MSC Industrial Direct Co., Inc. (MSM) Earnings Call Transcript & Summary

Good afternoon. Erik, John, Kristen, can you hear me okay?

We can.

Yes, we can.

Good afternoon. I'm Sam Darkatsh, and on behalf of Raymond James, we'd like to welcome you to the MSC Industrial presentation, ticker MSM. With us today from MSC is President and CEO, Erik Gershwind; Executive Vice President and CFO, Kristen Actis-Grande; and Vice President of Investor Relations and Treasurer, John Chironna. For reference, MSC is a leading North American distributor of metalworking and MRO products and services. The format of today's presentation will be as follows: the company will have perhaps 10, 15 minutes-or-so of prepared introductory remarks, followed by a fireside chat Q&A session, which I will host. If you would like to submit a question, you may do so using the Q&A feature in the webinar system. With that, Erik, Kristen, John, thank you very much for joining us today, and the floor is yours.

Thank you, Sam. Thanks for having us today. And I do look forward to next year, no more virtual fireside chat. Hopefully, a real fireside chat, but thank you for hosting us nonetheless. As Sam mentioned, I'll speak for roughly 10 minutes-or-so before getting into the chat portion. Thanks for joining us. We are now -- our fiscal year runs September through August, so we're roughly around the halfway point of our fiscal 2021. And I thought I'd begin today by summarizing the journey that our company has been on over the past few years. I'll then turn briefly to our near-term performance, but start with kind of the repositioning of the company. And that journey started several years ago, as we decided to reposition MSC from what was a spot-buy supplier to what we now refer to as a mission-critical partner on the plant floor of heavy industry. We did this in order to secure the next decade plus of MSC's success and to deepen the moat that's around the business. We captured the essence of the spirit of MSC and a new brand promise and that is built to make you better. And as I go through my talk, I think I'll bring that brand promise to life a little bit. We've entertained a number of bodies of work that have really transformed the company during that time. We recreated MSC's value proposition. We've remodeled our supply chain with an increased or elevated presence on the plant floor of our customers. We have reshaped MSC's sales force from what was a one-size-fits-all model to a more segmented sales force. We've created new platforms for growth, the CCSG business and we've accelerated the pace of innovation inside the company with technology advancements such as MSC MillMax, which is a newly released service. We've also built new digital capabilities like e-commerce advancements to improve customer retention and loyalty, a new pricing and function that hinges on better analytics and data science to improve price realization. And last but not least, we've taken steps to create a more agile and hard driving culture in order to drive change faster and more regularly as part of our business. A couple of quarters ago, on our earnings call, we outlined what we refer to as Mission Critical. And Mission Critical is essentially our pathway to translate all of these changes that we've made into improve operating performance. Along with that, we outlined 2 3-year targets, and those are accelerating market share capture and improving our returns on invested capital. We then outlined 5 growth levers that would deliver at least 400 basis points of outgrowth above the Industrial Production Index, which is what we're anchoring against to measure progress on share capture by the end of our fiscal 2023. We also shared a structural cost initiative that would yield at least 200 basis points in terms of operating expense-to-sales ratio improvements by fiscal 2023, powering ROIC back into the high teens during that time period. And while I'm saying we're encouraged by early progress, I'd also tell you that we have our sights set high, and we feel like we're just getting started. So we're making inroads on each of the 5 growth levers, and we are moving aggressively on the structural cost front to achieve both our 1-year and 3-year targets with a pretty robust project pipeline and a steady drumbeat of operational and structural changes being implemented through the company. When it comes to the 5 growth initiatives, the 5 are: metalworking, which is the heritage, the legacy, the core of the business; solutions, which includes inventory management solutions like vending and VMI, it also includes our new in-plant program, where we're taking a greater presence inside of our customers; it includes the third lever is selling our full portfolio of products and services, which includes CCSG and our strategic supplier partners; fourth is digital; and the fifth is diversified end markets with an initial heavy focus on the government sector. I'll now say a few more words on a couple of these diving deeper into a couple. So first is networking. And we're investing heavily in our core business in order to widen the lead that we had. One way we're doing so is by capturing new customers and market share from local distributors, and our market is large and is highly fragmented. So local distributors represent roughly 70% of the market we serve and they come under tremendous pressure in times like now, our current environment, when things have been weak. We track this program and our funnel of opportunities to win rate by market pretty religiously, and we're pleased in both in terms of the funnel and the win rate progressing according to plan. And we certainly expect that progress to build as the local distributors continue to come under more pressure with each passing month. And interestingly, as things turn and economy improves, history says that our local distributors come under even more pressure due to working capital constraints. MSC MillMax, which I mentioned earlier, is aiding our efforts to capture market share. So milling is one of the most significant cutting tool applications. Cutting tools represent roughly 30% to 40% of the $12 billion to $15 billion metalworking market here in the U.S. MSC MillMax not only provides opportunities to capture share within cutting tools, but it actually opens up access to our customers' broader industrial MRO purchases, which are multiple times of their cutting tool spend. We're seeing strong early reception to this new technology. And as a result, our funnel is building quickly and it's starting to produce wins. Much like our vending program, we're offering MSC MillMax as a service to our customers in exchange for incremental share of wallet. The second growth lever I'll highlight is government, which is right now our largest end market diversification play. We've been working hard over the past 2 years to turn our government business from what was an underperformer to an outperformer. And certainly, while we're benefiting from a PPE tailwind over the past year, we're -- nonetheless, we're still pleased with progress as the business grew over 35% in our fiscal first quarter. Beyond the current momentum, we're investing in the government area to build for the future, including adding new sales roles, hunter roles, in particular, that are dedicated to creating government-specific opportunities. The third area that I'll mention and highlight as part of the growth lever discussion is the buildout of our sales force. Growing and reshaping the sales force is an important enabler that essentially powers each of the 5 growth levers that I mentioned earlier. Now in recent years, we've taken sales headcount down, and we did that by design in order to reshape the sales force consistent with our new strategy. But for the first time in years now, we're poised to expand the sales force. We had a delay due to the pandemic, but we've restarted those efforts. And in our fiscal first quarter, we increased sales headcount by 50 people associates, including roles such as business development or hunters, networking specialists and government sales, which I just mentioned. This effort has been aided by the redesign and the outsourcing of our talent acquisition function, which was one of the Mission Critical restructural cost projects that we've initiated. So we're now hiring faster and at a lower cost. Our fiscal first quarter that we reported at the beginning of January evidenced nice progress on our cost takeout initiatives. In fact, we achieved $8 million in cost savings year-on-year, and our goal for fiscal 2021 is $25 million. Since the end of our first quarter and since we last reported, we announced a series of actions related to our commercial sales organization that will both remove cost and enhanced customer support. So we've eliminated roughly 115 management or back-office functions within sales, and we'll be opening roughly 135 customer-facing roles that will support our 5 growth initiatives and help us achieve our above-market growth goals. That 135-person increase is the largest increase in growth generating roles that we've executed in several years and is going to be, as I mentioned earlier, an important enabler in capturing share. As part of this move, we're closing 73 branch offices that had already been closed temporarily due to the pandemic. When all of these moves are said and done, this move, in particular, the sales move that is, will save the company roughly $7 million to $9 million in fiscal 2021. And that number will reach an annual run rate of $15 million to $18 million in fiscal 2022. Both of those numbers are before reinvestment. And a portion of that, as I mentioned, is getting reinvested into growth. And while these actions were already contemplated as part of our larger Mission Critical cost takeout goals, they are, nonetheless, further evidence that we're moving swiftly, executing plans and plan to meet our commitments. So quickly, before I wrap and turn it back to you, Sam, I'll turn to our fiscal first quarter financial results, which you can see on Slide 5. Overall sales were down 6.3%, and gross margin was down 30 basis points versus prior year period. Our operating margin on a GAAP basis was 7%, but that was significantly influenced by a nonrecurring asset impairment charge related to nitrile gloves. So as you can see on Slide 6, excluding the impairment charge and adjustments related to severance and costs associated with our Mission Critical project and our structural cost moves, our adjusted operating margin was 11%, down 30 basis points from prior year despite lower sales, and that was certainly helped by our cost savings initiatives. This result in earnings per share on a GAAP basis of $0.69 or $1.10 on an adjusted basis. That was pretty much all I had, Sam, on prepared remarks. So I think with that, I will turn it back to you.

Terrific. And Erik, I think it might have been a microphone issue, but if we could ask you to when you speak, just speak real close to the mic just because it goes in and out. I think, for your birthday, I'm going to get you one of these gaming headsets.

I will wear. Sam, were you able to make out most of the -- if there was anything in particular, feel free as we go through questions, I'll emphasize what...

Everything was audible. It's just it went in and out a little bit. So it will be fine. Thank you. The first thing, and this is probably -- this is an observation I have because I've covered you a long time. One thing that I think really gets missed by the investment community is just how strong your moat is within the core metalworking industry. And that -- even when you folks were really much more of a spot-buy play, lots of your competitors, including luminaries like Grainger and Fastenal would try to make a difference in metalworking and then would just struggle taking share from you. And I think 2 of the major reasons for that: you've got a huge technically proficient sales force; and you have the distribution agreements, the national distribution agreements with the 4 best-known brands in metalworking. Can you talk in-depth about just how powerful these 2 aspects are to the MSC value prop? And what it would take to replicate either of these 2 capabilities on a wholesale basis?

Yes. Sam, I thank you for calling it out because it really is at the heart of what makes a company tick, and I think why we're able to win, where we win. And also at the heart of the transformation and the repositioning, as I just referred to with Mission Critical was we saw this opportunity to take what we've been doing for years in metalworking and really bring it up a notch and help our customers who are under immense pressure of their own, whether that's global threats, whether that's their own digital disruption, but they're under margin pressures, they need to get cost out of their supply chain and products into their customers' hands faster. Our metalworking business is really at the heart of enabling our customers, and that brand promise of Built To Make You Better. It's about making our customers better. Metalworking is at the heart of how we do it. I think you're right. You've hit 2 of the pillars. So one is the broad product offering, which not only gives customers choice, but what it also does is it allows MSC to play a really objective role inside of our customers because our customers know that we're going to bring to them whatever the right product is that's going to improve performance and we'll not wait. So certainly, look, the 4 brands you mentioned and large suppliers like Kennametal, who are tight partners of ours, they're going to always be at the top of the list for us. But there really is like a compounding effect by having the entire suite of portfolio. The customer views us in a way that they can't get that kind of objectivity from anybody else. I think that's one. Two, you're right. Look, improving manufacturing process on the plant floor is dirty, roll up your sleeve, hands on, there's no way around it. And I spent my career with MSC now and went -- pre-COVID going into plants with our specialists. And what they're able to do, by virtue of their experience, is miraculous. I think what's happened in the last couple of years is we're adding kind of like a third pillar, if you will, to the metalworking story or moat. And that's around technology, using technology to innovate. And so MSC MillMax is the most visible example. I can tell you that sort of behind MillMax in the laboratory, if you will, there's other things in pilot form. And what they have in common is kind of at the intersection of using all the metalworking know-how that we have from years and years from our specialists, along with technology, data science and being able to kind of leverage in mind the hundreds of thousands of transactions and tests that we've run, that are pretty unique. And that's kind of what's at the heart of MillMax and why it's helping, and I think will continue to be a pillar moving forward.

And we'll get into Mission Critical in a second, but prior to formally announcing Mission Critical, and you alluded to this a little bit, Erik, in your prepared remarks, you went through an initial stage of a transformational journey in which you first addressed the sales force, right? You wanted to change a lot of the individual responsibilities. You wanted to cultivate a hunter's mentality as opposed to a gatherer's mentality or whatever taking mentality, what have you. Go into some of the details in terms of what all went into this? And it was a multiyear process. What did you learn in doing so? Maybe why did it take longer than at least some of the folks in the outside thought it might? And what are you doing right now structurally with the sales force, especially knowing that how you're starting to add now, talk about that whole metamorphosis with that critical element of your business.

Yes, Sam, I think -- and I think it actually, sort of sitting on top of the sales transformation is the repositioning of the company that went from the spot-buy business. And the impetus for that really began years ago with some of the disruptive threats happening in the industry. At the same time, hearing kind of a drumbeat for help, a cry for help from our customers, from manufacturing customers, needing productivity and needing improvements for their operations. We saw this opportunity to reposition the company to do it. The trickiest of the move and what I would consider to be like the brain surgery equivalent in distribution is when you touch the sales force, we had to make the leap because the sales force was used to selling a much simpler spot-buy value proposition. And it was a one-size-fits-all model. I think you summarized it well, Sam, that we moved from one-size-fits-all to a segmented, more of a hunter farmer. It's tough stuff. I think the learning way -- it did -- I think you're right, it did take quite a while. It's tough to do in the public eye, to be honest, because it's real fundamental changes, but ones that we knew we had to cross over and get to the other side. We are -- what's encouraging is we are on the other side now, as you said, and we are at the point where we're now putting the foot on the accelerator for growth. So you mentioned the fact that we added 50 reps in our fiscal first quarter. We like what we're seeing out of the hunter or the business development population that we've been adding, and we're going to keep accelerating, provided that we continue to see returns. I think a couple of learnings, Sam, so one would be, I think we've added a new element to our formula, and Kristen is really going to help drive and lead this, which is that funding that there is an opportunity to relook at structural costs in the business as we made the pivot from old to new. There was legacy stuff left behind this part of the old that didn't necessarily need to be there. And part of what comes with the change is not just adding on top of, but actually taking a hard look at the base business and making tough calls. So the nice thing is we're now in a position where we're going to be able to fund the growth investment that we want to make with structural cost takeout. I think that's sort of one big change or lesson. The other one, I'll say, Sam, is I think we've learned -- this -- it's a company that had kind of the same value proposition or go-to-market in that spot-buy value proposition for a couple of decades. We've become more adept at making change. So it took a while, the first go around. But I think the learning for me is we need to continue to accelerate the pace of change and move through changes much faster than we did the first time around. And a case in point there would be with the recent announcement we made with the closure of the branches, the move to virtual customer care, the elimination of jobs and the creation of new ones, we moved through that in very short order, in just a matter of weeks. And I think what we find is that the company is -- people are responding to that. We're getting feedback that our team appreciates it. Even the tough calls that have to get made, they get made quickly. And the distraction is less and we move on. So I think we're finding our footing. And hopefully, that bodes well because we don't want the changes to stop. We think they're going to need to continue over time.

This is a question that's not on the list, but where are you finding the hunters? I mean, you have to have a bit of an engineering background. So it's not like you're -- to an extent, it's not just you're going to the state colleges and picking up someone who's trying to earn their gas money. Where do you find these folks?

So it's a blend, Sam, we have a blend. So it's actually nice because we're adding to our team, some of whom we're adding are highly technical folks. So our metalworking folks, as you can imagine, are highly technical. There, where it's a technical resource, we tend to do really well recruiting for the manufacturing community. We tend to do well recruiting from manufacturers who are suppliers, who are also manufacture folks who actually spend time on the shop floor and are ready for a change in career. And we've also done a nice job of grooming some of our own metalworking talent. So one of the beauties about having a large pool of people is there's a lot of our elder statesmen or senior statesmen in the metalworking world are really excited about moving into a mentorship role. And so we've been able to build from our own. A lot of the hunters, what we're finding is that they don't necessarily need the same -- it's almost like selling is a team sport, where they can leverage the technical people. What we're finding there is the formula is really strong, not just -- I won't even call it selling skills, but relating skills and discovery skills because these hunters, the days of selling are over, you've got to be in and you've got to partner and you've got to add value. What I would say there, Sam, is the best success we've had is in some parallel industries. And just for competitive reasons, I won't get too specific but other industries that have been further along in the life cycle of the industry than we are, we're having some pretty good success having [indiscernible] business.

The -- let's get into Mission Critical, at least the market outgrowth element of it first. You mentioned the 5 levers or pillars or what have you, be it metalworking, selling the portfolio, solutions, digital and diversified end markets. Can you help us rank order them in terms of, not necessarily importance to you, but in terms of the likelihood they're going to drive growth for the organization?

Look, I think it's sort of a corny answer, but they are like -- they feed off of one another, and it's tough to isolate and rank them. Look, what I would say is the cornerstone of the business, the staple, the thing that's the toughest to reproduce you went right there is metalworking. So that's an area that will always get focus and attention because it is what makes us so unique. But from there, if you go into our best customers, Sam, they're going to be exposed to using many elements of those levers. So they're going to see a metalworking technical person who's helping them. You're going to see a vending machine. You may see an in-plant presence, you may see crossover with CCSG, you're going to see our key suppliers in there. So they kind of feed off of each other. So I would say metalworking the cornerstone, but then they all kind of create a virtuous cycle.

So a couple other questions on this. The selling your portfolio, you just mentioned it, cross-selling around CCSG. Cynically, one could say, well, you've had Barnes now, the old Barnes business for 6, 7 years, and you've originally envisioned cross-selling the fasteners element of it. What was the governor before? What restricted you before that you figured out the secret sauce there?

Yes. Look, Sam, I would say, and going back to the early days of the acquisition, I think one of the kind of like the core staples when you hear people talk about acquisitions, it's always easier to acquire in your core than in an adjacent area. This was clearly an adjacent area that we felt is critical to get into. So it took more time than, for instance, J&L that we had done years prior that was right in our core and we knew as well. I think that what I would say is it's a combination of a few things. One is leadership and the team is coming together at the top and sending the message, and this is really being driven by Eddie Martin, our Head of Sales, that, "Hey, we are one team," and he's made some structural moves to make that happen. There have been some systems and process improvements that have facilitated the cross-selling and made it easier to do. But we are -- I think importantly, we are, in the last year or 2, starting to see real momentum in the cross-selling and the promise of the deal, the thesis of it coming to life.

So then at what point should we see CCSG ADS exceed company average?

Yes, we should. I mean, what I would tell you is embedded in that our 400 basis point target is that it does. So as we start hitting milestones, and really, the first milestone, Sam, that we laid out was we plan to close the gap on IP this year and exit the year at 200 to 300 basis points in our fiscal fourth quarter. We're going to have some noise from PPE comps, et cetera, in our third quarter. Time to get to our fiscal fourth quarter, we expect to be 200 to 300 basis points. I expect CCSG to be a contributor to that.

Got you. Expanding solutions, that's, I think, code for vending, VMI and in-plant solutions. Remind us the percentage of total sales mix that the 3 of those initiatives collectively represent? I'm not sure we know.

John, do you want to...

Yes. I can handle that. So vending is about 12% to 15% of sales. VMI is somewhere in the 15% to 17% range. And in-plant is roughly 5% or so.

So I know the in-plant, you were talking about growing that, call it, 20%, 30%-or-so. If we look at the 3 legs of the stool together, the 3 legs of the solutions together, what's a realistic growth rate of the expanding solutions business or initiatives? Sorry.

Yes. And on in-plant, what we talked about doing, Sam, was doubling it as a percentage of revenues over the 3 years. So your number is right. Obviously, that's off a smaller base than vending or VMI, which aren't going to double. But if we look out over time, and we haven't shared publicly a specific goal tied to the 3 years. But if you take that -- those 3 aggregate into the mid-30s with this Mission Critical approach over time, should that number be 50% in North? Yes, it probably should.

Got you. Digital. You folks are one of the few that actually break down on a regular basis your e-comm sales in terms of specific percentages, which is wonderful. I know there may be some definitional issues between your e-comm which includes vending and some of the other attributes of it and others, but you've doubled that as a percentage of your overall mix over the past decade. I think it's gone from like 30% to like about 60%-or-so. A couple of questions here. First of all, what are some specifics in terms of how differentiated the MSC digital experience will be for customers? What sorts of new capabilities do you envision over the next year or 2? And what's a reasonable expectation for us to see e-commerce growth as a percentage of the total, that 60% to start to rise as a percentage of the overall mix? Because even though it went from 30% to 60%, it's kind of baselined there for a period of time. I know it's a few questions in there, sorry, but all basically thematic.

Yes, Sam. So what I would say is -- and when we talk digital, there's sort of a broad umbrella of digital and then there's subsets of it. So e-commerce or mscdirect.com, which is kind of the biggest chunk of that e-commerce, that 60% number would be one piece of digital. It's a -- so what I would say in terms of what customers can expect from MSC Direct, and what will be unique and different is it sort of goes back to the value proposition, this idea built to make you better, that all of the digital technology we put in place, we want to be aimed at improving the customers' productivity, taking costs out of their operations, improving throughput and cycle times. So a piece of that will come through mscdirect.com. And I think to answer your question on how do we get to -- it sort of plateaued. The penetration in the business has plateaued. I think there, Sam, on that piece of it, it's sort of like similar to the rest of the business where we've been going through a lot of change. And it's now time to sort of accelerate things. I think on that end of the world, no question, you have new entrants like Amazon coming into the space that have changed the paradigm. For a long time, we were a leader, and look, still are in the B2B context, the leader in e-commerce. But the bar has been raised and the paradigm becomes, I want the B2C experience in B2B. And so it's been a heavy investment area for us. We have staffed up a new team with true digital talent to bring mscdirect.com to the next level. So I think that's one. Within the digital umbrella, though, we're looking, Sam, beyond just mscdirect.com. And MillMax would be an example where it's -- if you take digital as broader of how does technology get applied to improve customers' operations, we see a ton of application of technology and data science. One of the beautiful things as a distributor of all these products and all these customers is we just have millions upon millions of permutations of transactions of tooling tests that get run, all these stuff that happens on vending transactions that are all little breadcrumbs telling us things and it's a matter of mining that for intelligence. So I think the other component of digital that you can expect to see from MSC is using information like that, like an MSC MillMax and other things we have down the road to improve customer output on their shop floor.

What's fascinating is you have all these initiatives for market outgrowth, at the same time, you're cutting OpEx pretty meaningfully. And some of that OpEx cuts are things like sales and service and supply chain and what have you. How do you manage, not only the imperative to take costs out of the operations and improve your leverage on the way back out, but how do you manage that without affecting your new go-to-market initiatives?

Kristen, you want to take them?

Yes, sure. So I guess, Sam, maybe where to start on that is we've obviously got 2 core components in the Mission Critical program. It's the growth initiatives and it's the OpEx initiatives. But the -- I think the shortest way to kind of answer your question around how do we sort of protect the growth initiatives while we're still able to take that kind of meaningful OpEx out is that we start by looking through the growth lens first. So we've examined where we want to grow, how we want to grow. We've set the action plans for those things, which Erik, of course, articulated. And then what we're looking at is, all right, what investment is required to get there? And then when you look at the kind of core operating cost of the business, where do we have opportunity? So it's all looked at holistically, but first through the lens of growth and then we're identifying or answering the question of how do we fund this growth through meaningful OpEx reductions. And I think a tangible example perhaps, Erik touched on this in his prepared remarks, but if you look at the announcement we just did with the sales branch closures and the personnel that were a part of that announcement, we eliminated 110 roles, but right away, we opened up 135 new roles that are all closer to the customer. So very, very kind of specific example, but I think it makes that dynamic very tangible.

We've got about 7 minutes left and 3 questions left. We're doing great. Okay. So let's talk about freight costs, clearly inflating meaningfully in general and the country with the supply chain constraints and what have you and trying to ascertain any risk to margins here. Do you use third-party shipping for your order delivery? You recently renegotiated freight contracts at favorable terms a few months-or-so ago. Presumably, that's with UPS, who is your contract carrier. Talk about how freight costs are or are not likely to affect margins this year based on those recent negotiations?

Yes. So definitely keeping a close eye on that, Sam. There's a lot, of course, happening now with freight expense to not just our business, but many different businesses. So we are fortunate that we did do a lot of mission-critical work around freight. Even back in '20, it was one of the first things we're really focused on through the Mission Critical program. So we do have a very slight headwind we're tracking to for this year just in terms of kind of what we're seeing as margin impact. But relative to what that would have been, had we not done that mission-critical work, I think we're in a pretty good position because of that.

Price. You previously mentioned that you expect to implement a price increase at the end of Q2, beginning of Q3, that's Feb/March, that's now, so what's the latest with the price increase? What's the general range? And what have suppliers announced themselves with respect to price increases? And what are you seeing in key commodities like tungsten? I guess the theme is just price versus cost.

Yes, Sam. So what I would say is you are correct, it's right about now that we'll be implementing an increase. We'll put more color on our call next month. But what I can tell you is relative if we were having this discussion 3, 4 months ago, certainly, it's a different tone now. We are seeing all the signs of metals inflation, all the inputs, the cutting tools and other products it's there. We are seeing -- even, Sam, I would tell you, even relative to late calendar year, because usually, it's early -- it's the beginning of a calendar year when we see the suppliers move, even relative to late in the calendar year when we would normally hear about it. There's a lot more both discussion and announced increases. So certainly, you can expect to see that captured. I mean, the timing for us is pretty good because that can then get captured in the price increase. I think the thing I'd add, particularly for those who are not close to us or it's kind of a sector is for a distributor like us, inflation tends to be our friend in the sense that particularly early stage in an inflation cycle, what will happen is we take price and see it in the P&L faster than cost. We'll do our best to buy ahead. And based on the way our average costing system works, it tends to be a tailwind early on. So I think as we think about our margin profile, certainly, that's an opportunity for us over the next couple of quarters.

Now oftentimes, you use supplier price increase and announcements as their cover. Have there been pricing increase announcements, be it from Kennametal or Sandvik or ISCAR or one of the major headliners?

Yes. The answer is, yes, not just in the cutting tools sector, but beyond. And Sam, it's a combination of the actual increases and then the discussions we're having with suppliers talking -- we're hearing about, "Hey, there's only so long we can hold off the input cost going up before we're coming to market." So yes. What we'll attempt to do, Sam, is capture what we can in the midyear. We never like to get ahead of the market. So you're right, it's an opportunity where a supplier goes up to take the category up. We never like to get out over our skis and take ahead. But sort of the next bite for us would likely be over the summer and whatever doesn't get captured now would get captured then.

Last question, and I -- though I'm not sure if this is for Erik or Kristen or both. MSC, over its history, has often toggled between regular dividends, special dividends, share repurchase, and then you've recently did several -- or 2 special dividends, including a couple of hundred million dollar special dividend a little bit ago. Talk about the calculus you and the Board make when determining special dividends versus share repo?

Yes. And Kristen, if you want to take it, and just sort of you can start sitting on top of that, Sam, is approach sort of philosophy, and this is at a CFO, CEO and Board level, kind of like philosophy to capital allocation. And our premise is, and it probably has to do with our heritage, our ownership structure, the fact that I'm not -- your typical CEO is always with the mindset of thinking like an owner. What does that mean? What it means is thinking like an owner means deploy the next dollar earned in a way that, on a risk-adjusted basis, is going to produce the best return is the goal. Do we get there? Sometimes we do, sometimes we don't, we're not perfect, but that's really the thinking. So what we try to steer clear of is a set formula that said 1/3 of our cash flow is going into share buyback, 1/3 is going into M&A because our premise as a Board is always like, "Hey, it depends on what opportunity before we can answer that question on a risk-adjusted basis, what does the return profile look like?" With that said, for us, priority one, especially now as we start to feel good about the performance of the business and we're through the repositioning is doubling down on organic reinvestment, kind of priority 1a. 1b is, over time, continued steady ordinary dividend growth, excuse me, sort of in line with -- and we're at a payout ratio, we feel pretty good with right now. And then from there, we're generally in the fortunate position, as you said, of excess free cash flow. M&A. Look, we'd love to do M&A. I would say 2 things. One is we've said the bar right now is pretty high given the internal heavy lift. We want to get the business humming, number one. Number two, valuations or anywhere that private equity is touching right now are just in ludicrous territory. So I think if you see us do M&A, it would be on the small-scale bolt-on, pay a reasonable multiple kind of M&A. It would not be large scale M&A. And so I'm drilling into, I guess, to the crux of your question, which is, okay, you're then left with what do you do with if there's excess cash? And we -- our propensity is to return it to owners. And I think we would use either, and we have used share buyback or special. Of late, we've done specials. And I think the calculus at the Board level is particularly, we'll look at a low interest rate environment and say, returning cash to shareholders is good and is value-creating in a low interest rate environment, no matter what. Specials -- the nice thing about specials is that there a value-agnostic way to return cash and take advantage of a low interest rate environment. We'll consider a whole bunch of other factors like tax rates and growth prospects, et cetera, et cetera. But it's just really a call about a combination of looking at interest rates and looking at sort of what is the TSR impact of dividending out when you know what it is versus share repo, which is -- can go either way. And our feeling is net-net, there's not a big difference between share repo and special. There is a big difference in value creation is not returning cash or returning cash.

With that, I think we're out of time. Erik, Kristen, John, as always, great to see you. Great to hear your voices. Great to see your smiling faces. We look to -- look forward to not only many happy returns in your participation in our conference, but in actual physicality, we'll do the elbow bumps next year. But really, again, thank you very much for your participation, be well, stay safe and keep on keeping on.

Thanks, Sam.

Thank you for the excellent work you do in covering the space, too, so.

You bet. Thank you, folks. Be good.

Take care.

Bye, guys.