MSM - Earnings call transcript Q4 2019 | MSC Industrial Direct Co., Inc.

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Operator

Good morning. And welcome to the MSC Industrial Supply 2019 Fourth Quarter and Full Year Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. ahead. go Please

John Chironna

Gershwind, and to Branden, quarter to Today, Financial are everyone. call. Rustom Officer; Thank our Jilla, you good to like Chief Erik room the welcome me fourth Chief our I'd Executive With and you, Officer. in morning our fiscal earnings XXXX

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

Let Private me of under reference our safe harbor XXXX. Securities statement the Act Litigation Reform

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

reconciliations non-GAAP we directly measures certain the our the this results, measures. in adjusted of comparable GAAP GAAP during non-GAAP financial presentation, measures, versus addition, adjusted financial may which contain to reconciliation which to refer the the please are call, to In refer most

call to the I'll now over Erik. turn

Erik Gershwind

you quarter XXXX it discuss review Thank for first environment well we off fiscal I'll I'll to To for will morning, for fiscal kick I'll margin joining before call, us good as turning details an this and performance questions. and fourth everybody. framework. then morning's results. before over fourth lines our as our guidance XXXX quarter John, who Thanks, provide of recent today. the our then the quarter of wrap fiscal XXXX, annual provide the our and open Rustom operating the And up overview up

our line performance fourth levels, decelerating we the related midpoint in improvement operating range. quarter. above the took represents of gross although to Our reported of margin included that they was the the environment. at with execution fiscal guidance a actions And roughly guidance anticipated productivity during the expenses demand were were solid end and in quarter cost Sales top

guidance. lower Excluding our these than operating costs, were expenses

As a a operating guidance. adjusted on of adjusted Rustom per just of will margin in in result, ahead all more earnings of our this and well share share minutes. details couple came

manufacturing positive, to which came XX-months takes MBI weakening output, is distributor deteriorated then Turning the the manufacturing readings sentiment and while rolling surveys was July, been XX.X points reading The was growth the average markets. August XX.X. softness XX-months progressed. is the environment. steadily Industrial evidenced in and and coming in it is XX.X still indicative September XX.X June demand to the rolling The were and data metalworking of and In as at XX.X. average the which indices. And for MBI quarter for declining

customers in some We shifts suppliers including restructure pockets eliminate are some seeing and layoffs. and

We are also hearing of shrinking backlog. order

few the automotive, in is end agriculture. some acute gas of is environment, comes demand truck, overhang one weakness and of did that pockets Aerospace decelerating remains pricing broad of like customers' areas terms based price in when strong. and end that macro due result the markets, growth, businesses of heavy to the to the with scrutiny In tariffs softness global in oil softening. typically markets with combined and uncertainty With slowdown, economic regards the industrial

annual about has X.X%. at recent increase our history. price so and as it with summer about and came implemented been line We in far in expected Realization

in through double our Now third growth growth rate. both weighing low Government customers taking from down digits the digits improved still our performance. grew a single look sales quarter in anticipated at national but and levels accounts Core in slightly the the quarter. declined low overall slowed as the

to government two of the headwind contract continuing the as half by quarter. abate fiscal XXXX our we fiscal The in first peaked fully our quarter losses continue our during should lap discussed and third fiscal third previously

seen discusses will territory hear account quarter. in deceleration he overall saw when from growth unchanged the growth from continued you rate our levels quarter the government essentially we guidance, turning fourth October while Rustom in with National first remains positive negative the September fiscal growth and in is negative. As

been most that not which change geared The markets surprisingly acutely heavily metalworking our has the soft. in towards customers biggest are core are

implemented One, particularly our plan business implementation. new around improve sales that performance designed profitability Two, field reduction expense and productivity. to an programs You our three, in execution we from call recall and of last action supplier three areas.

provide on now three. some each color I'll the of

wins were implementing translating those quarter, with new we executing well shared in you revenues. I business enough into wins As and not last

have sales bottlenecks momentum. business coming build the new addressed continue wins and new the the from over business wins should our Meanwhile, to and We funnel successfully quarters. ramp

business this area in Given will development the seeing, XXXX expand the fiscal investment success we of of as we early be are team. an size the

the vending of team. in has Sales, of new sales operations. Head and for the and leadership with investing accounts on new national rounded sales inventory business cuts management up as He out levels is development, intensity is he and areas all VMI. such meaning ramping our focus through business, management Eddie government, leaders necessary others, in performance making his And team and and certain Martin, new CCSG Beyond

of supplier community of action our from form good the the investment of We've MSC. into part in plan improve profitability seen to supplier increased was response second programs. our The our

gross basis. of realize fiscal improvement the a to expect due to This will margin our in come rebate programs. half XXXX. roughly is in our resulting combination method an profit costing fiscal the and improvements average We $XX timing and in of of on million XXXX The inventory back annualized

Our partners focus now program. invested turns to share delivering market have for in that the growth supplier the

The productivity. plan expenses third of action improve operating our to and part was reduce

over the on the You we of website, three operating will statistics notice the August. quarter. during of was that a last the in month This drop in headcount actions result the took

an retire. a program to centers ran distribution we significant giving our voluntary in First, tenure associates with opportunity

management third, selectively we where positions And our up ratcheted focus is performance intensity eliminated we changing. considerably. Second,

as of well. these most the are While program continuing first we during fourth actions were the into quarter, completed the quarter

expect areas a in to select the fiscal reductions. and in Moving for replace certain headcount our forward, QX the quarter come again to and hiring first the growth balance down portion we we anticipate year, of of

We intense will, focus however, maintain our management. on performance

will right and particularly deteriorates also environment We the the reshape further. size to continue if business,

I'll I'll who’ll some financial provide over to Rustom now then turn things further come remarks. with details concluding back and

Rustom Jilla

morning, you, Thank Good everyone. Erik.

total Company QX Mexican you details, let base the i.e. New guidance our Company into our excluding our both we provided that and acquisition remind AIS financial business. getting for total business, and me Before

OpEx fourth million initiatives. to performance we reduction incurred and fiscal in improvement expenses Additionally, our $X.X and of severance quarter, our separation related

terms our of terms in results the reflect costs our of reported these of results I'll then such and speak adjusted As only. which first in exclusion

our growth. mid-point Our were in of daily same million, line fourth increase Mexico sales just the X.X% roughly an average X.X% and quarter with quarter that MSC over contributed total guidance of year, $XX.X versus of half last range.

reported cost. accounted guidance basis XX%, last the the came for points Our roughly XX basis gross range to XX, XX down decline at the QX mix Mexico negative and margin from high end and roughly of from was and remaining roughly year XX basis year. Versus points price last our

million, in margin reported expenses a in which operating $XXX.X Total QX reported resulted were XX.X%. of operating

Our fourth resolution audits. due to XXX a was state the rate mostly approximately for of points tax favorable guidance the quarter tax below basis XX.X%,

and rate the Our was Jobs effective lower due to primarily Act. year tax last Tax than Cuts also

resulted this earnings All reported share per of of in $X.XX.

Now move me the to results. let adjusted

$X.X through XXX in This by a basis the headcount million and QX, accrual $X.X and lower bulk QX our mostly $XXX.X percentage Approximately performance sales of of Excluding charges of adjusted operating lower incentive million XX ongoing was a due midpoint in separation spending. this with guidance. declined and Total as incurred to due improvement the million. the of cost severance points than or controls discretionary reductions on were action. expenses our to

occurred mostly were late they in Now August, savings. minimal there QX so mid to

coming this salary the were $X coming annual half adjusted Versus increases and the services reduction the headcount from functions. million Mexican last flat and of sales business slightly All remainder addition our occurred sequentially distribution of year-over-year Field was and this of OpEx to headcount due half the the during and with the of headcount. quarter. higher support year, increase in --

of fourth adjusted contributed and was an tax margin basis than XX.X%. equally. of year fiscal with driver. margin reported basis about midpoint OpEx operating XXX midpoint Last margin $X.XX, lower from higher of was of $X.XX the points guidance prior year's was with Gross was rate main quarter adjusted operating with roughly for a the for the basis, above On Our effective accounting mid gross fiscal points guidance. XX $X.XX above tax the XX.X%, lower adjusted than fourth quarter the guidance EPS the rate down an midpoint lower the $X.XX. both margin our Adjusted EPS roughly

sheet. Turning remains to the balance very healthy. It

was accounts QX be driver. to XX national from day growth the DSO continuing higher days, XXXX's fiscal Our relative up in one with main

company remain that year's $XXX inventory during activities QX $X a versus than but Our million. by operating turns Net lower at provided million cash $XXX $XXX year. last million slightly quarter last QX, in was Total from decreased unchanged X.Xx million by X.XX. to the slightly inventory

by were versus in in quarter million. expenditures $XX the taxing expenditures operating capital flow some is capital last million million compared from net cash And provided $XX year's last our to fourth year's $XXX $XX after Our free QX. cash as activities, million

$XXX million This the paid brings bought per out In quarter, million reflecting out dividend dividend share. our in the year's shares. our $XX QX, ordinary during back in and million year total of $XX for free $X.XX cash to increased We flow XX in we dividend million. paid last

and and paid net During back million fiscal to million, XX our buying XXX million shares by XXXX, reduced leverage increased dividends our slightly. we $XX out

economy decline. or likely remains flow stronger of produced weak the we XXXX net free capital deteriorates flow working periods during as cash to typically historically free as weak rise fiscal further, cash is demand our If industrial

at and long-term of million other fixed $XXX million, million balance total of end credit $XXX debt our borrowing. and short rate the on quarter $XXX of notes comprising Our fourth facilities was term

Our $XXX million quarter. net was the cash balance debt of was $XX end million, so at the

end the year's at QX X.Xx to compared and as X.Xx last of to decreased ratio leverage Our QX.

let's million with however, see includes without first Now expenses. to XXXX the We of guidance you provide quarter fiscal the for of and X. approximately Mexican guidance $X.X This which move Slide do, can severance expected and separation on business.

be of $X.XX expenses margins Our total to million OpEx approximately at the expected including EPS of with is operating and these XX.X% $XXX midpoint.

guidance My will focus separation following remarks our excluding expenses. severance and on

ADS minus QX X.X% X.X% expect prior versus range the come to minus to We within the of period. year

-- can this that step You total October is minus on X.X% on on you September's can minus our was website estimated ADS the at and see X.X%. growth see

further midpoint guidance, X%. of November this that negative down the will to in take around the So assumption is step

down impact and last be million, basis to Our to around from $XXX a at basis adjusted down expected QX year's to costs cost QX expenses and sequentially expected mix basis points. flat approximately OpEx. that's points million XXX quarter operating with XX from minus down year-over-year plus excluding are due escalation, purchase separation gross and headwind QX from about million $X Mexico. XX XX.X%, sequentially points is is be first severance or $X QX's This margin

procurement We offset inflation cost expected our million our be savings bonus will by we cost expect actions, and QX up to down continued stepped investments level, roughly that accrual, sales lower on be in and volume OpEx would variable wage QX from indirect anticipate discipline. $X Based reduction expenses. higher the

is of additional costs lower to sales separation approximately and are and We this lower points our operating OpEx first at margin remainder decline the gross expect margin basis be guidance. of excluding XXX of the drivers of XX% points XXX on midpoint basis severance The the impact leverage. roughly year-over-year the quarter's due to decline.

to expected to the QX, tax line for be estimated is Turning the in with quarter rate first XX.X% XXXX.

range EPS QX is our guidance additional with and of $X.XX severance excluding $X.XX. midpoint separation $X.XX So costs to the

shares. XX.X Our count weighted guidance diluted assumes a million share of average roughly

into move us our XXXX operating let margin Now framework. annual fiscal

to the intended year perform the is and framework fiscal course under annual is you this the scenarios individual various help understand to quarters. business reminder, likely a potential annual As This on we last axis. annual not year, X. margin for rate how of and is our gross over XxX axis are scenarios you on Like see metric providing growth on that vertical Slide scenarios horizontal two

two to have and has to respect The contraction negative. of minus range X% revenue we ADS scenarios, positive slightly X% and growth, scenario With the X% ADS slightly X%. scenario positive growth to is slightly an

the Moving on to margin. midpoint which imply rate. actual XXXX's has margin Note range. scenario full could a XX.X% margin to half contraction gross was metrics has gross scenario XX.X% gross as half that XX.X% a year the gross margin top is expansion top the XX.X%. The fiscal still to the year-over-year margin QX reflects range XX.X% gross XX.X% while our run contraction

now more typically compression. in because the and gross of experiencing cycle cost negative are is XX we roughly XX price me offer bit mix have a margin. on sizeable experiencing Co to the as gross basis headwind. This because late a year-over-year Let points inflation Right we are perspective we margin stages are

back expect along to fiscal moves benefit also also gross escalation abate supply a end and However, initiative which we from our purchase should margin year loaded. as cost will

the As margin gross change absence fiscal any GAAP the of the improve to back year-over-year a in should result, environment, half year. our meaningful

margin close about flat margins Returning Operating would to anticipate quadrant. XX.X% fourth hand with grows in about XXXX's That adjusted quadrants gross XX.X% over or would fiscal to XXXX three margin level At the QX's over XX.X%. and the revenues, scenario digit. operating occur are or framework. of is right adjusted the equal middle only margin. margins single sales operating the our in being mid of we fiscal framework, close to In to upper operating equal, margin operating contracts of

of OpEx Given the to an increase the XX.X% versus gross prior X% margin this year. implies X%

from We $X inflation, indirect wage higher our of amount reduction growth million roughly amortization expect a savings net that headcount offset largely which include similar and would savings our productivity and measures investments. depreciation QX cost our and salary

going not or And process taken may this of of all and actions today take forward. actions any we as include additional in reflects does

I'll now turn to back Erik.

Erik Gershwind

deteriorating Thank you, industrial Rustom. condition and initial taken Against of environment, in to the actions the the backdrop reshape demand resize we've organization.

You early are seeing now results.

cost done transforming more model conversion in structure will leaner, our progress focus on Work continue to issues more to made revenue. be making remains we streamlining Moving forward, into investments our addressing business also development. the good and We've program of into operating such relate to and effective. including to agile be the new business as

conditions even that also deteriorate, be more. benefit remain we industrial should In forging expect are I the distributors we that back in credit, majority us new while industrial of share regional and demand right local gains initiated moving on programs will we people times Should to and for deteriorate forward. inventory, share market the an the relationships improve as the to demand market our MSC up at and further. our now, a This opportunity market to that when creates capture new They go seeing implementing well have positioned ones such supplier recently. just as past. levels make

best our The our journey seen recent the beginning of and terms end sales our as you've for productivity the in of as not on industrial the the be in actions mission well progress are world. to the initiative that fulfilling distributor

now up the will line questions. We open for

Operator

Instructions] [Operator

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

AdamUhlman

with of to there more I wins account of what $XX be laid have year bone new savings the and I kind able And could start expand, -- wondering am to out. be kind obviously funds. with wondering was Hey, deliver program, this you Erik, could it line million. some growth meat the that I earn maybe are was guys. are I provided top supplier does that you on if wondering that what framework associated if with that and on you the commitment but does am those to put is beyond targeting to Good sure the you the morning. you

ErikGershwind

Yes.

it. Adam, So, take I'll

common was coming and from I in investment is return Regarding behind of the upon there win-win. if spirit The imagine span scenarios the supplier, and of capture the characteristics I from supplier that and a is initiatives, think program you line supplier, emphasize theme around share the focus, depending product as it that the range circumstance. of the is for would a MSC. what could Meaning investment wide the exchange

the are that a you Now number comfortable we feel are we we deliver is a number to that's look, on. going giving number,

the profit of But improvement be would in a feel action. of we certain form some certainly that's that on number confident some be that would contingent So guarantees, in.

think on of is and In I an Rustom emphasize framework the terms hit important to and is timing. that briefly this I thing

that framework of is XXXX. is savings towards that reality the to are into fiscal fiscal the due going that into number achieved XXXX timing end So be factored of to but the the majority

so the that rate programs year So the on that P&L. timing are way is year, in of changes a program. to that deal really a is run And XXXX as One sync second a is calendar up of with through these timing XXXX. done an fiscal. annualized our of our our reason reach twofold. it the not is number work And our number our Many doesn't costing system average for that XXXX we is rebate rebate and quite and in calendar

XXXX. fiscal the towards benefit XXXX into late of see latter quarters you'll So and then

AdamUhlman

anything national of that account customer I then the you. customer the active traction account somewhat of update your you any to or lines that. or feeling how there. building was along on is wins related could wondering win share and could you Okay, an just share if got you. Thank new progress And

ErikGershwind

the was traction obviously seeing refresh everyone cycle wins build focus part in to revenue. we focus group this sales through that is we slow out we've but on that talked on that and implementation been quarter of function. turn in what was had to a at done what move start terms last the of of from win. we've the getting what not above with wins key come been building a And And expectation, only so good Adam, development or and called the too a time business the about down is is hunter last funnel business Yes. just transformation were them to or conversion wins, new the those have

last I as the press put court described on So it. call, on we full

I quarter the stage track stuck think conversion. revenue can use and to way from revenue for there many has last CRM moving really progress those been we manage the we all essentially at now through We was way too every is in accounts saw the long. what the and implementation same this the What we each account we opportunity stage we single realization. of stages too through relieve bottlenecks appropriately and the are seeing process, accounts

it time. Now what is I'll say, Adam, takes

we per rate run account. ramp to It to through when implementation. annualized time takes So we full target have on get even that

see So masked next over Obviously, to traction the those. on we going the what’s but on will that starting in quarters. macro continues are to revenue by build

revenue close We realization. to full not have come

Operator

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

KarenLau

Good everyone. Karen morning, for dialing morning. in good John. Hi, Lau It's

you going $XX sort missed are guys am on apologize cost these those savings to generate So action, but $X you much you how quarters. payback maybe charges first to year between of savings this million it at, the of if expecting year. And spending for looking Are on costs? one million you did I I quantify guess I

RustomJilla

then I'll So, answer the clarify me Karen, numbers. let and that

that and are $X.X QX and all now, the the million of So, savings into yes, is baked in QX into framework right right. the what of

in So the be roughly a $X that's savings what roughly net for have year. from is actions we And million full around be we QX million. to the And up expect net savings. to $X QX around

of half note So, And absolutely, payback are be savings the over our one reductions of the course the roughly but a year. the year. it higher, replacing is will significantly within that also gross

So--

KarenLau

to just Okay. doesn't framework the these first just looking and that talent most -- a of margins uplift from sales It I'm at expectation costs some regular receiving lot Is will savings. get - ongoing, from of mean, It things much doesn't operating I offset people from you're I the-- that framework. year just hire the the increase in areas. operating that? your of point of like just guess that appear a other that the quarter in lot in operating for savings hiring by offset the the year-over-year, get these by savings back

RustomJilla

Yes.

selective We more we I in Erik mentioned as are continuing But was went mean to when and he to service through QX invest QX, this. plan earlier. benefits also the have appropriately some talking look sales, development of headcount out like expect we more coming in sales increase business field this right. get I numbers,

obviously, budget, bonuses what got have All additional which we've inflation got We've related So kick as more we've QX, bonuses; We've off baked some then higher before. with the also costs. the should because year. got got got come numbers. coming line into higher from our amortization that's in depreciation, wage we these accruing have And in we through we've lower we’re expenses. savings we is volume

and But let a framework second. framework and to that take I'll for me the come answer the

of you got there. our think That's the XX.X%. out what framework about of about we've If basically midpoint

that the to out where this and end to higher. if help? If about takes the number mean but number very out OpEx. very that just we look take take of of the are at, us XX margin that that's we where in XX.X%. right, size Does points slightly then I and you close about basis we That's you higher, there Mexico, points are XX close And slightly gross for XX.X% coming midpoint at year basis go into

KarenLau

throughout inventory is guess mean, an in loaded. point there's Appreciate made your initiative, I gross down I typically margin, historically, sequentially inflationary inflation the environment, supplier I and on also margin the color. guess yes. And gross the more moderating goes you that where that the the backend year. Yes, from, saving

able environment, attractive your gross margin Given the throughout in even the the given this maybe given more it to dynamic that hold improve rebates back be terms a steady you of to expect so and do of you'll that? the you or year year, the you volume, Or give about to forth? back in pricing have the half how do do you thinking weak customers savings of some kind these to boost to little are

RustomJilla

complex So question.

little I'll more. then So a can part it. Erik of And handle even chip do in and

yes, materialize initiatives rebate that new So, are is of right. we're factor mean mean as QX price will the that's well all, is 'XX, the abating it in other benefit also and I it, do of the The abate, I only as from other I terms. of we mostly into first most these really be what see factor the comes remember I through yes, cost you Because to about that supplier have benefits there. continue you more talking calendar flowing get given P&L. the mean beginning and escalation The summit I half to mentioned into only will our second programs later. deals in programs to remember-- that's supplier think our year year. and inventory

ErikGershwind

to different hard year. One historic The we by this Rustom QX we typical that pattern without Rustom, is point time dynamics are and give are to There if only look, out well. it Karen, and cost the just inflation, weigh purchase two being perfectly. think, end generally that the guidance get thing right. happens and supplier right mean to the to to benefits you QX exactly that you know see abate hard at it describes that but you it loaded far significant add-on coming. in are a say year I our I QX change, out and correct looked drifts a back versus down I'd bit are that a what answered to then from that fact absent

answered it think he well. I So

KarenLau

Okay.

So it's be that trying had -- in past gross what fair the years? to maybe versus to more say we two margin stable what witnessed the you

RustomJilla

range. and frameworks provided us the there. in then midpoint we've are a we We So range. got as mean the the I range XX going

Operator

question Stephen Jefferies. next now live. ahead. line with Please your from Our comes go Stephen, is Volkmann

StephenVolkmann

that. Can hear me about Sorry you now?

ErikGershwind

we mute. Now got on you,

StephenVolkmann

we Well, forget. embarrassment we avoid keep mute to Yes. any then but

string more specifically So for little anyway. on pull bit that Can you cost? on are What thinking in we the price a just XXXX?

ErikGershwind

would is Stephen, me question. what I'll I look, say start So, let and answer your

Let drill. okay, cycle, high if I seen price would me over been a what inflation start few the we cost last And take flat. think what you and years, an level see we've over cycle, is has roughly

We are cost out now negative. been of have turned late stage pointing we've for and the couple last quarters and we been price

we okay. have with in seeing you if over mix about watch We headwind, price basis a a been are due now, negative you for sort cost mix, of to of points erosion to somewhere is gross and what price time, look I'll XX of the out XX lay formula neighborhood cost a gross margin margin

basis price XX would erosion. points cost XX at year-on-year therefore there right were to if So XX XX basis to margin obviously a be gross looking equal, points, we

is and at When look when the reference that end that now. price tail FY'XX cost price gets look positive, cost gets better is worse at of negative, FY'XX right

So, we is of But middle framework for precise year, the the going earlier, net-net year the towards a half it's for lot reasons described. and negative more much to buzz the we with give that what of slightly be cost going you you it's our as in but if XX.X%, number heavily a can't the Rustom Rustom about the for negative. better the first talked be price said, to fiscal look would that take end of XXXX, says

StephenVolkmann

based helpful. that about on top But the the wins then that's have line, some you the think assume et I I Okay, new contract we guess you would your X% sort outperformed on great, of the framework. cetera just of And midpoint as market.

relative accurate to think do So of kind guidance much market end and of growth of it markets? your is to say negative looks the you get you how being that outgrowth sort could at midpoint

ErikGershwind

at the Stephen, say is last about, Yes. saying heavy I is seeing right I that's what much the this factors relative in the performance bunch changes growth right what's as couple reference, quarters couple look don't disruption what government talked that you quarter. to terms the metal contract look Certainly deterioration including line. tell what what of the due has of for changed to from now, working. we would our happening would been we've reflective you with a from you're performance of some so of line we've in And manufacturing market. I we're in losses think our market, we've in of of that is roughly the rate and made in that

turned we're have on our definitely expect on point our we've you're of focused gap the us we the as What right, that in basically as to we're certainly over share a yes to as sharply levers; to it's assuming feeling talked usual, you market, XXX XXX gain hitting market effects. are we're Those think terms I for growth couple hit you one basis levers now, being on. And of gap now which range. time of historically, the business about the here seeing the I re-establish to framework look down and out,

wins. again that we see. continue And team one wins. hopefully what and ramping is are Two We're focusing around is are like program turning accelerate implementation to We of not once existing the making development. government like a to really we the on win and to going there tailwind. up business three, that only and We

some Eddie time grow. that making the It that changes some refined we're it's a gap the plan. then sound to are team I making materialize. is And the program, nice over just I but we refinements of was third that expect plan, should which to the and described being think to

Now, what environment, to over growth determine I certainly, gap what is absolutely expect would we can't the I happens we forward the to restore but move as time.

StephenVolkmann

at then capital? real working does what that's for, mentioned do helpful. do, just of do Great, a have XXXX, sort Rustom. some a potentially quick you we one year If You to opportunity there. think great, that And maybe flattish

RustomJilla

mean, I the our in when working up. and free capital cash when back, reduces Yes, economy this go weak, some we'll business flow you'll -- so see will so is coming cash typically

Operator

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

DavidManthey

Hey, guys. good morning,

mathematically of the you should to line, points basis gross you're some I fiscal XX half annually, that incentives about on $XX just in maybe the get guess margin So million XXXX. XX fraction in saying it's and

at that just are basis assuming if I'm incentives? to XX these you of make the up XX core the right supplier difference reading you with then So points sort this XX.X% and declines midpoint, that

RustomJilla

from parts expect the I mix as business yes, that lower headwind we mean mean, that I grow secular, Dave, secular the a to usual that margins. of more So, look, we gross have comes we have continue.

is should off So this XXXX. But when you fourth help the I fiscal quarter, to numbers. the XX.X% also the going quarter mean remember look fourth of

ErikGershwind

year-on-year points a midpoint where quarter math, do at mean right, the wanted you I and The the something basis last is if XX basis two looking guide. XXX framework which look Dave, And, take some points. the We're margin you're I to or would is think gross of going like imply QX at change. a

the would it So, XXXX. less in the of would mean the be run year little are point and you total of seen in reach million better. And impact rate would obviously, described $XX end correct, it's gets a you the is the bit half this and fiscal we that basis what actually than full towards

DavidManthey

it. Got

were tell touch shop traditional VMI the vending. high percentage of percentage sales as the model mission along a the mix like floor? MSCdirect.com, you. as critical that's any in your Okay. it parse disclosure, just way of what partner elements Thank second, from of on business and you seems marketing with Is that as out And direct kind resulting in there there your far e-commerce can you your so efforts we can us quarter both

ErikGershwind

back that's over been last know is, business. com. than year where if the the point. a you're or little going I that over different number, be We XX% MSCdirect look has Dave, If it's I so. radically would web traditional that if And good tell numbers the handy. not a -- you And you of correct. would What is you're from that's

mention So the what data that number has didn't one would e-procurement business. is MSCdirect.com. we the point remarks I don't vending point, and in that that number have I just has vending. prepared also It handy type

about of percentage have vending, the year-on-year. signings flowing year are And traction being talked don't for up, while vending. this So business we've we on I through good the signings seeing quarter

up, XX% we was QX year-on-year. it for are So say over to I want

closer where of terms the in new made, inventory strategy with we with to So the you're we traction seeing vending going movement these with plant floor. to management some of are getting changes

Operator

with Berry, Buckingham question Our comes please ahead. from Research, next go Robert

RobertBarry

Hey, guys, morning. good

sure said connect I'm is. on margin, not to dots the you much how Mexico Just the gross if

XX. from sources But maybe growth I cost say think like and by benefit offset XX sounds it incentives. supplier you the or is X price XX that's XX XX about or of

those about think XX kinds that pieces? moving the XX or main of I up to adds

ErikGershwind

Rob, you year? talking or are QX the

RobertBarry

of trying I'm the XX. year, down get sorry, For the the the down components to I'm XX. to

ErikGershwind

mean I -- so Yes,

RobertBarry

and call? Do the you out they lifting the of Mexico just sources I filtered the kind price of think was growth cost through supplier incentives.

RustomJilla

Right.

there, Mexico points from XX you is So basis right. about got coming

basis got which talking the about positive or remember and even got XX the if I roughly points points about consider coming you've got ballpark, which time; direction. that or supply You've in over it's talked okay, half-half, they've so. we incentives, you that in so And basis XX that that you about

is You costs. this I that, that that have come the price Speakers]. from of and that headwind sort talked points mean, rest is Erik a [Multiple well, about as talked it's and about, actually, I secular through

RobertBarry

XX. Yes, Great.

some about the sounds be sounded think just no just do? is It any I then to in an four Okay, markets but and delta didn't up assume And the that from growth you outgrowth. the all correct? between like framework. clarify like the perfect. the it end Is with down question, There on you earlier assumed could the four

ErikGershwind

Yes. Rob, look, do, try I here, mean, you’re right. we we what really what did to

slightly positive X scenario who get would and a year. a be we scenario So is a negative slightly those wide refer the for to them negative what is what a of scenario. reflective we're knows pretty economic are at as could slightly scenarios And essentially Obviously, happens plus at swing, the the X moment in given to for trying but from environments. we our quarter, sitting to minus QX guide

should I regardless about would that should start really -- and were outperform was of reflecting environment. we gap? we up what to we reestablish Yes, more look, us think, a environment. certainly But there Yes, move

RobertBarry

it. that just expect Got with would And you would into based continue on probably the business the decelerate the to historic XQ? correlation MBI,

ErikGershwind

to could tough lot depends Rob. a X.X. kind silly, our guide all tell. uncertainty There's Rob, of you depend is minus our the it of what's it to at on we going much now, So what we of happened. -- that speak see -- so this I'll what in but Certainly to midpoint It'll QX; sound guide, right have do was

tariff. October, seeing Rustom much math trade that's it's at uncertainty so more a we're are so beyond for down look over so much the there's we you expecting If there's seeing in And November. you, the we're on swirling What based September, go look, business. step because and the little of To did in in tricky what environment. that, a now,

trailing to change be not a in and quickly Things we this a indicator. indicator business tend leading

to that. So beyond call tough

RobertBarry

Got it.

in so XQ, that the a for about level investment hear kind three that $XX million the maybe P&L in would investment million. the like kind growth be lastly didn't one but of me, or was you at growth quarters first or I of a any of or million, zero sum the $XX Just to tracking I in expect a was XXXX $XX decline higher. from think

RustomJilla

combination the performance all as even required QX, that. a the early, factors at of the mentioned as aren't people rest we what eliminating Because positions coming in -- million it's that we're we give look, in the full guidance and to business we new required look taking we're the of right. the part But performance, of moving are hard in say right business. now, this are going we So, the as underway doing efforts to the $X.X the efforts as is well away, environment,

the redeploying are this where it, growth. business service, areas the that rest development We generate also areas of field, money will we all sales, think to in

ErikGershwind

going you, this to I factors. just seeing some on is put the reflects That's more One, color. the said Rob, environment. lot of gave think And, we're depend he's he's down investments what A up two to saying. right. of the on Rustom into based performance out flex and

and Just where been what are to VMI. a terms going think the which is on vending management, in we've investments by more focused doing, little inventory of and I color, similar large i.e.

new going things a is up, what vending. see example fresh from where then an I be that mentioned like two up. or CCSG see are going we one we way I rates like signings they're there; building it. continue we're nice seeing in the are mentioned to based And we it's in vending growth with what We development, some traction upon Eddie Business on to sprinkled look from of and expanding.

program on So one twists a with similar or based fresh two new look.

Operator

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

MichaelMcGinn

cash gentlemen. the in XXX% about your flow the environment. cash free back to want free -- today has just time dollar for look historically, I If average comments. flow Thanks to the I over conversion been XXX

to your side going anything I'm to sure I and this on vending be are Just positive for priorities going are forward? year. or, make cash missing not then that flow noted what signs CapEx you want just the

RustomJilla

So CapEx $XX correct. you're million million, to $XX

the saying going in math. but flow and $XXX providing mean million that not back 'XX, what I'm Free flow I'm we behind As look way; that networking if cash save environments. free by I color down you the capital down year. years, that's in guidance at just a go in you're was was there, you going few if back that cash it's to to, environment.

year. had dividend priority XX% we per mean, business. is one in as mean invest. What much to this the we've I invest can is we do to as I enhance dividends, we with increase I ordinary XB a the to continue mean, share cash, dividends.

ordinary then lots special balance fire of just keep the mean lots can power. I advantage there's cash. -- cash having environment a this to with And steady with like there's it's we sheet lots I tough an mean We can left a in of and stuff. after can today, We the dividend by behind, have it's dividends. that growth. So have that's of buybacks, money strong

MichaelMcGinn

I move the to if markets quick. real just touch And could Okay. end

business some Going called you that J&L. auto had I exposure. a acquired back ways, business believe

any see you Just anything breakout? you that impact with to in, check strike that of your GM on could if the wanted business going have front to or on kind

ErikGershwind

low. Yes, the move presence enhanced we if that the look at precision automotive fact of definitely the shops, yes. on of our job lot always you answer some the really What's We're mean, even J&L shops indirect markets is to like these end machine our service that I though, effect considerably. is Michael, would move to look, big hard is industry. we what that direct I it's is exposure say a the talk mean meaning get about end, it I Midwest and feeling to the big

Ag exposure another which our Iowa. automotive based being DECO for we contributed and Both saw while revenues the If increased you acquisition, going acutely. QX. second notice in not in offsets, two One actually negative got you'll the being what Ag, of look in in And sure positive, Midwest. saw company those in was were total that already our QX, things the we to acquisition, you being on Midwest there surprisingly

MichaelMcGinn

if can in sneak here. just And I Right, right. one then more

rebate For this missed between initiative inventory of second it the half which can is half this sorry, of for more of can upside I'm kind the the the of, costing you this, I year? Would initiative. -- year, you the expecting bucket if basically impactful second versus level you're

ErikGershwind

of we Yes, programs are you there's some not. We're lumping talking with sort sensitivity We as suppliers. Michael, about did together. And, specific imagine, around. could

costing coming half average of than some of XXXX in and that both made rebate, in here. QX. will up come is of come half, through good less that And million is of we're Under in of what number a bucketing $XX we're most effect annualized them is line chunk XXXX. in So will conveying is our slightly for full the punch we're that what doing the an purposes

Operator

go question with Please next Our Morgan. from comes Baumann J.P. Patrick ahead.

PatrickBaumann

Good morning, my Erik. for taking Good questions. morning, Rustom. Thanks

digit first year-over-year a circle be saying flat maybe looking at XXXX expenses. low single operating seems was percent would will I expenses. to down it it you're quarter had up. bucket on guidance billion operating thinking for $X to like the Just like of back But implied first and maybe that

XXXX? kind So versus think of high just How that dollar billion of year-over-year low end the the want the about of clarify to expenses to framework. to operating from bucket

RustomJilla

So, yes, up actually, a about flattened, we a nailed would it we X% you in flat on to saying. yes, X% environment framework, be the in are

million you that mean we I the it of on right $X the ballpark, call to everything function simply $XX million quite that So number. And did. is

out coming We have stuff. of of savings net $X million coming savings, of QX out the

indirect coming that have procurement. bit a little the from roughly more We out amount and

We've of there whole and on. going got investments a initiatives, bunch other pluses and minuses

-- also it number wages, net the have So higher a reasonably by this economy the tight with is we still well way employment as too.

So well our we into inflation numbers. and salary wage baked do as have

you of all where number net are exactly slightly. is that the So up out coming

ErikGershwind

actions based with to date. to on Rustom, all what think that's Patrick, add because the I a much say adjust thing his and think us the we've look, it other I'd economy prepared The variable. there's flat some look, out Rustom it quickly. taken index, deteriorate in discretion were happens here; remarks. upon did the is see and mentioned way If the economy, framework at things to comprehensive is, right not it adjust way probably thing, was depending The further, takes I only only to look, you'd

he's but of up indexing actions what some doing would got to worse. easiest flat, for there's the So we take room flat you to other benchmark saying kind of there things way and is

PatrickBaumann

just Got about the do macro normal, this whatever the single how organically or medium of those point thinking environment about like, think kind at it. you think you more If maybe low guys framework. assuming margin And incremental guys you mid more term, lines digits to along maybe grow then is guys it.

Just curious the on for you framework incremental margins mind? in could if update your

ErikGershwind

Patrick. sure, Yes,

cycle. margin cost seeing that in are time XX sort late think on a negative, roughly then gross that the points. likely i.e. I'll you And left and cycle, we XX the And to early an little talked walk how we're to to again in flat, in be somewhere start flat me we've of call cost down. And going over let roughly to over we be it. means economic Price a cost that right already color now. Price mixed about positive of put So 'XX like price is business with is pressures cycle basis the flat. about that

brings offsetting growth At digit revenue the of but leverage. ways. then One XX, that, do two but expect flat. on is there's revenue How obviously here we basis above see again Looking is XX digit, revenue degradation. margin growth. least how think top XX least see margins of at hopefully to XX mid-single we op better, generate cycle of ourselves get and at levels, line, gross add at revenue more ways you that And Potentially incremental two points economic more margins we least to digit would historic a we grow at leverage. high-single generating, operating where over would op therefore full where to growth those at we current levels levels I should to do least deliver really back mid-single

should improvements structure gone expansion. of create be to is path business layer making op thing would the on which second a top the that we and then margin the to operating cost the And certainly create model and now, to are

PatrickBaumann

Got it, okay.

maybe environment. growth to hold digit case margins So Upside mid-single incrementals. that XX% you a XX% case, be of kind --? Is base -- in should

ErikGershwind

I the the say call case I it would improvements the or the to cost enhance model look of out and we over base that some see as In operating would base if five in years, next it, structure that.

me So get plus, at time, look, a step right. XX% to to do we one it's

back I would part case. talking this But say about track. that that on the be of the get base we're Let's would things

PatrickBaumann

Got last quickly. it. for one me then Helpful maybe And color.

being step guess a And your said you in that? you're are Just my Or is just assuming to what's visibility November. sales conservative? question further down in I you

ErikGershwind

whether so take conservative we're or visibility say. trending at Hard the the being in to basically all I'll doing say the low. anything as business. bit low So And not, we're it what looking in uncertainty, we're Patrick. the now it, is I would is given usual to say really hard if right

add top So, suppliers, look in was the we're point you a from half QX, X.X, that seeing little September, what positive. then worse. you've were we seen October step a down of what a on it we're from our And got hearing were we channel.

suppliers channel, out best is past factors. the the what of in and not this what seeing honest. in as to always, see. numbers, now we November only sort discussions we're their they're be to MBI all what our that's upon And go Our that Hard guess seeing we have, right based those

Operator

question go with Please ahead. Bergner comes Research. from last G Our Justin

JustinBergner

larger? get Good what for smaller pretty mix review review headwind headwinds. want mix conversations. morning XX question. or to of of could my quickly XX you mixes thank and they basis I that mentioned to and But in the are just of would the just realized you sort just are those taking to cause drivers I get point what that

RustomJilla

Very accounts. headwind is do we national quickly, as we the more as do secular direct mix we do vending, as ship, and more

So There's cost quite in years. impacts grown agnostic all headwind happening have areas price last sort with of two demand and that that GM. the from what's secular a

JustinBergner

fluctuated of sort at net given level headwind much year? any It lower remained and Okay has in higher, consistently. much hasn't that pretty too too

ErikGershwind

absolutely, have we're-- Justin, and at. One to or an the less how exactly upon, because XX, types headwind, it's kind it that's thing of given as range. XX types rough channels, you around. I'll moves we different but it What the you it's of could fast a estimate, lot depending customer different product grow mixed function so giving of I we're be the look, more say, mean a

Operator

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

John Chironna

everyone for you, And you today. Thank Brandon. us joining thank

Our next months. earnings look with coming date the certainly is forward we over X, set XXXX. to speaking January And you for

Operator

The now for attending conference Thank concluded. you today's presentation. is

You disconnect. may now

John Chironna	Vice President of Investor Relations and Treasurer
Erik Gershwind	Chief Executive Officer
Rustom Jilla	Chief Financial Officer
Adam Uhlman	Cleveland Research
Karen Lau	Gordon Haskett
Stephen Volkmann	Jefferies
David Manthey	Baird
Robert Barry	Buckingham Research
Michael McGinn	Wells Fargo
Patrick Baumann	J.P. Morgan
Justin Bergner	G Research

MSC Industrial Direct (MSM) 24 Oct 192019 Q4 Earnings call transcript