MSM - Earnings call transcript Q4 2018 | MSC Industrial Direct Co., Inc.

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Operator

Good morning, ladies and gentlemen, and welcome to the MSC Reports Fiscal 2018 Fourth Quarter and Full-Year Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. of and President Vice Chironna, Investor Treasurer. Relations John please go ahead. Sir,

John G. Chironna

In everyone. Jamie, XXXX to call. and me Rustom and Officer. Executive you, Chief our I'd Erik fourth room Gershwind, are good conference Jilla, fiscal Thank Officer; our morning, like Chief with to welcome quarter Financial our the you

of found During today's the to as slides the accompany that refer operational presentation website. section as our and of well be financial call, various we which statistics, Relations Investor both our on will in management can comments our data

reference Let Private Act Safe me Litigation XXXX. our the Harbor statement of Securities under Reform

place company statements. to as the not obligation no assumes anticipated XX-K statements. press filings. our forward-looking These and Annual laws, as actual are to Risk other by expected statements ability plans, this update is and risks these that on strategic benefits market about our cautioned Factors guidance results, of future regarding These contain current comments we in expected statements from to on MD&A about well are forward-looking acquisitions. our filed as SEC cause on and expectations Form to our release call gain Our securities investment the with the expectations forward-looking sections the uncertainties reliance Report involve supplemental from and of our the information our in on those statements these are including latest and as statements. share, well meaning within results benefits expected these Investors website and the differ on the noted these undue Information based earnings risks providing recent U.S. materially the from including could SEC forward-looking

in results, most to the course call reconciliations GAAP measures. are directly non-GAAP GAAP presentation, measures. financial I'll reconciliation of financial refer which to of may the measures which the now In adjusted adjusted the Erik. versus the addition, to this non-GAAP the our turn contain to Please we certain refer call, during comparable over

Erik David Gershwind

thanks morning, us Good John. joining for everybody, today. you, Thank and

the the completed it we've over will progress. XXXX, provide and who company more to I'll will the fiscal before fiscal full there, then into some and the annual questions. fourth on the specifics turn our state I'll I'll like now framework. margin first up begin launched call guidance about As provide our recent Rustom, to XXXX XXXX our line with of perspective the quarter From who and quarter this for of and review offer and I'd performance. briefly fiscal details our wrap open up our fiscal operating we also year, environment

MSC manufacturing we've on past the repositioned plant a supplier to America. from several Over mission-critical floors spot buy years, North across partner a

technical done services touch. and are have focusing and products that so on We by high

of core into acquisition have space, We VMI new Metalworking. of C this our business Class success same by traction through leg upon We've platform of vending force our leadership journey and At The VMI. a was redesign OEM channels AIS. and cemented Fasteners to gained the in expansion sales continued our inventory in we've solid prepared achieve our sell of We've and play in established our the time, built was productivity XXXX. completed of we for customers that last higher to our them growth, profitability. customers, work role a sales high-touch partner. from serve and complex to better during mission-critical design deliver This that was one buy the to levels migrated upon our is that fiscal our a enabling one force to more as proposition to value management spot the new,

account growth head organic migration. and transitions count as made these declining rate implemented transitions, underperformed rep to we we sales roles the due sales into As our changes, new

is work this XXXX, fiscal begin we us. As behind

we're and of back Our and sales roles encouraged progress. team recent focus typical I'm the to into levels And by of customer signs field. execution more is in settling new

its return pilot right we strong momentum such away, our to progress And we areas while to revenue we market building as is test organic rates XXXX, that to important example, our performance core For we growth are expect the growth historical other company, across across fiscal Returning and seeing underperformed, well customers. of don't executed business, continued while particularly expected. the dimensions. in broader

We stability face of competitive a in continue the margin gross delivering fiercely environment.

margins our XXXX. operating gross continued roughly in fiscal We fact, a a the were result leverage on productivity. flat achieved of focus point improvement impact excluding In of XX acquisitions, basis expense with as

two DECO solid a direction exceed is expectations and our excitement a about and here momentum. continuing performed AIS Our to well of start. Overall, there to initial our acquisitions with off sense

above now Turning I'll top it above industrial our now the growth midpoint the gross range, environment. share and a year, quarter, of the sales remain in fourth Conditions $X.XX earnings our of guidance guidance. the at the of end turn fiscal with the was microcosm guidance full strong. our midpoint U.S. per market to margins of to our slightly range,

have mind. levels we in reflected XX.X, to were as continued occurs was volumes also XX and growth and catch levels. sentiment energy, recent which up uncertainty years in brings the is order month end everyone's on show. important outlook and of is, it's July Adding XX.X attended industry customer While strong they all sentiment. in It chance the is America's the customers, for pointing us to metalworking remain situation bit MBI every with such MBI This moderated and high. average for it's conditions manufacturing The in XX.X in general One September participants. markets. suppliers other the XX.X course, Last North largest rolling a of high The Chicago months, tariff two attendance in IMTS, and reading continued great to indices, August. and a industry at month,

supply. frame of let to with respect So to me MSC, exposure you our sources for Chinese

from that ourselves. import goods we have China First, directly we

China any brands our for passed only is of For is from that origins import X% amounts impact either countries or of products countries above from exposure directly This multiple Then example, we related is tariff to those exposure our of exclusive of expect we indirect suppliers just and have some of where this goods where tariffs. to paying one cost X%. along. about responsible MSC And China. be from the

list, will exposure nearly are manufacturing so, from X% So sold. would half may different to China. that more sourcing say impossible than of put and exposure have What of almost many and captured products, the of together, and exposure Even making this goods. subcomponents direct in less current XX% do suppliers to to comprised supply from we've chains suppliers goods we, low here, impact our are goods cost contain as those ourselves, certainly that our at mind is our indirect pool our multinational not total decline that from multiple of the of and of to Keep countries suppliers. fair increases slightly so, be of operations China than adjust our domestic cost cost and to it tariffs. many under in on it tariff as it's Of source

products we chain. So, numerous extensive with can to sourced And of our many from there's the alternatives flexibility some give China. brands, supply our customers in offering

conclusions outcomes. still it's of draw likely about let's definitive some to the impact early about While tariffs, talk

the in across input countries inflation along would increases to trends which X.X%. likely will from and increases. this the pressures higher Returning would to lead remained expect see long historic suppliers to cost price price environment we list and broader that our stable. pricing of fiscal stimulate other produce to likely result their quarter, fourth increases products. pass the which will increase who positive for about achieve materializes, of in addition price levels implemented cost and this from us demand Together, fourth the hold quarter, now be this China, summer modest We likely averaged on relatively growing price In a could would tariffs a price in manufacturers, If as economy as realization. demand the we during form

since the increase their remained quarter. turn on in mentioned quarter. during above inflation would revenue Sales growth our slightly we was midpoint in call, that raised came have the now limited realization price our our midyear performance fourth more the suppliers January headlines guidance of Price I'll the of though As number suggested. range. to than list the prices positive last our

noteworthy, not trend changes several surface under encouraged. in that particularly us is alone the have While

we at First, expect to base guidance. the to of improve from growth business in X.X% fourth the quarter the first midpoint at quarter X.X%

customers. core our Second,

aimed. primarily the mid-single-digit and digits. the August in because growth it the a year, This core sales We last core where uptick, noticeable of our growth changes in company high-single growth noteworthy, effectiveness were in is was saw core lagged most where rate. particularly September is though, For

of The the was additional along year-end quarter a fourth high-single-digit which a the national headwind future it swift ramping changes positive are to that over the the channel. sign, issues This first trend The sign was is due seeing encouraging our correct to mid-teens continued, account muting the by along was growth in new business. of for accounts, encouraging growth one third The are was government, quarters. the well thus the taken and but are in fourth next The rest contract that slower accounts, with smallest digits where our expect represented I of we couple We've sales of spend, remain in growth Government a the of other in improvement of not in in prospects. activity, encouraged quarter couple down government. recent XXXX. direct government marketing far do the impact in mid-single losses. we by and with to actions developments rate bodes growth government is

the our with same less behind more to pricing, benefits we've our we sales Combined into it based. translating and these it marketing model, changes As loyalty putting transactional and reengineered results. web resources transforming and channel, more done are relationship be direct of have the with

channel mid-teens. marketing During September our double with direct extended the the in up fourth into marketing That digits. grew direct quarter, momentum

last of to net salable can representing to the encouraging value a SKU contributed of life Rounding was even our that X.XX from by XXX proposition points growth this up million, as roughly fiscal view our sales without than as to XX,XXX. sales, our results out we and While right-sized fourth basis vending person roughly quarter, new XX% accounts. nearly quarter sign, count indication in live an another less the we bring customers

accelerated fiscal fourth Given through positively growth should sales SKU expansion the our the our in this and move impact as we program, success of we quarter it year.

sales that had salespeople. a as And head recruiting result, we opened funnel we're two we up effort net XX on the mentioned was added fourth pleased with we our count, our quarter. and strong to what recruiting the calls last Turning in a

made we that You'll slight the also website service a see in on operating definition. statistics posted and sales change our to our field

sales As our who a sales facility it changes, effectiveness to definition, which thought we service is the reassess any customer's completed providing now in a we or our was good associate includes function. time

a historical As changed slightly we data and head restated result, count accordingly. numbers

You'll see, though, historic changed not it's trends. that

across expect fiscal we add XX somewhere sales to neighborhood of the in forward, of year. balance Looking the associates the

could I'll to now turn down seeing performance upon course, or we're Of and our move based out it environment over the that reps. this of Rustom. up the new

Rustom F. Jilla

Thank you, morning, Good Erik. everyone.

for into me guidance the that results company our total QX and to we base had details, acquisitions. is business, our getting which excluding total Before provided you remind let company both

between last quarter, year. million, an X.X%. growth X.X% of basis of were points contributed acquisitive and $XX.X For was DECO the them business total average growth quarter base AIS, the our versus daily increase and fourth same sales XXX

XXX Our our points of the basis last this points XXX quarter, coming basis and the for year from at range, guidance top of reported acquisitions. down margin was roughly gross XX.X% with from the

roughly cost should exceeded mix our periods, year likely until QX, in headwind. realized our these from In net gross with our be the of supplier earlier impact product acquisitions down impact base points. XX.X%, in QX, of increases margin price still will the our year. fiscal But guidance. be fiscal margin Excluding higher benefits cost increase, ended lagged reflected XXXX XX during this pricing was a and prior from fiscal basis which both slight XXXX gross We quarter price with rebates. the you'll see and And of flat first essentially the business

business this from increase, year-on-year million, XX from personnel last The basis increase We freight million to limited and drive variable million with $X to OpEx mostly acquired year's attributable business last pick, about OpEx to sales volume-related Base roughly roughly the in of reduced with points as QX, QX. sales continue costs, $XXX investments. year XX was costs from is OpEx Total points the to pack, to productivity and is to such Of XX.X%, balance $XX commissions. basis last from XX.X%. base businesses. up below improved QX coming half ship,

cost our So of offset general once much and controls productivity increases. and again, investment inflation spending

fiscal purchase margin accounting It's worth Our quarter the margin down was we charges basis and to points. acquisition operating incurred mentioning value cost pulled amortize million by stepped inventory. up of on operating fourth acquired $X.X XX.X%. XX our that AIS roughly This required

the operating quarter expense margin our basis improvement on total business on as we result XX.X%, XX Cuts quarter the line in of Act, in OpEx. was a base a was impact XX.X%, Jobs Tax the a basis point with the Inclusive ago the same tax Our of comparable leveraged fourth and for year our guidance. percentage

sheet midpoint guidance. $X.XX earnings reported that Jobs and a comprised essentially purchase the included in net from per EPS in the that the of true-up This All QX, we AIS acquisitions share, benefit of Act, accounting And negative to $X.XX. $X.XX from to Cuts benefit completed dilution of of we balance $X.XX was due the of impact revaluation, year-end above one-time full-year $X.XX the as acquisition and Tax the resulted charges. of taking costs this reduction, In balance items. had of $X.XX sheet QX, of tax-related revaluation

balance with to flat our Now, was sheet, turning third XX quarter. our DSO days, fiscal

increased turns million. $X to flat from during up slightly X.X QX. That's Our sequentially quarter inventory the times. base $XXX business at And inventory remain million

income. $XXX ahead $XX inventory increase increase million we to was as to the cash by Net possible expected disruption supply provided million to activities expect quarter continue in the last first chain protect was against also The net quarter, price year. million a ahead $XX operating of we by increases. in and main versus Looking fourth driver

compares was by expenditures million, was million. Our capital million cash $XX and net expenditures our quarter from capital in fourth $XX QX. activities, That subtracting the flow $XX after in year's last cash operating provided free to

also We the million during brought $XX XXX,XXX back for shares quarter.

times. flow generation of very expenditure XXXX $XXX was flat million. Our strong million That's We year-on-year fiscal flow ratio to in with million prior free a with leverage XXXX's declined year, also used paying improvement $XXX versus pursue going $XXX back ended a in to million capital versus fiscal X our $XX cash year. year, million capital prior million versus uses versus the fiscal versus lower by million shares on ending attributable our we $XX still allocation acquisition capital. of shares over year. XX%, cash taxes on spend free year at strong AIS is cash $XXX with $XX fiscal XXX,XXX reduction million fiscal debt, And of paid We fiscal XXXX. spent relatively million million. XXXX out buying $XXX most slightly also balanced, We XXX,XXX operating lower our million $XX working ordinary the in increased the our the higher last from and million We the $XX XXXX opportunistic million. net acquisition of ended the $XX generated dividends And cash the profits, in for to And $XXX $XX but philosophy. for

continue sheet we have capacity. So, to balance significant

long-term of Our credit balance of as was million revolving $XXX and facility million, $XXX our the fixed-rate of $XXX year-end on million total mainly comprised debt borrowing.

with equivalents. ended We cash million the cash also in year $XX and

We and XXX to OpEx-to-sales XXXX. XX.X% full-year being base our fiscal business improved Revenue basis a tough maintained $XXX XX% gross total our points company turning growth $XXX briefly with margin cover of Before in of me this million ratio in environment by QX or million our our performance. rose P&L let guidance, organic.

focus and grew to on remained XX.X% our XX.X%; reducing our fund XX helped rose XX%. margin cost operating helped our total serve business acquisitions, offset almost to and to continued Due inflation and to profit from XX.X% productivity Our flat points us our by base however, operating investments. operating margin basis by at MSC

base for the resulted of this margin a incremental in of business XX% All year.

see to shown So and quarter X, first slide which guidance you for of let's fiscal XXXX, can without on now, move and acquisitions. with it's the

the that included is DECO is the it only business AIS Now is in base, acquisitions. that in

total ADS X.X% AIS. from X.X% to This X.X% includes to company points year versus basis growth by organic to period. the increase We X.X% XXX expect and prior of around

total year-over-year. the of QX Roughly Our gross to is basis is due to XX%, margin be minus points points. decline sequentially year-over-year expected XX XX basis plus That's XX up or down points AIS. and half basis

midyear increases a As I gross positive, it our headwind And put margins, remains increase slight fully price will noted until expected be while in cost increases base a QX when offset through realization fiscal price discussing QX. our QX. business cost in not supplier we will

operating roughly higher million. year's the from productivity, the over last head The sales just expected investment We're million, will business this. incurring under well Our remainder our service expenses also acquired our spending, are as million, $X this sales and $X $X $X of comes for around count, net roughly business with comes costs as stepped-up $XXX quarter Variable $XX direct of another base million first field remainder up quarter, be AIS that mostly marketing severance roughly repeat. not – of with inflation, associated expenses account million increased to for accounting like programs. million

severance from the However, this up allowing QX. in movement. costs. sales after to ratio year's our stepped-up $X service count, and absorbing QX Sequentially, prior all even million expected the of our attributable after head to unchanged is again, field be these, is marketing primarily volume increased is for OpEx-to-sales the expected OpEx and about And the

half the XX operating AIS the last decline of gross due be almost expect with to basis midpoint XX.X% remaining roughly year's over a basis guidance, year-on-year decline. XX the point to We coming to the from first points approximately XX.X%, margin margin quarter's

specific Our quarter difference productivity from journey decisions. but the comes impact of this continues, the

force First, sales expansion.

telegraphed next being in is see we're step-up count to than we we're for like likely in – larger the saw while, a a than this quarters. While of QX, head couple sales in

direct increase the because strong in marketing we the Second, growth of seeing. are

severance will Third, future costs, cost offer the savings. which

to with organizational these of our actions plan. growth All alignment and are support

initiatives actions operating the reported our will strong and productivity that continue future leverage, these our While may pay dividends. to is fact are still going impact

with it line is the estimated our quarter, what tax first to Turning in January. in rate we XX.X%, said for

guidance XX.X million. count diluted our also roughly share declines that assumes weighted to average Our

fiscal guidance $X.XX Our Note after first from quarter absorbing EPS XXXX this is AIS. $X.XX. is dilution range to $X.XX that of

us now fiscal Let into XXXX our move framework. operating annual margin

business As in. our under a environments baked perform with reminder, at framework attempt to is our various you specific understand is this initiatives annual likely also helping macro our

the our beyond business, Given short-cycle nature difficult. quarter guidance a is extremely providing of

realize have individual that both also swings and We quarters in outliers directions.

both this see and choose the demand year. last likely to framework how you annual potential course macro and So, allows axis. will providing rate horizontal our affecting likely growth perform scenarios over Like we're pricing, environment business the the a on then year, of

to However, second change metrics and scenarios. you doing greater the vertical the is on for provide see we AIS, annual from base this clarity. We're the slide X moving the total X; this of to Again, the for company. the our framework, first the the a axis margin and excluding making are gross year two-by-two for business, environment price to that

into expansion the expansion are Also both In the This into move realize margin the or see, of tariffs into historic then price move determine – we tariffs the is where to realization and total axis, scenario. respect the this expansion inflation price manufacturer stimulate increases inflation of If will assuming scenarios that scenario insufficient QX that sufficient impact we as company we pricing. frameworks, we offset with offset the Now, than as current cost in likely list gross the work fall as driver form to our margins is cost contraction represents inflation broad-based cost calendar broad-based level framework we're not way can whether increases, assumes points. mix. levels face guiding If that increases we contraction the at big we do and their data P&L. price through gross scenario, assumes to increases, XXXX stimulate Conversely, price list the the realization. the price scenario is our supplier of and because move more likely contraction most entering the on base you price mix. will a

you moving the see to XX%. range strong themselves; has our an for X, Now ADS moderate on X% and X% scenario X% growth growth frameworks of to scenario the ADS business, as slide growth for is to base

to For XX.X% scenario. XX.X% the our it's the the expansion to range contraction while is base business, in XX.X%, gross in margin XX.X% scenario

Our to of these XX.X% XX.X%. base businesses range operating average with scenarios margins under from XX.X% an

now the an the margin Stepping will hit on case the business company Erik. difficult range inflation. XX contracts back, by Therefore would company four In which expected framework; XX.X% pricing. it our case. is scenario in framework, incremental XX.X% growth revenue strong it to average gross and XX.X% pricing, is roughly would likely from base will broad-based getting we If XXX we scenario turn back I'll X.X% in fiscal likely driver you which be to to quadrants, our reduces points growth, quadrants, be XX% see lower to from means points as happen range again there range XX.X%. margins once not AIS you Now, not contraction XX.X%, XX.X% growth total growth The if margins not, to the the the likely the to we to scenario while with two operating from would expand to will from levels total do to to basis it ADS In framework, not be improve X.X% X, to of do operating is add see quadrant. three in reach. moderate as achieve year does we our from quadrant. our over here, of That range in XX.X% is margin would The to and Including price if slide they margins. If AIS see from X.X% XX.X%. so expand likely XXXX. left XX%. – current broad-based see each in XX can we basis gross about expansion they is is

Erik David Gershwind

Thank you, Rustom.

They keep were part Sunday, example single this important company before the production. quick cease engines Couple in you've that needing life. to afternoon obscure As day, job heard to close, by of of shop on did productivity We to our in I'm not that, would customers in next a brings though, meaningful the simply, floor early element say an help share and want and we the represent expertise that the first. hand, I savings. service Midwest-based desperately associate of Put of customer running. in get an a many to million. $XXX our end culture. in customer another our million delivered me manufactures is cost that's same of need technical advantage These way their $XXX puts customers. competitive weeks another competitive happy an important customer one manifests for I is every their in times, roughly in high-touch advantage a out but our marine documented element called equally if to pretty documented had fiscal XXXX, this MSC in important, our itself share salesperson But delivering cost savings the fiscal customer and ago, important our savings to that gains There's XXXX

at opened part thing our shipped the it. XX within minutes found mobilized meet they morning, Monday customer's the of X:XX production one we first their dock by team of and Our and up call arrived warehouses, It that had deadline. P.M., ensuring the

our their than Our our to happen satisfy customer in door, our helped a them for our to the questions. dedication so, out the customers role mission. availability. job up and the with team's and Examples and speak customer. get doing our all this now next-day helped across company critical was time like We to open entire We'll bigger them line

Operator

And (USA), our Mario comes from Inc. Hamzah. filling Capital in your Hi, question with today is go ahead Macquarie. Hamzah Cortellacci this - from question. Mazari Mario first for actually Macquarie Please Cortellacci

through you on due I if it like tariffs. the correctly, heard guys cost passing to your that So sounds plan are increases

XXX% think process? want Just on I you are clarify, this going the there'll through increase? those cover increases passing lag how you of And plan be this color clients? can any any do you conversations to to maybe on And price in guess, with do provide

Erik David Gershwind

Mario, Yeah, Erik. it's

short seeing. the the is, of on we're passing that along look, So, we all yes, increases plan answer

effects doing importing. there's the said, from where pays effect really we indirect importing, – As two it's is effect say direct an where would What MSC suppliers are still and relatively doing the direct tariff we're I who the early.

by So are passing we the as that it a affected directly is along. relates to direct effect where tariff, MSC

of right indirect, I the so costs. all expect say, is as would to recoup and it respect away doing the With We still do what mentioned, early. to are I

it of that cost So its while relates to that and the increases would see where really has would market that we list make to realize through the way the the this form parts manufacturer likely increases lots the are the in most moved, most input to makes timing there as occur likely through of to some to not form beginning suppliers have who final a of Rustom may and have be now yet in about of portion the a the likely product of expect only happened that right lag select P&L margin, been And that we these have from gross price earlier not yet. earlier talked in speaks year. price our Many increase.

in bulk. typical early where Our in occur January see expectation the a would calendar, would year, we be, meaning like XXXX that

approach lot your next can discussions. sales a within So, the growth new your on Capital (USA), two, you maybe touch over existing more Mario you would and Macquarie or term, Inc. head strategy? can have count current - on guys going Great. demand given you And environment about your force I you to any Cortellacci the think force capacity anticipate longer comment sales month we're also maybe as how

Erik David Gershwind

Mario. Sure, Yeah.

So, say hopefully, am progress we're the look, sales what taking the the changes terms the the and is up in I'll by tone, tell I that's to you the seeing which core pick effectiveness in business, an it's encouraged route, thing first one that of with can is the – important starting us. for trends and business by of the under covers in particularly part momentum. lagged It's we're seeing

So, I think progress made. being that's speaking to

to move rationale relates model so whole What to the the are add from but recruiting that never the was the quarter, formula. many effort. the how more to have these changes been create was saw, not fourth have that first plans quarter. of know translate the to you precise exactly adding rates sales head quite the reality and going in result quarter projections, a there's Yeah, strong and is one and science we you we the time, frankly, look, efficient behind then force really a and to hiring that, over historical count, – with strategy and the at expect a in it we keeping As not to

the from the being to is for plus had XX QX out, year, the being in the based which variables quarters. you neighborhood on to caveat you're is the variables. than somewhere one QX the move could two to at of of the That and with reps performance, sort mentioned, mentioned; remaining we see assess potentially of up. Cortellacci from there One or fiscal whether we XX would Inc. we're so over you Mario a us shared, if Great. two on look balance plus environment, being Capital Meaning, three in we the – here - are like what Thank you down the Macquarie likely I of that (USA), of new bigger that under up the seeing move as we step that new second So really terms what model. could much. up from performance

Operator

Evelyn Sachs. your from Our ahead next go Goldman from question question. with comes Chow Please

Evelyn Chow

Good morning, guys.

Erik David Gershwind

Evelyn. Hi,

Rustom F. Jilla

Good morning.

Evelyn Chow

And incremental expected price But have price up you're magnitude on that business, seeing actions potential I fiscal you price sort this X, in you to for the prospects Jan thus also upon that increase XX% Maybe with year of end. put perhaps, your to point are take what the suppliers in increase? far the up your step exceed mind touching price calendar some increase yet understand in of earlier-than-expected quarter? what X.X of the just XQ.

Erik David Gershwind

So, as possible. I likely think possible, closer pricing the X. that precede look, Jan action to is, although Evelyn, here, – less year our we we It's end get the would it

our function in meaning what would really So, December. it happen with could even earlier be It QX, happens manufacturers. a of

a heard than expected. cold – is there slower say As to will heard me that because this you move struggling have inflation here. of little has I the with now by northeast excuse me the would way, But occurring, discussion me, lot the you've tell of been you've as say, I tariffs. obviously,

which out. it once and going So, really to And input we how two are environment supplier mean expecting I now customers we on would And an talking but see. all moment, solid about increase, will take are next are right right suppliers, we'll I the is certainly more more be realization, look, key be all one do levels the becoming bear obviously, months we we to, cost meaningful for the there rising. think realization. next then, of to expect achieving to because

Evelyn Chow

recover next sense, the could us to then contract declines, losses? to on government just line elaborate actions the Erik. the you're the this into turning nature doing And quarters? the sight into couple taking maybe business of insight in of and you the give some of And so Makes

Erik David Gershwind

Yeah. Sure, Evelyn.

business, in the across of in up is a the a of different lot entities of we lot XX% government. made sales, is of which of described government contracts neighborhood our So,

recently, spread and out pretty And than well we multiyear and called and just it's and dates. So, reason this we varying the done we've that why from are Generally, at lose more The well one. frank, be time, government. couple across lost there, I diversified perfectly mentioned wanted rate quickly. we And with here flag, renewals in pretty terms over a we most changed stepping QX entity growth We out, is generally growth you significant which rate government called of lose. in us. But contracts saw not the it QX. adjustments. I down made is couple, event the We a a it's To for and leadership. the usual win to

other to In business, headwind and new this addition, countermeasures some share to we're of recapture taking some after some go mitigate there.

So, it what I that see would lessen. as of of described job, probably the is I quarters. their if some these countermeasures government couple think we'll a headwind do next But for

Evelyn Chow

from clarification finally, then, my end. last quick one And Great.

to and off step-up there? as thought Could roll AIS that I was on XQ probably to in that margins you're inventory more into little you a detail XQ. supposed what to to gross Because XQ. go Just impact from seeing

Rustom F. Jilla

What that's that margin than in margin gross to Yes, amortization, seeing the of the the mean that took – I mid-XXs. much place basically, just, I impact at profit the lower low- inventory AIS a being Evelyn, quarter. comes – in mean MSC's. you're the business fundamentally, has is gross is the in the fourth gross finished. a number in step-up mid-XXs,

Evelyn Chow

and Thanks, Understood, better, feel Rustom. guys, Erik. Thanks.

Erik David Gershwind

Evelyn. you, Thank

Operator

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

Ryan J. Merkel

guys. Hey, morning. Good

Erik David Gershwind

Hey, Ryan.

Ryan J. Merkel

So, core negative roughly us? the XXXX of gross impact basis first quarter guidance first Can you down for points. margin quantify on price/cost XXX

Erik David Gershwind

Ryan, our you talking guide? are about

Ryan J. Merkel

XXXX. guide Yeah, quarter for first the of

Erik David Gershwind

it's price/cost. it to – yet. not before you We'll the moving, honest, we – be give like given that generally the look, for To do wait it's quarter still after we

Ryan J. Merkel

Okay.

Erik David Gershwind

just – it dynamic the what's look, maybe about as about just So, talk right said, step what Ryan, now. and to happening, – slightly would happening and margin back will helpful see talk be – it be just and we Rustom

Ryan J. Merkel

(XX:XX) context on the it in you that especially book, think X.X% big got Well, in yet increase would, price/cost. you're a negative the I

So, maybe just all explain that.

Erik David Gershwind

clear, fine. be realization just price to Yeah, has so been really,

is, the the What – back XXXX, has timing going when been purchase Rustom on. of increase, to accounts and have have we Two from seeing, national are happened So to cost accounts which One QX whereas, you're And in which to to issue what helping pricing fuel handful accounts, cost we and as the is margin. what's things Price to, time points; as the expect based be three gross robustly you'd reacting accounts we and mix you're on seeing that ahead growth that headwind tailwind moment. mentioned, course, come see But within calendar is is creating for are us. solid. cost. a over I'm QX growing is we a flat actually. get basis national of that the are it's the is price typically, on. when say of a small that's from to fine generally see lower-margin third escalating. is then a the web slight to and sure XX up minus But realization issue And I of and national a movement slight sequential – you're going issue seeing bit you're of start in a these this of going pricing,

realization fine. So, are pricing, It's that factors the for three getting and it's price the points. basis been those accounting XX

Ryan J. Merkel

year. Okay. And where scenarios XXXX over to year gross framework, follow up, have expand you then margins

Obviously, a midyear. outgrows you for happen? accounts? need Do need Is core So, assume that is assume to to put the you mix through what national that possible a would outcome? that also so to positive need you to

Rustom F. Jilla

so pricing, one, Ryan, would So, price big it's with through putting right. pricing increases. broad-based mean, I inflation be the us fundamentally,

inherited I been yeah, better businesses Now much doing core the and mix, there. mean, with has the (XX:XX) core businesses

a fundamental is be would mix factor, the so, but And pricing.

Ryan J. Merkel

Okay.

Erik David Gershwind

hit remarks. in to the clarify prepared in and point one the Ryan, Rustom this framework,

Just to make it want clear.

particularly last The to year's chose – So, it if it XX.X%, data business, that so you from line flat where where let's But framework, guide. last go those we it are in We some years take be the if be go half natural for couple that other QX's is the you go we out and years business a to a talk on XX.X% that averaged gross be – margins words, margin, down. and years go you'll are from back top don't QX, where above recent just years the is where down, of fiscal framework, last need of bit XX.X%. the need headwinds and midpoint the the you there see to that AIS back, of see vertical a last of XX.X%. midyear. But to We drift you if have even of up and And would there to margins QX it's our gross you year's because most margins – little years, to look not margin XXXX's in different of the solid the or where if average. gross above no pricing typically in year, other in midpoint kind in base midpoint from QX, axis, year, is look, gross time, is XX.X%. those point get just year,

point So, off it's of not just that to I make wanted average, QX. year's it's that of last off

Rustom F. Jilla

we Y Well, margin axis. it's first that gross on time the provided the

last year's we And seeing number. off go going looking to currently versus at – where that running off so, decided better ourselves we're

You could do one choose just or that. the we happened to other,

Ryan J. Merkel

it. Got

you I've think distributors help tariffs, just I indirectly far your And margins guess, your the in only one help margins. say inflation mentioned XXXX. general I so you're heard gross could lastly, Okay. And gross of could that

Because these works So, can tougher exactly? feels achieving is transparency. just you positive given days it how explain just price/cost this like

Erik David Gershwind

the what one is – the here's Ryan, the – So, direct what on low MSC, the In is, characterize in right. we're percentage dynamic. sourcing that compared think I And to China direct X% you're as at that I around relatively – the versus of I indirect. has direct we case, I – there think a And think think of other out direct difference I would case, things split And right total. tariff. of paying around that company, distributors said the we

a it's challenge. think I

going see much That the that's that along aim an blended their And suppliers, XX% a more but amount most that is to from market the these it's increase. manufacturer, not and discussions some, a industry it's that tariffs, take while air from there'll are realizing And is they're that is except a price in to of – who you increase partners, product case, tariff more in neutral, gets the case And likely we're China. blended a industry increase. of sort cases, going of line go having with to think be in, really not is gets normal best unlikely bigger. the they're all realization. we're be different price that form and If to The I could branded all coming is companies likely what other through, right? where best do. get is we industry all when of to we're side in from net see that case around many And what cover which list it's

Our customers, input that up. suppliers, costs everybody are going our acknowledges

between direct difference the that's the and So, indirect. the

Rustom F. Jilla

add there. We can also Just one point to address sourcing.

our suppliers – Just our suppliers on chains, offer particularly not we rest of affected; the a like customers can just brand, that. products. the all alternative supply work rest, like with exclusive all They're

ways months, to So, multiple the address that. kick for but couple part of tariffs in it guess, is still days. early the And biggest more due I not are, to there's another

Ryan J. Merkel

Very helpful. Thanks.

Operator

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

David J. Manthey

morning, guys. Good Hi.

Erik David Gershwind

Hi, David.

David J. Manthey

Why they were such that had outline your negative what are key on with can to sales changes the Erik, year? made drive you a expected specific force productivity are factors the impact off, And in what First growth? coming effectiveness?

Erik David Gershwind

Yeah. Sure, Dave.

prepared we to fundamental her was have our it portfolio meaning penetrated sales the that which portfolio. MSC, the we back brand-new tied to with highly span changes movement the the and that last in few simplest level, different and we are accounts, had would the segment remarks, more the change all out of focus. was if were of of tied specific was different lifecycle from is complex to It of very prior we had on So, buy The lot where a proposition, was would a have because or there sales happen range At Meaning that what old, profile mentioned get a disruption on the do make to its said, roles. to model went (XX:XX) our that to down and accounts really year, head where same gist relationships. of spot looking new I rep on model. sales roles got so sales Dave, accounts rep way a these the cluster his to I've describe a was as accounts, to was made. of value types would moment that slowdown. not count have into of sales I've salespeople last was hiring we through called people got rightfully would of our changes, an sales hey, And force selling were out of we to our old as that we hire I year, simply, put model, more one-size-fits-all same customer which across sense. take because There into head made to

a took sort – we on of disruption. a the whammy of pause segmented, came So, double on down, hiring to head was top count as which we sales so

are say, of on We other market to the of and side that kind sea would we I the would test the pilot – And suggest. it. legs progress see now find starting our are

So, here. a pilot we had market

reach Before to to I That force a of sales for we market double-digit couple and say, in took it growth. would then the couple whole quarters, of quarters this. pilot took through put settle a

in pretty is do of company, these government where track changes at solid right the the which progression we in are we the aimed that bulk were specific particularly issues in – core, such core. just and track, muting areas on what the company look, is against the market's is is that So, I pilot earlier as the mentioned really what QX progress

so, encouraged there. we're And

David J. Manthey

of is midpoint to question be margins. have we're the XX% in to first read to pull-through first wondering Rustom, that is much than I'm are the imply Okay. Thanks what calculating and or guidance it right. margins if the that. the But going remainder believe to we've that see year what what of just seems at and the The through clarifying. framework I'm close XX%, than going midpoint terms margin in the bet contribution around on lower to full-year we quarter better do contribution expected And for quarter? second seen pull-through on to in

Rustom F. Jilla

here. mean, around. year. quarters point an annually. in probably I and do if it memory, a annual So last one been Actually, it's we've quarters the margin move said, QX framework you also quick QX, kind have mean, past mean the that was year's I XX% away It's don't last all, it's interest, you of of that back think, around at incremental again, I quarter, of look I've I from and XX%, had almost and just XX%. walk run in thinking – hey, Dave, was first

factor out So of take there. quarter the

we're we so I mean, driving So productivity. that of constantly XX%? deliver – first really how all, do

for going it comes sales of reducing that. and in improved cost OpEx particular, in years. yeah, the Erik I to basis actually expand Our the the functional impact was have marketing our that over so head I'm increased spending our XX%-type three made it. in, count. we're to the has to that mean, we'll We're continuing gross other service it's we're range sales to I productivity. repeat incremental per And margins, deliver see we're to the and mean, the as don't going driving that's cost that in We're in margin. So, that and, there. to But as investments do serve in We're on those really just we to XXX would, point XXXX, QX, last important, but points if see continue well, to we've decent have Provided right? really looking we there's expansion, relatively gross se. midpoint, to the come sales, in margin, to got you close there, not

we our a going a that because this ahead, fact business, that to in us rest months, the it later those are combination I take come while all have through like you cost pricing. will – an a it's P&L. of that mean, we way to it's so know increases time, as of I go early I And again, in at that the anyway quite we've this buy cost because know the of through certainly Others increases the has, guess, our important. costs occur, mean, it, It's just our huge average to I'll got to factors what repeat that extent, be So, a cost through it's through. increases the a the those realized work we year. as but flow just year because one, that's we lot the the lag, pricing, in will determinant and their final through come happen, point

is pricing to anything well. as So, huge Erik, add?

Erik David Gershwind

it that I think the thing with a I'll that only Dave, bit respect is up The to QX. OpEx, add, pretty that was OpEx comprehensive. – step There's a from so of there's QX to in the part OpEx it's the up of we the out like year, doesn't repeat. not there growth step if investments. look down. the But of And is across goes then balance other

as through get as goes percentage modestly we we year. comes OpEx sales a so That's up sales, percentage down, on through on revenues do assuming to leverage the move OpEx But the expect revenues, year. we actually do So, do as we'd the what of the the of a OpEx plan.

Rustom F. Jilla

Yeah.

David J. Manthey

All right. guys. See Thanks, next Okay. you week.

Erik David Gershwind

Yes, take then. See you care, Dave.

Rustom F. Jilla

Thanks, Dave.

Operator

with Ryan go ahead Our next your Northcoast comes question question Research. Please from Cieslak with

Ryan Cieslak

me? hear you Can

Erik David Gershwind

Now we can, Ryan.

Ryan Cieslak

Okay. Great.

much are organic government from quarter organic Sorry just the of well to make the that ultimately, framework impact the sales? an for wanted may sure Can the maybe on so about giving year. I this on be that. impact I first understand full dragging as you sales loss how as contracts Yeah, of guidance you quantify, guys

Erik David Gershwind

Yeah.

you sense. look, specific sensitivity, getting competitive for So can in a without Ryan, QX, too get just

from But likely on, about that there of not the So, portion for of mentioned the – year-on-year. couple of that there's digits talked decent of going all we step countermeasures headwind a is next What a is in headwind spend But we continue losses. I'll I is is number had mid-teens. a mid-single that of quarters. down portion change one. year-end from then activity that lot and the look, that a will a tell a you

moderates QX. is there headwind the decent where So, a is in it chance from that

talking about, that lot performing there. expect, that still there. would sort improvement in see I've we'll high-single get of the and that out there to would move look, picture the be get And get overnight, looking Ryan, tailwinds been digits that year, the is we that and there with but we and a through of be zooming wouldn't here, we should see the the that business as it offset this able expectation what big are and ability to And I headwind

increased added new to So, settling just have investment making not those an changes. direct sales We are impact. the momentum accounts. are building because SKUs mentioned impact. are into – look, that having performance an new the of the We're just we're of we starting marketing hires small that there. Rustom yet We sales see

tailwinds are the me pretty So, that these have encouraged.

Ryan Cieslak

to want last And was September the off Okay. sure? at of be guys in you just fully gave, in rolled numbers it number, make off quarter, clear, just reflected October rolled they the – to are they end

Erik David Gershwind

QX. in reflected fully They're

Ryan Cieslak

Okay. Got you.

looking account at look growth I easier it October you October, a into moderated significantly? Is take are Erik, the like how were you look in it little days a like so the stacked the or XX the on seem look last contracts rate sales, anything Has demand? when two-year in of changed at point some bit. government As that the out trend of that there overall – anything is comps or else, within things maybe you'd from these or environment,

Erik David Gershwind

the anything, doing again and No Ryan, small better. of the would progress, bread account, the solid core seems business, environment of butter kind is accounts, say if on and I the

starting of So with government, that But last I'm say, take look, business XX% growth? that of my to sales we here, mean but year overall and the point it just just obviously, the ballpark what encouraged Now, mid-teens changes does all. bread-and-butter don't that we're sales to take and made we the hypothetically, is hold. say, flat, the own

else environment the So, no. other parts business, I'd nothing note the or in of

Ryan Cieslak

seems that for get my price facing back right get what are it And but realizing follow-up, I was price/cost And like of that cost, queue, I'll just I in surface lag has now below you realization were a maybe Okay. you little so into guys the the it tight, how headwinds. then and surprised on fallen the times sort dynamics considering far get lead supply wanted strong Just date? just seen year, improve I off. into based would Erik, a it's what price/cost been that's your are maybe to of least environment, we've to, extending. actually a At year expecting. why sense next here on really chain's comes

this that really why you can offset some If cost into rolled headwinds of maybe quarter, sort XXXX? some able of these may and into you be Thanks. have that were offset how more fiscal or get to

Rustom F. Jilla

it So mix, one we quick point just call I before QX a mean, Erik take as X.X%. comes if rounded mean X.X% there, you to the was there. price guide, I as in realization, basically, our

a mean, we to our you what price be I and increase price is, continue July, was So, point we – would increases we've through. see realization. cost I of back we think, in, with Ryan, really the see come it took right, important moved, had cost

all the while any way takes of okay. those up some actually works, – in we system And of what's other pre-buying, and behind our increases my of in start P&L. with of with to That's those with costing showing average them by them, case, the deferred it for point. impact a cost Some the actually

look several a out, pretty provided cost relatively how a we've will pretty of If remains months got for good sales sense mix Erik? have the you sense good – same, our trend. of our we

Erik David Gershwind

we inflationary add us the of dynamic Only is is say, to the the I manufacturer what sort is to – Yeah. tariff again, – other happens cycle, an is always as in than typically described trigger there, as situation why, Rustom average realize and mentioned, Ryan, we pricing. that gives along thing costs, and for Rustom opportunity of a benefit We the saw you – list us and price price pass the primarily from that system us. timing get costing that to because movement, ahead where of the take

our that So a inflationary the turned next a and we an of up, happens the cetera, benefit, then pricing, costs then get couple is and we cycle, in of a if where in time there's the is, price round Over work ago, to back et cost of had from you range flat go And quarters couple happens cost still through what to variance. negative created cetera. were their way P&L. positive what another and and catch positive there et quarters

X.X% suggested. seeing So, – opportunity summer our would that's here. basically you're as thought, story. big manufacturers not as as at temporary headlines. is here really given temporary I That's the the stimulate to Look, was we tariff have if move the and, what specifically, increase But hopefully, this the

Rustom F. Jilla

get can I lost mean, in gross (X:XX:XX) this. Back just about to second. me make doesn't to stability, on mean, we're sure a if pretty it. you margin focused want I for it think

at end actually base And much environment at XXXX, gets XXXX. bunch by mean the we margin over for customer year I a with in focus fiscal on That's pretty profitability. bad this achieved it. that too I of business, the right, mix, mean are of on in margins all. I gross discipline line look approach that's how you the focus not our in If being business the gross think our

in time serve of shows on our cost sort a cost and in also helps lot margin. but That productivity of up doesn't So we operating of to efforts that, spend serve. us and impact our

make to we we've how out done as XXXX. want on QX, that focus well just that I in as there sure So,

Ryan Cieslak

top-line some though, is maybe you appreciate today, the initiatives. be costs rolling with fair get Erik, certainly, some initiatives, growth this But Thanks. offset ability, ultimately, ability price sales get continue that's I to and there's is force to your move balance impact a to between color. want that to the No, think, clear, nothing of and to you price forward, you're not coming through. sales And margin. new as have force the these should that there in, impacting now so behind just guys as been and your you you that I related has

Erik David Gershwind

factors near the which get it the that continues, only a marketing over the of sales new which to Ryan, about, the growth headwind the account, The lot, should of is the called not talked only we've lower two factors major a that – talking impact gross answer No, factors out. price. for time, a The model no, two working other – channel we a other are been about slight have ability web But us. that accounts on tailwind mentioned small margin the Two accounts our is I headwind. pricing, national only that I did slight not called a I walk two the okay. helping the that it beyond in is grew a actually, which, were; shouldn't. in one, direct are we've QX handful been accounts term, talked purchase QX, we so and quarters, to other But those that cost if fuel to a it we is needle-mover, slight it's couple last about, becomes margin

Ryan Cieslak

guys. Thanks, Okay.

Operator

final our question Steve ahead with go And Markets. comes today Please from Capital your Barger KeyBanc from question.

Ryan Mills

morning, on Good Ryan guys. This is Mills Steve. for

Erik David Gershwind

Hey, Ryan.

Ryan Mills

end pay you Yeah. talk believe question, going more reps added I to of add My on in I regards you the field a them impact operating maybe fixed them you're to transition structure. commission-based you quarter XX about you that? Erik, said this a salary the framework the Can where XX by first and, assume year. there's then Because on that, and to component your a margin tied as start cost

operating there adding any framework margin to So, is from field your impact reps?

Rustom F. Jilla

already service me works way operating Like costs. and to is It's during all they of margin They whatever QX, there. bring the of our actually. QX, number QX. our or for sort that does part, people, the actually it have fully, that, – plans XX that board, into Yes, we through. factored framework. hit this so add built of year is that hired the But it like you let we the already on the right. that factored obviously, that remaining the So, for the and for take And in our is all in in most come for people

it and and remember made the we we've that one is this. point that impact Now, other sales made calls prior of in

start when in well. do when really then hire, before enough there's sales themselves a to you to is you to field there lag they actually salespeople, pay drive So always and lag for a start bring always

started that's and or fiscal hiring up today, course, at and really latter fiscal QX revenue of definitely in So, the the then, to fiscal show XXXX, XXXX, we've the end until with our too right. that of going not ongoing assumed of much it's in we part XXXX –

So, way, the all the is op stuff, margin factored by framework. into the

Ryan Mills

then, And to going government your a as I October called and out you trends, Okay. headwind. September know

prepared from in missed impacts Sorry, could but if hurricanes? this point there remarks, any were you that out I your

Erik David Gershwind

we to good there too to but much – Minor quantify, mean, there's bother. Look, September October, of look, make headwind – really try a probably so honest, it's it. be in Ryan. probably yeah, tricky question, Yeah, didn't some I to gets and was we it didn't

Ryan Mills

then And question. my last Okay.

You Can the focused you reaccelerated your growth. on process products more Is SKU products? about count it higher-margin talk high-turnover decision-making there? or

Erik David Gershwind

while. look for which a at the count can growing SKU program, been we has quite SKU – new So, generally you our see so been will new has –

where data-driven customers formal we are – them to of we We in market efficient process looking we're criteria, are tend it's we These program financial that those will look after be capital. see revenue. Primarily, a and add returns that the of across look bring at products a terms looking marketing into line to and more number generally to in may on them ways a them. pretty into only be are inventory we bring around of looking market sight are ad-hoc, that create We'll and – metrics. sourcing products because selling in we at requesting,

course, on but strong. we'll at look to capital, very Of and margins, primarily return tend be

we accelerator, repeat, expenses time A QX by not that way, And success and over through where did and, QX beginning contribution in move saw an expense. there there, QX we the little was pockets So that of opportunity over some quarter, is in it we the little recent much. this the in so you some in as there saw year. doesn't we quarter, builds the imagine, trickled a bit fourth certain from is what we hit

Ryan Mills

Thanks for taking my questions.

Erik David Gershwind

Thank you, Ryan.

Operator

that question-and-answer like for conclude any call And will session. over the conference ladies and today's Chironna closing Mr. remarks. to I'd at time, to gentlemen, turn this back

John G. Chironna

some us the holidays, over Thank We'll be on conferences attending joining today. before and road shows. and the everyone Jamie, you, the next thanks for road coming months

Have So, not, look XXXX. seeing you X, we earnings there. on out next if to a we'll good And report forward day. our January

Operator

thank attending call. conclude and today's Ladies does that We conference you do gentlemen, for today's presentation.

disconnect now You may your lines.

MSC Industrial Direct (MSM) 30 Oct 182018 Q4 Earnings call transcript