Good morning and welcome to the MSC Industrial Supply 2021 first quarter 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 zero. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would 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 everyone. Erik Gershwind, our Chief Executive Officer and Kristen Actis-Grande, our Chief Financial Officer are both on the call with me today. As on our last call, we are all remote, so bear with us if we encounter any technical difficulties. 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 the Investor Relations section of our website. Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, a summary of which is on Slide 2 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 in 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 Factor and MD&A sections of our latest annual report on Form 10-K filed with the SEC, as well as in 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. 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 reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I’ll now turn the call over to Erik.

Thank you John, and good morning everybody. Thanks for joining us. I’ll begin by wishing each of you a happy, a healthy, and especially a safe new year. I’ll start the call this morning with some perspective on our journey and our recent progress. I’ll then review first quarter results and take a deeper dive into our growth initiatives. From there, Kristen will review the financials in more detail and provide color on our structural cost programs. I’ll then wrap up before we open up the line for questions. As we enter the middle of fiscal 2021, momentum on our mission-critical initiative is building. This is evidenced in part by improving numbers, but more importantly by progress against our key initiatives and by the increasing pace with which we’re operating the business. As a reminder, several years ago we decided to reposition MSC from a spot-buy supplier to a mission-critical partner. We captured this in our new brand promise, Built to Make You Better, and we did so in order to secure the next decade-plus of MSC’s success and to deepen the moat around our business. Since that time, we have recreated MSC’s value proposition, remodeled our supply chain with an elevated presence on the plant floor, reshaped MSC’s sales force, built new platforms for growth such as CCSG, and we’ve accelerated the pace of innovation with advancements like MSC Millmax. We’ve built new digital capabilities like ecommerce to improve customer retention and loyalty and a new pricing function to improve price execution and realization. Finally, we’ve taken steps to create a more agile culture in order to drive change faster. On our last call, we outlined mission critical or our pathway to translate these changes into improved performance. We shared two, three-year targets and those were accelerated market share…

Thank you Erik. Let me start with a review of our fiscal first quarter and then I’ll update you on the progress of our mission critical initiatives. For reference, on Slide 4 of the presentation, you’ll see key metrics for the first quarter on a reported basis. Slide 5 reflects the adjusted results, which will be my main focus this morning. Our first quarter sales were $772 million or $12.5 million on an average daily sales basis, both a decline of 6.3% versus the same quarter last year. Moving to gross margins, our first quarter gross margin was 41.9%, a decline of 30 basis points compared to the first quarter of last year. Sequentially, gross margin improved 30 basis points compared to fourth quarter 2020 despite the headwind from some large PPE sales that we mentioned on our last call. We continue to see solid performance due to the traction of our initiatives. Our execution on both the pricing and purchasing fronts has been strong with solid realization from our annual price increase, as well as improvements to our supplier programs. December gross margins continued the trend of solid execution on the price and cost fronts. We could, however, see increased headwinds in gross margins due to PPE-related SKUs over the next couple of quarters. Total operating expenses in the first quarter were $243 million or 31.4% of sales versus $257 million or 31.2% of sales in the prior year. This includes about $4 million of costs related to severance and the review of our operating model, both related to mission critical. The severance made up about one-third of that amount. Excluding these costs, operating expenses as a percent of sales were 30.9%. In the prior year, excluding $2.6 million of costs related to severance, operating expenses were also 30.9%…

Thank you Kristen. Last quarter, we outlined our mission critical initiative that’s aimed at turning the hard work we’ve performed over the past several years into improved financial performance. Our company’s sights are firmly set on two goals referenced on Slide 12 to be achieved by the end of our fiscal ’23: first, growing at least 400 basis points above IP, and second, returning ROIC back into the high teens. We have five growth initiatives powering our market share aspirations and we are executing significant structural cost reductions that we expect to improve operating expenses as a percentage of sales by at least 200 basis points. As we move into the middle of our fiscal year, we’re encouraged by the momentum that’s building inside the company. This is evidenced by improving numbers and by improving execution of the projects behind them. Most significantly, there is an energy building inside the four walls of MSC and with each passing quarter, we expect that energy to grow. We will not rest until we have achieved our mission of being the best industrial distributor in the world as measured by all four of our stakeholders. Thank you, and we’ll now open up the line for questions.

[Operator instructions] The first question is from David Manthey from Baird. Please go ahead.

Yes, good morning, and happy new year everyone.

Hi Dave, happy new year.

Hi Dave.

Hi. First question, kind of big picture, could you outline the role of technology in the mission critical efforts? I mean, if you’re cutting costs and you hope to maintain or improve the productivity and customer service of MSC, how are you doing that? Can you give us a couple examples?

Yes Dave, I think it’s -- so good question, and what I would say is just the way on the growth side we described sales force as an enabler, you know, the expansion of the sales force as something that powers or enables each of the five initiatives. Technology is underpinning everything we’re doing, and that’s on the cost side and it’s on the growth side. On the growth side -- and I’ll get to your question on costs, on the growth side, heavy investment into digital, as we had talked about as one of the five levers, heavy investment into pricing analytics that we’re beginning to see translate in the form of improved price realization on the gross margin line, and then of course, yes, heavy emphasis on using technology to power some of the structural cost initiatives. I think what’s most significant there is the cost take-out here, this is not an exercise of just stripping cost out of the business. This is an exercise in improving how we do things, so a perfect example of that is what Kristen just mentioned with our move in Melville. Yes, it was a downsizing of the building, but really what we’re doing is rethinking the way we work and using technology to do it, so it’s moving to a hybrid work model. Obviously for all of us, technology has been at the core of that, and not only does that open up productivity gains, it allows us to shrink real estate footprint, it allows us to rethink travel and how often we need to get together, but it opens up talent pools in new locations that we’re not wed to Melville, for instance that we can recruit especially in certain functions in other areas. That would be an example, Dave, but I think what you’d see if you go project by project across the three big buckets - sales and service, supply chain and G&A, is technology is underpinning a lot of it.

Okay, thank you for that. Then just to clarify one thing, on Slide No. 5 where you say that non-safety sales were down year to year but improved sequentially each month, when you say improved, are you talking about dollars there? Is that average daily sales growth rates? What is the improvement you’re referring to?

That would be an improvement in our average daily sales rates, Dave.

Perfect. All right, thank you very much.

Our next question is from John Inch from Gordon Haskett. Please go ahead.

Thank you, good morning everyone. Happy new year.

Hi John, happy new year.

Thank you. Let me start, Erik and Kristen. Raw material costs have been going up. Have you seen that reflected in the prices of your purchased products, and how, Erik, are you thinking about the annual price increase, and maybe you could talk about just supplier pricing actions and trends in general.

John, so you’re right - what you’re pointing out is something we have--our sourcing folks have their eyes on closely, particularly as it relates to metals. What I would tell you is to date, it’s been a little early to see it translated. As you know in following us for a while, one of the real triggers for us is seeing the commodities movements translate into supplier list increases, which have not yet come in earnest. We do expect, though, that that’s going to build should the inflation sustain. As of now, our thinking is we would expect to implement a price increase. Timing-wise, it’s still a little early, but figure roughly end of Q2, beginning of Q3 is kind of what we’re thinking now. John, the only other thing I’ll point out is if you look in our growth decomposition, you’ll see we’re seeing improved price realization. The most recent increase we took was back over the summer. It was in the 1% range, so it was pretty modest given the low inflation at the time, so we’re encouraged. We’ve invested a lot into price execution, price analytics, and we think we’re starting to see that in the form of improved realization.

So just based on your answer, it’s too soon to tell if the rising raw material costs are going to translate into higher product costs? What’s traditionally the lag, and are your competitors raising prices yet or are they also kind of waiting and seeing?

Generally there is a lag, and it will depend on how--you know, it’s usually a several month lag. It depends on--exactly when depends on how fast they snap back, and of course I think it would have to be sustained for a bit of time before our manufacturers pass it along. We watch pricing carefully. I would say to date, we’ve not seen a lot of movement, but history would suggest that if what we’re seeing now in inflation does hold, that it would yield increases coming from our suppliers and it’s a matter of time.

No, that makes sense. Just as a follow-up question, Erik, so the 400 basis points of targeted market outgrowth, does your plan provide for a more granular breakdown, say by targeted industry, so some aspects government might be more than 400, some less? If so - I’m assuming that’s the case - can you give us any details to square up the 400 target?

Yes, so look - inside the company, John, we have the 400 broken out a few ways. Certainly by customer type, we have a look. We also have a look by product and service category, and we have another look that’s literally down to the geography, the zip code, so at a level by initiative of our five big levers. We have multiple [indiscernible] at it. Certainly, there’s going to be industries that grow faster than others. What I would say is a couple things. One is you’re going to see us--for us, it’s a balance. On the one hand, you’re going to see us continue to invest in our core. Our core is metalworking and metalworking gets sold into those heavy manufacturing sectors that have been hit pretty hard. If you look at the IP numbers, they’ve been lagging. Those heavy metalworking centric end markets have been lagging. At some point when there’s a real recovery, those will snap back, and we think we’ll benefit in an outsized way by staying focused on that segment. The second piece would be--you know, the balance, sort of the fifth lever if you will, is diversified end markets and the biggest focus for us right now is the one you touched on, John - government. Certainly, we’re encouraged by momentum there. That would be one that we would expect to outpace the 400 for sure given its relative size in our portfolio, size of market, and the level of investment we’re putting there.

Yes, you mentioned metalworking in the last call, Erik, as a continued focus, so does metalworking grow faster than 400 or is it kind of around the 400, based on your plan?

I think it will move around, John, and obviously it will be a function of how we execute, how much share we capture. I think the way we look at it is given our relative size in metalworking and market share that we have, if we were growing at 400 basis points above IP in metalworking, that would be a pretty good result and would allow us to widen the lead, given the size of the base we’re starting with.

Makes sense, thank you.

Thanks John.

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

Hey, good morning. Happy new year.

Hey Hamzah.

Hey. My question is just around the reacceleration of market share. You mentioned there’s a new energy building inside the company. Maybe you could talk about how is this restructuring different from a cultural buy-in perspective, and then how conservative are the numbers you’ve put out there, the 400 basis points, the ROIC, sort of mid-teens? How do we think about those two items?

Hamzah, let me start with the energy, the question around the energy, and there is. I mean, if you’re inside the company, and right now by large measure that’s inside it virtually, you would feel a change. What I would say is I’d go back to say, look, if you go back over the life of this company, particularly our life as a public company, we’re going on 25 years now, the DNA of this company is a growth company and one that always stretched. [Indiscernible] having goals that were much bigger than where it was at the time. Look - over the past few years, we’ve been through a lot of changes. We’re coming out the other side of the changes and are reconnecting with that legacy and the idea of thinking big and setting stretch goals. I think that’s one of the biggest things, is the reconnection with that idea and a leadership team that’s embracing it, that’s embracing the idea of stretching from [indiscernible]. I think that’s beginning to trace its way through the organization. To your point about how conservative are the goals, look - as you could imagine, like most things, inside the company we are stretching and for any goal that we’re talking to you about, you could imagine that for the group inside of sales, is there a higher aspiration? Sure. For the group that’s focusing on the cost side by area, is there a higher aspiration? Sure, because we are trying to build the mentality into the company of stretch and think big.

Got it. Then just on the gross cost savings target of $90 million to $100 million, do you have a sense of how big the reinvestment you’re thinking into growth will look like, and where you’re going to reinvest? I know you talked about rebuilding the sales force and hunters - 50, I think you said as a number, but just order of magnitude, how much of those gross savings would be reinvested, and is it going to be all in sales or are there other areas?

Yes, so for this year, we’re looking at a $15 million reinvestment - that would be for fiscal ’21. For ’22 and ’23, you can definitely look for that annual number to step down. We’re going to continue to invest--I don’t think we’ve given a specific range for it, but I’d say you could probably look for $7 million to $8 million of reinvestment in ’22 and ’23. That’s always changing, though, as we continue to add more to the pipeline, look at the prioritization of when things come online. As far as where the investment goes, we’re focused on the three areas - cost out in G&A, supply chain in sales and service. It’s investment really underpinning all three. This year is a bit more focused on the sales and service areas, particularly with the digital initiative ramping up very quickly, but you’re going to see investment across the board. As Erik mentioned, a lot of the stuff we’re looking at on the cost side is really transformative due and requires investment, so it would be across the board, nearer term a bit more weighted to sales and service.

Got it, very helpful. Thank you so much.

You’re welcome.

The next question is from Kevin Marek from Deutsche Bank. Please go ahead.

Hi, good morning everyone.

Hi Kevin.

Good morning.

Can you just update on what happened in sales in terms of safety versus non-safety performance? How did it trend by month through the quarter, and then obviously through December?

Yes, sure. We can get you specific numbers. What I’ll do, Kevin, is give you sort of the general picture as to what’s going on. It’s consistent with what we’re seeing in the indices. We are seeing a sequential build in the performance particularly of the base business, and by base, I mean non-safety, non-janitorial. If you look at safety and janitorial, which is a great proxy for our PPE program, through the first quarter that was growing in the low 20s. December stepped up to high 20s, close to 30. But I think the real story is what’s been happening in the non-safety/janitorial, the core of the business, which has been a steady climb up. You go back to the teeth of the pandemic, we were talking down, I believe it was mid-20s in the depths of this thing, and we’ve been on sort of a gradual climb up. Obviously we got a nice, pleasant surprise in December where all other of the base business was down low single digits, so one month does not a trend make, it was an encouraging sign, we got some benefit of some CARES Act spending as that was expiring, but it’s been a steady climb up in the base business.

Got it, thank you. Then as a follow-up, is there any gross margin implication that you would call out from the trends you’ve seen in December as far as Q2 expectations are concerned? I think typical seasonality doesn’t call for much of a change Q over Q.

Yes, let me touch on gross margin and I’ll put it back in the context of the guidance we gave last quarter around the operating margin framework. What we told you last quarter on gross margin range, thinking about the year, is you can expect this to be flat to maybe down 50 BPs. The biggest variable there is really mix, driven by the PPE headwinds. Since then, we’ve seen a couple of things happen. One, our price and cost execution has been really strong, like we alluded for December. I’d say it’s as good or better than we had envisioned. Two, we see a higher change of larger PPE headwinds for a quarter or two, and what’s behind that is, one, we’ve got a large inventory position on masks - you know, the virus is surging, we may end up selling through a lot of those. At the same time, it’s no surprise to share that mask pricing has come down over the past couple of quarters, but really given the strong price-cost performance, we’ll still likely fall within that flat to down 50 BPs range, even with the larger PPE headwind. I think if the PPE headwind were to become really large, it’s possible we could stray outside that down 50 BPs range. If that happened, I think what you’d see us do is enact countermeasures, whether it’s on the gross margin line or elsewhere on the P&L, to mitigate that risk as much as possible, but really trying to still protect those investments that are going to drive the growth back in ’21 and beyond. Regardless of what happens with PPE, it is a temporary headwind, thinking a couple of quarters. The underlying price-cost dynamics, that’s what we’re most focused on, and we’re really pleased with what we see there. More broadly, we’re still very committed to the two overall mission critical targets around the market growth capture and ROIC improvement.

Got it. Understood, thank you. Happy new year, guys.

Happy new year.

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

Hey, morning everybody. Great quarter.

Thanks Mike, happy new year.

Happy new year. I wanted to touch on your annual margin framework. Historically your financials have seen a slow start given the first half seasonality of the business, but you were able to meet the low end of your full-year framework on a mid to high single digit revenue decline. Assuming mix is normalizing and price building momentum to the benefit of your gross margin, I was just curious, what are your embedded assumptions for SG&A in terms of cost-out opportunity, and maybe what factors would push that to the high end of the annual framework?

Sure, so drilling in a bit on SG&A in terms of the op margin framework that we laid out last quarter, our thinking on the operating expenses still holds, really. If you end up seeing revenue flat to slightly down, you can look for the opex expense to be slightly down as well, and we are on target for that still. If you think about what would drive us to the upper end of the overall op margin framework, I’d say you could have one potential where you’re looking at potentially over-driving the productivity programs. We’re always looking to be more aggressive on things in that department. On the gross margin side, again we are seeing strong underlying price and cost performance. I’d not sure that I would say the mix headwind is behind us yet because we still do have PPE volume moving through, and especially in the next couple quarters it’s still likely that PPE mix could be a headwind. But I’d say the operating expense is largely still in line with the framework. Gross margin, we feel confident we’re in that flat to down 50 BPs range, so if you saw anything advantageous against either of those, those could take us to the upper end of the range.

Okay, I appreciate that. Then you mentioned some nice trends within milling and the Millmax initiative you have. I’m assuming that’s catering to your core customer as well as some government. Can you remind us what milling and maybe CCSG combined as a percent of your revenue is?

Let me talk a little bit, and Mike, what I’ll do is maybe frame for you Millmax, which is really--you’re right, Millmax is powering the core business. The interesting dynamic, though, is it’s powering it in the metalworking category but we see an opportunity to power through other ancillary MRO products within the heavy manufacturing sector. Let me explain a little bit. Metalworking the U.S., we size at $12 billion to $15 billion, and it fluctuates based upon what’s happening in the market. You can imagine right now with spending being down, the economy being soft, it’s at the lower end of that. Cutting tools as a whole represents 30% to 40% of metalworking. That’s been the company’s bread and butter for a long time. Within the cutting tool universe, milling is one of the biggest applications within cutting tools. That’s where MSC Millmax is designed to show productivity, and look, the results in terms of improving customer throughput productivity have been really, really encouraging. So frame there, we believe there is roughly around 45,000 locations, customer locations in the U.S. that would be candidates for MSC Millmax, and that’s basically the universe of where we see the right fit of heavy manufacturing that’s doing milling applications. The opportunity for us is to go in there, and it’s not just--it’s to improve the customer’s productivity, and then as we described, we’re really providing a service and in exchange for the service, we’re asking for incremental market share capture. In many cases so far, and obviously it’s still very early, what we’re seeing, though, is the market share capture may or may not happen in cutting tools. It may happen in the customer’s ancillary spend, so if you go into a typical manufacturing operation, generally for every dollar of cutting tools they’re spending, they’re going to spend some multiple of that on MRO purchases, and so that’s the bigger opportunity for us. All of this, obviously, is to power the 400 basis point outperformance that we’re gearing ourselves towards.

All right. If I could dig into that a little further, can you maybe touch upon why Millmax is important to have in the hands of a distributor versus maybe an OEM, because my perception is you’re going in, you’re providing these services, and you’re finding the best and right solution, so how does that work with your maybe supplier relationships and you’re able to provide the best product that you know works, versus favoring one or another product where an OEM might?

Yes Mike, that’s a great question, and look - I think as much as I love the Millmax technology and what it’s doing, I think we are perfectly positioned to be the one to bring this to market for a couple of reasons. One is the technology by itself is a piece to the puzzle. The end here is about finding productivity and helping customers improve throughput, reduce wasted materials, etc. To do that, you need the tech. This technology is unique, but by itself it’s not enough. You actually need a technical person alongside to interpret the data, somebody who understands machining and metalworking, which obviously we’ve got the largest national footprint of metalworking tech specialists in our field and in our customer care centers. Then on top of that, Mike, and this gets to your question about the suppliers, our suppliers or the manufacturer could do this. Here’s the challenge they face: ultimately what this tool does is it bring objectivity, and it removes brand preference because it moves it to performance. The benefit that a customer has by doing business with MSC is we’re going to give them the right--we’re going to interpret the data and then we’re going to give them the right answer to their problem. The nice thing there is MSC has the broadest and deepest metalworking portfolio in the industry. I think all three of those components together are what’s needed to really maximize value to this thing, and I think we’re in a fortunate position to have all three.

Thank you, appreciate the time. I’ll pass it along.

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

Hey guys, good morning. Happy new year to you all.

Good morning Adam.

Happy new year.

I was wondering if we could start with a discussion about your hiring plan for the sales force for the rest of the year. I’m wondering if you’d be willing to dimension just how many folks you are looking to add to the sales force, and then--or maybe more of this reinvestment, the $15 million for the year is--do you think of that as going forward as being more digital investments and not headcount related?

Adam, I’ll start. Let me start with the bigger question on investments, growth investments. We are really focused on this three-year--if I haven’t said it enough, the 400 basis points plus, and building momentum along the way. We’ve got five growth levers and we believe all five are critical to hitting the 400 basis points plus, and underpinning that is the sales force expansion, which I’ll get to. But again, those five - metalworking, solutions, selling the full portfolio, digital, and diversified segments, which right now is government, you’re going to see investment. Where the growth investment is going, it’s going directly into those five, and then into the sales force that’s going to power those five. In terms of the sales force particularly, look, we’ve been--it’s been a few years now since we’ve expanded the sales force. Adam, you’ve been following our story for a while. We have been through this whole repositioning of the business and we needed to reshape the sales force in order to bring this thing to life, and what that meant was over the last couple of years under Eddie’s watch, we’ve taken headcount down because what we found was that we were over-assorted in certain roles, i.e. in farmers, did not have enough in hunters and some other key roles in metalworking that we’re now throttling up, so we’re reshaping the sales force. You saw us add 50 in the first quarter. If we can continue hiring the right people as we’re doing, we could see that continue at that rate and pace, plus or minus, for the balance of the fiscal. We’d like to get it where we’re back to 2019 levels on what we publish in our sales and service stats by the end of the fiscal, and obviously the idea is we’re going to be funding that growth investment--you know, that’s the headcount addition and the sales force, we’re going to be funding that through the productivity work that Kristen described.

Okay, great. That’s very helpful, thank you. Then secondly, Kristen, could you provide the magnitude of the PPE headwind to gross margin this quarter within that 30 basis point decline, and just given what you’re seeing so far here in December with the surge in PPE orders, did I hear you correctly say that a similar headwind in the second quarter or is that still up in the air?

Yes, I’d say second quarter is likely to be higher. We’re not seeing it yet in December, but based on what we think is going to happen with inventory moving out the door, we do see a larger PPE headwind for Q2, probably also for Q3. I think I heard you mention something in there on Q1. We did see some PPE mix headwind in Q1 that was really driven by some large orders that went out the door, which is a similar reason that we would expect to see increased risk in the second and third quarters as well.

So do you think your gross margin was closer to flat with the positive pricing and purchasing that you had, if you were to back that out?

Yes, I’d say we were closer to flat.

Okay, thank you.

Adam, maybe just to chime in a little bit with two cents on gross margin, and look - Kristen hit this, I want to underscore a couple of points. I think what we’re seeing since we--you know, we basically said hey, for the year we see ourselves flat to down 50 basis points. Since last quarter, two things. One is we like what we’re seeing on price execution and we like what we’re seeing on the purchase cost side and the sourcing side. I think that’s a net positive. I think what we are saying, though, is we do see the potential in the next quarter or two for more pronounced PPE headwinds based on the factors that Kristen described. You’ve got a big mask inventory, virus surging, no secret prices have come down on masks, so there is the potential for a more pronounced PPE headwind for the next quarter or two than we’ve seen in the last quarter or two. There’s been some that we’ve absorbed, but not as much as what we may face in the next quarter or two. I think for me, what I’d want to underscore, what I’m looking at is saying, hey, the PPE stuff, we’re talking about a once in a generation kind of episode here that’s really hard to predict. It was really hard to predict months ago, it’s really hard to predict now. For me, again, sights set on the three-year goals on the ROIC improvements. The real underlying value creation drivers for us are going to be price and cost. That’s where we like what we’re seeing.

That’s it, thank you.

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

Thanks, good morning. Just a couple of follow-ups. First, for the impairment, you said the ability to get the gloves is increasingly in question. Is that just based on how long it’s been, or is there something more specific? Really, I’m trying to understand if we should be worried about inventory risk for other pandemic stuff as cases hopefully slow down as ’21 progresses.

Yes Steve, so look - this is a--this was a really unique situation with nitrile gloves, and we followed--not only unique but a really difficult situation that is isolated to nitrile gloves in terms of a prepayment and an exposure of this size. The accounting rules are pretty clear than when you reach a certain point of uncertainty, and without going through all the details, you could imagine we’re pursuing every path possible, but when we reached a certain point of uncertainty and it was clear, we impaired the asset, which is a prepayment. What I’d say is we have used the prepayment tool many times over during this pandemic, and it’s been--it’s become a fairly standard industry practice actually through the pandemic to secure scarce product. It’s worked out most of the time. In this case to date, it hasn’t worked out. What I would say, though, is in terms of prepayment exposure, if that’s where you’re going, no, we don’t see another case like this. This is pretty unique.

So truly a one-off, and you don’t see inventory risk for other pandemic related products?

Certainly what I would see is we don’t see any prepayment risk. Look, obviously as Kristen described, we’re sitting on a lot of mask inventory. That will be a function of how it moves. Is there risk there? Sure, of course, depending upon how the virus moves. But you know, what we’re talking about, the set of facts with the nitrile gloves with the prepayment, isolated to that.

Got it. Of the 50 people added, did you break out how many were metalworking specialists versus the hunters, and how long does it take a new metalworking specialist to reach the level of productivity you want versus that new sales person?

We did not. Steve, for competitive sensitivity, we don’t break out specifically. What I can tell you is we gave you the three sort of primary buckets of the 50, which are the BD hunters, metalworking, government as the three big areas of focus. What I would say with metalworking is we generally find a faster ramp-up because they are coming with industry expertise. The one caveat, in most cases when we’re hiring a metalworking specialist, they don’t necessarily have their own book of business. What they’re doing is they’re supporting--so the way we see the benefit in a metalworking specialist, number one, we’re going to see it certainly in Millmax installations, but we’ll then see a lift in their geography for our metalworking sales people who are out there generating sales because of the technical expertise the individual brings.

And presumably that’s a really fast ramp to get them up to speed on Millmax to get them in the door, to hopefully leverage to other MRO products?

There is a ramp. There is a ramp on Millmax, and we’ve been super aggressive about rolling it out. There is a little bit of a ramp on Millmax. I mean, it’s not rocket science, but certainly it’s a new trick, it’s a new technology, and that’s the case not just for a new person but for all of our metalworking experts, so Kristen mentioning pockets of investment, it’s certainly been one area of investment where we’ve been rolling out sample kits and testing tools and doing training for our metalworking folks at a pretty fast rate. That’s a piece of our investment, and we’ll continue that.

Just to be clear, that Millmax program is unique to you?

Yes.

That’s great. Thanks.

Our last question comes from Patrick Baumann from JP Morgan. Please go ahead.

Hi, good morning everyone. Thanks for taking my questions.

Hi Patrick.

Hi. Just quickly, you talked about investments in SG&A of $15 million incrementally this year, and I forget what you said annually beyond this year, but my question is on capex expectations and if you expect capex to go up over time as well as a result of the initiatives, and by how much.

Yes, so for this year capex, we’re estimating in the range of $70 million to $80 million, which is a step up over our historical run rates. In future years for the program, in ’22 and ’23, I’d expect we’re seeing more of a sustained level over where we’ve been historically, probably not as high as the top end of that range but you’re definitely going to see a sustained increase for the next three years.

So that 70 to 80 is going to be more of a sustained level, then, for those years? Is that what you’re saying?

I’d say the lower end of the range, maybe think 60 for ’22 and ’23, but we’re still working through a lot of the detailed planning on that. It’s going to be dependent on how we prioritize different projects in the pipeline, what the specific investments are that we bring online at what time. We can give you some clearer guidance on that as we get closer to 2022.

Got it, and then on the longer term ROIC target, can you remind us of the components of that? How much of that is sales versus margins, and I guess the invested capital side of the equation, are you assuming changes in that by that time, whether with working capital investment, or I guess maybe you’re using debt and equity as the denominators for any buybacks - I don’t know. Just trying to understand the components of that high teens number.

Yes, so we haven’t broken that out specifically yet on what the drivers are or the components of getting to the high teens ROIC. I would say everything is on the table right now. We’ve been talking a lot, of course, about the growth and the operating expense side of things, where we see gross margins going; but really, everything is on the table for us as far as opportunities go, and we did touch last call on turning our sights more aggressively to looking at working capital opportunities, and that’s something that we’ll be getting into throughout ’21.

Just last one from me. Remind me of the gross margin dynamics annually through that time, what you expect?

Sure, so for the op margin framework for ’21, you can think flat to down 50 BPs is the guidance we’ve been giving, and then for the out years, we haven’t commented specifically on what we expect to happen with margin, but we’re seeing very strong price-cost and we’re investing heavily into pricing analytics. Not sure what the inflation dynamics are going to look like that might be driving costs yet in ’22 and ’23, but we’d be looking to cover that exposure and to continue to deliver strong realization.

Is there still a mix headwind, though, that you have to deal with over that time? I mean, that’s been kind of the story the last [indiscernible].

Yes. There’s always--mix is the biggest unknown, right, and where we fall on those kind of ranges on gross margin. Right now, you’re hearing us talk a lot about the PPE pressure, which as Erik mentioned, that’s really specific to ’21. It’s kind of a unique situation given the pandemic dynamics. But mix could remain a fluctuating factor for where we land in that range in ’22 and ’23, but I’d say it’s more about where the growth comes from in terms of the products where we’re growing, the parts of the business where we’re growing, and then how fast each of those five growth levers comes online. That could definitely influence the margin rates.

Yes Pat, just to maybe add a little perspective on gross margin, so if you think about our formula over time, what’s gone on and what we’ve talked about, this year is a funky year with PPE and wild swings. Ex-PPE, just ordinary course of business, somewhere between 30 and 50 BPs has been where we fluctuated in mix headwind, so the assumption we’ve had and what we’ve seen for a while is if price costs are flat, then you’re looking at modest gross margin erosion year-on-year. That’s sort of what the thinking has been. What I would tell you is this year in particular, what you’re hearing from me and Kristen, is we may have outsized mix headwinds specifically because of PPE, but looking beyond that, you’re hearing us encouraged by our price realization and our execution there and the work happening on the sourcing side. If those things continue and that momentum continues, it could create positive price-cost spread which could eat into that mix headwind and create a little bit different dynamic for us, a better one. Obviously to be determined and we’re early, but on the price-cost front, we’re encouraged by momentum.

Yes, sounds good. Okay, thanks for the color - really appreciate it, and best of luck, guys.

Thank you.

Thanks Pat.

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

Thank you Jason. Before we end the call today, a quick reminder that our fiscal second quarter 2021 earnings date is now set for April 7, 2021. I’d like to thank you for joining us today and please stay healthy and safe. Take care, everyone.

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