Q3 2020 MSC Industrial Direct Co Inc Earnings Call
Participants will be in listen only though.
So to me the systems.
And specials Starkey Paul.
After todays presentation or we opportunity to ask questions.
Yes. Good question. They were press Star then one already touched on so.
Well George Your question. Please press Star then too.
Please note today's work is being recorded.
Now, let's turn the conference over to John Graff, Vice President Investor Relations.
Let's go ahead Sir.
Thank you Rocco and good morning, everyone.
Erik Gershwind arc, Chief Executive Officer, as well as Greg Clark, our interim Chief Financial Officer.
On the call with me.
As we work on our last call. We're all remote so bear with us if we encounter any technical difficulties.
During today's call, we will refer to various financial management data in the presentation slides that accompany our covenants as well as our operational statistics, both of which can be found on the investor Relations section of our website.
Let me refer to our Safe Harbor statement under the private Securities Litigation Reform Act of 1995.
Comments on this call as well as the supplemental information we are providing on the website contain forward looking statements within the meaning of the U.S. securities laws, including statements about the impact of covert 19 on our business operations results of operations and financial condition expected future results expected benefits from our investor.
In a strategic plans and other initiatives and expect to future margins.
These forward looking statements involve risks and uncertainties that could cause actual results could differ materially from those anticipated by these statements.
So based on about these risks as noted in our earnings press release, and the risk factors and the Mdna sections of our latest annual report on form 10-K filed with the FCC.
As well as in other actually see filings.
These risk factors include our comments on the potential impact of Cobot 19. 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.
I'll now turn the call over there.
Thank you John and good morning, everybody. Thanks for joining us today.
Most importantly, let me start by saying that I hope everybody on this call is staying safe and healthy.
Before I dive into the details of the quarter I want to begin.
Mornings call by providing some perspective on our company's performance since the covert 19 pandemic began.
I'm quite pleased with how our company has risen to the occasion.
The face of the most severe crisis.
Most of us have seen in our lifetime.
When we spoke on our last call. It was early April.
And we were still in the early stages of crisis management.
And we were focused on playing defense.
And that meant ensuring the safety of our team at our customers.
Solidifying business continuity plans for ourselves and partners.
Adapting to a remote remote working environment.
And ensuring the financial stability for the enterprise.
Well all of these still remain top of mind.
Our attention has since turned to playing offense, where we saw opportunities.
That's just providing much needed P.P.E. and janitorial supplies to keep our customers running.
Capturing new customer relationships.
As our smaller competitors struggled to effectively serve their customers.
And striking new and improved programs with our supplier partners.
This dual approach of playing offense and defense.
Has served us well thus far.
At the same type.
It's also clear that we're not out of the woods yet.
As you can see from our June growth rate.
With the benefit from the P.P. search subsiding.
Our base business is showing the realities of a challenging manufacturing environment.
Very cautious customer base.
More about this later.
Well, it's not surprising to us given the dynamics in key industries that drive metalworking consumption, such as automotive aerospace in oil and gas.
Along with the obvious uncertainty regarding the trajectory of the virus.
But the early days of crisis management now behind us.
We resume our journey to position reposition M.S.C. from spot buys supplier.
To mission critical partner.
Over the past four years.
We've migrated M.S.C.
From a secondary supplier.
To our customers primary option.
We play a key role on the plant floors draw metalworking technical experts.
Our inventory management service team, who support vending along with our via my program.
Which is also the centerpiece of our class C business.
And more.
His presence deepens, the customer relationship which when executed.
The benefits of higher customer retention rates, and hence stronger lifetime values.
And more resilient gross margins overtime.
It also allows for the ongoing capture.
The legacy spot by business in these customers.
Before the pandemic began.
We have completed most elements of the repositioning.
With just a few remaining.
And I'll provide an update on those remaining ones later on in my remarks.
Let me now turn to an overview of our fiscal third quarter.
And I'll, then hand, the call over to Greg will review the details of the quarter.
I'll then wrap up before we open up the line for questions.
First.
An update on our business continuity efforts.
While our customer fulfillment centers have remained open throughout the crisis as an essential operation.
Most of our other areas remains in a remote working mode.
And given its effectiveness.
Continue operating remotely until at least September 1st in most of our facilities.
Which point will determine our go forward approach.
In the meantime, we continue operating our fulfillment centers with enhanced safety procedures.
As of mid March we eliminated all travel in order to ensure health and safety.
Over the last couple of weeks some limited travel has resumed.
Primarily for our sales and service associates, who need to be onsite with customers in those states that allow it.
And rest assured they're all practicing social distancing and using strict safety protocols.
We plan to keep travel quite limited for the foreseeable future.
The only on customer facing needs.
Our fiscal third quarter financial results.
Afflicted strong execution in a tough environment.
And tough as an understatement.
Versus the prior year.
Overall sales were down 3.6%.
Gross margin was down just 10 basis points.
You may recall that we experienced an unusually large gap between bookings and what was invoiced in fiscal March.
This trend continued through fiscal April with bookings, increasing at a double digit case over prior year.
Due to the continuing surge and large safety in janitorial orders.
Scarcity of product.
Longer lead times.
During both fiscal March and fiscal April.
Our non safety and non janitorial product lines saw significant declines versus prior year.
Due to the impact of prolong customer shutdowns in the world wide efforts to control cope and 19.
May sales grew over prior year.
And that was driven by the fulfillment of the large safety in janitorial backlog.
That had built over the prior couple of months.
At the same time.
We noted that bookings levels for safety and janitorial orders came down in may from the elevated levels of March and April.
As a result, our order backlog decreased from well above 100 million.
To about 100 million at the end of our fiscal third quarter.
The current backlog now stands at roughly 85 million.
Which is still above historic levels.
But certainly below the bowls, we saw last quarter.
Orders and invoicing in May for non safety and non janitorial products continued to see double digit declines versus the prior year.
Although we did see average daily sales rates improve at a modest rate through them up.
Looking at performance by customer type.
National accounts declined high single digits, even with the safety in janitorial surge.
In contrast, our core customers declined mid teens as remember this is the portion of our business.
Most heavily levered to metalworking, which saw a significant weakness and really extensive shutdowns.
D.C.S.G. similar to National accounts was died down high single digits.
Government sales.
And that includes both federal and state were up significantly in large part due to the surgeon safety in janitorial orders.
And that partially offset declines in other areas of the business.
In fact as a percentage of total sales government represented 15% of sales in our fiscal third quarter.
This is a high watermark for government and we would expect more normal levels moving forward.
As you can see from our June's estimated total sales growth of minus 11.1%.
Or minus 14.8% on an 80, yes basis.
Customer Reopenings have provided today only a modest improvement in underlying non safety non janitorial related sales.
We're hearing a few things from our customers and our Salesforce.
First most manufacturing end markets are quite soft.
Fundamentals are weak.
For example, our job shop in machine shop customers that normally have a new order backlog in the range of six to eight weeks.
Down to a much smaller backlogs right now.
Second unrelated.
Customers are cautious about spending and so they're burning off as much inventory as possible.
And third.
There's also caution about the persistence of the virus.
And the potential for future surges.
So while customers are reopening.
They're doing so gradually.
And in fact, many have even cut hours after opening up particularly in late June.
Some customers shut down for a longer than normal period around the July 4th holiday.
As a side note you'll see that our fiscal June this year has one extra day compared to last year that explains the discrepancy between total sales growth and average daily sales growth. This was due to the timing of July for fourth falling on Thursday last year in our decision, hence the close on that Friday.
So all of the caution that I described is reflected in the recent sentiment indices such as the M.B. I.
The March reading was 41.
April was worse at 34.4.
May rebounded to 40.8 and the June reading, a 42.9, while a slight improvement continues to point to significant contraction in metalworking end markets.
The weakness in industrial demand was pretty much across the board with some isolated pockets of strength in areas, such as medical manufacturing and food processing.
Which are not quite as core to us at some of the others.
As I mentioned earlier.
We're seeing sustained and acute weakness across certain heavily metalworking said centric markets, such as automotive aerospace and oil and gas.
I'll move now to gross margins and I was quite pleased with our third quarter performance, which built upon the solid results that we've been seeing throughout the fiscal year.
There are three levers to our gross margin formula and each one worked in our favor.
The first is price.
As I mentioned earlier, we continue to see good realization from our mid year price increase supported by some improvements to execution.
The second this purchase cost.
As anticipated we're seeing the purchase cost escalation that's been with us for the past year start to Wayne.
This is due to a combination of lower income input costs, making their way through our average costing system.
And also due to improve supplier programs that we had recently negotiated.
Our third gross margin leverage mix.
Right now mix is more of a wildcard than the other two.
Well, it's generally been a gross margin headwind over time.
It had less of an effect this quarter.
Due to a combination of product mix and lower production oriented metalworking sales.
June gross margins continued our solid Q3 trending.
Looking beyond June.
We expect to sustain our recent gross margin performance with a couple of caveats.
First our Q4 generally has a seasonal tick down from Q3 levels and that would likely be the case again this year.
And second.
We do anticipate some pressure on our rebates as we talked about over the last few months due to lower purchasing levels with lower sales.
In terms of the gross margin levers that I just mentioned, we expect to continue executing well on the price front, albeit in a tougher pricing environment.
We also expect to build on the momentum to bring purchase costs down.
Notwithstanding the rebate factor I just mentioned.
Rebates again will remain a headwind with purchasing at current levels, although that could change quickly. If we were to see a pickup in the coming months in sales.
Mix will remain a wildcard, especially in these unusual times and is therefore less predictable.
Finally, I'll move to operating expenses, where we managed our spending carefully and took temporary measures to reduce our cost structure.
As a result, our opex to sales ratio was 60 basis points below the prior year period, and Greg will provide more detail in just a bit on how we did that.
All of this resulted in an improvement in operating margin of 40 basis points and earnings per share that were down four cents versus the same quarter last year.
I'll now turn things over to Greg before coming back with some concluding remarks.
Thank you Eric.
Let me get right you three number.
Our average daily sales were 13 million a decrease of <unk>, 0.6% on an 80 basis.
First at the same quarter last year.
As Eric mentioned, the fine with it that much greater without the film without the largely in janitorial backlog that had built in the first two month of the court.
Our Q3 reported gross margin was 42.4% 10 basis points below the prior year.
The year over year growth Mark Klein.
As we've seen strong price realization on our price increase Mark had good success with our supplier incident.
Finally, as purchase cost escalation continued to decline.
Total operating expenses in Q3 were 244 million for 29.2%.
Sales versus 200.
Or 29%.
Higher year.
This also includes about 1.3 million of cost related to the review about operating model, we had mentioned on previous calls.
Going forward and beginning in Q4, we plan to break <unk> costs out separately.
Activity related to this initiative to ramp up.
Our Q3 results reflect the swift cost containment measures implemented including temporary reductions in variable hour.
Dan Mannes and salary separate suspension of our form 10-K, Max hiring freeze reductions in third party.
And vibrant related travel restrictions.
In light of current conditions. Most of these actions are continuing and all the fourth quarter.
Moving on our operating margin was 13.2% versus the prior year up 12.8.
Strong gross margins and the cost containment measures I, just mentioned treatment to the year over year improvement.
Combined with the stronger than expected fail.
All that resulted in sequential margins for the quarter coming in a low single digits.
Looking at Q4, we would like to be around the low end of our previously stated range.
So 20 to low third.
Our tax rate <unk> third quarter with 24.9.
10 basis points below the 25% tax rate in the prior.
All this resulted in earnings per share on the dollar for.
Turning to the balance sheet.
Our dsos at 61 days up two days from fiscal 2019 Q3.
Well count continues to be the main driver.
Our inventory increased during the quarter to 575 million up 19 million from Q2.
Primarily related yeah, whereby the support increased demand although fraud.
Excluding safety in janitorial Q3 inventory levels dropped roughly 25 million.
About what we expected with the decline.
Total company inventory turns were relatively flat at 3.4 times in both Q3 can you.
Net cash provided by operating the third quarter with 59 million versus 89 million last year. As we can you use our strong balance sheet as a competitive differentiator by increasing inventory level.
Our suppliers assignment.
We also paid about 42 main ordinary dividends during the quarter versus last year Q3 of $35 million.
As discussed on the last call, we're continuing to manage our liquidity very closely.
As we drew down 300 million from our revolving credit facility in March to ensure a greater liquidity.
Our total debt has again with the third quarter was 970 million comprised primarily of $580 million down kind of revolving credit facility.
20 million of short term fixed rate borrowings.
65 million of long term.
That's the cash equivalents were 353 million.
That was 624 month.
At these levels, we are very ample room under our debt covenant.
Oh no since our third quarter ended our cats levels have increased roughly $100 million.
Which before payment of our next dividend.
A lot.
I'll now turn it back there.
Thank you Greg.
As I look ahead.
We remain focused on our three priorities.
That will complete the repositioning of MSC from a spot buys supplier to a mission critical partner on the plant floor.
And it will accelerate our performance.
First.
We will resume our salesforce refinement efforts.
Specifically restart business development or new Hunter hiring.
We do so amidst an environment full of market share capture opportunities in our large fragmented marketplace.
We've been on a temporary hiatus from hiring due to external conditions.
And while hiring is likely to be slow.
Our resuming our plans to complete the final step over sales transformation.
Second.
We are building on the recent gross margin momentum driven by improvements in pricing execution and new supplier programs.
We will apply the learnings from our mid year price increase to future increases.
And to the day to day business.
In order to sustain higher price realization levels.
On the supplier front.
Previously negotiated programs are yielding benefits, albeit at slightly lower rebate levels due to lower purchases.
And we will look to continue to negotiate new agreements.
Third.
We have we initiated the project.
Focused on aligning our operating model to the new strategy.
We expect this program to generate a couple of hundred basis points of improvement in our operating expense to sales ratio within the next three years.
In closing.
I'd like to reemphasize, how pleased I am with how our team has come through the covert 19 crisis.
You can see in our fiscal third quarter results.
Resiliency of our gross margins.
And also what is possible in terms of operating cost reduction.
While much of that was achieved through temporary measures.
The results still show what's possible.
We will use the review of our operating model.
To find more permanent structural improvements that replaced those temporary measures.
Well our June sales show that we're not at the end of the difficult economic environment.
We will continue.
Well look to play office.
To accelerate share gains and to take cost out of our business.
I want to close by thanking our entire team for their hard work.
And I extend that appreciation to our customers suppliers and other supply chain partners, who have all come together.
To address this large challenge that we all face.
We'll now open up the line for questions.
Thank you we will now begin the question answer session.
The asking question we were press Star then one on the Touchtone phone.
If you're using the speaker phone, yes, James Kisner handset, which were pressing the key.
<unk> chartered a question. Please press Star then too.
Today's first question cultural the terms of Missouri with Jefferies. Please go ahead.
Hey, good good morning. Thank you my own a good morning. My My first question is just you know I know June was pretty weak you mentioned some reasons could you give us a sense of how youre performing relative to your end markets.
Are you gaining share are you losing share I know, there's a lot of noise because of safety and covert 19, but just any any comments you can provide there would be helpful.
Yeah, Hamzah I think the punch line is we feel pretty good about our performance and despite the absolute numbers of 11% down on a total basis and fourteeneight on.
What I would tell you is the environment in metalworking markets is really tough right now and there's a bunch of reasons. The linear reasons I mentioned on the call in a lot of ways.
We would expect history to play out moving forward and what history suggests is that the tougher it gets out there the more the opportunities are for us to capture share because again, 70% of our market is made up of local distributors, who are really hurting and we're hearing that from our sales team I am encouraged a into.
Terms of particularly the channel checks were doing on.
The number of new wins were seeing.
The customer satisfaction ratings were seeing from a market share capture perspective, I am encouraged obviously early days.
It's hard to get too excited about numbers being down double digits, but I will say I feel good about our performance and better about the prospects for share capture moving forward.
Great and then and then just you know gross margin performance was was pretty Gord. You referenced you also mentioned you know learnings from the midyear price increase are you looking at pricing differently is that something different could you just remind us about how you approach pricing this year of other.
Do you know past years. Thank you.
Yes, Hamzah I do I do feel good about what we're doing there and I'm going to give you a tactical answer I think there's sort of two things going on.
There's a tactical level to the answer in a strategic level tactically.
What I would say yeah, we have made a couple of pretty significant improvements or changes over the past couple of years on pricing and I'll note two of them. One is to build out of a pricing team, whose bringing more I would say data analytics science and rigor to our process, making it more data driven and then the second thing is Eddie.
Has brought really as a new sense of rigor and discipline into the field around how to negotiate in a win win way with our customers to capture price. So those are the two tactical changes that we've made I think strategically the other thing I'd call out is okay. We've done a lot of work over the past.
A few years to reposition this company.
From a spotlight supply to a mission critical partner and I think part of what we're seeing here is the positioning as a mission critical partner on the plant floor is helping us with a more resilient gross margin because we are they are providing cost savings to our customers in a way that look we're earning the value that we're charging for so I.
I'd say, that's sort of a story on gross margin.
Great. Thank you so much.
Our next question Craig comes from Ryan Merkel were William Blair. Please go ahead.
Hey, guys. Good morning, congrats on the margins.
Right.
Right.
So so first off for June can you give us a safety growth and non safety grower and then secondly, I think the surprise for me on June it's more that safety doesn't seem to be as they get that help us I was thinking so why why wasn't safety stronger why did it more at the backlog ship in June.
So Ryan here, here's here's what I'd say and maybe just sort of the whole picture. If you go sort of pre cove, it and when I say pre cope with the month, leading up to March and then coated March April may and now June and beyond just give you a sense of the dynamic so.
What we saw when covert hit was this massive surge in the orders for safety in janitorial, while at the same time, we're talking about the based it let's call the base everything but safety in janitorial down in the neighborhood of 25% to 30% at the trough.
Most oh look a lot of a lot of the safety in janitorial orders did bill out and it's why you saw a may at plus six something percent. Despite the base business being weighed down was the billing out of those orders. There is still some to go and some of that is a function of supply chain.
She was blanket orders because as you can see our we mentioned our backlog at 85 million is still up.
Not close to what it was but still above where we would normally be around 40 to 50 million. So there's still a bit to work through here.
What I would say in terms of June so whats happened Ryan is there was a big surge safety janitorial spend has come down to slightly above pre cobot levels, but just slightly above pre called at levels. We think what's gone on is like a lot of us on the personal front when cobot hit.
What did everybody do they went to the supermarket and they stocked up on needed supplies a lot of our customers have told us. They did the same thing there were surge buying.
And in some cases their eyes were bigger than there are some mix and they're working that down.
I look I would suspect Ryan we're all watching the news and seeing how this virus is continuing to accelerate should that happen.
I think there's a good chance, there's going to be the elevated needs moving forward and one of the things we put a premium on was getting you can see our inventory number is getting inventory getting that P. P E janitorial inventory into our warehouses, so when that happens again.
We are positioned to ship it out quickly so I hope I answered your question there.
No you absolutely did I I think I was thinking there was still scrambling for safety in June but it sounds like everyone Sorta ordered and then maybe ordered more than they need it. So it's sort of a pause yeah I think thats right Ryan and then I think we know the discussions that we're having with customers would indicate that to the extent if look at the virus begins to wane deferred.
Story, but if it keeps elevating there's likely to be further needs down the road and that we made was hey, we're going to keep the inventory on the shelf. It's a competitive advantage for us we want to have a debt.
Okay. Okay.
Then second question you talked about reinstating the project focused on aligning the operating model I'm. Just wondering if now is that right time could be doing this and could create risk on execution on share gains if you're right you know really cutting costs.
Hey, we we don't think so and that's a good question Ryan I I would say, we don't think it's an either or we think it's a both and it all sort of ties back.
To this idea of the repositioning to being mission critical so what you're going to see from US is sort of a dual path where look when it comes to growth investments. We're accelerating we're back to will be hiring BD folks to complete the sales repositioning.
And this kind of this new mission critical value proposition were full steam ahead on at the same time.
The cost moves will go to make our about executing the value proposition more efficiently. So we kind of think their symbiotic and.
And we do think that the time is right to do both.
Got it perfect. Okay I'll pass it on thanks.
Our next question comes.
Comes from David Manthey.
Please go ahead.
Hi, good morning, everyone.
[music].
So first off to level set.
Excluding the surging safety and Jan San sales, how do you view your April May and June.
Core.
Yes growth rates.
So we bottomed out.
And I want to say was Greg April right. So back half of March and April where this piece of it with your customers, we had 25% to 30% partial or full customer shutdowns and saw the base business go down from commensurately. What's happened Dave is since then May and June we saw.
Sequential lift call it in the roughly 5% per month, so may 5% over April June 5% over may and that base.
So so what you're seeing is a rather slow ramp so it's interesting that the.
The headlines which are I think the headlines are indicative of a faster ramp than what we're seeing in customer activity and I think thats a function of what we talked about Dave yet metalworking end markets are slow customers are really cautious and many had bought up before the cold the crisis in are burning off inventory where they.
Okay, and they're afraid of a a second wave here in their opening very gradually and they were three shifts before maybe there are one shift so I think that's what you're seeing.
Look from our standpoint, yeah, regardless of the trajectory in some ways. The slower it is the more opportunity for us given that what it means for the local distributor, but that's sort of what we're seeing in the base.
Okay. So what you're saying is that April was down 20% plus and then May and June were somewhere in the teens, but June daily sales was maybe just a touch better than may still down because the environment. Its top out there yes, you got it so so yeah, when I referenced the 5% 5% that.
It was not year on year that was sequential so we bottomed out in April and May have the base business now stripping out the P. P and safety may sales were up roughly 5% over April and June up another five over met so it's been a gradual.
Sort of climb back if you call it.
Got it Okay, and one clarification, Greg had mentioned that you expected to be on the low and the decremental margin range of low twentys to low Thirtys can you just specify I don't know what the low end of that is is it twentys or or thirtys.
No the low end to that would be 20, so okay. Okay.
That that's where they need it alright, guys. Thanks very much like that.
Next question today comes from out of all men with Cleveland Research. Please go ahead [noise].
Hi, guys good morning.
Hi, Eric to follow up on Ryan's question on the repositioning of the the operating plan.
Yes, you know, you're saying that you're looking for a couple of 100 basis points of expense leverage.
You know today I think you mentioned that you think that that could take three years.
Complete which.
I think seems like a long time, but earlier you would you had mentioned that you're looking to get going right. Now so I don't know if that means the chair.
Looking to pull that.
Program forward, even faster than the three years, but and maybe could address that and then just discuss some some more specifics around no what exactly you're looking to achieve and do you have any like best in class metrics that you could share with us that you're looking at in the industry that would be a good representation.
And the of the model that you're you're looking to get too.
Yeah sure. So Adam when this project started we had a three year time horizon and the reason the way to think about this it won't be a big Bang. So it's not going to be like where you have to wait two to three years to see anything and then we unveiled this big reduction it's going to be waves of initiatives.
And so the two to three years is reflective of getting to full run rate progress will be NADL, along the way. It I'll I'll add that will put more color on this next call and give you more detail basically what we did we got some outside and help.
With a group that has a ton of experience in distribution and best in class distribution. So we didn't do a lot of benchmarking.
Project basically split out along three tracks there was a sales and service track a supply chain track energy and aid track.
The sales and service track as much as anything else was about.
Maybe some cost actions, but more about how do we more productively and effectively grow so to be clear the company's aspirations are to grow its going to be it about how we do it more efficiently.
Supply tranche track was a whole bunch of initially I mean, it's a ton of initiatives that are a lot of singles and doubles looking at freight patterns order consolidation patterns, how good slow in and out of our distribution centers and look that's an area that I think we've been.
Fairly strong in for a long time in the benchmarking showed that but even so when you put a microscope to it there's always opportunities to do better.
And so that's a lot of what we're going to be looking at their order freight and flow of goods sort of patterns in and out and how we take hidden costs out of the business.
The third track is Gionee, which is basically looking at the support function of the organization.
We'll be looking at all of our spend that could be everything from indirect procurement and contracts. It could be taking a look at business processes like order to cash and procure to pay and were just you know legacy process. It had been around for a long time that can be tuned up and made more efficient. So the way to think of this is those are the three tracks. Those three tracks are going to produce.
As a whole bunch of waves of initiatives that will move through the company and we'll build to that sort of number over time and again, we'll put more color on this on the next call, but hopefully that helps.
Give you a little detail.
Okay. Thanks.
Helpful and that's somewhat related to that I guess, he mentioned you expect to grow headcounts here in the near term.
Right now, it's running down like 3% year over year or so on the field sales force I guess, what should we be expecting over the next three to six months.
Magnitude the increases I mean, there you're likely looking to get the gross but.
Do you have a lot of catch up that you have to do and then maybe just remind us what that long term algorithm looks like because that low single digit head count growth drives high single digit sales growth or something along those lines would be helpful. Thank you.
Adam So near term just a reminder, so the sales.
Work being done here the completion of the sales transformation ties directly back to the repositioning of the company and we had a body of work going on for 18 months, Eddie Martin came in a year ago took a fresh look at it and reached the conclusion of right strategy Punch line right strategy wrong implementation and specifically tightening up implementation.
Matt we were over allocated to the farmer role and under allocated to the BD or hunting role and so if you remember pre cove. It just feels like a lifetime ago now, but earlier in our fiscal year.
We took head count down in the field and that was a reduction in farmers. The other side of that was to scale up BD hunters and the reason was the focus on a new growth formula with a heavy heavier emphasis on new customer relationships and new share of wallet programs.
New share capture so what happened was cobot comes along just as we started to scale. The B D. Hires. So what we're talking about is really just completing what had been interrupted by cove. It.
The clat, we do yeah, we had already added something in the neighborhood of 100 BD rolls over the last couple of years in the company.
Pre coated that group was well ahead of plan as you can imagine cold it certainly would interfere with that so we're encouraged by what we're seeing out of the group at where we're going to add is into the BD function primarily.
In terms of over the next three to six months, Adam I I don't think you're going to see a hockey stick here.
A bunch of reasons, but one of which is just practically the environment, it's still an and easy one as it relates to hiring with social distancing and everything so I think it will be a fairly gradual scale up.
Your other question is about the long term growth Formula look we intend to get this business back to high single digit organic growth in a normalized environment.
That is the objective that's what 80 is chartered with that's the legacy of this company I have no doubt, we will get out there as we move through all this repositioning.
The question is okay, what's the ratio of how much sales hires that we need I'm going to reserve judgment on that one Adam because look it isn't new model.
And the whole idea of the redesign is that it should be a more efficient model, we shouldn't need to add at the same ratio that we used to add which was you know overtime kind of close to the actual growth rate I would expect it to be considerably better.
But I'm going to reserve judgment on that a little bit but short answer for to punch line is the next three to six months, we'll be focused on completing the sales repositioning.
On a fairly gradual lift in hires.
Alright, thanks there.
Our next question today comes from Chris Dankert with Longbow. Please go ahead.
Hey, good morning, guys. Thanks for taking my question I guess, the comp pull that threat a little more you've given us some great deal on the Salesforce realignment.
Historically, adding feet on the street has been directly correlated to the sales here, but I guess going forward have you given some thought to how do we grow sales without the addition of significant human capital can you move more towards pushing digital marketing or something else. It doesn't require I'm just more bodies any thoughts there would be great.
Yeah, sure, Chris and really where your question is leading is particularly in a post covered world.
And this is something we think a lot about in the last month, we've given a lot of thought too is what does life look like into new normal.
Our conclusions to date or that I'll start with what I think won't change.
In the postponed world and that's our value proposition and the role we play for customers. So this migration to the being mission critical on to plant floor.
We think that that is.
As or more important now than ever.
For one metalworking markets are soft our customers are soft there starving for productivity enhancements.
And this value proposition enables us to do it for another our customers just need help in how to navigate a post cobot world how to think about laying out their plan how to think about P.P. protocols and our positioning really helps so I think that doesn't change.
I think what does change in a post covert world is how we go about delivering that value proposition.
So for instance, certainly E. Commerce is already you can see from our staff, but generally we're at 60% plus electronic commerce that number is likely to grow and we'll continue investing there others digital technology that enables our metalworking experts to the on site with our customers in quote.
Even if access is restricted and we have example after example.
During this crisis, the pandemic, where we were providing plant audits and doing it through face time and other virtual technologies.
So I do think that you're right that the use of digital technology is going to pick up and for us. It's more about how we deliver the value proposition to value proposition itself. We think holds as strong as ever.
Yeah, Yeah that makes complete sense I guess I mean, those digital tools can certainly scale a bit more too large add on the smaller customers as well, which I think struggle, particularly in the past couple of months here I guess just to kind of.
Legal when I guess would you highlight anything from from the Mexico initiative or Canada, just anything on the international businesses that are worth calling out as different versus U.S.
The only thing I'd call. If you look in the office that's international growth was pretty stout I would give a shout out to both particularly our Mexican team.
The business performed really well.
Really well and has grown at exceeded our expectations that I give a lot of credit to.
The CEO of that business has done a great job.
A good portion of that like in the U.S. is it's kobin related but I have to tell you. Unlike the U.S., even when you strip out covert products you still done a great job growing that business I think Canada has been down I cannot have gotten hurt badly.
Our business in Canada has held up I think better than we would've expected and better than the relevant metrics were looking at still down but not as badly Mexico has been a real shining star.
Got it thanks, so much.
Our next question today comes from Michael again with Wells Fargo.
Good morning, everyone good quarter, but thanks for sneaking.
Right.
Hi, I go back to I think what Dave mandate was asking about the core customer as you guys are increasing year.
Touch points in that facility you see any of that any delayed maintenance or is this more of a function of getting back from the the one shift you know gradually working our way up to the second and third shift.
And what are the cadence of that core customer gonna be what is it really based on.
Mike I think you're seeing both thing you, what's going on and the reason for the gradual ramp up since bottoming in April is it's actually it's a couple of things. So one is that you know, particularly big drivers of metal working you got aerospace obviously being hit very hard automotive continues to be hit hard oil and gas it.
The markets themselves are not strong so customers are not call. It coming back full strength Thats. One two is a lot of in bought up pre cotwo before told that came to the United States that we started seeing a dynamic in February where our bookings outpaced our invoicing.
And what we were hearing from customers was some degree of buying up just to prevent supply chain disruptions when coated with strictly a Chinese event.
So there. They then shut down there there's a lot inventory. So they are cautious they're trying to avoid spending where possible would be a second factor and then the third one is just caution about how aggressive we do we open if we're going to only need to retrench again, if when the virus flares I think you've got all of those factors playing into it.
Thanks, Eric I would add this is John.
That not all of our customers had reopened right. So it peaked somewhere in the 25% to 30% range and today, they're still probably something like 10% to 15% that or not.
Fully open.
Got it and you on the other side of the house the Nonmanufacturing Pp demand do you have a sense.
The $85 million in backlog you were operating with a 100 million Clos before what is the difference in the horizon that those sales versus what you what you expect to deliver those versus prior quarter.
All right so.
Right now we do believe the backlog could offer some help during our Q4.
As Eric mentioned, our to grow backlog is in the 40 to 50 million range.
Ah well be above normal backlog supports newsprint.
And as he mentioned before some of that remember that some of that I thought that reflect blanket orders that the customer plays but one that somewhat over future.
Some of that were pushed into the 21 as well.
Okay. Thanks, I'll pass along.
Thanks, Mike.
Our next question comes from Patrick Darren.
JP Morgan. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my questions and congrats on the a solid execution of margin turned the corner just just quickly on the Opex initiatives can can you give a sense of how much spending you've done on these projects are ready that's been embedded in earnings and then what you expect could break out from earnings going forward, just yes, roughly just trying to.
Get a sense on payback on a 200 basis points improvement.
Opex to sales ratio and then also kind of what kind of top line growth rates you need to achieve that improvement.
Okay. So I'll take the cost side so.
From a standpoint, we're talking about $1.3 million of costs during the quarter related to that.
Operational problems project, and we would expect somewhere around double that in the into Q4.
And we will start to break that out like we mentioned as we go forward.
And then Pat I'll say by the way so the reasons the cost pick up so the overall project, but with within the overall initiative I had mentioned lots of projects.
Greg's team in finance is all over this and each of these projects are going to have to earn their own return to contribute so we won't move forward, if something costs more than the benefit will be.
Some of some of the expense is going to be in the form of fees I mentioned getting some outside help for benchmarking and best practice and then some will be.
Cost specifically tied to a project, but again those are going to all have to go through return.
Hurdles in terms of the growth rate look I need a couple of hundred basis points over this two to three year period, we'd like to think of as primarily predominantly independent of sales growth because your historically this business has required.
Maybe call it mid single digit sales growth to get any sort of opex leverage and the idea behind this project is to improve that so we could see opex leverage at lower rates of sales growth. So for many of the initiatives anyway, they would be not all but many would be up sales growth agnostic.
[music].
It is that what about the temporary cost cuts this year, how much what's what's nine to that and just trying to understand it does that come back as a headwind next year, if demand improves their way to quantify that.
Oh, yeah that so we have looked at it falls into two buckets costs. So there's the costs are temporary costs related to depend Devon and then there's our longer term cost related to.
Operational review so.
Well I couldn't say personnel, we took out about we took out over $9 million and call.
Three related to the temporary changes being made as result of dependent.
Taco core we took a look at our model and they've car model made some implemented changes and the cost out of around 9 million I listed some detail in the script on that.
And then most of these reductions will extend into Q4, although overtime, we will add many of them back as they go through improved.
And then put into the second bucket.
Good luck it through our operating model review, our goal would be to replace the temporary cost reduction measures.
Permanent ones.
And we'll provide some more color on that.
Oh.
That's helpful. And then last one quickly just on gross margin is.
Mix some mix is a wildcard a near term but.
Maybe medium term how do you think about that is is it still a I think you've talked about 40 to 50 basis points headwind per year at kind of the.
Rate any update on on how you're thinking about mix over the medium term.
Yeah, Pat I would say our gross margin formula really longer term hasn't changed much you know the comments about mix being a wildcard I really specific to the pandemic and it's a combination of yeah, you get one or two skews it given month that moved the needle depending upon surge buying which is highly unusual.
Well for us.
Let's go post cold and world when things if they just assuming they do some sort of normal.
Yes, I, we would expect mix to return to being a headwind in the 30 to 50 basis points and then how our gross margin fares will be up a question of how we do on the price cost line.
What we had said for a while its look price cost likely you know overtime flat and then you have a 30 to 50.
Basis point gross margin year on year headwind due to mix I mean look our recent.
Results have us encouraged both on pricing on cost.
And if we can continue executing in that momentum and we get prize at positive price cost the gross margin outlook could improve but I think mix at some point post Cove. It does return tool where we've been.
Great Super helpful. Thanks for the color and good luck.
You bet.
And today's final question comes from John and what's the Gordon Haskett. Please go ahead.
Thanks, Good morning, everyone.
I was dropped so for a temporary time, so I don't want to hopefully a ask questions that were already asked but I did want to ask you about.
The 9 million of Opex savings I think Greg you talked about that being from the pandemic. If we go back to last quarter you thought it was going to be maybe six to seven. It's your your sales were up sequentially 50 million. So it's actually pretty impressive how did you managed to do that kind of in the big picture like and preserve your profit was this all.
On the function of the price increase that it looks like really significantly flowed through or were there other moving parts like how did you Hadnt you end up say do so much money in the face of Oh, having your costs go down in the basin the sequential volume improvement.
It sounds so it was strictly to focus on cost control. So we had put in implement we've implemented some costs down initiative and we executed really well known and you know we've talked about the big areas.
In the sprint and we were just <unk> successful to see those areas. We retired talked about hiring free we held true to that and both with our costs down. This is from salary and wage reduction in addition to the hiring freeze.
And of course is north of that you can 60 million that we talked about in the previous.
So that might decide what Oh go ahead. Please start the only thing I'll add I think Greg Greg summed it up well the one thing I'll add as I look I think our team really rallied I was pleased with the way cross functionally people rallied around the crisis. So the numbers that we gave the last time of the six to seven it would.
Building blocks that Greg mentioned.
There's there's areas where our team went beyond so so whether it was looking at outside personnel or consulting areas and say you know what we can go deeper and we can do without unexpected attrition in certain areas, where somebody just leaves the company something happens and people say you know what we can step up we can rally in for so I attribute a lot of that to our teams stepping.
Up.
Across the board Yep makes make makes sense. So then why and I apologize if you've done this before but then why do decrementals sequentially.
So from kind of north of.
20% is there are no Eric you mentioned rebates and stuff is the route is their mix playing out in the quarter that was my other part of my question like how would you size mix this quarter versus what you expect in the fourth quarter and then going back to my detrimental question. Because I think you said that you expect a lot of these temporary cost actions to hold still in the fourth quarter.
And maybe begin to bleed back next year, but just trying to triangulate everything yeah, John So here here's the way to think about the decremental picture. So last quarter right. So we gave the low twentys to low Thirtys range. The performance. Obviously, we exceeded that in Q3, you had three elements one strong gross margin performance to strong cost controls and then three.
You know if you would ask me at the time, our revenues to only be down three and a half. If you asked me at the start of this crisis I wouldn't have believed it. So so good revenue performance. If if we look if we fast forward to Q4, the reason for that range and seeing the low twentys strong gross margin performance. We're saying we think should hold you know you never know things could change, but should hold strong call.
Cost controls, Greg just describe to you should hold the big change is.
The minus 3.6% revenue growth compare that to what June looked like so if if.
The rest of Q4 looked like June on the revenue side, it's a big difference.
On the other hand, you know if for some reason July and August to a heck of a lot better than June on the revenue side in the quarter looks better on revenues could we do better sure.
But hey, John that this John again, there's one other thing I would throw in there you know you had a lot of sales come in right. The BP stuff that didnt have the same variable cost you know you've heard us reference historically, 10% variable cost on sales growth did not have that same quite that same mud lift in Q.
Cost due to the fact that a lot of PB stuff was picked up right at the port. So we didn't have that like some of the outbound freight we didn't have that on some of that stuff.
Yes, I know that makes sense then maybe just lastly, how firm is this 85 million a backlog, yes, there were at risk of maybe customers, having double order door or and then sort of how do you see the backlog kind of shifting out to get back to the normal weather I forgot what normal backlog looks like but maybe you could just come.
Went on that.
Yeah, I would say, there's always risks to some degree Johnny So the 85 million would compare to it she quote unquote should be a normal normal environment 40 to 50, so you're looking at a sizable delta does all of that bill out in the fourth quarter, probably not if there's some cancellations.
And they're probably that would be consistent with historical pattern should there be somehow probably so it's it's somewhere in the middle but it but it is still elevated just not at the levels. It was in a in April.
Understood great. Thanks, so much United States that.
Yes.
And ladies and gentlemen, this concludes the question answer session.
I can turn the conference back over Juncker for any final remark.
Well, we'd like to thank everyone for joining us today as always our fiscal fourth quarter and full year earnings date is set for October 27th this year.
Obviously, we are continuing to refrain from giving formal quarterly guidance and we will continue providing the interim monthly updates via press release, you can expect the update for July developments just after the first week in August.
So again I'd like to thank you for joining us today and please stay healthy and safe Haven today.
Ladies and gentlemen, this concludes todays conference call you may now disconnect your lines another wonderful.