Q4 2019 Earnings Call
Zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. You May proceed star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
Now ill turn the conference over to John Corona, Vice President Investor Relations and Treasurer. Please go ahead.
Today I'd like to welcome you to our fiscal 2019 fourth quarter earnings call.
During today's call, we will refer to various financial one management data in the presentation slides that accompany our common.
As well as our operational statistics.
Which can be found on the Investor Relations section of our website.
Let me reference our Safe Harbor statement under the private Securities Litigation Reform Act 1995.
It's on this call as well as the supplemental information, we're providing on the website contain forward looking statements within the meaning of the U.S. securities laws, including guidance about expected future results.
Stations regarding our ability to gain market share expected benefits from our investment as strategic plans, including expected results from acquisitions.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
Information about these risks is noted in our earnings press release, and the risk factors and the N. DNA sections of our latest annual report on Form 10-K filed with the FCC as well as in our other FCC filings.
These forward looking statements are based on our current expectations and the company assumes no obligation to update these statements.
Investors are cautioned not to place undue reliance on these forward looking statements.
In addition, during this call we may refer to certain adjusted financial results, which are non-GAAP measures.
Please refer to the gap versus non-GAAP reconciliations in our presentation, which contains a reconciliation of the adjusted financial measures to the most directly comparable GAAP measures I'll now turn the call over to Eric Thanks, John and good morning, everybody. Thank you for joining us today.
The kick off this morning's call.
I'll provide an overview of our fiscal 2019 fourth quarter results.
And I'll, then wrap up before we open up the life of question.
Our fiscal fourth quarter before let's revpor represent solid execution in a decelerating demand environment.
Sales were roughly in line with the midpoint of our guidance and gross margin was at the top end of the guidance ranch.
Sure most heavily geared towards the metalworking markets that are acutely Saul.
Sure most heavily geared towards the metalworking markets that are acutely Saul.
Sure most heavily geared towards the metalworking markets that are acutely Saul.
Sure most heavily geared towards the metalworking markets that are acutely Saul.
Field sales execution, particularly around new business implementation.
Two.
For the ability of our supplier programs.
And three.
Expense reduction and productivity.
Given the early success, we are seeing.
Beyond new business.
He is ramping up the intensity and focus on performance management through all levels of the sales team.
He is ramping up the intensity and focus on performance management through all levels of the sales team.
And investing in others.
Such as business development Ccs Gi.
And inventory management, meaning vending and be a lot.
We expect to realize roughly $20 million in profit improvement on an annualized basis.
We expect to realize roughly $20 million in profit improvement on an annualized basis.
We expect to realize roughly $20 million in profit improvement on an annualized basis.
We expect to realize roughly $20 million in profit improvement on an annualized basis.
We expect to realize roughly $20 million in profit improvement on an annualized basis.
And in fiscal 2021.
And in fiscal 2021.
This is due to a combination of our average inventory costing method.
This is due to a combination of our average inventory costing method.
This is due to a combination of our average inventory costing method.
This is due to a combination of our average inventory costing method.
Our focus now turns delivering market share growth.
Our focus now turns delivering market share growth.
Our focus now turns delivering market share growth.
Our focus now turns delivering market share growth.
Well the supplier partners that have invested in the program.
The third part of our action plan was to reduce operating expenses and improved productivity.
This was the result of three actions that we took during the month of August .
First we ran a voluntary program and our distribution centers.
Second.
Moving forward.
We expect head count to come down again in our fiscal first quarter.
And for the balance of the year, we anticipate select firing in certain growth areas.
And to replace a portion of the Q4 reductions.
We will also continue to reshape and rightsize the business.
We will also continue to reshape and rightsize the business.
We will also continue to reshape and rightsize the business.
We will also continue to reshape and rightsize the business.
Before getting into the financial details, let me remind you that we provided you pull guidance for both total company end up based business that is our total company, excluding the I.S. acquisition and a new Mexican business.
Before getting into the financial details, let me remind you that we provided you pull guidance for both total company end up based business that is our total company, excluding the I.S. acquisition and a new Mexican business.
Before getting into the financial details, let me remind you that we provided you pull guidance for both total company end up based business that is our total company, excluding the I.S. acquisition and a new Mexican business.
Before getting into the financial details, let me remind you that we provided you pull guidance for both total company end up based business that is our total company, excluding the I.S. acquisition and a new Mexican business.
Additionally, in our fiscal fourth quarter, we incurred 6.7 million of severance and separation expenses related to our opex reduction in performance improvement initiatives.
Additionally, in our fiscal fourth quarter, we incurred 6.7 million of severance and separation expenses related to our opex reduction in performance improvement initiatives.
Thank you for reported gross margin was 42% at the high end deposit guidance range and down roughly 90 basis points from last year versus last year, Mexico accounted for roughly 25 basis points of the decline and the remaining six decided roughly 65 basis points came from mix and negative price.
Cost.
Cost.
Cost.
Cost.
Total reported operating expenses in Q4 would do other than 63.1 million, which which resulted in a reported operating margin of 10.7%.
Our tax rate for the fourth quarter was 23.1% approximately 100 basis points below guidance you, mostly the baby favorable resolutions of state tax audit.
All of this resulted in reported earnings per share up a dollar in 20 cents.
No.
Let me move to the adjusted results, excluding the 6.7 million of severance and separation charges incurred in Q4, adjusted operating expenses with 256.4 million.
Approximately 1.4 million or 20 basis points as a percentage of sales lower than the midpoint of our guidance.
Total headcount declined by 135 in Q4 with the bulk of this due to our cost reduction then performance improvement actions.
Adjusted operating margin was down roughly 840 basis points from the prior year with lower gross margins the main driver.
On an adjusted basis EPS for up to school fourth quarter was a dollar and 30 cents six cents above the midpoint of guidance with the lower tax rate accounting for about two cents.
On an adjusted basis EPS for up to school fourth quarter was a dollar and 30 cents six cents above the midpoint of guidance with the lower tax rate accounting for about two cents.
Now see as reported DBS with the Dollarstwenty nine with an effective tax rate of 29.6%.
Now see as reported DBS with the Dollarstwenty nine with an effective tax rate of 29.6%.
Now see as reported DBS with the Dollarstwenty nine with an effective tax rate of 29.6%.
Now see as reported DBS with the Dollarstwenty nine with an effective tax rate of 29.6%.
It remains very healthy.
DSO was 57 days up one day from fiscal 28, 2018, skew fall with higher relative growth in national accounts continuing to be the main driver our inventory decreased slightly by 2 million during the quarter to 559 million.
Totally total company invent returns remain the 3.5 sites that unchanged from Q3, but slightly lower than last is 3.7 sites.
Totally total company invent returns remain the 3.5 sites that unchanged from Q3, but slightly lower than last is 3.7 sites.
Net cash provided by operating activities.
Q4 was 141 million worse as I did a 9 million last year, our capital expenditures in the fourth quarter was 16 million versus last year's 14 million.
Q4 was 141 million worse as I did a 9 million last year, our capital expenditures in the fourth quarter was 16 million versus last year's 14 million.
Q4 was 141 million worse as I did a 9 million last year, our capital expenditures in the fourth quarter was 16 million versus last year's 14 million.
And after subtracting capital expenditures from net cash provided by operating activities. Our free cash flow was 125 million as compared to 95 million in last year's Q4. This brings our total free cash flow for the year 277 million.
We paid out 41 million in ordinary dividends during the quarter, reflecting our increased dividend of 75 cents per share in last year's Q4, we'd be though 33 million in dividends and bought back 57 million in shares.
During fiscal 2019, we increased dividends paid out by 20 million to 146 million and a net 64 million buying back shares and reduce our leverage dicey.
If the economy remains weak or the easier. It's further our fiscal 2020 free cash flow is likely to rise as we historically produce stronger free cash flow during periods of weak industrial demand as net working capital typically declines.
Our leverage ratio.
Now, let's move to guidance for the first quarter fiscal 20, which you can see on slide five. This includes the Mexican business. We do however provide guidance with and without was approximately 2.3 million of expected severance and separation expenses I.
Total opex is expected to be approximately two other than 56 million, including these expenses with operating margins of 10.7% EPS of 1.15 at the mid fives.
Hi, following remarks, we focus on our guidance, excluding severance and separation expenses.
We expect Q1 ideas to come within a range of minus 2.5% to minus 0.5% versus the prior year period. You can see this on you can see on the upsets yeah on our website that September is totally radius growth was minus 0.6% and october's is estimated at minus 1.2 the.
We expect Q1 ideas to come within a range of minus 2.5% to minus 0.5% versus the prior year period. You can see this on you can see on the upsets yeah on our website that September is totally radius growth was minus 0.6% and october's is estimated at minus 1.2 the.
We expect Q1 ideas to come within a range of minus 2.5% to minus 0.5% versus the prior year period. You can see this on you can see on the upsets yeah on our website that September is totally radius growth was minus 0.6% and october's is estimated at minus 1.2 the.
We expect Q1 ideas to come within a range of minus 2.5% to minus 0.5% versus the prior year period. You can see this on you can see on the upsets yeah on our website that September is totally radius growth was minus 0.6% and october's is estimated at minus 1.2 the.
So this isn't the midpoint of guidance is the assumption that November who take a further stepped down to around negative 3%.
Our Q1 gross margin is expected to be flat sequentially with Q4 at 42.0% plus or minus 20 basis points.
This is down 100 basis points year over year due to budget cost escalation mix headwind and a 20 basis point in fact for Mexico.
You want to operating expenses, excluding severance and separation costs I expect it to be around 254 million.
That's down approximately 1 million from last year's first quarter and doubt about 2 million sequentially from Q4's adjusted offerings.
Instead I expected sales levels, we would expect appears to be down roughly due to the new one from Lula, while you variable expenses.
We expect this quarters operating margin, excluding additional additional severance and separation costs to be approximately 11% at the midpoint of guidance.
How did it 40 basis points year over year decline the drivers of this decline of the roughly 100 basis points of lower gross margin and the remainder is due to the impact of lower sales on our opex leverage.
Consumes a weighted average diluted share count of roughly 55.4 million shares.
Consumes a weighted average diluted share count of roughly 55.4 million shares.
Consumes a weighted average diluted share count of roughly 55.4 million shares.
Now, let us move into our fiscal 2020 annual operating margin framework. As a reminder, this annual framework is intended to help you understand how our business is likely the before but with the close of the fiscal year under various scenarios and not the individual quarters.
Like last year, we're providing potential annual growth rate scenarios on horizontal axis and annual gross margin scenarios on the vertical axis. This is the Dubai to matrix that you see on slide six.
Like last year, we're providing potential annual growth rate scenarios on horizontal axis and annual gross margin scenarios on the vertical axis. This is the Dubai to matrix that you see on slide six.
With respect to revenue growth, we have to sit out it was slightly positive at slightly negative C.
Because the traction scenario is buying that's a 4% to zero EPS growth and the slightly positive scenario has an ABS range of zero to 4%.
Moving onto gross margin, 42.0% is the midpoint, which reflects our Q4 actual run rate.
The gross margin contraction scenario has a 41.2% to 42.0% range, while the top have gross margin expansion scenario has a 42.0% to 42.8% range note that the top half of the matrix could still imply year over year gross margin contraction.
As fiscal 2000, Nineteens food your gross margin was 42.6%.
Let me offer a bit more perspective on gross margin.
Right now we're experiencing sizable year over year gross margin compression. This is because we have we are priced cost negative as we as we typically I ended in the late stages of the inflation cycle and because we are experiencing a roughly 40 to 50 basis points mix.
As a result absent any meaningful change to the environment. The gross margin gap year over year should improve in the back half of fiscal year.
Operating margin is close to all he will also equals the fiscal 2000 Nineteens adjusted operating margin of 12.1% only in the upper right hand quadrant.
That scenario would occur if gross margins are about Q4's, 42.0 level and sales grew low to mid single digits.
At the middle of upgrade work with flat revenues, we would anticipate operating margins being about 11.3%.
Given the 42.0% gross margin this implies an opex increase of zero to 1% versus the prior year.
We expect to that productivity measures, which include roughly 6 million of net savings from our Q4 headcount reduction.
Similar about indirect cost savings would largely offset salary and wage inflation higher depreciation amortization and our growth investments.
And all of this reflects actions taken or in process as of today and does not include any additional actions. We may take going forward I noted that Eric.
And all of this reflects actions taken or in process as of today and does not include any additional actions. We may take going forward I noted that Eric.
And all of this reflects actions taken or in process as of today and does not include any additional actions. We may take going forward I noted that Eric.
And all of this reflects actions taken or in process as of today and does not include any additional actions. We may take going forward I noted that Eric.
Thank you Bruce them.
Thank you Bruce them.
Thank you Bruce them.
Against the backdrop of deteriorating conditions in the industrial demand environment.
We have taken initial actions.
The reshaping resigns the organization.
You're now seeing early results.
Moving forward, we will continue to focus on streamlining our cost structure and transforming our operating model to be leaner more agile and more effective.
We've also made good progress in addressing the issues related to the conversion of new business into revenue.
Work remains to be done.
Work remains to be done.
Work remains to be done.
Work remains to be done.
Work remains to be done.
Including making investments into programs such as business development.
They should also improve our market share gains moving forward.
In times, when industrial demand deteriorates the.
The local and regional distributors that make up the majority of our market.
Pull back.
On inventory.
Credit people and more.
This creates an opportunity for us to capture market share, while forging new relationships and implementing new supplier programs such as the ones that we initiated recently.
The recent progress on our sales initiative.
And not the end of our journey towards fulfilling our mission is to be the best industrial distributor in the world.
We'll now open up the life for questions.
We will now begin the question answer session.
To ask a question you May Press Star then one on your Touchtone phone.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble a roster.
Hi, guys good morning.
Yeah, So Adam.
I'll take you regarding the supplier initiatives, what I would emphasize is that and as you could imagine the the characteristics of the programs span a wide range of scenarios, depending upon the supplier the product line in the circumstance the spirit behind them and I think the common theme was around win win meaning that if there's investment coming.
From the from the supplier it's in exchange for a return of focus share capture investment from and I see a now the numbers that we're giving you isn't number looked at that's a number we feel comfortable were going to deliver on so certainly some of that that that profit improvement would be in the form of guarantees some.
Would be a contingent on certain actions, but that's a number that we feel confident in in terms of the framework and I think this is an important thing.
Emphasize that responded I hit on briefly is timing so that number is factored into the framework, but the reality is.
That the majority of that savings due to timing are going to be achieved towards the end of fiscal 20.
Into fiscal 21, so that is a number that is an annualized number that we reach full run rate in 21, not in 20 and the reason is really twofold. One is timing of our average costing system as as.
Changes to our deal work their way through RPL and the second is the timing of our rebate programs. Many of these programs are done on a calendar year, a calendar year 20 rebate and so it doesn't quite sync up with our fiscal so you will see benefit towards late the latter quarters of fiscal 20, and then into 2021.
Okay got you. Thank you and then somewhat related to that I was wondering if you could just share an update on I'm sure you're new customer win progress and anything that you could share along the lines of active customer account or national account wins or any any feeling.
How the Tractions building there.
Yes, Adam so the I look this this was a key focus of last time, obviously and then just to refresh everyone. We've talked about is part of the sales transformation that had been done was a built out focused on new business wins with 100 or business development function and what we've been seeing is good traction from that group.
We believe those bottlenecks and what we're now seeing is the account appropriately moving through the stages of implementation to revenue conversion now what I'll say Adam is it takes time. So we have targets on full annualized run rate per account. It takes time to ramp to that even when we get through implementation. So.
We are starting to see revenue traction on those obviously masked by what's going on in the macro but that will continue to build over the next quarters, we have not come close to full revenue realization.
Okay. Thank you.
Our next question comes from John inch with Gordon Haskett. Please go ahead.
Hi, good morning, its Karen Lau dialing in for John what everyone.
Karen how are you guys got so I guess first on yeah first on the cost savings action I apologize if I missed that but did you quantify how much savings you got to generate well this year and I'm looking at you know you guys spending maybe nine to 10 million of charges.
These quarters are you expecting so no one year payback on those costs.
So Kevin let me, let me answer that satisfy the number so yeah. The 6.7 million is in Q4 and the savings of all if that's I was out what's baked into into Q1 and into the frame work right now right. So what so what we have is we expect net savings in a in the.
Q1 to be of public Q4 actions to be roughly around $2 million and roughly around 6 million for the full year and that's the net saving so absolutely it's a payback.
Back within the one year and note that across the gross savings are significantly higher but will also be replacing roughly half of the off the reductions over the course of the year.
So.
It does I mean, I'm just looking at the operating framework it doesn't appear that.
From the operating framework that.
A lot of that.
You are seeing much uplift from.
The operating margins from these savings I guess to your point in their first quarter a lot of that savings get offset by just regular cost increase another area. That's off the expectation for the year that most of these savings will get offset by.
Hiring back the Paul.
Hiring back the Paul.
Hiring back the Paul.
Hiring back the Paul.
And then once acquisition costs, all that's baked into our numbers, but let me come to you to the framework I think that it onto the framework for a second if you think about the midpoint of of our framework of what we've got out there. That's basically about 11.3%. If you look at the site. That's out there just go into the midpoint of 7.3% and if you take up 12 point.
And then once acquisition costs, all that's baked into our numbers, but let me come to you to the framework I think that it onto the framework for a second if you think about the midpoint of of our framework of what we've got out there. That's basically about 11.3%. If you look at the site. That's out there just go into the midpoint of 7.3% and if you take up 12 point.
The 1% number that that we ended this year at take out at about 10 basis points for Mexico, right coming out of the number and about 60 basis points of gross margin I mean that takes us very close to two where we do have yeah, and then it and say slightly higher that's it's like the hybrid vehicles, we have yet.
Given the in the given I inventory terms the benefits of these new deals with mostly materializing up BNS I mean from Q4 really as it comes in and then continue well into 21 rates I mean, that's that's what you see that the the only other factor to remember and I think I mentioned it but the only other affected remembers that we also have the price cost escalation.
Ken can we pull on the string just a little bit more specifically I'm price cost you know what are you thinking or for that in 2020.
Price cost has been roughly flat we are now late stage and we had been for the last couple of quarters and we've been pointing out price cost turned negative we are price cost negative now.
If you look over time and also to lay out a gross margin formula for you with price cost about a wash what we had been seeing is somewhere in the neighborhood of 40 to 50 basis points.
Okay, Great. That's helpful. And then just as we think about the top line. You know you sort of have good zero percent midpoint on your framework, but I guess I would assume that you know based on some of the new contract wins et cetera, you'd outperform the market. So is that accurate to say that the midpoint of your guidance extraordinary.
Looking at market growth being negative and kind of how much outgrowth do you think you could get relative to end markets.
Ah, Yes seemed so look what I would say as we look at our performance right now what I would tell you in terms of outperformance relative to market, what we've been saying for the last couple of quarters is we're right in line with market.
And that's due to a bunch of the factors that we've talked about including some of the disruption from the changes we've made from the couple of government contract losses that you referenced.
And that's due to a bunch of the factors that we've talked about including some of the disruption from the changes we've made from the couple of government contract losses that you referenced.
And that's due to a bunch of the factors that we've talked about including some of the disruption from the changes we've made from the couple of government contract losses that you referenced.
Roughly in line I don't think much has changed this quarter I'm certainly what you're seeing is a deterioration in the growth rate.
That is reflective of what's happening in heavy manufacturing and metal working those have definitely turn sharply down and I think we're feeling the effects what we're seeing in terms of the framework for now.
It's basically assuming business as usual now you are right as we look out I certainly expect us overtime here to reestablish our share gain gap to market our growth gap to market, which historically, we've talked about as being the three to 400 basis point range and yet you're hitting on one of the levers that you hit on a couple of the levers that.
We're focused on and really there's three one is business development, we like what we see we like the wins and we are not only going to continue focusing on implementation of existing wins, we're ramping up the team to accelerate the wins to its government and turning that program around and hopefully once again, making that a tailwind I think we're making some nice changes to the program.
The growth gap to restore overtime.
Great Great. That's helpful. And then maybe just a real quick win for rest of it. If we do have sort of flattish year 2020, you know what does that do do you think to working capital you mentioned, you know potentially some opportunity there.
Great Great. That's helpful. And then maybe just a real quick win for rest of it. If we do have sort of flattish year 2020, you know what does that do do you think to working capital you mentioned, you know potentially some opportunity there.
Yeah, we have so typically when the sit in this business when you.
And when the economy as we come in working capital reduces and you'll see some cash coming back so free cash flow will go up.
Okay and leave it there thank you.
Hi, I'm, so just mathematically the 20 million in incentives on the gross margin line. It's about 50 to 60 basis points annually and I guess, you're saying you should get some fraction of that maybe half in fiscal 2020. So.
Hi, I'm, so just mathematically the 20 million in incentives on the gross margin line. It's about 50 to 60 basis points annually and I guess, you're saying you should get some fraction of that maybe half in fiscal 2020. So.
Just if I'm reading this right at the 42.0 mid point are you assuming that the core sort of declined 25 to 30 basis points and then you make up that difference with these a these supplier incentives.
Just if I'm reading this right at the 42.0 mid point are you assuming that the core sort of declined 25 to 30 basis points and then you make up that difference with these a these supplier incentives.
So today, but yes, I mean look we have the secular the usual secular mix headwind that comes as we as we grow more from a box the business. That's a at lower gross margins I mean, we expect that to continue. So this should help when you look to the number but also remember in the the 42.0 is going.
Well, the fourth quarter fourth quarter of fiscal 19.
And Dave if you wanted to do some math I mean, I think where you're going is right. We just take a look at the last quarter or two and the Q1 Guy we're looking at something like 100 basis points year on year gross margin change the midpoint of the framework would imply 60 basis points. So obviously would that would mean is towards the end of the year It gets better and.
You are correct, it's actually a little bit less than half of the total 20 million would be seen in this fiscal and we would reach youre the full run rate and the basis point impact you described in 2021.
It seems that you mix in there both traditional direct marketing business along with the elements of your high touch model like via mine vending [laughter] is there anyway, you can cause a in a quarter or what percentage of sales were just MFC direct dot com doing kind of parse out there.
Hey, guys good morning.
Hi, Rob.
Sounds like your price cost to say 20, or 30 and sources of growth 50, offset by about 25 of benefit from the supplier incentives I think that adds up to about 55 or 60.
Robin you talking Q1 or the year for the year I'm, sorry, yeah that down 60, I'm trying to get to that.
Yes, I mean I.
Right. So you so you've got makes it goes about 20 basis points coming from there right you've got the over time, you've got the supply incentives, what you're talking about Russia, you know each I remember that we talked about the 60 basis points also and even if you consider that half half. Okay. It's roughly in that both up yes, they've got about 30 basis points. So so positive coming in.
So the secular sort of headwind as well that that I talked about uniform and that Eric talked about actually.
So the secular sort of headwind as well that that I talked about uniform and that Eric talked about actually.
So the secular sort of headwind as well that that I talked about uniform and that Eric talked about actually.
So the secular sort of headwind as well that that I talked about uniform and that Eric talked about actually.
<unk> basis points that come through from that and the rest is price costs I mean it.
No outgrows, there could be some but it sounds like you didn't assume any in the framework is that correct, yeah, Rob Rob look I mean really what we did here what we tried to do with your right. So from minus four to plus four is a is it pretty wide swing, but essentially what we're trying to get that is those are reflective of.
Should we really start to outperform and re establish a gap a yeah that would that would certainly move us up regardless of environment, but what we reflecting there was more about environment.
Certainly what I'll do with speak to what we have in Q1, you can see that our guide of at the midpoint of our guide was minus one and a half if you look at September October roost and did the math for you you know we are expecting a little more of a step down in November and that's based on what we're seeing in the business. What we're seeing in the environment to go beyond that is so tricky because.
Look there's so much swirling now there's so much uncertainty over trade and tariff things change quickly in this business and we tend to be a leading indicator not a trailing indicator so tough to tough the call. It beyond that got it got it just lastly from me I think the growth investment in the first three quarters was tracking at some about.
15 million I didn't hear any in Fourq you. So maybe that was like one or zero, but would you expect the growth investment in the 2020 personnel to be a kind of a decline from that 15 16 million or.
15 million I didn't hear any in Fourq you. So maybe that was like one or zero, but would you expect the growth investment in the 2020 personnel to be a kind of a decline from that 15 16 million or.
Kind of level or higher.
Kind of level or higher.
So.
Part of what were doing as well is even the even the effort to 2.3 medium to mentioned in Q1. The efforts. We've got underway right now as we're taking as you know as we're moving away.
As we think the Generead growth.
Business development, we like what we see there it's gonna be expanding we like what we see from vending I mentioned that the growth rates in vending are up signings are way up.
Got it alright, well appreciate all the color. Thank you.
Our next question comes from Michael begin with Wells Fargo. Please go ahead.
[noise] extra time today, gentlemen store I'd go back.
Your free cash flow conversion has been over 150% averaged about 150% <unk> dollar environment. Just noted vending science signings are going to be positive. This year I just wanted to make sure.
Right right behind what we say when they don't networking capital and free cash flow in dollars and vitamins.
Right right behind what we say when they don't networking capital and free cash flow in dollars and vitamins.
There's lots of stuff is going to buybacks are going to special dividends. We can just keep the cash I mean, it's a in a tough environment like days today, there's an advantage to having a strong balance sheet with the.
Going back away you acquired a business called Jantel I believe that business had some auto exposure just wanted to check and see if you have anything on the G. M fraud with that strike going on or any impact to your business that you could.
Going back away you acquired a business called Jantel I believe that business had some auto exposure just wanted to check and see if you have anything on the G. M fraud with that strike going on or any impact to your business that you could.
Got a breakout.
Yeah, Michael look what I would say definitely you that moved the J they'll move enhanced our Midwest presence considerably I mean, if you look at the end more I mean, the answer is yes, we're feeling it even though we always talk about the fact, our direct exposure to some of these big end markets like automotive is low what's really big and is hard to get.
If I can just sneak one more in here for the second half of this year can you kind of I'm, sorry, if I missed that can you walk it basically the level of upside you're expecting.
Between the rebate initiative versus the inventory costing initiative, what it which is more impactful for the second happened this year.
So what we're doing is were bucketing them for purposes of what were conveying here and look to punch line is open 20 million that as an annualized number full effect in 2021.
Under half slightly less than half in 2020 of that it's made up of both some will come through a average costing and a good chunk will come in rebate most of that coming in our Q4.
Appreciate the color.
<unk>.
Our next question comes from Patrick bombing with JP Morgan. Please go ahead.
Good morning recording wish them. Thanks for taking my question.
[noise] just had a maybe first just circling back on operating expenses I was looking at the first quarter guidance and thinking it would maybe in pipe 2020 would be down like low single digit percentyear over year for that 1 billion dollar bucket of operating expenses, but.
This is still the reasonably tight.
Employment economy, as well too so we do have wage and salary inflation as well baked into our numbers. So the net number coming out of all of that is exactly where you are upstate.
Employment economy, as well too so we do have wage and salary inflation as well baked into our numbers. So the net number coming out of all of that is exactly where you are upstate.
Employment economy, as well too so we do have wage and salary inflation as well baked into our numbers. So the net number coming out of all of that is exactly where you are upstate.
Yeah.
Yeah.
Yeah.
Some discretion here, depending upon what happens with the economy recently I think mentioned it in his prepared remarks. The framework was all based on actions. We've taken today, if things where did deteriorate further look you'd you'd see us adjust that adjust quickly. So there's some room there and what he's doing is indexing for you, saying flat to flat.
It's kind of the easiest way to benchmark of but we would take other actions if things got worse.
Got it and then maybe along those lines just thinking more medium term like how do you guys. At this point I'm thinking about the incremental margin framework if.
I assume you guys grow low to mid single digits organically wherever you guys think about just curious if you could update on the framework for incremental margins in your mind, Yeah sure Patrick So let me start and I'll sort of walk you down.
Our left with the mixed pressures that we've talked about in the business of somewhere 40 to 50 basis points.
Looking at the revenue line.
We would expect to deliver again overall full economic cycle here at least mid single digit revenue growth hopefully better but at least mid single digit revenue growth at those levels, we see ourselves generating we should generate at least 40 to 50 basis points of operating leverage.
Where we would see more leverage and the second thing is improvements were making to the business to the operating model and the cost structure, which should be gone now certainly would then create a path to layer on top of that and create out margin expansion.
Got it okay. So base case, you hold margins in kind of a mid single digit growth environment upside case should be you know, maybe 15% to 20% Incrementals is that.
Well.
Hey in the base as we see it if I look out over call. It. The next five years I would say in the base case or some of the improvements to cost structure and operating model that would enhance that so look to do we get to 20% plus to me. It's one step at a time like let's get back on track, but I would say.
The things that we're talking about would be part of the base case.
Got it helpful color and then maybe last one from me quickly just you said, you're assuming a further step down sales in November .
Got it helpful color and then maybe last one from me quickly just you said, you're assuming a further step down sales in November .
Got it helpful color and then maybe last one from me quickly just you said, you're assuming a further step down sales in November .
I guess my question is what what's your visibility to that.
I guess my question is what what's your visibility to that.
Or you just being conservative.
It's a so.
Thank you Patrick I would say visibility as usual low and if anything really low right now given all the uncertainty it is so hard to say.
Thank you Patrick I would say visibility as usual low and if anything really low right now given all the uncertainty it is so hard to say.
Hard to say, whether we're being conservative, but basically what we're doing is we're looking at the trending in the in the business us what you've seen a stepped down from Q4. We were positive September we were half a point I would 0.6 October got little worse, and then you add on top of that what we're seeing from our suppliers.
Okay. Thanks, I appreciate the time and not good luck.
Okay. Thanks, I appreciate the time and not good luck.
Hi, Ross question comes from Justin Bergner with GE Research. Please go ahead.
Oh good morning, Thank you for taking my question.
Hi, Justin Hi, I, just want to review the mix headwinds I'm I realize they sort of just get mentioned pretty quickly I conversations but could you just review what are the drivers of those mix of that 40 to 50 basis point mix headwind and what would cause that to get smaller or larger.
Hi, Justin Hi, I, just want to review the mix headwinds I'm I realize they sort of just get mentioned pretty quickly I conversations but could you just review what are the drivers of those mix of that 40 to 50 basis point mix headwind and what would cause that to get smaller or larger.
Hi, Justin Hi, I, just want to review the mix headwinds I'm I realize they sort of just get mentioned pretty quickly I conversations but could you just review what are the drivers of those mix of that 40 to 50 basis point mix headwind and what would cause that to get smaller or larger.
Very quickly the secular mix headwind is as we do more Wendy.
Very quickly the secular mix headwind is as we do more Wendy.
Very quickly the secular mix headwind is as we do more Wendy.
Okay and that headwind has sort of remained at that level pretty consistently it hasn't fluctuated too much higher too much lower in any given year.
This concludes our question and answer session I would like turn the conference back over to John Corona for any closing remarks.