Good morning, everyone and welcome to the MSC Industrial Supply 2021 Third Quarter Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I would like to turn the conference call over to John Chironna, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

John G. Chironna - Vice President, Investor Relations and Treasurer

Thank you, Jamie 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. As we continue working remotely at MSC, please bear with us if we encounter any technical difficulties.

And before I get into our cautionary language, I wanted to highlight that we recently created a microsite dedicated to corporate social responsibility. For many years, the concept of doing the right thing has driven everything we do in all of our stakeholder interactions at MSC. I invite you to learn more about our community relations, diversity and inclusion, corporate governance and environment and sustainability efforts by visiting our website. This is only the very beginning of our ESG journey, but we are committed to progress and continually striving for excellence.

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. The information about these risks is noted in our earnings press release and the risk factors in the MD&A sections of our latest annual report on Form 10-K filed with the SEC as well as in our 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.

Erik Gershwind - President and Chief Executive Officer

Thank you, John and thank you everyone for joining us. I hope you enjoyed your holiday weekend. I'm excited to update you today on our progress this quarter. We are seeing the benefits of the strategic pivot that's been made by our Company over the past few years. We made significant investments across the organization to transition from a leading spot-buy provider to a mission critical partner on the plant floor, augmented by our spot-buy capabilities. With the bulk of the less visible changes completed, we outlined our plan to return to historic levels of revenue and earnings growth, consistent with the legacy of our Company.

Mission Critical is our program to translate those investments into superior financial performance. And we shared with you two goals that underpin our efforts. First, to accelerate market share capture with a target growth rate of at least 400 basis points above IP by the end of our fiscal 2023. Second, to return ROIC into the high teens, powered not only by leveraging growth, but also by structural cost take out of $90 million to $100 million also by the end of fiscal 2023. This year, our fiscal 2021 began our proof of concept, with our fiscal third quarter serving as the latest encouraging data point.

With respect to revenues, we committed to achieve a minimum of 200 basis points of positive spread versus the IP by our fiscal fourth quarter. Q3 is muted by PPE comps, but the non-safety and non-janitorial business grew about 21% year-over-year, and we expect our total Company growth to meet or exceed our fiscal Q4 commitment. This year, with the help of numerous structural cost reductions, we increased our customer facing sales headcount, and we'll continue doing so into fiscal 2022. We've grown share in metalworking through investment and innovation that improve our customers' businesses.

At the tail end of fiscal 2021 and into fiscal '22, we're implementing improvements in e-commerce. We started with a new production information system, earlier this year, and are now rolling out enhanced search capabilities, new user interfaces for both desktop and mobile, a new transactional engine and overall improved functionality.

We've committed to maintaining our gross margin through a series of initiatives and excluding the write-down for PPE, we have done so [Phonetic]. The macro environment is driving price increases, and given our inventory turns and innovative merchandising and pricing programs, we expect strong realization to continue.

Finally, we've picked up the pace on structural cost takeout. We've already exceeded our $25 million cost takeout goal for fiscal 2021 for the full year. Looking ahead, fiscal 2022, it's setting up even better than the current year. We will build on our momentum and continue making progress towards our goal of 400 basis points or more of market outgrowth as measured against the IP Index.

On the gross margin line, we expect inflationary pressures to continue. While purchase cost increases are beginning to make their way into our P&L, they will be offset by ongoing price realization yielding a stable gross margin outlook year-over-year. On the structural cost front, we will deliver roughly $20 million of incremental savings on top of that, which has been achieved over the past two years. And that will include benefits from existing initiatives, which will deliver incremental savings during the first half of '22, plus benefits in the second half from new initiatives that we have yet to execute along with a handful of more transformational projects that will deliver additional savings in '23 and beyond.

We will once again reinvest a portion of these incremental savings into our five growth initiatives to build upon market share capture. Nonetheless, we expect incremental margins at or above 20%. How far north they go will be a function of how high we can get revenue growth and how much price realization we see. With all of this as the backdrop, I'll now turn to the specifics of the quarter beginning with the external landscape.

The economic environment improved significantly. Most of our manufacturing end markets turned positive during the quarter. And this evidenced itself in IP readings that turned to double-digit growth in April and May, and in sentiment readings such as the MBI Index, which are at very high levels. All of this is supported by our customer's outlooks, which are robust. At the same time, the industrial economy is experiencing very real supply chain shortages and disruptions. These disruptions are evidencing themselves in product scarcity, freight delays, and extreme labor shortages that are resulting in significant availability and inflationary pressures. And we are certainly not immune to these challenges, and in fact, we're seeing them play out.

That said, we are very well positioned to navigate the current environment, particularly, when compared to the local and regional distributors who make up 70% of our market. MSC's broad multi-brand product assortment, our high inventory levels, strong supplier relationships and next day delivery capabilities position us well to accelerate market share capture. Additionally, the supply chain challenges are resulting in significant and growing inflation that is producing the most robust pricing environment we've seen in years.

Turning now to our performance, you can see our reported numbers on Slide 4 and adjusted numbers on Slide 5. Revenues were up 2.2% on an average daily sales basis, as we're seeing continued sequential improvement in our sales levels. Most notably, non-safety and non-janitorial product lines improved through the quarter from mid-single digit declines in our second quarter to 21% growth in our third quarter.

Sales of safety and janitorial products as expected, given the significant surge during the pandemic last year, declined just over 40% for the quarter. Looking at our performance by customer type, and excluding for a moment the safety and janitorial product lines, all of our customers, all types were up strong double digits.

However, including all product lines, and given the extremely difficult comparisons, government sales declined nearly 40%. National accounts returned to growth by posting a low single-digit increase while our core customers improved and grew in the mid teens. CCSG grew mid-single digits. June showed continued improvement with total Company year-over-year growth estimated at 15.4%. Our non-safety and non-janitorial growth is estimated at roughly 20%, while safety and janitorial are estimated to be down roughly 10% against last year's continued PPE surge.

We expect strong growth rates in non-safety and non-janitorial products for the balance of the fiscal year. On the pricing front, we've seen solid realization of the March price increase that we mentioned last quarter. And as a result, we saw a sequential lift in gross margin from our fiscal second quarter's adjusted rate of 42.0%. Since that last call, we've seen continued, significant pricing activity from our suppliers, and as a result, we've implemented a June price increase. This is earlier than normal, but certainly warranted given the environment. We will not hesitate to move again if suppliers continue raising their prices.

Beyond the numbers, we had a couple of positive developments during the quarter. One was the recovery of the nitrile glove impairment which Kristen will touch on in just a bit. The other was the acquisition of a majority stake in the William Hurst Company in June. First is a metalworking distributor based in Wichita, Kansas with a heavy focus on the aerospace sector. And this deal is meaningful to MSC in several ways.

Hurst goes to market with a highly specialized and highly technical sales force. It fills out a geography in which MSC was under-penetrated. And more importantly, brings technical capabilities that we can leverage across the entire MSC business. Aerospace is roughly 10% of total MSC sales today. It's an industry that is poised for strong growth coming out of the pandemic. And the Hurst platform will considerably enhance our effectiveness in serving and growing that portion of our business. Hurst has been led by CEO, John Mullen, who remains at the helm, and retains a meaningful ownership stake in the business.

I'll now turn things over to Kristen to cover the financials and our Mission Critical progress.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Thank you, Erik. I'll begin with a review of our fiscal third quarter and then update you on the progress of our Mission Critical initiatives.

On Slide 4 of our presentation, you can see key metrics for the fiscal third quarter on a reported basis. Slide 5 reflects our adjusted results. Our third quarter sales were $866 million, up 3.8% versus the same quarter last year. We had one more selling day this year in our third quarter. So, on an average daily sales basis, net sales increased 2.2%. Erik gave some details on our sales growth, but I'll just reiterate that our non-safety and non-janitorial sales grew 21% in the quarter, while our safety and janitorial sales declined 42%.

Moving to gross margins, execution and realization on our midyear price increase was solid. Our gross margin for fiscal Q3 was 42.3%, up 30 basis points sequentially after adjusting out our inventory write-down from last quarter, and down just 10 basis points from last year. Looking ahead, we took our summer increase in early June in response to the continuing inflation we are seeing from our suppliers. We expect the recent trending to continue and aim to achieve a gross margin for fiscal 2021 that is flat with fiscal 2020.

Operating expenses in the third quarter were $257.3 million or 29.7% of sales versus $242.8 million or 29.1% of sales in the prior year. Our third quarter includes just $400,000 of legal costs associated with the loss recovery, which I'll discuss shortly. So opex as a percent of sales, excluding those costs was the same as the GAAP figure or 29.7%.

Let me share a few more details on our third quarter opex. As I mentioned on our last call, we expected opex to increase sequentially from our second quarter, not only by the variable operating expenses associated with higher sales, but also due to expected higher incentive compensation, as well as growth investments related to Mission Critical. Recall that our adjusted opex for Q2 was $244 million, a $90 million increase in sales means roughly $9 million of variable related opex. The remainder of the increase was primarily related to higher incentive compensation.

While Mission Critical growth investments did increase sequentially, this was offset by an increase in Mission Critical savings which I'll speak to in more detail in a few moments. As you may have seen in our earnings release this morning, we had a very positive development regarding the nitrile glove impairment we announced in our fiscal first quarter. We're pleased to report that last month we received a $20.8 million loss recovery of the original $26.7 million impairment loss recorded in Q1. That recovery is below the operating expense line in the P&L, but it does increase our GAAP operating income such that our GAAP operating margin for the quarter was 14.8%.

Excluding the $20.8 million loss recovery and associated legal fees as well as restructuring charges during the quarter of $1.3 million, our adjusted operating margin was 12.6%, down 70 basis points from the prior year. GAAP earnings per share were $1.68, adjusted for the loss recovery as well as restructuring and other charges, adjusted earnings per share were $1.42.

Turning to the balance sheet, and moving ahead to Slide 7, our free cash flow was $3 million in the third quarter as compared to $49 million in the prior year. The largest contributors were our increasing inventory and accounts receivable balance as our sales picked up significantly in the quarter.

I would also note that we repurchased $47 million of stock during the quarter, or about 507,000 shares at an average price of $92.92 per share. This underscores our ongoing commitment to a balanced capital allocation philosophy and our goal to maximize total shareholder returns.

In fact, to date in our fiscal Q4, we repurchased another 229,000 shares at an average price of $89.07. Lastly, when it comes to cash flows, please note that the $20.8 million loss recovery was received in June and will therefore be reflected in our fiscal fourth quarter cash flows. As of the end of fiscal Q3, we were carrying $598 million of inventory, up $66 million from last quarter. We're actively managing inventory levels to ensure we can support our customers as sales continue accelerating. Therefore, inventory levels are likely to continue climbing in the fourth quarter.

We still expect capital expenditures for the fiscal year of approximately $55 million and we still expect our cash flow conversion or operating cash flow divided by net income to be above 100% for fiscal 2021. Our total debt as of the end of the third quarter was $759 million, reflecting a $75 million increase from our second quarter. Roughly two-thirds of that increase was used to repurchase shares under our ongoing share repurchase program. As for the composition of our debt, a $187 million was on our revolving credit facility, about $200 million was under our uncommitted facilities, $20 million with short-term fixed rate borrowings and $345 million was long-term fixed rate borrowings. Cash and cash equivalents were $27 million resulting in a net debt of $732 million at the end of the quarter.

Let me now provide you with an update on our Mission Critical productivity goals. On Slide 8, you can see our original program goals of $90 million to $100 million of cost takeout through fiscal 2023, and that is versus fiscal 2019. Our cumulative savings for the first half of fiscal '21 were $17 million and we saved another $12 million in our third quarter, bringing our year-to-date savings to $29 million against our goal of $25 million by the end of this year. We also had invested roughly $7 million to $8 million in the first half of fiscal '21 and we invested another $7 million in our third quarter, bringing our total year-to-date investments to $15 million, which compares to our original full year target of $15 million.

Given the success of the program through the first three quarters, we now expect to achieve savings for fiscal 2021 of roughly $40 million. Regarding total investments for fiscal '21, we now expect roughly $25 million which would result in net savings of $15 million for this year. Before I turn it over to Erik, let me leave you with some broad expectations for the coming quarters. With respect to sales, the difficult safety and janitorial comparisons will ease in our fiscal fourth quarter and into fiscal '22. We expect double-digit growth rates for the total business in our fiscal fourth quarter and continued strength into fiscal '22.

For fiscal '21, we expect a low single digit total Company growth, and we aim to achieve gross margins that are flat with fiscal '20. In terms of adjusted operating expenses, sequentially from our third to fourth quarters, we will see a decline due to volume-based expenses from sequentially lower sales dollars and lower incentive compensation.

With that in mind, we remain on track with our adjusted annual operating margin framework for fiscal 2021 which you can see on Slide 9. Furthermore, and as Erik mentioned earlier, we expect to achieve 20% or higher incremental margins in both fiscal '22 and fiscal 2023.

And I'll now turn it back over to Erik.

Erik Gershwind - President and Chief Executive Officer

Thank you, Kristen. Fiscal 2021 is finishing on a high note, and we expect that momentum to continue into fiscal '22. We are gaining steam internally, and our end markets are strengthening as evidenced by IP readings. The inflationary environment, along with our ongoing price realization should continue to support gross margins. On the structural cost front, we've made strong progress on our Mission Critical program and we'll deliver further savings over the next two years and beyond. All of that should translate into incremental margins at or above 20% for the next two years.

I thank our team for all of their hard work and dedication, and we'll now open up the line for questions.

Question & Answers

Questions and Answers:

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Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions]. And our first question today comes from Tommy Moll from Stephens. Please go ahead with your question.

Tommy Moll - Stephens Research - Analyst

Good morning and thanks for taking my questions.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Hi, Tommy.

Erik Gershwind - President and Chief Executive Officer

Hey, Tommy, how are you?

Tommy Moll - Stephens Research - Analyst

Doing great. Doing great. Erik, I wrote down one of your comments and I think - I think I'm getting it about right. You talked about this being one of the most robust pricing environments you've seen in years. So I wanted to dig in on that. Talked about another increase in June, possible we'll see another one before the end of your fiscal year? Any way you could frame for us what the June increase looks like quantitatively? And if you play this out longer term, beyond the next quarter or two, in this kind of inflationary environment, is this a net benefit, net neutral to your platform? How does this play out?

Erik Gershwind - President and Chief Executive Officer

Tommy, so - yeah, look, I think, let me start with the macro and the environment and you did capture the - my comments accurately. If you go back and - for those who have been studying our space for long periods of time, you go back to different areas [Phonetic] that we've experienced for the past ten or 15 years and, generally strong robust inflation is a distributors' friend. And so, if you looked at MSC's gross margin performance in the 2000s versus what it's been the last several years, you would see a noticable difference. And we've talked about our gross margin formula consisting of three things, price, cost and mix. And we've talked about the fact that there is generally a mix headwind in the business of somewhere 30 basis points to 50 basis points.

So to the extent price and costs were a wash, we would see erosion of somewhere 30 basis points to 50 basis points. And not surprisingly, over the past few years, that's about what you've seen from us in a very low inflation environment, I think unusually low. 2000s may have been unusually strong, this is unusually low. Certainly, some of the supply chain issues that we discussed and scarcity are leading to more inflation than we've seen - than I've seen in at least a decade.

Price increase is coming from suppliers, fast and furious. You're right. For us to take two moves in a matter of a few months, we haven't done that in a while and that's in response to the environment. Net-net, Tommy, we view this as a positive. Typically, what you would see from us is the early stages of an inflation cycle, price would outpace cost. And we believe that's where we're at right now. You know, certainly in the later stages, things can flip around, but to the extent that this inflationary cycle has some legs to it as it appears, we would expect price to outpace cost.

So if you look, the proof in the pudding will obviously be in our numbers. But you think about - yes, we're going to begin to start seeing cost in our P&L, yes, that will begin to happen as early as this quarter. But you know, if you sort of zoom out and say okay, fiscal 2021 we're calling to be plus or minus flat with prior year, and as best we can tell now and of course, we'll come back next quarter with a framework as we normally do. But as best we can tell now, we're giving you sort of a look ahead to '22 and say, we're seeing a roughly flat picture that would imply positive price cost in each of those years to offset mix.

And then you take it a step further and I'll stop talking Tommy. But if this business can produce roughly flat gross margins and IP does what it is forecast to do, and we continue to build on our internal momentum and outpace IP, you're looking at strong top line growth, roughly flat gross margins, enhance that with some cost takeout, and we think we have a really compelling picture.

Tommy Moll - Stephens Research - Analyst

Thank you, Erik. That's all very helpful. I wanted to follow up with a question on inventory which you provided some helpful comments on in the script. What - has the philosophy changed at all in the appropriate level there? I mean, you've got potential supply chain issues that you may want to protect against. I think you referenced in the script, the opportunity to deploy - or to put your balance sheet to work with some inventory to take market share. Has anything changed in your mind about how to manage that? Or what do you want us to know about how you're thinking about the inventory right now? Thank you.

Erik Gershwind - President and Chief Executive Officer

Tommy, I would say this. No change in philosophy, some change in tools and tactics and keeping up with the times. But in terms of philosophy, no change. And again, going back, being in this business now, over two decades, times of growth and times of product scarcity create really compelling opportunities for distributors like MSC.

Bottom line is, if you have stuff on the shelf, you're going to capture share. So I think what you're seeing, the big build in inventory you're seeing over the past quarter we telegraphed [Phonetic] we expect it to continue, we would have liked it to be even bigger if it weren't for scarcity issues. We're going all in on making sure that we have product on the shelves for our customers at a time when product is scarce. And it's critical as the economy now ramps back up the industrial economy that our customers keep their lines running.

So we are going all in on inventory, and it's sort of a - it's a reflection of our view on the outlook of the economy, and a view on the importance of having product to capture share.

Tommy Moll - Stephens Research - Analyst

Thanks, Erik. I'll turn it back.

Operator

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

Ryan Gunning - Jefferies - Analyst

Hey, this is actually Ryan Gunning on filling in for Hamzah. Could you just talk about your current vending initiative and how much of your customer base or what percent of revenue is vending, and what kind of growth you're seeing there?

Erik Gershwind - President and Chief Executive Officer

Yeah, sure. Good morning, Ryan. And what I'll do is just connect back to - if you recall - we are right now laser focused on restoring the kind of market share capture rates that this business had become accustomed to. And so, we put our first marker out there of 400-plus basis points by '23. The first sort of goalpost in getting there is going to be our fiscal fourth quarter, at least 200 basis points. And then if you recall, we outlined five growth initiatives that are going to get us there. One of those is what we refer to as solutions. And in solutions, it's specifically it's three things. It's vending, it's vendor managed inventory, and it's our in-plant program, all of which are aimed at bringing us closer to the customer and embedding us onto the plant floor. So what I would say is, vending is picking up steam. We definitely saw, and not surprisingly, Ryan, we saw a low in our new account signings. The growth rate, of course, the growth rate of the installed base came down with COVID in its bounce back as the business has.

The new signings took a low during the pandemic because of the inability to get into plants. We are seeing it come storming back. So we're measuring size of funnel, dollars in funnel, close rate. All of those are doing what we wanted to see happen. As the years gone on, they've gotten stronger and stronger. So what I would say is, it remains an important growth driver along with VMI and in-plant as part of this solutions initiative.

Ryan Gunning - Jefferies - Analyst

Got it. That's helpful. Thank you. And then I guess kind of switching gears, can you talk about what you're seeing in terms of metalworking markets from a growth perspective and just the competitive dynamics there?

Erik Gershwind - President and Chief Executive Officer

Yeah. So I think from a market standpoint, what we're seeing is - and particularly, Ryan this quarter, if you think about metalworking, and our end-market exposure, they're very tightly coupled. And so not surprisingly, nearly half of our sales are tied into five heavy manufacturing end markets that are the bulk of where the metalworking consumption happens.

Those - and those heavy manufacturing end markets went down deeper than most of the economy, and quite frankly have been a little slower to recover. We saw that start to flip in the past quarter. And so, if you take a look at below the IP reading, you can see some of the sub-indices. We are starting to see the heavy manufacturing markets come back. And we think that's a great opportunity for us in terms of share capture. We're still sitting, so leadership in metalworking - but still sitting in the neighborhood of 10% market share.

So we've got a big runway ahead of us in terms of share capture. And we have end markets that we think have legs to them in terms of this recovery. So we're excited by our metalworking outlook. And what I would say is to capture that share, there's a few things that are powering it. Investment into people; so you see our head count ticking up. That's investment into metalworking talent. We did it both organically in the past quarter through acquisition. We're really excited about Hurst joining the family. We're doing it through technology, with initiatives like MSC MillMax that are combined with our people are really helping customers take cost out of their operation.

And then, I mentioned earlier to Tommy's question sort of the old fashioned way of just having product on the shelf when others don't. We think that really matters as well. So, all of those sort of feed into what we think is an exciting metalworking outlook.

Ryan Gunning - Jefferies - Analyst

Great. That's all super helpful. Thank you very much.

Operator

Our next question comes from Adam Uhlman from Cleveland Research. Please go ahead with your question.

Adam Uhlman - Cleveland Research - Analyst

Hi guys, good morning.

John G. Chironna - Vice President, Investor Relations and Treasurer

Hey, Adam.

Erik Gershwind - President and Chief Executive Officer

Good morning, Adam.

Adam Uhlman - Cleveland Research - Analyst

Hey, can we go back to the price increase discussion we were having earlier? I guess in the operational stats, it looks like there was $1 million attributed to price, which seems kind of low. And I understand there is some other offsets that you call out in there like customer mix and product mix and discounting. Can you maybe parse that apart between what were the headwinds that offset the price increase from March?

And then, as we put this price increase through in June, how should we be tracking that contribution to total sales growth? I guess maybe you could just dimension it too, it sounds like low-single digits, but maybe you could clarify that.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Sure. So, going back to the first part of your question, first thing I'd say is price realization, I think as Erik touched on is solid, we're pleased with what we're seeing around realization. And then the second metric that you mentioned, which is what we see in the growth decomposition - composition in the op stats, that has about 0.1% of growth assigned to both price and mix. But to your point, it's a combination of things that are in that metric.

Normally, that's a pretty good indicator for how you could think about price growth in the business. But what's happening in the second half of this year in Q3 and Q4 is if you look at the large amount of PPE volume that we had in the base, so in the second half of '20, it's really making it a - not a very meaningful metric to think about how price is impacting the business.

So that's kind of what you see near-term. I think if you zoom out and you look at what's happening, sequentially, we did grow margins from Q2 to Q3. So that's an indicator that we're seeing the price benefits that we had expected to see coming into the numbers. And then beyond that, like Erik - Erik touched on, we're seeing about flat margins '20 to '21, which is not something we typically see in the business. I mean, through offsetting, the cost coming out of the P&L and that traditional mix headwind that we see in the business. And, we're expecting to do the same thing again in 2022.

Adam Uhlman - Cleveland Research - Analyst

Okay, got it. Thanks. That's helpful. And then, for Mission Critical I guess, you know, there is $40 million of gross savings remaining over the program for the next couple of years. Could you dimension some of the bigger buckets that you expect those savings to come from? And then, have you changed your thoughts at all on your reinvestment appetite of those savings?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Yeah. So for the few - for the following two years on the program, '22 and '23, we've got program - we got programs that are working across all areas of the P&L. I think we're - if you think about kind of the transformational work that we have ahead of us sort of like the bigger, longer-term projects to execute, you'll probably see us pivoting a little bit more to the operation side of the business. We did a lot of work around the sales side of the business that you saw us execute in '21. So there'll be a bias towards operations on the transformational work.

But then, the pipeline of projects really touches every part of the P&L. There is - there is a lot of small things that are going to deliver benefits, particularly in kind of '22, second half of '22, will get [Phonetic] carry over in the beginning of '22 from what happened with - in particular with sales program or the sales restructuring that you saw us execute in fiscal '21. And then those transformational projects are going to position us on for '23 and beyond.

And in terms of the reinvestment, I'll give you guys some firmer guidance on that in next quarter when we publish the framework. But one of the things that we're looking at right now is kind of which projects we want to bring online and when on the growth side. And we're really committed to delivering that incremental margin of greater than 20%. So we'll probably adjust the investment schedule accordingly, based on our other assumptions to make sure we're delivering on that incremental north of 20% that we committed to for fiscal '22 and '23.

Adam Uhlman - Cleveland Research - Analyst

Okay, thanks.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

You're welcome.

Operator

Our next question comes from David Manthey from Baird. Please go ahead with your question.

David Manthey - Robert W. Baird & Company Inc. - Analyst

Hi, good morning everyone.

Erik Gershwind - President and Chief Executive Officer

Hey, David.

David Manthey - Robert W. Baird & Company Inc. - Analyst

First off, Kristen in your discussion there on price mix, if we set mix aside, it sounds like you had solid price realization on the March increase. And with the glide path from that increase in addition to the new June increase, in light of the current inflationary environment, should we be reading that your expectation for price realization alone might be on the higher end of low single digits or even in the mid-single digits in the coming quarter?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

No. I'd say - I'd say, lower single digits is a reasonable expectation, Dave and I think what's starting to happen too in Q4 is the costs - all the inflation we're seeing passed on to us from suppliers were starting to roll on to the P&L. So it's dampening a little bit of the price cost spread we might have been hoping to see when we looked forward last quarter. But generally, still really pleased that being able to offset the mix, cover the cost, and keep the margins flat for the full year.

David Manthey - Robert W. Baird & Company Inc. - Analyst

Okay. And I know you've always been hesitant to talk about price realizations specifically. But, if - based on your comments, it sounds like from your price realization, forgetting about mix and forgetting about the cost side it sounds like you're seeing good realization which might imply a little bit higher than low single digits. Is that in the ballpark?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

We are seeing our realization come online as expected, yes.

David Manthey - Robert W. Baird & Company Inc. - Analyst

Okay, fair enough.

Erik Gershwind - President and Chief Executive Officer

Yeah, and Dave, just to put color on that. As Kristen mentioned, so the metric, that's the public metric she mentioned because of last year, the PPE surge, the mix component of that metric is so distorted compared to what it typically is in normal time. That will correct itself in the quarter or two.

As you can imagine, inside of the Company, our pricing team has ten wasteful Sunday in which they're looking at more micro price realization metrics. And, yeah, we're seeing just - as Kristen said, just as we would have expected in terms of outcomes.

David Manthey - Robert W. Baird & Company Inc. - Analyst

Okay, sounds good. And second, on the e-commerce front, it seems like that metric lost momentum during the pandemic, and is since reaccelerated, I think trailing 12 months, you're back over 60%, e-commerce. What does that tell us about the trends in the business, if anything, as we come out of the downturn here?

Erik Gershwind - President and Chief Executive Officer

Yeah, Dave. So I think important to understand just sort of what makes up sort of the buckets under that 60% e-commerce. So obviously there is a big chunk, over half of that is mscdirect.com. And that's the part right now I mentioned investments into digital, most of the investments are directed there, to take mscdirect.com to another level. And certainly I would expect over time that portion of the business to grow as a percentage of revenues. The total 60% includes other buckets like vending, things flowing through a vending machine, e-procurement with large accounts which, so there was sort of a mixed dynamics going on underneath the covers, because as you can imagine, I mentioned earlier, vending dropped considerably during the pandemic, and is now climbing back.

For us, what I'm going to be looking at is the quality of the experience on mscdirect.com going to be looking at retention, average order size and some of the sort of micro measures and then, yes, I think for you over time seeing a 60% grow will be the way to look at it and evaluate it.

David Manthey - Robert W. Baird & Company Inc. - Analyst

Great. Thanks, Erik.

Operator

Our next question comes from Ryan Merkel from William Blair. Please go ahead with your question.

Ryan Merkel - William Blair & Company, LLC - Analyst

Hey, everyone. Nice job on gross margins this quarter.

Erik Gershwind - President and Chief Executive Officer

Hey, Ryan. Thank you.

Ryan Merkel - William Blair & Company, LLC - Analyst

So my first question is on SG&A leverage. I know you expect strong leverage in '22, but should we expect SG&A leverage in the fiscal fourth quarter?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Yeah. So fiscal fourth quarter is going to - we're going to come down sequentially, Ryan, relative to where we were in Q3, a little bit of that coming with a decline in sales. And then, we're also going to see a bit of a normalization on the sales - excuse me, the sales incentive compensation. So we will see a more favorable opex rates coming in Q4, better leverage coming in Q4. And then for the year, feeling confident that will land inside that low single digit framework.

I'd say probably on the lower end of that given where we think revenue is going to land and kind of given what we see happening in the inflationary environment, really, we've talked a lot about kind of what's happening on the cost of goods sold with inflation, but we're also seeing some costs start to creep in to the business on the SG&A side, around things like labor inflation, wage increases, things like that.

Ryan Merkel - William Blair & Company, LLC - Analyst

All right. So it sounds like SG&A leverage will improve in 4Q and then it'll improve more so in 2022. Is that right?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Correct.

Ryan Merkel - William Blair & Company, LLC - Analyst

Okay. And then my second question, June average daily sales growth, that was a nice number. I know you're not giving guidance, but I'm hopeful to get your view on what inning of the macro recovery we're in? And then, if sales growth can accelerate from the June level.

Erik Gershwind - President and Chief Executive Officer

So, Ryan, I - look, I think from our perspective we are encouraged. I think for me June is sort of one data point. We're looking at it sort of a bigger story here. And I am encouraged by the momentum we're seeing, and I think that goes for macro, but also sort of a micro, meaning how is the Company doing relative to IP. We had a pretty good quarter in Q2. Obviously PPE noise [Phonetic] here, but we are starting to see progress.

In terms of the macro recovery, again Ryan, we're coming from a fairly slanted view where we're heavily exposed to heavy manufacturing, which have been hit hard at later stage. So we think there is plenty of room here. We're kind of hitting a speed bump as an economy, an industrial economy with the supply chain and labor constraints right now. No question [Phonetic] impacting growth with our customers, anyway, but we think there was a nice recovery here, particularly in certain end markets where we think there is some ways to go. To answer your question, early innings.

And then, I feel the same about internally, we still feel like we're in the early innings. We think this year has kind of been a proof point that we're on the right track, but we have sights set high in terms of share capture and spread above IP and still feel like we're early innings there too.

Ryan Merkel - William Blair & Company, LLC - Analyst

Sounds good, Erik. Thanks.

Erik Gershwind - President and Chief Executive Officer

Thanks. Ryan.

Operator

Our next question comes from Michael McGinn from Wells Fargo. Please go ahead with your question.

Michael McGinn - Wells Fargo Securities, LLC - Analyst

Hey everyone, good quarter.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Hi.

Michael McGinn - Wells Fargo Securities, LLC - Analyst

I was hoping to get a little more color - Hi, I was hoping to get a little more color on the recent acquisition. Is there, can you frame for us what aerospace is like round about percentage of your business today? Is there ever a point from a portfolio management standpoint where you think you cap yourself?

Erik Gershwind - President and Chief Executive Officer

Mike, so we're sitting at around - so - and I'll touch on what Hurst brings to us. So aerospace roughly had 10% of MSC's revenues. We think that it is a really good fit in terms of an end market for MSC for a number of reasons. First and foremost of which, we can really move the needle for our customers' productivity using metalworking. Our metalworking experts, metalworking technology like Millmax, our product portfolio, etc. So we think it's a good fit.

In terms of capping it, at some point that will be a very high-class problem. We think we have ways to grow in penetrating that market. We really like the timing of Hurst, because aerospace obviously has been on its back and we think has a long way to go in recovery. And what really excites us is the team there is really technical, and really focused.

So they're bringing something in some sense, expanding our metalworking capabilities for sure, but they're really bringing something that we don't have organically in the business, which is a metalworking focus specific to aerospace. And we think that's a capability, not just to build out and cross sell into their customer base, but for John and his team, we think we can leverage that team across MSC's broader aerospace customers to increase penetration.

So we see - bottom line is, we see ways to go with aerospace and at some point we'll be in a high class position to have - try to cap it. But we've got a long part of that with the runway in front of us there.

Michael McGinn - Wells Fargo Securities, LLC - Analyst

Got it. And then going back to the earnings algorithm. You outlaid earlier in the call mentioning if we can get flat gross margins, just - in terms of that, how back to - how much runway, do we have to get back to normal in terms of gross margin rebates, and in terms of the local core customer catching up to that national account?

Erik Gershwind - President and Chief Executive Officer

So here's what I'd say, Mike. So let me break apart gross margin into three buckets: Price, Cost and Mix. What I would say is, we still see - so, over the past few years, price and cost have more or less been a wash, and what you're hearing is that price is now outpacing cost. And we think that as long as the inflation cycle continues, and by all measures, given product scarcity, labor scarcity, etc, etc, it does feel like we're in the early stages of an inflation cycle, to the extent that continues. While costs are going to creep into the P&L, we think we can stay ahead of it with price.

That brings us to mix. Mix has a lot of - you mentioned a couple of moving parts, Mike. There's a lot of moving parts to mix in terms of which product lines are growing faster, which end markets are growing faster, size of customers, you said national accounts, etc. Net-net, when you put it in the wash, and you put all of the mix components in the wash, we still see a negative sort of a headwind coming from mix. And we do still see it somewhere in the 30 bps to 50 bps, and it's tough to give you a precise number, it moves around. But somewhere 30 bps to 50 bps per year.

So the way we get to sort of an out - the way we get to flat and take '21 as a - for instance [Phonetic] is, it's mix headwind, yes, but price outpacing cost are not being a wash.

Michael McGinn - Wells Fargo Securities, LLC - Analyst

Got it. Appreciate the time. Thank you.

Operator

Our next question comes from Kevin Marek from Deutsche Bank. Please go ahead with your question.

Kevin Marek - Deutsche Bank - Analyst

Hi, good morning. Thanks for taking my question.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Good morning.

Kevin Marek - Deutsche Bank - Analyst

A lot has been asked, I guess, maybe wondering if you could give some more color on some of the supply chain constraints. What are you seeing in terms of labor, product availability. And, I think it's gotten better or worse for you and for your customers and kind of how are you managing there?

Erik Gershwind - President and Chief Executive Officer

Yeah, Kevin. So let me talk about - I'll talk about sort of broad marketplace, which would include customer and supplier. I would say over the past quarter, the supply chain issues have become more acute, not less. And I think that in particular, the one that is just white hot is access to labor. Everybody I'm talking to is feeling the pinch, and what that means is, it's really at this point constraining growth. I think the exciting thing is to the extent this is a speed bump, the long-term prognosis outlook is really good.

But what it means for our suppliers, an inability to hire people who are needed to produce stuff and ship stuff to distributors like MSC. For our customers, it's much the same, their order backlogs are massive. And if they can't keep up, then they can't get product out the door. I think from our standpoint, Kevin, we think we're really well positioned to navigate this. First of all, it should be - it should be temporary. I mean, who knows how long it takes to relieve [Phonetic], but it should be temporary.

The second thing is, we think we're well positioned. Number one is that whatever issues we are facing, and we are facing them. We mentioned we would like inventory levels to be even higher than they are, we're facing issues from our suppliers, but whatever we're facing, remember 70% of our market is made up of local distributors who really struggle in gaining access to the product.

So we think there is a tremendous market share capture opportunity. And then the second thing I'd say is that, all of these constraints and scarcities are what are fueling the inflation that has been fueling - is then fueling the ability to take price. So you know, we think we're well positioned to navigate this. We think the outlook is really good. But to be clear, absolutely, the issues are acute and labor is at the top.

Kevin Marek - Deutsche Bank - Analyst

Got it. Thank you. That's really helpful. Maybe just one more coming back to some of the Mission Critical commentary. Is there - is there a scope to by the time we get through fiscal '23 to be above $90 million to $100 million given that you're executing on a chunk of that - kind of faster than originally anticipated? I think - I'm wondering if there are other things or other initiatives that maybe you didn't make the first round of planning for Mission Critical that you now feel like you may have the ability to pursue.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Yeah, I think we're definitely optimistic that that's possible. We're clearly at the higher end of that $90 million to $100 million range right now. And one of the things we talked a lot about internally is that we communicate Mission Critical as kind of time sense between 2019 and 2023. But really what we're doing here is changing the culture of the Company to make this idea of driving these costs out of the business and ongoing - an ongoing part of what MSC does year after year.

So we do have a long pipeline of projects. I think it's always possible we shuffle timing on some things, pull somethings forward, that could provide the potential to go above that. But one of the things we are thinking through for '22 is, you've got some big projects basically in '21 that carryover some smaller new things we're going to execute that help us in '22. And then you're going to see us really reload and kind of recharge on the transformational projects that will hit in '23 and beyond.

So to the extent that we could bring those big transformational things on faster or maybe to a greater extent than we're originally contemplating, that would be the path to going above that $90 million $100 million range right now.

Kevin Marek - Deutsche Bank - Analyst

Got it. Understood. Thanks a lot. I appreciate it.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Welcome.

Operator

And our final question today comes from Patrick Baumann from J.P. Morgan. Please go ahead with your question. Patrick, is it possible your phone is on mute?

Patrick Baumann - J.P. Morgan Securities, LLC - Analyst

Hello? Sorry about that. Can you hear me now?

Erik Gershwind - President and Chief Executive Officer

Oh, there we go. Hey, Patrick.

Patrick Baumann - J.P. Morgan Securities, LLC - Analyst

It was on mute. Apologize for that. Erik, wondering if you could talk some more about what you're doing to the website and why? Is this - is this just basic upgrades or is it something more transformational in the way you interact? And then on this front, like, how would you benchmark yourself the website capabilities, I guess mscdirect versus kind of leaders in the industry at this point?

Erik Gershwind - President and Chief Executive Officer

So Patrick, what I would say and I'll answer your question on e-commerce. But to do it, I just want to underscore something Kristen said, and it was in relation to Mission Critical. And that was about a cultural change happening inside the Company. And I bring this up in the context, you asked me about e-commerce, because what Kristen described happening in Mission Critical with it becoming a way of life and kind of like constantly raising the bar on ourselves, the same thing is happening everywhere in the Company, across our commercial organization, across marketing, across structural cost, you name it.

So I think what's happening here and the investments being made is we're raising the bar on ourselves. I mean, certainly we benchmark peers inside and outside of the industry for capabilities. But I have to tell you the North Star for us that's driving this change is the customer. How we can make their lives better, how are their expectations with a younger, millennial, influenced workforce growing as a percentage of total workforce. Like, this is about raising the bar on ourselves and doing better for customers. So what we're doing is, and I'd call it somewhere between an upgraded transformation of really changing the technology stack we use. And what that means is moving certainly more cloud-based where we can capture changes that happen overnight as opposed to needing to do upgrades. We're talking about using capabilities like AI-powered intelligence and logic that allows our search engines, our website, our whole digital experience with the customer to constantly improve.

So I think some of this is around technology. And then some of it is flat out just around customer experience and reducing friction and creating a better experience, a stickier experience for the customer. So that's really what's going on. It will happen, so we're beginning to put things into market in flight [Phonetic] this quarter. That will continue. So we'll continue to launch sort of iterations along the way, won't [Phonetic] be big bang into the first couple of quarters of '22. And obviously, we'll be watching carefully for performance. But I think this all goes back to the idea of raising the bar on what we expect out of ourselves and for our customers.

Patrick Baumann - J.P. Morgan Securities, LLC - Analyst

But what do you - what do you use to track kind of the progress? Is it - it sounds like some voice of customer maybe there's got to be some metrics you mentioned stickiness like - is it site visits, is it sales metrics, is it revenue per visit? I don't know. What do you use to track that?

Erik Gershwind - President and Chief Executive Officer

Yeah. So one of the things that are new and we've really upgraded our digital team - and it's a strong group, and one of the things they have implemented is a weekly business review process where they're managing through a whole bunch of metrics, a couple of them, you've mentioned whether that's average order value, whether that's number of unique visits, whether that's conversion from the top of the funnel, meaning people coming to the site to the bottom of the funnel ordering, and looking at all points along the funnel. So there is a bunch of metrics.

They're meeting weekly, and literally, when they see metrics move one way or another, they're adjusting by weeks. So if it's of going to doubling down on it, if they see sort of a negative break-through [Phonetic] trend, getting to root cause and then making adjustments real-time. So that's happening on a weekly basis.

Patrick Baumann - J.P. Morgan Securities, LLC - Analyst

Great. Helpful color, Erik. And maybe one for Kristen really quick, a follow-up on opex. You mentioned variable comp and incentives as positive sequentially in the fourth quarter. Do you also expect any sequential net savings from the various programs that you have in flight [Phonetic]. And then also what about freight costs? Any update on what you're seeing in the P&L there going into year end?

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Sure. So sequentially, for Mission Critical, no impact from investments in savings on a net basis. It will be flat sequentially. And then on the freight side, sequentially, not really seeing any headwinds. Freight is a bit more of a story for us on a year-over-year basis. And that really has more to do with lower freight rates that we saw in the second half of '20 last year due to how we were shipping the PPE out to our customers where the customers were taking possession of that product.

So, we are seeing a bit of freight inflation creep in. Sequentially, it's not an impact. It's maybe a $1 million to $2 million on a year-over-year basis in the fourth quarter. But we feel like freight is relatively well controlled given what's happening in the macro environment. We do a lot of small parcel shipment. And that is - the sort of terms of how we pay for that are pretty well bound by our contract [Phonetic]. Expect to see a little bit more pressure coming in from our LTL shipments next year. But I think given what could be happening with freight from what we know of the macro environment, we're in a pretty good position.

Patrick Baumann - J.P. Morgan Securities, LLC - Analyst

Great. Helpful color. Thanks. Thanks a lot. Really appreciate the time and best of luck.

Kristen Actis-Grande - Executive Vice President, Chief Financial Officer

Thank you.

Erik Gershwind - President and Chief Executive Officer

Thank you, Patrick.

Operator

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd now like to turn the floor back over to John Chironna for any closing remarks.

John G. Chironna - Vice President, Investor Relations and Treasurer

Thank you, Jamie. Before we end the call, a quick reminder that our fiscal fourth quarter and full year 2021 earnings date is now set for October 20th, 2021. I'd like to thank everyone for joining us today, and we certainly hope you enjoy a fun, healthy and safe summer. Take care everyone.

Operator

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MSC INDUSTRIAL DIRECT CO INC

Q3 2021

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