Q4 2021 MSC Industrial Direct Co Inc Earnings Call
[music].
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 should you need assistance. Please signal a conference specialist by pressing the star key followed by.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I'd now like to turn the conference over to John Corona, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you, Jason and good morning to everyone.
Erik Gershwin, our chief executive.
Zero and Christian <unk> Grande, our Chief Financial Officer are both on the call with me. We continue working remotely at MFC. So please bear with us if we encounter any technical difficulties.
Like last quarter, when I highlighted our recently created microsite dedicated to corporate corporate social.
Actual responsibility.
So I invite you to visit our completely redesigned investor relations webpage, we have made it much easier to find information and ads 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.
I'd like 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 our accompanying presentation.
Our comments on this call as well as the supplemental information we are providing on the website contain forward.
Following 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.
These forward looking.
It looks 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 and MD&A sections of our latest annual report on Form 10-K filed with the SEC as well as in our other SEC filings.
Statements. 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'll now turn the call over to Eric.
Thank you John good morning, and thanks for joining us today I.
I hope that everybody remains safe and healthy.
As we close the books on fiscal 'twenty, one and we kicked off our fiscal 'twenty two.
Transformation story is gaining steam.
Several years ago.
We began repositioning MSC.
Is that 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 imagine our value proposition.
Reengineered our supply chain.
Shaped 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 'twenty.
We rolled out in 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.
<unk> 'twenty once a growth above the IP index.
By the end of our fiscal 2023.
Our first base camp would be this past quarter, our fiscal 'twenty, one in fourth quarter.
Where we expect it to be at least 200 basis points above IP.
The second goal was to restore.
At this point of invested capital or ROIC see 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 take out of $90 million to $100 million, helping to reduce opex as a percentage.
A return else.
By at least 200 basis points over that time period.
We're now one year into our mission critical journey.
And I'm very encouraged by progress.
With respect to our first golf market share capture.
We're gaining momentum.
Our Q4.
A sense was strong.
With a D S growth of roughly 500 basis points above I T.
Our growth continues to be powered by the execution of the five growth levers that we outlined at the start of the fiscal 'twenty one.
And those are metalworking solutions selling our portfolio did.
Performance and diversified end markets.
We're also seeing improvement in our Oh I see.
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.
Digital there's 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 take out also helped drive profitability.
And I'll speak more to that in just a minute.
The second driver of improved ROIC, she 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.
<unk> mission critical program.
We achieved.
$40 million of cost savings in fiscal 'twenty one exceed.
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.
Two of them, we've redeployed field sales head count from back office into growth drivers, including metalworking government.
And our business development progress.
We're approaching pre COVID-19 levels on our vending machine signings.
And our implant program is gaining traction fin.
Finishing fiscal 'twenty one.
Or just over 7% of company sales as compared to 5% a year ago.
We continue to upgrade our web infrastructure, including.
Including a new search engine product.
Product information platform and user experience.
These have started.
And it will continue to drive improved performance.
<unk> through e-commerce.
We've executed all of this in the face of very challenging conditions.
Including severe supply chain disruptions substantial.
Substantial cost inflation.
In extreme labor shortages.
And while we're certainly not immune to these challenges.
I've been quite pleased.
It just team's response to navigate 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-19 levels.
It is well above most of the industry.
With our tennis 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 'twenty two.
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.
Things on top of the $40 million in fiscal 2021.
As Christian 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 as 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 acute pockets of softness like automotive.
This is reflected in the IP reading that continues to show growth.
And incentive reading such as the M B I 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 or certainly constraining growth across the industrial economy in the near term.
Product scarcity.
Create delays and extreme labor shortages are also resulting in significant inflationary pressures.
We are well positioned to navigate this environment, particularly.
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.
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.
We're 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 costs.
National accounts improved their growth rate into the mid teens.
While our core customers maintained their growth rates.
D C. S. G grew in the low double digits.
September.
<unk> continued the trend of a low double digit growth rate with a D. S Ats growth of 11, 1%.
Our non safety and non janitorial growth was roughly 15%.
Good evening.
11%.
Keep in mind that the difficult safety and janitorial prior year comparison.
Our sins continue for the first half of our fiscal 'twenty two.
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 'twenty two assumptions when she discusses our annual operating margin framework and 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.
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 will look to offset this with further pricing actions.
I'll now turn things over to Christian who will cover.
Financials mission critical progress progress and our fiscal 'twenty two annual operating margin framework.
Thank you Eric I'll begin with a review of our fiscal fourth quarter, and then update you on the progress of our mission critical initiatives before I turn it back over to Eric I'll 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.
Our 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%.
Eric gave some details on our sales growth, but I'll, just reiterate that the non safety and non janitorial and <unk> sales grew 20% in the quarter.
Our safety and janitorial sales declined 14%.
Our gross margin for fiscal Q4, with 42% and as Eric 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.
<unk> or 35% of sales.
Versus 227 million or 34% of sales in the prior year, it's worth noting that our fourth quarter operating expenses included nearly $8 million of expense add back from prior year Covid cost containment measures.
Opex also increased its inflation challenges began.
While our quarter exclude.
Excluding approximately $1 million of acquisition related costs have dropped adjusted Opex was $252 1 million or <unk> 33, as a percent of sales.
As expected our adjusted operating expenses came down sequentially from Q3 due to volume based expenses from sequentially.
And the Fort Hills 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 nine 8% in the same period last year.
Excluding the acquisition related costs as.
Lower slows 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 <unk> 90.
As well 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 nine in the prior year period, an increase of 15, 6%.
94 into 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.
Largest contributors to the decline were increasing inventory and accounts receivable balances.
Waiting to our year over year sales lift.
I would also note that we.
Just $20 million of stock during the quarter or about 231000 shares at an average price of 89 O eight 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.
<unk> 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 million to $60 million.
In addition, our fiscal year 2021 annual cash flow conversion.
<unk> 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.
We're now about 200 million was under our uncommitted facilities and approximately $350 million with 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 accumulative savings for fiscal year 2021 were $40 million against.
No goal of 25 million and our revised goal of $40 million.
We also invested roughly 23 million in fiscal 2020, one which compares to our revised full year target of $25 million.
As we have already begun our fiscal 'twenty two I'll give you our expectations for this year.
We expect additional gross savings.
In fiscal 'twenty, two 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 roughly $10 million.
As a result of our strong progress on mission critical savings.
Our original we are increasing our total savings target to a minimum of $100 million through the end of fiscal 'twenty three 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.
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.
Okay.
That yields company growth on an ADR 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 'twenty one.
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-19 cost add backs and additional COVID-19 related cost of more than $13 million.
I would point out that $3 million of those costs are for an incentive a marketing campaign to help us achieve compliance with the federal contractor vaccination mandate.
These costs will likely.
[noise] 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.
So called comparisons in the first half of fiscal 'twenty, two as Covid related cost saving measures. We are still in place in the first half of fiscal 2021.
Finally, keep in mind that our fiscal year 'twenty. Two includes a 50 <unk> week and you can find our fiscal calendar on our IR website.
I'll now turn it back to Eric.
Thanks Kristen.
Our mission critical transformation is gaining speed.
With our recent Q4 performance says another strong data point.
Our market share capture rate is growing.
Our efforts around gross margin and productivity improvements are beginning to lift ROIC C.
Towards our FY 'twenty fiscal 'twenty three goal of high teens.
Looking to fiscal 'twenty two.
We're set up for a strong year include.
Including 20% incremental margins and are likely growth range.
And we're accomplishing all of this in the face of difficult conditions.
I'd like.
Like to thank our entire team of MSC associates for their hard work during challenging times.
Your work is allowing MFC to standout from competition and delight our customers.
Thanks, and we'll now open up the line for questions.
We will now begin the question and answer session.
To ask a question.
You May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from Tommy Moll from Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Hey, Tom it's Tony.
Hey, Tommy.
Eric I wanted to start on price cost.
Does it feel like we're in to you in terms of this inflationary cycle.
And more specifically to the 2022.
They're fair to discern that that youre, assuming roughly neutral price cost.
And the gross margin outlook for the year.
So Tommy I would say that generally what happens is you know just as a little sort of a background early stage inflationary cycle distributors like us see positive price cost spread.
And that's what we saw in fiscal 'twenty, one that allowed.
<unk> us to you know realize for us, particularly with where we have the growth engine pointed there's a mixed headwind that we've talked about in the business of 30 to 50 bps, depending upon how things move around so to achieve a flat gross margin. We've done it two years in a row the goal would be to make it three years in a row, you know plus or minus flat that requires a positive price cost.
Cost spread that was the case in 'twenty, one that would be the aim again in 'twenty two so to answer your question. Tom you look at some point and 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's a lot of legs to this inflation story.
You know I always hesitate to predict the macro but in terms of earnings it still feels like relative Ernie early innings, and I say that because of product scarcity with what's happening with freight and with whats happening with labor. The extreme shortages. It just seems like there's still a ways to go and that's consistent with most folks I talk too so.
It's still relatively early innings of the story and hopefully that can continue to fuel.
More price and positive price cost spread even as costs creep there.
Thanks, Eric that's helpful.
Chris maybe one for you on the.
On the mission critical execution you have planned for.
I wouldn't want you to.
Tie.
Timing of the savings versus the investments is always an important issue. So as we progress through the quarters or are there any that you would point out were saved.
Savings would would significantly be ahead of of investment or vice versa.
Yeah, So telling me, it's gonna 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 in Q3 to Q4 sequentially and 21 that that net savings spread narrowed them, it's going to stay a little narrow in Q1 and Q2 and then widen out again in the second half.
For the.
Based on current expectations, but I think as I've articulated to you guys before we have a pretty good pipeline of what projects are in there and we have definitely shuffled timing on things as we progressed through the year. So if we expect that to be significantly different and I'll make sure to signal that to all of you in the next call.
Fair to say, though Kristen.
In any given quarter, the expectation would be theres still a net savings spread it's just a matter of the degree to which okay. Correct correct. That's helpful. Thank you I'll turn it on me and the one thing I did want to add in was.
Related to mission critical.
Other cost factors like Tommy if you're thinking about modeling out the quarters. So for instance, Q1 like we had in this fourth quarter, we are facing a prior year comp where there'll be COVID-19 cost measure add backs. So if you're thinking about like incrementals or cost it will likely be muted in Q1, we've got stuff going on early in the fiscal year.
The COVID-19.
Cost add back comps is one two kristian mentioned.
The vaccine incentives and marketing program those will both be first half of your events.
That will mute incrementals relative to what we'll see in the back half of the year.
Got it.
Appreciate it Eric I'll 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.
Thanks, Ryan how are you.
Good.
So my first question is on the fiscal 'twenty two sales outlook. So what is your forecast for price inflation.
And then is it fair to assume that there's some pent up demand at your customers Eric at supply chain issues get solved.
Yeah.
Thank Ryan so so two points on price inflation look tough tough to forecast precisely, but what I would say is implicit in our assumption is a continued.
Inflation. 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 right and what I mean by that is you've been following us for a long time typically we will have one big price increase late summer.
That takes us into the early fall fall and then there'll be we are mid year sometime.
Kate in the calendar year, that's usually usually have a lesser amount what were seeing now is a more consistent cadence of price increases that arent necessarily quite as big on a relative basis, but are more frequent given just the rapid fire inflation, we're seeing so that sort of continuing that drumbeat.
And that cadence is baked in.
Your second.
Early engine has 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.
To know precisely when but it does feel like particularly for MSC, we're heavily levered towards heavy manufacturing sectors. I mean, the supply chain right now is really severe and I'm sure you're hearing this everywhere no surprise.
Price no question, it's 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 in the recovery runway for 'twenty, two and maybe even into 'twenty three.
Got it okay. That's helpful.
And then second just how are you thinking about the cadence of gross margin through 'twenty, two should gross margins be higher year over year in the first half and then and then bleed down a little bit in the second half.
Yeah, So the way I think about gross margin.
You've typically seen from us the past few years Q4 to Q1 sequentially as we tend to have.
A bump up Q4 Q1 sequentially I would not expect that this year and it says are Eric articulated we have really different timing happening right now related to the price increases.
It's definitely going to look more even throughout the year then our margin patterns typically look they're kind of tends to be like a little bit of an arc in Q2.
Q3, and then comes back down in Q4 with our seasonal decline.
Still see that in the fourth quarter, just not to the same extent that we would typically see.
Everything is basically to look a little more even than it would if you look at sort of our historical sequential trending in margin.
And again, it's of course based on what we know today about the pricing environment.
<unk> and cost.
Costs coming online and you know as.
As Eric articulated and 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'll pass it on thanks.
That's right.
Thank you.
The next question comes from Michael Mcginn from.
<unk> Fargo. Please go ahead.
Hey, good morning, everybody.
I had some.
I wanted to get a metals update from you Alcoa had some interesting comments about magnesium shortages and theres a lot of concerns in China regarding the.
Energy.
Well that gas prices and what the impact it's having on the mills can you give us like a an impact on what potential lag would be from the tungsten or hours or any sort of commentary you're hearing from rising raws there.
Yeah, Mike look I I would say I don't have any specifics.
Specific commentary to share on our primary metals 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 effects now and will continue certainly through the remainder of the calendar year likely into 'twenty, two I don't know I'm not hearing from.
Now customer base, Mike that it necessarily gets way worse from here, but in terms of <unk>.
Material shortages, leading to product scarcity, leading to higher prices longer lead times, we're living it now were feeling it now I have not heard anything of late and we pulse check our field and our customer base regularly.
That would be.
Cereal 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 of <unk>.
Putting tools out there is doing some acquisitions in the software space CAD I just wanted to get your.
Your take on how well positioned you are.
Thank you.
Grow with those suppliers from a digital footprint standpoint.
And just emerging platforms out there like kind of like zama tree and things of that nature.
Yeah, Mike look what I would say there is we are whole.
With anchored the MFC value proposition around helping our customers find productivity on the plant floor speeding up throughput.
Finding cost out getting the products out to their customers faster and solving labor challenges, that's where we sort of have our our entire machine aimed and that.
We've seen 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're doing some of it ourselves we've talked about some of our own innovations theres a lot of disruptive new technologies out.
There are many some of whom we've mentioned some of whom have been acquired by.
That suppliers, certainly we see if anything technology as an accelerator for us to.
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 thats.
So using many of the ones you're speaking of in the supply of Youre thinking of certainly is a critical.
Cerner and helping us do that.
Got it appreciate the time best of luck.
Thank you Mike.
The next question comes from Hamzah, Missouri from Jefferies. Please go ahead.
Hey, good morning, Thank you.
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 or performance Rois see high teens, where does the free cash flow conversion look like relative to today is is there room to optimize that.
Yeah, good morning Hamzah.
Part I'd say, there's 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 of mission critical Hasnt been a big focus area for us so far in fiscal 'twenty, one, but definitely an area where more aggressively turning our sights to here.
Yeah, I mean in fiscal 'twenty, two and then if you just think about kind of cash utilization in general is it first half of 'twenty one.
And we were generating a lot of cash things were still kind of sluggish our second half of 'twenty. One we've been utilizing a lot more cashless ourselves pick back up as we built up our inventory to support our customers.
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 stable working capital pattern for us.
Got it very very helpful and just my follow up question I'll turn it over could you just remind us how much of the portfolio.
Purdue is levered to the production cycle, the OEM production cycle factory floor relative to sort of just your MRO facility maintenance type.
Just give us a sense of I know you flagged automotive is seeing some supply chain issues, but just trying to get a sense.
Sense of how much of the business today is purely MRO, which maybe a little more resilient to supply chain issues.
Yes, that's fair Hamzah and one thing I would say is the supply chain issues. We're seeing are across I think there are acute and heavy manufacturing, but they are across the board and I think youll.
Probably if you pulse check the portfolio of distributors, you'll see it across the board not just not just in heavy manufacturing, but to help you size. It for US like you sort of give you a couple of cuts and end market view and a and a product view.
What we've talked about is metalworking products, which obviously tend to be most heavily levered to a production environment or a little.
Cost of revenues.
And the balance would be made up of the rest of our portfolio of the class C parts.
Things like fittings infuses in 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.
Wonder how markets also around 50% of company revenues.
So that sort of gives you hopefully a little bit of a feel.
For our exposure.
Great. Thank you so much.
The next question comes from David Manthey from Baird. Please go ahead.
<unk>, Thank you and good morning.
First off your in your comments, you are saying, 20% contribution margins in your likely growth scenarios, but as im calculating this out because of the seven extra days you have in 2022 that means reported.
There's going to be two or three percentage points above avs I believe.
Then under that scenario Youre framework sort of implies 15% to 20. So I'm just I'm, 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.
Growth onto the ADF framework.
You're right. We do we do have the 50 <unk> week and the way you can roughly size that is probably.
About $70 million on sales rough numbers on added <unk> 15 on EPS.
And because of the flip flop, we have between 22 and 23 on the extra week.
And we're very focused on working within the Ats framework because of that change.
Okay.
Okay.
And then as we're thinking about contribution margins if price is a bigger component of growth here and.
And you are picking up 30.
Points for mission critical and gross margins are assumed to be roughly flat.
There are two I'm just trying to gauge the.
Teams of the 20% contribution margin I know, there's other cost pressures here, but.
With all of those positives lining up right now.
Why why.
You see higher than normal contribution margins at this point in the cycle.
Yeah. If you a few thoughts on that I think the first thing David we aren't we are really optimistic about how 'twenty two is setting up generally the pricing environment is favorable.
<unk> early favorable results on price realizations.
Why wouldn't been feeling really good about mission critical so I think it's a fair question.
Ourselves a bit of a wiggle a bit of wiggle room in a range here because there's a lot of sort of macro things that play in 'twenty two 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 'twenty one here.
And then the other thing I would add around why we may not be getting more aggressive on the incrementals, it's really around our <unk>.
Investment expectations, so we've been on.
Really thoughtfully prioritizing investment.
Men as part of the mission critical initiatives and if there's an opportunity for us to potentially do more investment depending on how 'twenty. Two plays out that's something that we're going to be keeping an eye on and looking for opportunities to invest to have early payback that will help us drive additional growth in 'twenty three.
Okay. Thank.
<unk>.
That is just.
And Christian laid it out in the framework do you think.
There is massive inflation happening right now across the U K. So if you just combine the inflation number we gave of $25 million, which is significantly greater than we would see in a normal year on opex.
Plus.
$15 million in Covid related add back and then.
Vaccine incentive and marketing program and Thats $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.
Hey, everybody good morning, Adam.
Yeah.
A couple of clarifications I might have missed it earlier, but when you were talking about.
Mid to high single digit revenue growth forecast.
How much of that is.
I think you said that it's going to be building a little bit through the year. So is that like we go from 3% in like three in quarter, three and a half or is that like 345 could you just help me.
We have let's put it this way and I didn't put it like we're not.
We're not disclosing a specific.
The number Adam, but what I said is that it would be basically what's implied for fiscal 'twenty. Two is a continuation of the pattern that we've seen over the past two to 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 it will continue seeing steady.
Price increases are moderate size throughout the fiscal year.
Okay, Yeah, I'm, just trying to put in their contracts.
The Levered free.
Civic notion of $25 million seems like a lot.
I understand I think some of your your shipping cost of them you know you've done a good job with contracts.
Fair to say that most of that is labor and then fiduciary or any thoughts on.
As hiring folks for the fulfillment.
In flavors getting any easier with the enhanced federal.
Benefits falling off.
Yeah, maybe I'll take the first part of that I'll, let Eric chime in on the second part of your question. So on the 25 million in the way that I would kind of think about that it is more.
Labour I'd say roughly it breaks down to be.
More than half of that is labor.
Freight we're expecting to go up about 20, Bips and then we've got some sort of inflation baked in on kind of other areas of operating expense, but yeah. The the labor is the biggest piece of that.
To your point and then I think on the second part of your question on the CFC staffing.
Eric you want to chime in on that one.
Yes, sure Adam what I would say is I think it's been quite a challenge across the economy.
Several of our locations, we have already made some adjustments to wages to sign on bonuses et cetera to respond to what's going on and that is all implicit in our 'twenty.
Two sort of captured in our 22 framework.
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 you know obviously, we are nowhere near out of the woods and I think that cost not just for us but for the entire economy right now.
<unk> got to Eric could you share any.
Stats on it.
The wins that you guys are having with mission critical in terms of anything you can share on like new markets, where you're getting more traction with the sales guys are active customer account or anything along those lines, yes sure. So.
What I'll do at them and look I think sort of pulling back up for a second and I'll give you. Some a few things that were 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.
And maybe it was the best proxy over a long period of time for market share capture we are seeing that that spreads 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'd point to.
Two is really the five.
Key growth levers, that's sort of where we are heads down focus so.
Metalworking being the first we have expanded the size of the team we are approaching 10% share in metalworking, we still feel like we've got plenty of room.
We've got a new technology and new Max that's being rolled out.
Still.
Still early stages should fuel that.
On the selling of the portfolio front, our big focus has been Ccs G and our Vms business, which we're seeing that business returned to double digits solutions.
Solutions is another big area for Us and if you recall solutions includes vending it includes <unk>.
It includes implant so on implants in particular, we had talked about taking that portion of the business, which by the way right now is really resonating with customers.
They need help it's helping them close of labor gap, but what we had talked about is moving that business from 5% to 10% of sales. That's at seven so it's a nice healthy jumping.
Jumping a year.
We also at <unk>.
Vending the other portions of solutions, we definitely saw a dip during COVID-19 signings are pretty much getting back this past month and September got back to pre COVID-19 levels and so all in we're seeing solutions.
Revenues as a percentage of total.
<unk> from customers with solutions, that's implant GMI vending.
In the mid <unk> as a percentage of total sales. So we feel good about that.
Fourth area is digital so we talked about within digital the primary focus for the last couple of quarters into 'twenty two was going to be on MSC direct dot com so you'll recall.
Our e-commerce as a percentage of total revenues hovers around 60, it had 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 water watermark of around 60, I think more significantly though Adam under the covers we look.
Specifically at MFC direct dot com to say are we getting payback.
Seeing MSC direct dot com revenues as a percentage of sales actually hit our high watermark.
Greater than 50% of that.
Total ecommerce number but it actually hit a high watermark in Q4, and then last but not least as government, where we're feeling really.
Really good about our competitive position and government and it sounds ironic.
Coming off a quarter with a minus 30% growth number but that really is about safety and janitorial comps there were looking specifically at.
Total customer count and new customer wins, we feel quite good about our position in government.
So, yes, so thats a rundown of the big five as we call it which is the five levers that were focused on to widen the market share spread.
Thanks, Eric.
The next question comes from Steve Barger from Keybanc capital markets. Please go ahead.
Hey, Thanks, good morning, guys.
Eric 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 at customers for traditional products.
Steve It's actually a great question, it's something we monitor carefully.
What I would say.
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 Kansas, where we would see that play out as our order cancellation rate.
Okay.
Significant change there so we are monitoring.
Monitoring it carefully.
But to date I would say nothing I'd call out.
Like we were talking about last year with the 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 there are.
Pinch points and you just can't get stuff right now or whats. The what are you having the most trouble sourcing.
Yes, Steve So I would say.
Issue number one is overseas is really just just to put it bluntly is the overseas supply chain right now globally is a mess.
So I think the fortunate position for MSC.
A real pay percentage of.
Total purchases in 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 that's an advantage for MFC is even where we global source as you said most.
Most of the lines, where we offer an imported product we have domestic alternatives.
Beyond the imports what I would say is look theres, a few branded industry suppliers and without getting into names, but there's a few that have been hit acutely hard.
Whether it's micro company specific issues.
He is a sector that they're in so we have some pain points with specific suppliers I wouldn't necessarily call. It a product line or two more so specific suppliers and again the nice thing is with the the multiple brand choices, we are able to offer customers alternatives and at.
At the same time, it's why you're seeing our inventory go up is to make sure that as lead time.
<unk> extend we're in a position to be there 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 at 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 some of our cutting tool in metalworking offering is sourced overseas certainly some of our class C offering are sourced overseas.
Due to some degree some of the lines like you mentioned like a hand tools, where we do some <unk>.
Private branding.
But again as a percentage of total I think for us relative to peers 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.
I guess first off we touched on it earlier.
From our side, but what does large account growth look like if you pulled that kind of a big comp headwind out of there how the rest of the market is trending on a national account.
So we had said.
Our national accounts number which was mid teens, Chris there.
There is some and I don't have the number off hand I'm sure there is some.
Safety janitorial comp in that number because some of our a lot with the government, but there were some too.
Large accounts look what I would say probably just a good proxy Chris would be if you just look total company and say total company.
Sales without the safety janitorial at 20%. So that gives you a feel for how the underlying business is performing what I would say is on the large accounts. The national accounts side, we are encouraged by progress there.
And what I'd call out that's more specific to that area is we did have a leadership change a couple of quarters back we put somebody in who has a strong.
<unk> longtime MSC sales leader.
Who's got a great tracker and moving into large accounts, we're seeing can move the needle relatively quickly there.
Got it got it good deal and then I guess.
Remind us what percent of national account contracts can be are up for renegotiation within the next 12 months versus those are kind of on a more multi.
Multi year cycle, just trying to size the ability to really keep pace with inflation, if things keep heating up here.
Yes, Chris what I would say most of our national accounts are on a contract.
Most of most of the time there is an annual cycle, so while quarter to quarter. It may be tricky to keep up precisely.
Over the course of a year. It is something we are able to do and what I would say is now so more than ever you know 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 the same customer 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 and I guess I'm going to stick.
One more in here just we touched on it with e-commerce, but any update specifically on kind of the enhanced search the transactional engine rollout just any anything specifically on some of those new tools that are kind of helping.
Salesforce today.
Yeah on E Commerce, the new search tool is in the market now the new user experiences in the market now so we've launched in what I would say is those are constantly getting fine tuned to get better and better we rolled them out during our fiscal fourth quarter. So it's still pretty early we did like so.
So we have sort of the macro the big metric. We track is what are the percent of company revenues flowing through MSE direct dot com, we saw a nice tick up from Q3 to Q4 underneath that though our ecommerce team you can imagine they're measuring 10 ways till Sunday.
Basically measuring what we call 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 search and user experience. We have new features coming out basically through the first at least through the first half of the fiscal that will.
<unk> to flow in.
And we'll keep fine tuning the ones that have already been rolled out like search and UX.
Got it got it thanks, so much.
Our last question comes from patent Feldman from J P. Morgan. Please go ahead.
Hi, Eric Hi, Christian Thanks for taking my questions here.
Good morning.
You just mentioned I think the leadership change in national accounts and not sure. If I missed this but did you address the change in overall sales leadership that was announced earlier this month kind of interested in what drove the change what his responsibilities where at this point how it impacts the transformation if at all and then and then also as the interim replacement.
Longer term solution here.
Yes.
It didn't touch on it in the prepared remarks, because we did have the press release earlier on.
In the months, Eddie Eddie Eddie did a really nice job for us in.
Sort of fine tuning the sales playbook and driving execution.
And so we really appreciate.
Contributions that said I have to tell you I'm really excited by.
By Kim Shacklett, taking over its on an interim basis, but at the moment I can tell you. There's no search Kim has been with US for 15 years and another 15 years before that with <unk>, which was a metalworking distributor we.
And she's one of the most well respected people not just in the company, but in the industry with the supplier community, especially.
She is excited I can tell you we've got thousands of people in the field between outside in customer care that are ready to run through a brick wall for Kim and I think the punch line Pat what you can expect is no changes.
<unk> 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 rallied the team around it.
Got it okay.
That's helpful and then maybe zooming out a little bit just on pricing.
Just wanted to kind of perspective on how you.
Change in your current positioning I guess on peace price versus the industry and what I mean by that is.
Are there any particular product or customer categories, where youre less competitive in today that you.
Do 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.
Spot buys.
Your views is what you are moving more towards the contract end solutions based type of sales.
So Pat I'll start.
I'll take it and start first question on competitiveness of pricing look I think the perspective, we've always had at MFC is our goal was never to match market on price.
And that doesn't mean.
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 their total cost and if we got into a game of saying the pes prices, where we win we think that's a losing battle and by the way for our customers what we share with them is the cost of the products.
We don't think theyre buying from us industrial supplies represent well under 10% of the total cost per manufacturer.
The two single biggest chunks of labor and materials. So MFC has.
Especially with this mission critical pivot that we've made we've really aimed and pointed the lens at.
The 50%.
Product, 70%, plus it's labor and materials and helping customers drive costs to do that we're investing like crazy in technical resources in digital resources in products et cetera, we've got to be able to charge a premium or we can't afford it so.
I feel good about our price position overall.
Pricing has become much more sophisticate.
<unk> stated 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 would hear from them is there is always areas that need to be tuned up or down but.
But in general we feel good about our positioning.
There was another parts of your question, Pat and I think it had to do with the.
<unk>.
How the business has migrated.
Yes, 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 you know sort of is.
As we look at the.
Sort of like the end state of where we're headed with this mission.
Mission critical program getting closer to customers one way, we get closer is by embedding not just our salesperson, but a solution inside the customer whether thats, an implant vending via that.
That percentage of business is in the mid fifties right now as a percent of total.
That would be sort of one proxy and then I think beyond that if you looked.
Where we have a relationship and it's not just transactional.
Would be where we have a salesperson, calling on an account would 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 revenues is closer to 90.
Got it helpful.
And then kind of more of a.
Looked at.
Shorter term question the extra.
You get in fiscal 'twenty two.
Does that.
Would you normally get extra leverage out of that extra week. So.
Is that well I guess is 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.
Isn't that.
Yeah. This is the framework is definitely on an <unk> basis, and we're doing that because the inverse of what happens in 'twenty. Two of course happens in 'twenty. Three so we will continue to give the framework on an ADR basis, which is about the 20% Incrementals are based on.
Helpful. Okay. Thanks, a lot.
I appreciate the color and best of luck guys.
Thanks Pat.
This concludes our question and answer session I would like to turn the conference back over to John Corona for any closing remarks.
Thanks, Jason.
Before we end the call I'd like to give a reminder that our fiscal.
22 first quarter earnings date is now set for December 22nd 2021, that's roughly two weeks earlier than we typically report as we continue to drive efficiency throughout the business.
With that I'd like to thank you for joining us today, and we hope you enjoy a healthy and safe fall season.
Thank.
20 of the conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Thank you.
Okay.
Okay.
Okay.
Hum.
Yes.
[music].
Okay.
Hum.
[music].