Good morning and welcome to the MSC Industrial Supply 2021 second 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 to everyone. Erik Gershwind, our Chief Executive Officer and Kristen Actis-Grande, our Chief Financial Officer are both on the call with me today. Most of us continue to work remotely at MSC, so bear with us if we encounter 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 statements is noted in our earnings press release and the Risk Factors and MD&A sections of our latest annual report on Form 10-K filed with the SEC, as well as in other SEC filings. These risk factors include our comments on the potential impact of COVID-19. These forward-looking statements are based on our current expectations and the company assumes no obligation to update these statements except as required by applicable law. Investors are cautioned not to place undue reliance on these forward-looking statements. In addition, during this call we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation which contain the 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. I hope this call finds you are doing well and staying safe and healthy. As we enter the second half of our fiscal year, I wanted to focus my opening remarks this morning on our company’s mission. Since the inception of MSC over 80 years ago and through our last 25 years as a public company, our mission has stayed the same: to be the best industrial distributor in the world as measured by our four stakeholders, and we have not wavered from this. Two concepts underpin our pursuit of this mission. The first is reinvention. We believe in the need to continuously reinvent ourselves in order to remain relevant and secure our future. Our history demonstrates this, and it can be captured in chapters, each one of those chapters being defined by a different reinvention from a storefront to a cataloger, from a regional metalworking distributor to a national broad line MRO distributor, from catalog to digital, from direct marketing to field sales, from generalist to specialist. The second concept that underpins our mission is growth, which is the lifeblood of this company throughout its history. Growth has enabled us to attract and retain great associates, better serve our customers, produce market share capture for our suppliers, and generate returns for our shareholders. Historically and up until the past few years, we’ve produced a revenue CAGR in the double digits with an organic revenue CAGR in the high-single digits, and these results were a product of continuous and focused investments. This growth produced strong incremental margins which allowed for reinvestment back into the business, thus creating a virtuous cycle. Our most recent reinvention has been one we’ve talked about, the repositioning of MSC from spot buy supplier to mission critical partner on…

Thank you Erik. I’ll begin with a review of our fiscal second quarter and then update you on the progress of mission critical initiatives. On Slide 4 of the presentation, you can see key metrics for the fiscal second quarter on a reported basis. Slide 5 reflects the adjusted results. Our second quarter sales were $774 million or $12.7 million on an average daily sales basis, both a decline of 1.5% versus the same quarter last year. Moving to gross margins, our second quarter gross margin was 38.1%, a decline of 400 basis points compared to the second quarter of last year. As Erik mentioned, this was primarily the direct result of the roughly $30 million PPE write-down we recorded during the quarter, which was primarily related to masks. Excluding this write-down, our second quarter gross margin was 42%, a 10 basis point decline from the prior year and a 10 basis point increase sequentially from our first quarter. Our pricing realization has remained strong and solid execution of our supplier programs has continued. I’ll add two points here: one, we don’t expect any further impairments going forward; and two, our midyear price increase had no impact on our fiscal second quarter as we implemented it in March, the first month of our fiscal third quarter. Operating expenses in the second quarter were $245.1 million or 31.7% of sales versus $251.4 million or 32% of sales in the prior year. This includes about $700,000 of legal costs associated with the nitrile glove prepayments we impaired in the first quarter. Excluding these costs, operating expenses as a percent of sales was 31.6%, a 40 basis point improvement from the prior year in which there were no operating expense adjustments. With regard to the nitrile glove impairment we announced in our fiscal…

Thank you Kristen. As we move to the back half of fiscal 2021, momentum is building both inside and outside of the company. On the outside, the environment continues to firm. On the inside, we’re accelerating progress with respect to growth investments and structural cost takeout. I’d like to thank our entire team for their commitment to our mission during the past year, and while we’re just getting started, we are encouraged by the progress that is beginning to evidence itself. We’ll now open up the lines for questions.

[Operator instructions] The first question is from Hamzah Mazari from Jefferies. Please go ahead.

Good morning, and I hope you are well. Thank you for the question. I guess the first question, you mentioned an outsized lift as things rebound. Could you maybe touch on that a little more? Is there this pent-up demand that you’re hearing from your customers? I know you mentioned customers are building backlogs, you hired 135 people, the most you’ve done in a long time, so clearly you’re confident on what’s to come. Maybe just give us a sense of level of confidence in the outsized lift, whether it’s qualitative it is fine, however you want to answer that question.

Yes, sure Hamzah. Thanks, and hope you’re well. Look, I think what you’re hearing from me and Kristen this morning is encouragement and excitement about the future of the business and the trajectory we’re on, and really feeling like we’re at an inflection point here. We’re coming off of a whole lot of repositioning work and we’re moving into now execution on growth and cost takeout, and I think the confidence is coming really in terms of the outsized lift, Hamzah, from two things, the macro and the micro. So, the macro is what’s happening in the environment – clearly, we’re hearing from customers as the vaccine rollout picks up steam, things are firming up, particularly starting to firm up in some of the metalworking markets that have lagged so much for the past year. You combine that with some infrastructure stimulus and the macro looks pretty darn encouraging. Then I’d say the same thing for what’s happening inside of the company. We’ve added cost takeout to an equation that we haven’t had before, and that’s allowing us to fund investment. While the 135 are not yet fully on board, Hamzah, that’s going to build as they do. It is the largest increase we’ve had, and we’re encouraged by what we’re seeing, and what I would say, it’s qualitatively and quantitatively. So, quantitatively, while very early, we did start to see a positive spread to IP in our fiscal second quarter which was a bit ahead of where we thought we’d be, and if you recall at the start of the fiscal year, we were running under IP, so that’s just beginning. But really, that’s just the start, and as these share wins and investments kick in, we see this building. Just to put a little more quantitative to it as we look ahead right around the corner, and you take out the PPE product lines in which there is going to be very high comps in our fiscal third quarter - look at non-safety, non-janitorial business, and we’re seeing in March that turn positive. We would anticipate in Q3, Q4, healthy double digit growth rates in non-safety, non-janitorial business, so we do think it’s starting to happen. Again, the nice thing is the investments we’re making now haven’t even kicked in yet in terms of realizing a benefit, so that’s still to come.

Got you. My follow-up question is two parts. One is on the safety piece do you have a sense of what is reoccurring versus non-reoccurring for you in a post-vaccinated world? I know it’s probably tough to know how many masks people will continue to wear post vaccine, but any rough sense of that? Then secondly, the virtual hubs, could you talk a little more about that? What I mean by that is can these virtual hubs replace your entire branch network, or where are you putting the virtual hubs, are they strategic locations, Do they have any negative impact you see initially when you move towards a virtual hub and shut down a branch? Just any more color around those issues would be great. Thank you.

Sure Hamzah, absolutely. Let me start with the safety or PPE--you know, it’s really been safety and janitorial. What I would say is, look it’s still early to say what will continue post pandemic here, which we hope is right around the corner. What I will say is we’re likely going to be negative, and we saw it in March, in our fiscal third quarter because that was when we had the huge surge last year. But if we look beyond our fiscal third quarter, look the safety and janitorial businesses even going back pre-pandemic, were growth businesses for us. We anticipate them continuing to be growth businesses, and a good case in point would be just look back at our Q2 results. So, Q2 was sort of still in the midst of hopefully the tail end of the pandemic, no crazy comps, and the business was up double digits. I think that would be our expectation of what could be fairly representative once we get past fiscal third quarter into more of a steady state. That would be on the safety PPE. The second question on the virtual care hubs, we’re excited about this one, and what I would say is this move, the seeds were planted on this move well before the pandemic. The seeds that were planted were really around technology, around a smart integrated phone system and around a CRM system that allows our entire sales team, inside, outside, to get a 360-degree view of the customer. What we did, Hamzah, is actually most of the branch locations that we had are now closed, so what’s changed is the physical footprint and removal of some management layers. What hasn’t changed is the one-to-one connection of our inside people with their customers, so our same -- inside sales people that have built sticky relationships with customers for years and years are still--they’re working from home, they’re working remotely, but they are still the same ones speaking to customers every day. We’ve been able through the technology to create a virtual local branch, if you will, and what that does again is it not only takes out cost that we can reinvest into growth, but allows us to then open up hiring of technical talent wherever an individual may sit, even if it’s not where one of our branch locations are. So, we are encouraged. We had a good plan going in. I think we’ve moved through it quickly. Early returns have been positive. I think the other thing I’d add at the buzzer is realized our branch locations were not primarily inventory stocking locations, so our service in terms of inventory to the customer and delivery has also not changed, so on the risk front very low. I do think, look, realistically probably a little bit of distraction as we move through things in January and early February, but we’re through it and returns have been positive.

Wonderful, thanks so much.

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

Hey everyone. My first question is on gross margin, I guess a two-parter on gross margin. How should we think about gross margin sequentially into fiscal 3Q, and then given the price increases you’ve announced, can price cost be neutral in the second half of 2021?

Hey Ryan. Yes, so for sequential or kind of second half perspective on gross margin, I’ll start with Q2 to Q3. We do expect margins to bounce back in the third quarter to the levels that they’ve been running at, so around 42%. There should be a nice tailwind from the price increase, and as I touched on in the prepared remarks, that went into place in March. Q3 to Q4, just a caution that we do see a typical seasonal downtick in the fourth quarter, but if you put all of this together and excluding the PPE write-down, we would expect our annual ’21 gross margins to be at least flat with full year ’20. This wouldn’t, I guess just as a caution, contemplate any other major pricing moves related to the strength of the inflation cycle.

Got it, okay. That’s helpful.

Ryan, just to piggyback, I think Kristen nailed it for ’21. The only add is, and you’ve been covering us for a while, I think one of the other things to the story as we look beyond even the back half of fiscal ’21 and ’22, it does seem like the makings are there for a pretty robust inflation cycle and that generally--you know, the increase we took now, if that is the case, would just be the beginning of moves to come down the road in response to continued inflation. Again, early stages of that should be a tailwind for us.

Yes, that actually leads to my second question, which was about incremental margins looking out, since that’s a question I’m getting from clients. I don’t know, maybe this is for Kristen, but how should we think about incremental margins in ’22 and ’23? Can we get to the old days of mid-20s, and what level of top line would you need? Then Erik, you mentioned the price environment, that’s also a consideration, so maybe how should we think about that?

Sure, let me take that one, Ryan. I guess I’ll kind of walk you down how we’re thinking about ’22 and ’23, just sort of thinking about the structure of the P&L. To kind of frame it up, you heard Erik talk about a lot of these themes, but we’re really excited about what’s building here. I think Erik used the term inflection point - I totally agree with that, it’s a good descriptor. We like what’s happening inside the company, we like what’s happening outside the company. From a macro perspective, as we touched on, the environment looks good, everything is kind of pointing to a strong recovery and also the early stages of a pretty healthy inflation cycle, and then inside we’ve got this widening share gain over IP. If you think then about gross margins, generally they’ve been stable despite the noise in PPE, and because we’re moving into the inflationary environment, we think we’ve got possibility for pricing tailwind. On the opex side, we’ve been taking cost out pretty dramatically and pretty differently than we’ve done here before at MSC, and we’re well positioned to leverage our fixed costs over the next few years. We’re not going to need another distribution center, we’ve been streamlining the headquarters footprint, we’ve closed all the sales branches, and as we touched on we’re reinvesting a good chunk of that back into growth. But putting all the pieces together, it’s a pretty compelling story on operating margin and we’d expect incremental margins to be 20% or higher, starting in fiscal ’22, obviously with the usual cautions about assuming the recovery holds and nothing--there’s no setbacks from the virus which might derail things. Erik and I are pretty excited about what’s been happening and very optimistic when we think about ’22 and ’23.

Very helpful, thanks.

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

Hi, good morning everyone.

Morning Dave.

First off, relative to Slide 9 where you show the 2021 operating margin framework, when I think about that and relative to the stronger pricing, higher gross and net opex cuts, and then some of the investments that should drive incremental stronger growth in a strengthening market, and I guess overall you kind of implied that flat revenues were the baseline for 2021, as I look at that, the grid there, shouldn’t that put us squarely in the middle box with better odds towards the high side of the 11.2 to 11.6, based on a lot of those upside factors we just noted there?

Yes Dave, I think the way you’re thinking about that is right. I think we’re definitely in that flat box with line of sight potentially to the top box, low single digits depending on how fast things pick back up.

Okay. Then Kristen, on capex, I think when you originally outlined $70 million to $75 million for this year, which you just toned down, you implied that the higher rate would be carried forward, so should we assume--beyond this year, should we assume $70 million to $75 million in the out year?

Yes, for ’22 and ’23, Dave, we’re still thinking about which investments come online at which times, which is going to rebalance things between capex and P&L potentially, P&L investments potentially. But I’d say for the purposes of modeling, I would assume $65 million to $70 million in ’22 and ’23.

Okay, and then finally as it relates to capex and working capital and returns on invested capital, you’ve outlined the higher capex. I don’t recall you discussing anything about working capital changes, so if we just assume a roughly similar invested capital base, if you back into it, you come up with sort of a low teens operating margin would be needed to get you to the high teens returns on invested capital. Is that the way you’re thinking about it over the next two to three years?

Yes, I’d say the most conservative case would be to assume similar levels of invested capital - I think we touched on this briefly in one of our other calls, but we do see opportunities to make working capital improvements. It hasn’t been our primary focus right now. We’re getting things kind of going with the P&L investments, the growth-related investments, but when you think about the whole pipeline of projects that we have for mission critical, there are several things in there that are focused on working capital improvements, like particularly around the value streams, procure to pay and order to cash, that we haven’t started actively working on in a really big way yet, but that is going to be a focus going into ’22 and ’23. We’ll provide you with more of the thinking on that once we get through ’21.

Great, thank you very much.

You’re welcome, thank you.

The next question is from Tommy Moll from Stephens. Please go ahead.

Good morning and thanks for taking my questions.

Hey Tommy.

I wanted to double back to price cost and really just focus on the cost inflation side. What kind of anecdotes or observations can you share with us there, maybe just comparing the last quarter trends - better, worse, same? Just any insight you could provide there would be helpful. Then as we go forward, it sounds like good early results expected for the price increase you just recently announced, but what’s a reasonable time frame for us to think about for when you might double back on whether you need to pull the pricing lever more, just to keep up with the cost inflation or potentially outpace?

Yes Tommy, so I’ll start with the first part of your question around cost inflation and what we’re seeing. Look, I think--and it’s probably not going to be a news flash, but I will say that what’s happening in the global supply chain right now, it’s pretty chaotic, and I think that’s really at the root cause of why the change in the last few months. But if you think about what’s happening right now kind of across North America and global supply chain, we have a faster than expected economic rebound that’s left a lot of suppliers and manufacturers with insufficient inventory and capacity to handle the demand pick-up. At the same time, many of these businesses are still battling COVID, they’re still battling disruptions to the production line from COVID, and so that makes it even harder to ramp up production. We’re looking at extensive delays coming in for things sourced globally, extensive delays at the ports, and then the recent weather issues--recent, I’m going back to February now, but the weather issues in Texas were also pretty significant in terms of messing things up. What’s happening is there’s a lot of product scarcity and that’s beginning to lead to significant inflation, and we’re seeing it in the form of our suppliers beginning to move. In terms of--so really, that was in large part the driver behind our March increase. Our typical cycle, Tommy, would be the next meaningful increase that we would take would be sometime over the summer, but what I would say--and certainly if things continue on their current trajectory with the macro, we would anticipate a healthy increase because we are hearing more and more from suppliers about the need to make pricing moves. What I would say is, if you look back over time, it’s also--it’s feasible that we could even do something sooner if we saw that much inflation heat up that quickly, we could move before then.

Thanks Erik, that’s all very helpful. Just to pivot to a bigger picture question here on the MillMax strategy, what can you tell us about the pace of the rollout there? Any anecdotes from the customer side? For those of us observing from outside the company, are there any proof points you would call out to us that we should be mindful of today and going forward, just to track--

Yes Tommy, it’s a good point because we touched on--we didn’t touch on MillMax in the prepared remarks. I did touch on the output of that, which is what’s happening with metalworking market share capture, because they are closely coupled. MillMax is really an enabler, so what I would tell you is anecdotally the technology is working really well, and when I say working really well, the hit rate when we run a MillMax test in terms of producing cost savings for customers is incredibly high. It’s still early, our team and customers are still adapting to the technology, very encouraging early going, and it is fueling some of the metalworking capture. What I would say in terms of the best output metric that you can latch onto, Tommy, is going to be seeing what happens to our growth rate in our core business, and particularly if you look non-safety, non-janitorial, because that’s going to really--there’s going to be some noise for the next few months with comps. But as we break out, we should see real acceleration in that portion of the business - that should be driven by a combination of MillMax and metalworking market share capture, so I think that’s what I’d look for.

Great. Thanks Erik, we appreciate it. I’ll turn it back.

Thank you Tommy.

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

Hey guys, good morning. I was wondering if we could start with the March price increase. Could you remind us how big that price increase was, and then related to that, I might have missed it, but I think Erik, you had mentioned that you would expect a positive price cost dynamic to unfold early in the cycle, but then were saying that gross margin is expected to be stable over the next couple of quarters. Would that mean that we’re waiting on this next price increase to come through, where you might be able to capture a little bit of a price cost spread? Just maybe flesh that out.

Yes Adam, sure. Look, to be clear, we expect--so the increase we took, which we took early in March, as I mentioned, it was the first move in response to inflation, roughly call it in the 2% range. What I’d tell you, it’s still early, we’re a few weeks in here, realization looks solid. To be clear, we absolutely expect a tailwind from this price move, so I think as you heard from Kristen about stable for the balance of the fiscal year, the formula of what she’s capturing is pricing tailwind should absolutely help lift things. We are mindful that our usual pattern is Q4 drops from Q3, so we’re sort of putting the two quarters together and saying, okay, roughly about the same, that you have a tailwind from pricing, a headwind from the usual seasonal drop. If for whatever reason that seasonal drop were not to occur and you isolate it, yes, we should get price tailwind from this price increase, and that hopefully builds with more to come.

Okay, got you. Then as we think about the trends by your vertical end markets, I’m wondering if you could maybe walk through some of your bigger ones and share where you’re feeling the best about demand levels within metalworking that’s going to get us to this double digit growth pace. You’ve got some easy comps, but just qualitatively where are you feeling better about and what’s still lagging, what are the verticals that you’re the most concerned about?

Yes Adam, interestingly, when we look at the verticals underneath the broad IP index and compare our growth to IP, what’s interesting is that we’re encouraged by Q2, where we saw the gap to IP flip to positive, and yet while that happened, our biggest end markets, as you’d imagine, are large concentrated metalworking end markets, so machinery and equipment, aerospace, auto, etc., those are still lagging the broad IP, industrial production, for many of the reasons you could imagine. Well, auto actually--I should say auto is not, but of our five big ones, I’m looking at them right now, four of the five other than auto were lagging IP, aerospace being a poster child for that. What’s encouraging for us is we were able to outpace IP despite the fact that several of our big end markets were lagging. As I look ahead and certainly think about the vaccine rollout, qualitative feedback from customers, it does seem like things are picking up steam even within those core metalworking end markets. That’s part of what gives us encouragement along with what we’re seeing in the market share capture, which we track at a detailed level, that we’re seeing from local distributors. How that evidences itself in the numbers, and you’re absolutely right, of course - it’s on lower comps, Adam, but in March we saw--so if you think about how it builds, and I’m taking safety and janitorial out again because we’re going to see peak comps in the third quarter, but March non-safety, non-janitorial went positive, mid single digits. If we look out for the full quarter of Q3 and into Q4, we would expect non-safety and non-janitorial to be healthy double digits. That’s even without some of the benefits as these growth drivers kick in. Over time, that should build.

Great, thanks Erik.

Thank you Adam.

The next question comes from Patrick Baumann from JP Morgan. Please go ahead.

Good morning guys. I wanted to talk on that last point. Do you, considering the recovery in the base business that you’re seeing, that you can grow yourselves in the third quarter, or are the surge sales on safety too much to overcome based on what you’re seeing? I remember last year, you talked about the first, I guess, part of April being down and the end of March being down a lot. Just curious, what’s the base business growing as you exited March into early April?

Yes, so Patrick, if you’re looking at total company for Q3, I would say not exactly sure, to be honest. What I would tell you is the dynamics are non-safety, non-janitorial growing double digits, big PPE comp to overcome. We are right now, call it plus or minus flat on the total business, and if things really accelerate, we could turn positive, but plus or minus flat Q3 and then we get past--May will be the big month with the biggest comp for selling PPE. Once you get past that and you go June-July-August, we turn very healthy growth rate positive for the whole business.

Understood. Then just curious the process that you went through to determine whether to take a big charge on the inventory versus just putting it through over several quarters. What dictated that?

Sure, so in terms of taking the large charge at one time in the second quarter, without going into a whole technical accounting overview, really what we were looking at is what we were seeing on market pricing for the disposable masks, and based on how you have to account for inventory, if we have a higher carrying cost on that product than what the market price is going for, we have to take a write-down, which is what you saw happen in the second quarter. I guess maybe to go a little bit further in terms of our decision to exclude that from the adjusted results, our goal here is really to make sure we’re giving you all max transparency about our numbers, and given the size of the write-down, it made it really difficult to see the result of the underlying business and make heads or tails or what’s happening. I guess for a more accounting explanation on that, we reviewed this pretty extensively and we view the inventory write-down charges as an unusual or infrequent event, and that was really what prompted our decision on how to reflect them in the results.

Understood. That’s helpful. Last one from me on just the operating expenses, kind of mid-$240 million range in the second quarter, it sounds like you could have a little bit of upside on net savings in the back half versus your initial plan. Just curious how to think about that number into the back half, the operating expenses. Are there offsets? I mean, you mentioned growth investments maybe offsetting [indiscernible] on some of the savings. Just kind of curious how to think about that number.

Sure, so if we think like first half to second half sequentially, which is, I think, a better way to think about opex for the year given all the noise we had in Q3, Q4 last year with COVID costs savings initiatives, but if you think about opex sequentially, first thinking about variable expenses, you’re going to see those increase because we’re anticipating significantly higher sales levels between first half and second half. Just as a reminder, you want to use a variable rate of about 10% of sales for our variable expenses. But one caution I’ll give you, we’re going to see that run higher in the second half as we’re adding back incentive compensation expenses, and that’s going to normalize after a quarter or two. As you mentioned, we also highlighted that growth investments are stepping up first half to second half, while the cost savings, the structural cost savings on mission critical first half to second half are going to be about the same. If you put all that together, you’re going to see the opex dollars step up in Q3 and Q4, but the ratio as a percent of sales is going to decline relative to what we saw in the first half, and that’s how we’re thinking about operating expenses in terms of the adjusted operating margin framework.

And remind me, what [indiscernible]?

I’m sorry, say that one more time? I couldn’t quite make that out.

What was the total number that was in that framework for operating expenses for the year?

We haven’t specifically given an opex number. I think what you’re going to see in the second half, and why we’re pointing you guys back to operating margin framework, is we’ve got moving pieces here in terms of what we see as risk or opportunity within gross margin and within operating expense, so we’ve got a few different paths that might play out that put us within that adjusted operating margin framework, which is really why you hear us point you guys back to that flat to low single digit scenario for op margin.

Got it, totally get it. Makes sense, thanks a lot. Really appreciate the color.

No problem, thanks.

Our next question comes from Chris Dankert from Longbow Research. Please go ahead.

Morning everyone. Just to return to footprint realignment, definitely some exciting changes this quarter. How do we feel about customer engagement following these branch closures, and how do we increase activity, how do we avoid a call center feel? Just any comments on the customer interface after these changes.

Yes Chris, good morning. I think a couple things. One is, as you could imagine, we’re tracking customer feedback qualitatively, quantitatively very carefully, and the early returns are strong. We’re not seeing any sort of blip. I think to your point about--was your comment, how do we avoid a big company call center feel?

Yes, just maintaining that personal relationship.

You just hit the answer, Chris. We really believe that--you know, the answer to this business, it’s digital and it’s people together, and it’s about the one-to-one relationship. I think sometimes moves like this can go awry. It’s when a company and management loses sight of the importance of the one-to-one relationship. In this case, these moves, we retained the one-to-one relationship, so the physical presence of the branch goes away, virtually our teams are connecting - they’re on Zoom or Microsoft Teams all the time with each other, and they have the same customer relationships that they’ve always had. That’s the biggest thing.

Got it. Has there been a digital transformation there as well to link with the customers more efficiently in terms of bidding and that type of thing, or is that still pretty much the same interface as well?

What I would say is the digital transformation has been happening over time here, Chris, and so the ability to make a move like this happened because of technology that was put in place. It’s going to continue to happen, so the enabler here was how we communicate with each other inside the company and work gets done. We’re beginning to make some inroads and investments. A few of the investments we’re making are around digital interface with customers as well, and that’s beyond website but some other elements. I would say it’s going to continue, but certainly it’s been an enabler to make this happen.

Got it, thanks so much for the color there. Just one last quick one, if I could, any update on implant sales, any kind of what signings look like there? I know that’s still very, very early days, but implant details would be great.

Yes, so funnel and wins--the wins are early, so when we look at a funnel, we look at total opportunity set and then we’ll look at customers won and what the annualized revenue is. That will take a little time to build up, but actually very encouraging. What we’ve seen, and what I would say is beyond implant, Chris, if we look at many of our growth drivers, and other example would be vending or our inventory management solutions, we saw a lull in both funnel and wins basically coming out of COVID because of the inability to get into customer plants, the inability to do presentations. That filled up in a hurry, so vending for instance, our funnel is back to pre-COVID levels, and on implant it’s well beyond pre-COVID levels because it’s a new program for us, but it’s building nicely. We’re actually on plan despite pandemic this year with implant. We’re encouraged.

Got it, good stuff. Thanks so much.

Our last question comes from Michael McGinn from Wells Fargo. Please go ahead.

Hey, good morning everybody. Thanks for sneaking me in.

Hey Mike.

I just wanted to go back and verify some numbers. The $15 million to $18 million savings from the virtual customer hubs, what was the compared to what you had budgeted - higher, lower?

We budgeted for savings--that’s the same range that we originally contemplated, the $15 million to $18 million.

Okay, and then you’re now expecting to exceed this year slightly higher, the $25 million total cost-out savings, and it sounds like within your SG&A, it’s a lot of opex but is there also a capex component? Can you just walk us through the various items, what the cash cost to get there would be?

There are capex investments for mission critical, which I think is what you’re asking. There’s a component of this that’s P&L and a component that’s capex, definitely. It’s probably not as heavy on the capex side in ’21 if we think about the order of projects coming online, but there are things that would be in capex around our digital initiatives and around some of the solutions initiatives, but we haven’t specifically carved that out in terms of our total capex spend at this point.

Okay. This last one is more of a high level question. A lot of the quarterly earnings questions have been answered. Can you just walk us through--you have MillMax, you’ve taken vending internal to improve your service. Now the supply chain just globally is a little chaotic. Can you just walk us through your service offerings as you are an integrated supplier, helping customers manage through safety stock, and then maybe that level of TAM increasing with the addition of MillMax versus what you’re hearing versus potentially 3D printing morphing from prototyping into the manufacturing high throughput environment? Can you just high level walk me through your TAM as a full service provider?

Yes Mike, I think really what you’re getting at is the heart of the repositioning that we did, that we moved from spot buy supplier, which basically meant next-day delivery, the long tail inside of a customer which generally the long tail represents 20%, 30% of total spend, if that, to becoming the mission critical partner where basically what we’re all about is helping our customers speed up their lead times, free up cash, and find productivity on the plant floor. Certainly it’s opened up the total addressable market inside of a customer, because we’re attacking more elements of their spend, and you see that--like, the acquisition of Barnes, which is now CCSG, gave us a new avenue into maintenance. MillMax brings us closer and closer to the production floor - that opens up production metalworking in a bigger way to us. Certainly the addressable market, we’re looking at pretty much most things inside of the customer spend, but all of these services are really geared around saying, how do we improve the customer’s output and how do we make their business run better. In terms of--whether it’s 3D additive or advanced materials, there’s a ton of things coming at our customers right now, and they need help themselves making heads or tails of some of the advancements. I think that’s really what things like MillMax are geared to do, our metalworking specialist, is help them navigate. I’m not sure if I’m answering your question, but basically the repositioning has opened up the total spend from the customer.

Appreciate the time, thank you. That answers my question.

Thank you.

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

Thanks Jason. Before we end the call, let me give a quick reminder that our fiscal third quarter 2021 earnings date is now set for July 7, 2021. We’d like to thank you for joining us today and hope you have a healthy and safe start to our spring season. Take care.

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