Good morning and welcome to the MSC Industrial Supply Fiscal 2024 Preliminary Third Quarter Results and Annual Outlook Update 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 would now like to turn the conference over to Ryan Mills, Head of Investor Relations.

Good morning. Thank you for joining us for MSC's Preliminary Third Quarter Fiscal 2024 Earnings Results Conference Call. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer are both on the call with me today. During today's call, we will refer to various preliminary financial data in the presentation that accompany our comments, which could be found on our Investor Relations webpage. Please note that the estimates announced today are subject to change based on the completion of the company's quarter-end review process. Let me reference our Safe Harbor statement, a summary of which is on Slide 2 of today's presentation. Our comments on this call as well as the information found on our website contain forward-looking statements within the meaning of the US securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and other SEC filings. I'll now turn the call over to Erik.

Thank you, Ryan, and good morning, everyone. Yesterday, after market closed, we released preliminary results for the fiscal third quarter and we updated our full year outlook. I'll provide color on this update and I'll then pass it over to Kristen to cover our outlook in greater detail. We'll then open up the line for questions. Before getting into the numbers, let me offer some perspective. Over the past several years, since the start of our mission-critical chapter, our management team worked hard to improve execution across all areas of the business. And those efforts translated into three consecutive years of meeting or beating our targets from fiscal 2021 through 2023. We are disappointed with our performance thus far in fiscal 2024. However, we are undeterred and we remain steadfast in our commitment to the long-term goals that we've set for revenue growth and operating margin expansion. Even this fiscal year, many parts of our business are performing as expected particularly in a challenging macro environment. The technical and high-touch portions of our growth formula, including implants, vending, national accounts, public sector and OEM are all executing well. We've isolated our performance challenges this fiscal year to two things. One is the slower-than-anticipated ramp of revenue growth in our core customer. And this is due in large part to delays in the rollout of our new website and search functions, which have a ripple effect on other initiatives like our marketing plan and our web price realignment. We are taking action to accelerate progress on the website rollout and hence unlock the path to core customer growth. Two, is a miss to our gross margin plan for the full rollout of our web price realignment. This was a highly complex project hinging on highly complex pricing and discounting systems. Our testing during the pilot phase did not sufficiently surface all of the pricing anomalies that we saw during the rollout. As a result, we experienced some surprises. We've gotten our arms around those. We are implementing corrective actions and we are beginning to see improvements to our gross margin trend. Looking longer term, we'll continue executing the initiatives that are delivering. We are correcting the two areas that hurt us this fiscal year. And we will continue executing a productivity pipeline to fund ongoing investments in growth. All of this is with an eye towards outgrowing the industrial production index by at least 400 basis points and growing adjusted operating margins to the mid-teens. I'll now turn to the specifics, beginning with a summary of our preliminary results for the third quarter. Average daily sales declined a little over 7% year-over-year and that's inclusive of a headwind of approximately 300 basis points of one-time public sector orders in the prior year. Gross margin improved slightly year-over-year, but was below our expectations, and is expected to be below second quarter levels by approximately 60 basis points. Operating expenses performed in line with expectations and were similar to the second quarter on a dollar basis. These factors combined, produced in GAAP earnings per share an expected range of $1.26 to $1.28 or $1.32 to $1.34 on an adjusted basis. Cash flow generation remained strong in the third quarter, keeping us on track to achieve greater than 125% operating cash flow conversion for the full fiscal year. Simply put, we are not pleased with these results. And this is especially the case for average daily sales growth and gross margin. The remainder of my prepared remarks will focus on explaining the performance and on what we are doing to change the trajectory of those two metrics. Starting with revenues. As you can see on Slide 4, average daily sales increased sequentially across our primary customer types with notable sequential improvement in the public sector. However, these improvements were not meaningful enough to achieve our flat year-over-year growth expectation for the full fiscal year. And there's two factors behind this. First, the expected macro improvement has yet to materialize. Conditions remain soft, particularly in the heavy manufacturing and metalworking related end markets that comprise a large percentage of our revenues. This is evidenced in output metrics, sentiment surveys and feedback from channel partners many of which have eroded since our last earnings call. Within our own business, only 43 of our top 100 national accounts showed year-over-year growth in Q3. And second, while several of our growth initiatives are executing to plan, the improvements to the core customer growth rate are occurring at a slower pace than we expected. I'll now address what we're doing about it. First, we're maintaining focus on the areas of the business that are delivering. This includes our high-touch solutions where momentum continues building, as evidenced by the quarter-over-quarter improvement of 4% in our In-Plant program count and 2% in our installed vending base. Another area is the public sector, where budget constraints are beginning to ease. We are winning here and achieved double-digit sequential ADS improvement during the quarter. An additional focus area is our OEM fastener business and our cross-selling formula, which is resulting in new wins and double-digit sequential ADS improvement. We remain committed to the initiatives tied to reenergizing our core customer. The single biggest headline here is our website enhancements, which are running behind schedule. We still expect some improvements to roll out this fiscal year, but not to the magnitude we expected during our previous call. We expect the balance to now roll out in the early stages of fiscal 2025. And this is also slowing the pace of our marketing campaign and hence the traction of our web price realignment initiative, as we're holding off from aggressively driving new customers to our website until the improvements are in place. As a result, this delay is impacting the timing of revenue inflection across our core customer base. As you may have seen, our former Chief Digital and Information Officer, John Hill, resigned as of this week. Brian Bello, who has been a strong leader within MSC's IT organization for over 15 years is assuming the Interim Lead of the area. Alan Yang, also an experienced leader with us for over 15 years maintains his role as Chief Technology Officer. To further assist our e-commerce efforts, we've added resources and some third-party expertise. I have confidence that we will deliver a high-quality upgrade to the web experience. The web pricing realignment was completed at the end of last quarter. While it is taking more time than anticipated to translate into growth, we continue to see encouraging signs in customer behavior that bode well for the future. These include improvements in customer Net Promoter Scores and website metrics such as exit, add-to-cart and conversion rates. Finally, with respect to marketing. As I mentioned, we've taken a more moderate approach to date than we anticipated due to the website delays. We are gearing up a more aggressive campaign to launch coincident with material improvements to our website to strengthen our position in capturing the expected benefits. We'll include digital marketing and social media campaigns, search engine marketing, supplemental print materials and personal outreach. The second factor that influenced our fiscal third quarter performance is gross margin. Roughly half of the miss is attributable to mix driven primarily by the public sector, combined with the slower ramp in core customers. The remainder of the gap is the result of unexpected drag from our web pricing realignment. As you will recall, our pilot generated an outcome that was roughly gross margin neutral. After a full rollout in late February, the following few weeks in March performed in line with plan, which contemplated some early gross margin chop that we saw during the pilot. However, April and early May gross margins took a step down from March rather than ticking back up as we saw on the pilot. Our root cause analysis identified that when we move from pilot into full rollout, the complexity of our pricing and discounting systems produced some anomalous results, including unintended extra discounting. The pilot which was smaller in volume and contained fewer product lines was not robust enough to surface these complexities. We've taken corrective actions to address this and we started seeing improvements in gross margin trending, as of the last week of May and into early June. We'll update you on our gross margin trajectory during our third quarter call on July 2nd. And I'll now turn things over to Kristen.

Thank you, Erik, and good morning, everyone. Moving to Slide 5. As a result of our third quarter performance, we are lowering our outlook for the full year. We now expect ADS for the full year to be down 4.7% to 4.3% year-over-year. As you may recall, embedded in our prior outlook was a meaningful second half step-up in our average daily sales rate that I will speak to momentarily. Given our reduced sales outlook and recent gross margin performance, we are lowering expectations for adjusted operating margin for the full year to a range of 10.5% to 10.7%. The gross margin, as Erik previously mentioned, we experienced unanticipated headwinds this quarter from our web pricing realignment initiatives combined with mix headwinds. Additionally, we tightened the expected outcome of certain other financial metrics with less than three months left in the fiscal year as shown on the slide. All of these fall within the prior range. And lastly, it is worth noting that we do continue to expect strong cash flow generation throughout the year and have approximately 2.1 million shares remaining on our current share repurchase authorization. Before turning the call back over to Erik, I want to spend a moment walking you through drivers influencing our lowered revenue improvement in the second half. The midpoint of our updated outlook implies a first half to second half ADS step-up of 1%, compared to the 10% we previously expected. The biggest factor of the decline is lower than expected benefits from macro conditions, which is also pressuring the typical seasonal uplift we experienced in the second half. The balance of the walk can be found on Slide 6. I will now turn the call back over to Erik.

Thanks, Kristen. Over the past three years, our management team worked hard to improve execution across all areas of the company. We built a solid track record of meeting our commitments for many quarters consecutively. This year has been a step back and we are not pleased with our performance. However, we are moving swiftly to take corrective actions and to restore performance to where it belongs. We remain firmly committed to our longer-term goals of outgrowing IP by 400 basis points or more and achieving mid-teens operating margins. Before we open the call for questions, and as a reminder, the purpose of our press release and call is to update you on our preliminary results for the fiscal third quarter and the impact on our annual outlook. We appreciate your keeping questions this morning focused on those two topics. And then we'll provide more color and a progress update on our July 2nd earnings call and then in turn, a full fiscal 2025 framework during our October call. Thank you and we'll now open up the line.

We will now begin the question-and-answer session. Our first question comes from Dave Manthey with Baird. Please go ahead.

Hey. Excuse me. Good morning. This is Quinn Fredrickson on for Dave. So I just wanted to ask about.

Hey, Quinn.

Hey, good morning, Kristen. Just wanted to ask about gross margins. So specifically, the 60 basis points of negative variance versus your expectations in 3Q. How much of the two factors, the mix and web price solution are you assuming carries over into 4Q, if at all? And then I think you made a mention about exceeding normal seasonality or in line with normal seasonality for 4Q. Can you just remind us of kind of what fair normal sequentials are for 4Q?

Yes. Sure, Quinn. So on the first part of your question on the web price realignment, we would expect that 30 basis point headwind that we saw sequentially Q2 to Q3 to correct itself. So you should think about a 30 basis point benefit Q3 to Q4. I'll elaborate a little bit, maybe on how to think about overall gross margin sequentially 3Q to 4Q, because obviously that is just one component of that. So if you assume you got a 30 basis point improvement in price from the web price realignment corrections, there is a step-up sequentially in cost, product cost inflation, which is about 40 basis points. So netting those out, it's a decline of 10 basis points sequentially. And then we're seeing a little bit more mix pressure coming in the fourth quarter. I'd size that as probably 10 to 20 basis points down. And then to answer your second question, what we would normally see Q3 to Q4 sequential is a headwind of 40 to 50 basis points from mix. So that's kind of in a normal year based on what we see in product and customer mix, Q3 to Q4, that would be the normal amount of pressure on mix.

All right. Thank you.

And the next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, Ken.

Good morning, Ken.

First, on the demand outlook. I'm curious—you're seeing more headwinds in heavy manufacturing and among your core customers. Can you give any color on how auto sales performed this quarter and how you’re thinking about demand in that vertical into the fourth quarter? Also, it would be helpful if you could walk through, with as much granularity as possible, the other heavy manufacturing end markets that have turned faster than others.

Yes, sure. I'll take it, Ken. Look, I would say in general, and I don't have the auto numbers right in front of me. But in general, what we saw was, obviously, as you know, 70% of our business is manufacturing, the majority of that is heavy manufacturing areas like machinery and equipment, metal fabrication, our job shops, which are highly representative of our core customers were particularly soft. You could see that if you look at the IP and some of the sub-indices, that's where we saw most of the softness. And that's really reason number one for the core customer not inflecting as we expected was we were expecting more improvement there. And then again, reason number two was in our own control with some of the initiatives and particularly around the website that we have our arms around now and plan to fix quickly.

Okay. Maybe just as my follow-up, on the 4Q OpEx, I think you're highlighting that being sequentially higher as a percentage of revenue. Can you quantify in dollars, what is the sequential impact of maybe some higher incentive comp or versus the other buckets of lower volume absorption? Any color there?

Yes, sure, Ken. So on the step-up, I break it down into really two main buckets. One is an increase in variable compensation, which is tied to nonrepeating benefits that we got in the third quarter. And I'd size that like around $4 million roughly. And then the second bucket is a combination of G&A from prior strategic investments and the strategic investments, which are currently impacting the P&L. And I'd size that around like $2 million to $4 million, could be as high as $5 depending on when we bring the marketing efforts online.

Got it. That's helpful. Thanks.

The next question comes from Steve Volkmann with Jefferies. Please go ahead.

Right. Excuse me. Good morning, guys. Thanks for taking the question. I wanted to talk a little bit about the price realignment, Erik, because obviously, others have done this in the past. It's been choppy for most who have done it. And I guess I'm trying to figure out how you have confidence that you sort of have your hands around the unexpected dilution that you saw this quarter relative to that initiative.

Yes, Steve, thanks for the question. As you said, this was a highly complex initiative. We entered the full rollout with a lot of confidence. Our goal was gross margin neutrality, which was aggressive, and we felt good about it based on the pilot results. What happened is the pilot simply wasn't robust enough to surface the issues. We have a very complex set of discount structures, systems, and algorithms, and the anomalies didn't surface during the pilot. I will tell you that I've been pleased with the reaction of the team. Because these anomalies were in pockets and not across the board, it took us a bit of time to get at them. We do feel that we have gotten to them, and how we know is we've seen several weeks in a row with nothing new. Once we identified and fixed the issues, those fixes began to positively impact gross margin trends in late May and into the current month. Our confidence comes from the team's response when we identified the issues and from having several weeks now without any new problems.

Okay. That's helpful. And I guess the follow-up maybe for Kristen is how should we think sort of sequentially about gross margin then? Is it better in the fourth quarter? Or how does it sort of stack up with normal seasonality?

Yes. So overall, slightly better than normal seasonality, Steve, and the way that you get there sequentially from Q3 to Q4, this is what we're expecting to happen in fiscal '24. You get a slight improvement from price of around 30 basis points. Costs, however, is stepping up sequentially. So net price cost should be down about 10 basis points and then a little bit more mix headwind down about 10 to 20 bps.

Okay. All right. Thank you.

And our final question comes from Patrick Baumann with JPMorgan. Please go ahead.

Hi, good morning. Thanks for letting me in here. Just wanted to zero-in on the website enhancements and your ability to manage this within the renewed time line given the leadership changes you disclosed this week. So first, what changes have been made already to the website and what's still to come? And then relatedly, you said something about adding resources to help support this. Does this require hiring new people from the outside? And if so, how long does it take to get new software engineers into the company to assist here?

Pat, happy to take this one. Stepping back, we talked about the core customer not inflecting in part because of the website. We had several programs aimed at the core customer, and not having the website ready for prime time had a ripple effect on the others because we didn't want to launch the marketing. Without launching marketing, the web pricing realignment is less effective and it’s harder to gain traction with some of our new customers. That’s the issue on the revenue side. At the start of the year we highlighted two areas of focus: the platform, which is the transactional engine, and search or product discovery, meaning how you find and buy. Most of the work on the platform is done. The big headline is search, which is the major step-function change in user experience we’re counting on for revenue growth, and it’s running late. John’s resignation does not affect our timeline. One silver lining is that it gives me a chance to get closer to the website and the team, and I’m confident we can and will fix this. The resources we’re talking about are not months-away new hires. We’re approaching this with urgency, so assistance and resources will come from inside the company or from third-party help because it has to happen fast. I expect some improvements to search and product discovery to begin rolling out this fiscal quarter, with the bulk of the work coming in the early portions of fiscal 2025. The marketing program will launch when we and our customers feel the experience is ready for prime time and we’re ready to drive people there. We will fix it and we’re moving with urgency, not waiting months for new engineers.

Okay. Thanks for the response. I'll respect your request for one question and best of luck.

Thank you, Pat.

Thanks, Pat.

This concludes our question-and-answer session. I would now like to turn the conference back over to Ryan Mills for any closing remarks.

Thank you for joining today's call. Please reach out with any follow-up questions you may have. We look forward to speaking to you again during our fiscal third quarter earnings call on July 2nd.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.