. Chris, what I would say, most of our national accounts are in a contract, most of the times there is an annual cycle. So while quarter-to-quarter it may be tricky to keep up precisely, over the course of the year, it is something we’re able to do. And what I would say is now some more than ever.

Chris, this is a very different environment from what we’ve seen in past cycles, so customers understand. If we talk about the need to open a negotiation on price, whereas same customers that three years ago would have said go pound salt. There is more of a conversation now because of the environment..

Got it. Okay. That’s helpful.

I think if we could sneak one more in here, just -- we touched on that with e-commerce, but any update specifically on kind of the enhanced search, the transactional engine rollout, just anything specifically on some of those new tools that are kind of helping the sales force today?.

Yeah. On e-commerce the new search tool is in the market now. The new user experiences in the market now. So we have launched, and what I would say is, those are constantly in fine tune to get better and better. We rolled them out during our fiscal fourth quarter. So it is still pretty early. We did like.

So we have sort of the macro, the big metric we track is what are the percent of company revenues flowing through Mscdirect.com. We saw a nice pickup from Q3 to Q4.

Underneath that though, our e-commerce team, you can imagine they are measuring 10 ways till Sunday basically measuring what we called top of funnel to bottom of funnel, meaning for every visitor to the site, what percentage translates into orders, which is a gauge of effectiveness of the site. Early signs are positive there, again still very early.

Beyond certain user experience we have new features coming out basically through the first, at least through the first half of the fiscal that will continue to flow in and that will keep fine tuning the ones that have already been rolled out like search in U.S..

Got it. Thanks so much..

Our last question comes from Pat Baumann from JPMorgan. Please go ahead..

Hi, Erik. Hi, Kristen. Thanks for taking my questions here..

Good morning, Pat..

Hi..

Good morning.

You just mentioned, I think, the leadership change in national accounts, I am not sure if I missed this, but you addressed the change in overall sales leadership that was announced earlier this month kind of interested in what drove the change, what his responsibilities were at this point, how it impact the transformation if at all and then also is the interim replacement kind of longer term solution here?.

Yeah. So I didn’t touch on it in the prepared remarks because we did have the press release earlier in the month. Eddie -- look, Eddie did a really nice job for us in sort of fine tuning the sales playbook in driving execution and so we really appreciate his contributions. That said, I have to tell you, I am really excited by Kim Shacklett taking over.

It’s on an interim basis, but at the moment, I can tell you there is no search. Kim has been with us for 15 years and another 15 years before that with J&L, which is metalworking distributor we acquire. She is one of the most well respected people, not just in the company, but in the industry with the supply community especially.

She’s excited, I can tell you, we have got thousands of people in the field between outside and customer care that are ready to run through brick wall for Kim. And I think the punch line, Pat, what you can expect is no change in the playbook. I think the playbook that Eddie built with the team is the right one.

Kim is going to take it and drive it and I think rally the team around it..

Got it. Okay. Helpful.

And then maybe zooming out a little bit just on pricing, just wanted to kind of perspective on, how you view your current positioning, I guess, on piece price versus the industry? And what I mean by that is, are there any particular product or customer categories where your less competitive in today that you think you might need to adjust over time in order to grow faster? And then just as a refresh kind of what percentage of the portfolio today is the spot-buys versus what you are moving more towards the contract and solutions based type of sales?.

So, Pat, I will take it and start, first question on competitiveness of pricing. Look, I think, the perspective you have always had at MSCs, our goal was never to match market on price and that doesn’t mean we don’t at times for large orders, et cetera, or for big customers.

But in general our pricing philosophy is such that, our goal is to help customers bring down the total cost and if we got into a game of saying the piece prices where we win, we think that’s a losing battle.

And by the way for our customers what we share with them, the cost of the products that they’re buying from us industrial supplies represent well under 10% of the total cost for manufacture. The two single biggest chunks are labor and materials.

So MSC has -- especially with this Mission Critical pivot that we’ve made, we have really aimed and pointed the lens at the 50%, 70% plus the labor and materials and helping customers drive cost.

To do that, we’re investing like crazy in technical resources, in digital resources, in products, et cetera, we have got to be able to charge a premier or we can’t afford it. So I feel good about our price position overall. Pricing has become a much more sophisticated in the world and inside the company. So we have a team that’s constantly monitoring.

And I would tell you, constantly fine tuning. So what you will hear from them is, there is all areas that need to be tuned upward down, but in general, we feel good about our positioning.

There was another part to your question Pat and I think it had to do with the -- how the business is migrated?.

Yeah.

I guess, I was wondering the percentage that today is kind of spot-buy oriented versus more solutions or contract oriented?.

So I shared a metric in one of the responses sort of as we look at sort of like the end state of where we headed with this Mission Critical program getting closer to customers. One way we get closer is by embedding not just our sales person but a solution inside the customer, whether that’s an implant, vending, VMI.

That percentage of business is in the mid-50s right now was a percentage of total. That would be sort of one proxy.

And then I think beyond that, if you look at where we have a relationship and it’s not just transactional, it would be where we have the sales person calling on in account, be that an outside person or somebody via phone, because that’s where we’re doing more than just providing a spot-buy service. That percentage of revenue is closer to 90..

Got it. Helpful. And then kind more of a shorter term question, the extra week you get in fiscal 2022, does that -- would you normally get extra leverage out of that extra week.

So is that or I guess, if the 20% incremental is that just kind of on a normal 52-week basis and then you have an extra week, which should let you get little bit better than that?.

Yeah. So the framework is definitely on an ADS basis and we’re doing that because the inverse of what happens in 2022, of course, happens in 2023. So we will continue to give the framework on an ADS basis, which is what the 20% incrementals are based on..

Helpful. Okay. Thanks a lot. I appreciate the color and best of luck guys..

Thanks….

Thanks, Pat..

…Pat..

This concludes our question-and-answer session. I’d like to turn the conference back over to John Chironna for any closing remarks..

Thanks Jason. Before we end the call, I would like to give a reminder that our fiscal 2022 first quarter earnings date is now set for December 22, 2021. That’s roughly two weeks earlier than we typically report as we continue to drive efficiency throughout the business.

With that, I would like to thank you for joining us today and we hope you enjoy a healthy and safe fall season. Thank you..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..