Q4 2020 MSC Industrial Direct Co Inc Earnings Call
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Good morning, and welcome to the MSC industrial supply 2024th quarter and full year conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by zero. After todays presentation, there will be an opportunity to ask questions.
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Please note that this event is being recorded.
Now I'd like to turn the conference over to Joan Corona, Vice President of Investor Relations and Treasurer.
Like Constantino and good morning, everyone.
Erik Gershwind, our Chief Executive Officer, and Kristen This ground day, our Chief Financial Officer are both on the call with me.
As on our last call. We are all remote so bear with us if we encounter in technical difficulties.
During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments as well as our operational statistics, both of which can be found on the investor Relations section of our website.
Let me reference our Safe Harbor statement under the private Securities Litigation Reform Act of 1995, a summary of which is on slide two of the accompanying presentation.
Our comments on this call as well as the supplemental information we are providing on the website contain forward looking statements within the meaning of the U.S. securities laws, including statements about the impact of COVID-19 on our business operations results of operations and financial condition expected future results expected benefits from our investment and strategic plans.
And other initiatives and expected future growth and profitability.
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 Mdna sections of our latest annual report on form 10-K filed with the FCC as well as in other SEC filings.
The risk factors include our comments on the potential impact of COVID-19. These.
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 GAAP versus non-GAAP reconciliations in our presentation.
And the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures I'll now turn the call over to Eric.
Thank you John Good morning, everybody, let me start by saying that I hope everyone remains safe and healthy.
We have a pretty packed agenda. This morning, so I'll get right into it I'm going to begin with a brief overview of our fiscal fourth quarter and I'll, then turn it over to Kristen. So she can review the financials with you.
After that we're going to look forward and we're going to look forward to the next three years to discuss what is the next stage of our transformation journey.
We've completed the heavy lifting of our Salesforce transformation.
We are now focused on accelerating market share capture.
And improving profitability.
This is a company wide effort that we're calling mission critical.
And mission critical is more than just a project name.
It's reflective of our business strategy.
Serving as a mission critical partner to our customers on their plant floors.
And it also reflects the fact that accelerating market share capture and improving profitability.
And doing so with urgency is mission critical for our organization and our stakeholders.
A lot more is coming on this shortly well.
Well I'll first turn to the quarter.
And we've provided some highlights on slide three.
Our fiscal fourth quarter financial results continue to reflect solid execution in a tough environment.
Versus the prior year period overall sales were down 11.3% or 12.7% on an average daily sales basis.
Gross margin was down 40 basis points.
And operating margin was 9.8% as compared to 10.7% in the prior year.
Excluding onetime adjustments our operating margin was 11.2%.
Down just 30 basis points from 11.5% in the prior year due to implementing effective cost controls.
This all resulted in solid earnings for the quarter.
As we noted in our August sales release sales of our non safety and non janitorial product lines have continued to improve sequentially through the quarter.
Sales of safety in janitorial products also continued growing with year over year growth of roughly 20% each month on average and for the quarter.
Looking at our performance by customer type.
National accounts declined slightly more than 20% well.
While our core customers declined mid teens.
And she CSG was down in the low double digits.
Government sales and that's both state and federal were up significantly due to the surge in large safety in janitorial orders.
Additionally, offsetting the declines in the other customer types.
As you may have seen in our operational statistics released earlier. This morning September average daily sales declined 8.5%.
And our October estimated sales declined 4.6% and benefited from some large orders.
All of this shows that sales levels have continued to lift and have seen a slight increase in the rate of improvement over the past couple of months.
[noise], most manufacturing end markets, well showing sequential improvement in the quarter.
Are still soft.
Many national accounts are running one shift as opposed to the two or three shifts they were running pretty pandemic.
Our job shop in machine shop customers continue carrying smaller than normal backlogs.
These customers remain cautious about spending.
And they're burning off inventory as much as possible given continued uncertainty.
The persistence of COVID-19, and its potential for future searches are certainly playing a role in all of this.
And this caution is reflected in recent sentiment indices, such as the N.B. I, which remains negative on a rolling 12 month average.
That said.
The readings have improved over the past couple of months and actually reach neutral territory in September.
Should this improvement continue.
It would bode well for our business.
It should translate into continued sequential lift in our revenues.
In terms of end markets.
The office and industrial demand was broad based.
With acute weakness in heavily metalworking centric end markets, such as aerospace and oil and gas.
There are some pockets of strength in certain areas, but.
But not in our core end markets, which remain suppressed.
We continue to hear that local distributors are suffering.
And the longer that the weak conditions persist more.
The more pressure there coming under.
This continues to create market share capture opportunities and we're focused on capitalizing on this.
Moving now to gross margins I remain pleased with our performance.
In particular, we're executing well on both the pricing and the purchase cost for us.
We're seeing strong realization from our annual price increase and were continuing to benefit from supplier programs on the purchase cost line.
You'll note that our sequential drop from the third quarter to the fourth quarter in gross margin was on the higher side of the typical seasonal decline.
This was strictly the result of mix and in particular, the sale of P.P. related skews.
Absent this headwind we maintained underlying gross margin stability.
September and October gross margins continued our recent trending.
Price and cost are performing well.
But we'll likely have continued P. P mix pressure in the first quarter similar in size to that of our fourth quarter.
Looking beyond the first quarter as.
As we move past the P.P.E. related mix noise, we expect gross margins to remain at levels close to or at prior year.
Cash flow in the quarter remains strong and allowed us to repay a significant amount of debt.
Before I turn it over to Kristin I want to take a moment to thank Greg Clark for his interim leadership of our finance team.
And the team did an exceptional job over the past few months, particularly during the crisis.
We are grateful Greg for your hard work and of course, you continue to be an integral part of our future efforts.
And Christian welcome aboard welcome.
Welcome to your first earnings call them, we're thrilled to have you so with that I will turn it over to you.
Thanks, Eric it's great to be here and I'm looking forward to the work ahead of us.
Over the coming months, hopefully I'll have an opportunity to meet those of you on the phone who I haven't done that already although that will probably be virtual of course.
As Eric mentioned I'm going to run its quickly through the numbers for our fiscal fourth quarter and then we'll devote time discussing mission critical on slide four of the presentation, you'll find key metrics for the fiscal fourth quarter and full year on a reported basis.
Slide five reflects adjusted results and those will be the primary focus of my comments. This morning.
Our fourth quarter sales were 748 million a decline of 11.3% versus the same quarter last year.
Our average daily sales in the fiscal fourth quarter were 11.7 million a decrease of 12.7% on an EPS basis versus the same quarter last year.
Our operating margin was 9.8% compared to 10.7% in the same period last year.
Excluding severance and other costs, our adjusted operating margin was 11.2% versus an adjusted 11.5% in the prior year.
Within our operating profits Eric touched on the items impacting our gross margin, which was 41.6% or 40 basis points below the prior year. So I'll go a little deeper now into our operating expenses.
Total operating expenses in the fourth quarter were 238 million or 31.9% of sales.
Versus 263 million or 31.2% of sales in the prior year.
This also includes about 11.2 million up costs related to severance.
And the review of our operating Niall mentioned on previous calls.
You will see a sizable drop in our total company headcount in our operating statistics. This is this was the result of actions tied to our structural cost initiative and explains the severance costs in the quarter, which were 8.1 million at the 11.2 million.
Excluding those costs operating expenses as a percent of sales were 30.4%.
In the prior year, excluding $6.7 million of costs related to severance.
Operating expenses were also 30.4% of sales.
Our results for the quarter reflect the swift cost containment measures, we implemented due to COVID-19, including temporary reductions in variable hours and executive management salaries temporary suspension of our four one k. match, a hiring freeze and virus related travel restrictions.
We've now reversed some but not all of these temporary actions for example in our fiscal first quarter, we were stored I for one can't match.
All of this resulted in earnings per share of 94 cents adjusted for severance and other costs earnings per share was a dollar nine.
Turning to the balance sheet on slide seven.
We achieved strong free cash flow of 171 million in the fourth quarter. A key driver was the 32 million decrease in inventory from last quarter to 543 million.
This reflects typical contraction in a soft environment, but also maintains level set support share capture we also benefited from a large reduction in receivables.
We continue to manage our liquidity very closely given the stabilizing environment, we paid down over 300 million of our revolving credit facility in August as well as 20 million of maturing private placement debt.
Our total debt as of the end of the fourth quarter was 619 million comprised primarily of a $250 million balance on our revolving credit facility.
20 million of short term fixed rate borrowing and.
345 million of long term fixed rate borrowing.
Cash and cash equivalents were 125 million. So our net debt was 494 million.
In September and October we deployed our strong cash flow by paying down another 120 million of our revolving debt.
Overall, our balance sheet and liquidity remain very healthy.
I'll turn it back to you and Eric Thanks.
Kristen.
Turning to slide eight many of you know that over the past couple of years, we've been working hard to reposition MFC from a spot by supplier.
Two a mission critical partner on the plant floor of our industrial customers.
Our focus now turns to implementing mission critical.
To deliver re accelerated market share capture.
And a step change in improving profitability over the next three years.
We plan to do so with the same sense of urgency that we demonstrated during the pandemic.
I'll start with Reaccelerating market share capture which is on slide nine.
Our target is to outgrow the markets in which we compete by at least 400 basis points over the cycle.
This market share growth capture is indexed against industrial production or the IP index.
Our analysis shows that IP is highly correlated with our growth rate over a cycle.
And it's a good proxy for the relative health and performance of the end markets that we serve.
This is shown on slide 10.
IP is not perfect over shorter time frames as the aggregate IP index includes some of our non core end markets as well.
Nonetheless, we're going to use that going forward as our primary benchmark.
As it gives us the opportunity to better measure our performance overtime.
This does not mean that sentiment indices, such as the yen VI are no longer important indicators to gauge the state of our markets. They.
They are.
But they are less indicative of outgrowth or share capture since they're purely sentiment service.
Competitor and supplier growth rates also remain relevant.
Differences in end market and product line exposure result in different levels of market growth for each of us.
Spread above IP over a cycle is we believe the best gauge for outgrowth of our markets.
Looking over extended periods of time average IP growth is in the 2% to 3% range.
So this implies MSC growth of at least 6% to 7% over a cycle.
We believe that the actions we've taken recently.
And those that were taking now and into the near future.
Bill to this level of outperformance overtime.
At the same time, we think that we can outgrow the market over the near term as well and.
And so our goal is to exit fiscal 2021.
At roughly 200 basis points above IP.
Most forecasts indicate a return to low single digit positive growth for IP during calendar 2021.
Adjusting for our fiscal calendar and assuming that these forecasts are accurate.
It would mean that we would be expect to be growing in the mid single digits in our fiscal fourth quarter.
But that would still be slightly down for the full fiscal 21, taking into account the ppt headwind that we will face primarily in our fiscal third quarter.
There were five growth priorities that will deliver this above market growth.
And none of these should surprise you given that they are aligned with the work that I've spoken about pre previously.
What you should take away from this discussion though.
Is the details with an age and.
And the specific actions and investments that we're making to produce measurable returns.
Let me spend a moment on each one.
First as metalworking.
This is the core of our business.
A position, where we have leadership today, and where we think we can widen our lead.
We will do this by building on our talented team of metalworking specialists through hiring and training.
We began this effort in earnest and plan to add about two about to add about 25% to our metalworking specialist team over the course of the year.
We'll also continue adding to our industry, leading product and supplier portfolio.
And we'll introduce value added services to our customers such as MSC Mailbacks and excludes exclusive technology that we just brought to market.
It's a proprietary product that with a simple tap on a machine.
Uses data and analytics to optimize our customers machining operations.
Early customer response has been very good.
And more importantly, MSC INOMAX is delivering improvements to their operations.
We're now making it available to all of our customers.
The second lever.
Selling the strength of our product portfolio.
This encompasses investing in RCC SG poor class C consumables business.
Leveraging the cross selling that results from it.
And leveraging the programs that we've put in place with those supplier partners, who have recently invested with MSC and stepped up programs.
Our joint opportunity funnels are growing nicely along each of these dimensions and we are focused on converting those into business new business.
The third lever expanding our solutions footprint.
And that includes vending.
Yeah, Mike.
And our growing in plan solutions program.
We're finding that bringing these solutions to our customers consistently produces higher growth better.
Better retention rates and stronger lifetime value.
As a result, we're increasing investments into each of them and we're raising our performance expectations.
Our goal for in plan solutions program sales is to double them over the next three years.
Our fourth lever is digital.
E Commerce has long been a strength of ours and represents roughly 60% of our sales to Howie.
However, standing still is not an option and.
And so we're raising the bar on ourselves to produce a better experience for our customers.
We have hired a new leader, who is staffing a new team with deep digital expertise.
Their focus will be on our website and on the other digital tools that bring us closer to our customers and build higher levels of loyalty and retention.
This will include a new product information system, a new search engine, a new user experience as a new front end transactional engine.
The fifth lever.
He is diversified customer end markets.
While the core of the business is selling into durable metal cutting manufacturers.
We're also focused on building scale in other areas that are counter cyclical and that's still leverage many of our strengths.
Government is a good example of this.
It's no secret that we had some execution issues. There are a couple of years back.
We've worked hard to rebuild our team and our business.
We're seeing that pay off in the form of accelerated growth rates, which of course has been aided by coated relief.
We plan to continue building on this momentum.
Towards that end, we'll be adding hunter roles that are specific just to government.
I'll now turn to our second goal as summarized on slide 11.
To deliver ROI see return on invested capital in the high teens within the next three years.
This would imply profit growth of at least the high single digits.
And it would also apply incremental margins in the high teens.
Again, all of this assumes that IP grows in the ranges that I mentioned earlier on.
We launched an operational cost and productivity initiatives to deliver on this goal back in fiscal 2020.
As you've heard me mention we expect this initiative to deliver about 200 basis points in cost down on an operating expenses to sales ratio basis over the next three years.
I'm going to now turn things over to Kristen, who will give you more details on the actions that will define our productivity runway.
As Eric mentioned, a significant part of the mission critical program is to reduce operating expenses as a percent of sales.
The cost take out is going to come from Anna Sorta assortment of programs a line to three separate track. So the first is sales and service second is supply chain and the third is general and administrative costs.
Erik covered some of the sales and service initiatives. So all elaborate a little bit more in supply chain and the DNA track let me.
The first say that the productivity comes from a number of projects and we are tracking each of them closely with several already announced or even executed.
For example, under supply chain, we recently announced that we will be closing one of our smaller distribution centers located in Dallas and moving the service to the remainder of our distribution network.
We're also stepping up our use of automation and robotics at several of our customer fulfillment centers for packaging.
This was started last year in Harrisburg and is now being expanded to Elkhart.
These moves will improve our productivity and allow associates to perform greater value added services.
We have also renegotiated our freight contracts and will realize significant savings over the next three years.
When it comes to DNA in our fiscal fourth quarter, we completed a process redesign of our talent acquisition function, which resulted in outsourcing I function. This is allowing us to find talent at a faster pace and reduced cost another.
Another example is the voluntary retirement program, we offered in our fourth quarter.
The take up on the program with very good as is evidenced by the significant head count drop in our fiscal fourth quarter.
While we will likely reinvest some of this cost savings over time into the five growth initiatives that Eric mentioned earlier, the program will still pretty meaningful overall cost reduction.
Weve also revised our travel policy such that a significant portion of the coated related temporary travel cost savings will become permanent.
And finally, we're renegotiating indirect spend contracts, where we'll see an opportunity for further savings.
Stepping back from these examples I'm just kind of thinking about the overall operating expense dollars in fiscal 20, we reported operating expenses of 993 million in fiscal 21, the add back of costs associated with the temporary cost reduction measures roughly offset the reduction in variable costs from.
We lost out.
As Eric mentioned mission critical includes growth investment and that'll be in the range of about $15 million in our first year of the growth program, which is 2021.
This will be more than offset by total structural mission critical savings in 2021 in the range of 25 million.
And by the way. This is in addition to approximately 20 million that savings that we've already achieved in 2020.
Putting all this together means that we would expect operating expenses to be slightly down if sales are flat to slightly down in fiscal 21.
Now, let's dig into 2021, a little bit more to supplement what Eric mentioned earlier on the growth line.
On gross margin, we expect the full year to be flat to down 50 basis points year over year.
And operating margin framework as shown on slide 13 for GAAP and 14 for adjusted figures.
Operating margins will naturally vary based on the south level. If sales are down slightly on an adjusted basis, we would expect operating margin to be in the range of 11.2% plus or minus 20 basis points and.
Sales are flat, we would expect operating margin to be in the range of 11.4% plus or minus 20 basis points and.
And finally, if sales are slightly up we would expect operating margin to be in the range of 11.7% plus or minus 20 basis points.
And I'll turn it back over to you Eric.
Thanks, again, Chris and Bill.
Before we open things up for questions I'll, just close with a brief summary here.
Over the next three years, we are implementing a change equation that we believe will accelerate market share capture.
And improve profitability.
On the growth side of that equation, where.
We're targeting growth rates of at least 400 basis points above market over the cycle.
By investing in the five growth levers I described earlier.
Our investments will be funded by costs being taken out of the business.
And we're looking to grow profits faster than sales.
This will enable us to improve returns on invested capital.
To the high teens.
All of this is aligned with our ongoing work to reposition MSC from a spot by supplier to.
To a mission critical partner on the plant floor of our industrial customers.
The results will not come overnight.
Particularly given that we're still dealing with the uncertainty being driven by COVID-19.
However.
You saw some early actions being taken in the fiscal fourth quarter.
And Morris the Cubs.
As we move into fiscal 2021.
Despite the uncertain environment.
We're going to press ahead with urgency.
This is going to be a year of taking measurable action to change the course of this business over the long term.
He will be a year of investment.
Investment that will be more than funded through cost savings.
2021 is also going to be a year about re committing to our values.
Doing the right thing.
Being humble.
Putting our customers first.
Embracing differences.
Being transparent.
Transforming.
And most importantly delivering results.
We'll now open up the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on the telephone keypad.
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 our roaster.
The first question comes from the line of Kevin Mcveigh with Deutsche Bank. Please go ahead.
Hi, Good morning, Good morning, Kevin how are you doing seven.
Good good.
You noticed that a big focus operation operationally going forward is on share capture I was wondering if you could talk about some other customers or end markets beyond government, where you feel like you can expand nicely.
Yes, sure Kevin I look I think the first thing I'll say is the share capture algorithm or formula that we laid out has five levers to it and first and foremost look we are reinvesting into our core business. So thats metalworking that some of the solutions programs that I talked about that's the Ccs GE busy.
Yes, and our key supplier partners, who have invested with us that's all about re and reinforcing the core one of the five that I mentioned was diversified end markets said look we highlighted what today would be the biggest one of those and government weve talked about putting a full court press on to it we've been pleased with the performance to date and so its encouraging us to do.
Two more certainly outside of government, we have our eye on a couple of others I would say you know for competitive reasons, all sort of be opaque about which ones, but the nice thing is the ones that we have our eye on fall within the umbrella of where there is some business today, we do have some scale and it'll be about pressing harder.
But it would be areas that fit within our industrial profile, but our outside of our core metalworking markets.
Great. Thanks, and then just just one more for it past that I'm wondering if you could give us an updated color on kind of customers during the pandemic kind of government or otherwise and whether you've seen some of those customer show a willingness to reorder with you or whether you you found over time that most of them are really at one time opportunistic.
Buyers.
You mean, so so Kevin you're referring to some of the P.P., where we provided pp into those customers.
Yeah, yeah that or or even outside bps, you saw customers kind of come to you because maybe others can service them during that time of the depth of the pandemic just kind of an update on.
That dynamic yeah look we certainly Kevin there's likely some of both going on which means which is to say that a lot of where we serves was our core customers who have been with us for a long time so.
Certainly there were cases, where we were able to help.
Companies organizations that normally didnt do a lot of business with US I you know I would say the majority, though and where our focus was was.
Helping out our long term customers the most where we have.
Longstanding relationships.
That's great. Thank you I'll pass it on.
Thanks, Jim.
The next question is from the line of Hamzah Mazari with Jefferies. Please go ahead.
Hi, This is merrier poured a lot she filling in for Hamzah.
Just wanted to have asked a question on just your Salesforce productivity.
And you talked about obviously, the measurable action to Reaccelerate and your market share capture but I guess just could you give us an idea of how you're measuring sales force productivity today, how that has maybe changed or how is that tracking relative to history.
Given what where we're in and Corona and your head count reductions and then also with your optimization.
Do you expect that those productivity measurements to change going forward in to to reach your goals.
For 2023, Yeah, Mary Jo So you raised a good point, we enumerated five growth levers one of the areas in which you will see us investing is into the salesforce investments into the Salesforce are really an enabler that underpin each of the five and so if you think back and I you know obviously.
The highest of levels the easiest way to look at Salesforce productivity is sales per head count I think right now, it's a pretty deceiving and pretty tricky metric and I say that because if you think about what's happened over the past couple of years here Eddie Who's our head of sales has determined that we were.
Overindex to farmers and under under index to hunters and what you saw a pre covert you may remember sales head count came down pretty considerably as part of that plan and the plan was to build it back up.
By expanding our Hunter population that remains the plan.
We had a little.
Diversion, there with coated where we lost the ability to really higher in earnest for two or three quarters. We are back to hiring what I would tell you in terms of how were measuring performance is it's going to be getting it is getting right now a lot more granular than just looking at you know sales per head so for each of those five levers that I.
Mentioned, what Eddie and sales management team are building or down to the M.S. say level.
Performance tracking and scorecards along each of the five so for us it won't just be about do we hit a certain sales per head, it's got to be hitting the sales in the programs in which we're investing and that sort of look is going to allow us to really optimize performance at a grassroots level. The other thing is going to allow us to do is we realize things change.
And so as the three years unfold and there will be another three years beyond that to throttle up or throttle down the levers based on where we are seeing performer.
Great and then just one more and I'll turn it over.
I think Chris had mentioned that you guys are you renegotiating your freight contracts.
Just wondering if you could provide more detail on that are you able to quantify any of the savings you're expecting over the next few years and then also I mean, what's your outlook for patient on freight.
And how do you think thats going to impact your gross margin line, but getting had heading towards your targets.
Yeah, Yeah, so Mario.
As you can imagine given our logistics model, which is a centralized model the majority of our of our freight costs.
Our overnight next day shipping.
With with large carriers and so you know we will.
What I would tell you without getting too specific or detailed.
But it's been improvements in really all areas of both the supply chain, but particularly around you know programs with our carriers, where we're able to.
Ah workout win win arrangements I think I, probably won't go deeper than that.
Eric This is John I would just add to Marios very last comment keep in mind that freight for us the bulk of our freight freight out that you see in the 10-K and in our reporting that's not in our gross margin. That's part of SG day, So just to be clear on that.
Got it and that's helpful. I appreciate it I will mention one of the thing on the freight line and this is this is part of the work that was done with mission critical aware with kind of a deeper look using analytic kind of sophisticated analytics a deeper look into the business. You know one of the things that we did see in addition to just renegotiations was.
An opportunity to optimize our freight and order patterns with customers, so meaning by aggregating orders as opposed to shipping a onesie twosies, we could sort of shrink the whole pie for us and the customer and bring freight costs down so that within the footprint of what Christian was describing that is another program.
Great. Thank you so much.
Our next question comes from the line of David Manthey with Baird. Please go ahead.
Dave We can't hear you if you're there you may be muted.
Mr Monthly can you hear me.
Okay.
Mr. Mom. So we can know here can you hear us.
Moving on to the next question. The next question comes from the line of Michael Mcfadden with Wells Fargo. Please go ahead.
Hey, guys. Good morning, good morning, Mike.
And I was wondering if I could switch gears and talk about free cash flow in terms of the investments that you're making a you mentioned that thing as one of the drivers for mission critical I'm also digital is a big component can you talk about what you're expecting capex to be or as a percent of sales or maybe dollars over this three year horizon.
Yeah, Yeah sure. So capex for 21 and beyond we're definitely expecting to see kind of an increase over our historic run rates I'd say 21, Capex dollars you can expect to be about $70 million to $75 million range and if you look at kind of what that represents is an increase over.
Our historic patterns I'd say about half of that is investment into digital related to the growth levers there described and the other half it's kind of split across the other initiatives. We discussed on things like solutions for example, and so we will see a higher sustain that level of capex, Turkey or is that helps.
Bring notice growth levers online enables the programs they're talking about.
Great.
And then on the operating margin framework that you guys put up a great quarter in terms of just operating execution here and it seems like the mid point of your 21 framework is kind of flat with the year year end 20 levels and sounds like reeling, a little better growth risk.
Curious what what are the ins and outs in terms of the cost the cost and then the mix factors in terms of gross margin. As you know are these onsite bending lower gross lot better operating I'm just curious why wouldn't this great EPS you in a run rate.
Rick.
You could just kind of talk about at a high level sure sure. So maybe let me start with with just gross margin. So I think.
If if things play out favorably for us from a mix perspective, we've got line of sight to keep being gross margin flat 20 to 21. So I'd say right. Now next is kind of the biggest.
Hi, lever or driver of gross margin that we're really keeping an eye on you know we mentioned some of that pp easier and then but if we don't see a big big mix headwind I think you can expect to see gross margins stay roughly flat if we do see a bit more of a mix headwind, we think the Max exposure there its probably down.
50 basis points, and maybe pivoting to kind of the Opex side of the equation you know to your point, we did have a strong fourth quarter on opex expenses versus the prior year. We're we're down about $25 million have been kinda like pick apart the pieces of that about roughly $10 million of it.
It is tied to just variable related costs associated with the revenue decline.
About 7 million of that would be on some of the upside from the mission critical savings in 2020 that we discussed.
And then if you break down the <unk> the remainder I'd say about half of that is cost reductions related to temporary cost actions. We took and then the other half is what I'll call kind of just generalized spending delays you know we closed a few things down on that only picking on backup and 2021 or so of the 25 million that we were down in.
Q4, I'd expect about 80 Eightnine that comes back online in Q1, and it's a little bit more indicative of what on what our run rate and figure could look like for 21.
Got it appreciate the time best luck and I'll pass it along thanks.
The next question comes from the line of Ryan Merkel with William Blair. Please go ahead.
Hey, everyone, thanks to great detail.
Hi, how are you.
Good.
So first off the growth programs you mentioned are not new I think Eric you mentioned that so my question is what is changed that you're now in a position to structurally drive share gains is it mainly that the heavy lifting on the sales force optimization has done or is that the investment in digital and on site solutions Equaliser.
Important yeah.
Yeah, Ryan I I think you've got a couple of things going on that explain why why more conviction number one yeah, I mean, and I think you called out a lot of it.
We went through a lot of heavy lifting as as you know over the last couple of years to reposition the salesforce It was distracting.
Most of that work is behind us. So I think one is moving past the change.
Two would be seeing some of these programs in action and gaining conviction around what they do for the customer and what they do for US in terms of growth I think it's two three the other big thing I'll call out Ryan is having a structural cost program to take cost out to fund investment in the growth so that the investment.
Isn't simply coming on the backs of the shareholders, but that we're funding it through productivity. So I think what you're seeing is increased conviction in the programs at a mechanism to fund it and then the last thing I'll add is you know Eddie has done a really nice job with the sales team in terms of increasing the level of rigor inspection and execution. So I would.
Tell you from my standpoint, Ryan the confidence is greater in investing into the area because I do feel like you know the execution between what he's driving what Christians, bringing to the table as our CFO in terms of improving operating performance the inspection will be greater.
Yeah that makes sense, especially funding or the new sales hires with cost takeout. So.
So let me ask about that I I think Christian mentioned 25 million of cost coming out in 2021. So to two questions is that all structural and then secondly over the next three years, how much cost you targeting to take out.
Yeah, Hey, Ryan So for 21, the 25 million Ah, Yes, I would characterize that as structural cost savings.
And then over the course of three years, we're targeting about 90 to 100 million of cost takeout related to mission critical.
Yes, all right and just on that one on that point I realize that for us to if we're going to see 200 basis points of Opex improvement and we're talking about the need to reinvest into growth. Then you could imagine right. The total cost number has to be bigger because of the reinvestment.
Right exactly yeah, Pat as Eric mentioned this is really about funding growth investing in those growth investing into those growth levers.
Okay Super helpful. Thanks, I'll pass it on.
The next question comes from the line of Chris Duncan Longbow Research. Please go ahead.
Hi, good morning, everyone.
Great. Thanks, guys.
You guys mentioned, a doubling the implant sales over the next three years, that's pretty aggressive growth I guess can you just kind of the size is for today, how big that is and where we're starting from.
Yeah, sure and Chris what I would say is that that program has been in.
In inside the company for a number of years now.
It's definitely I think the change and the reason we're calling it out is for a number of factors, it's picking up steam.
So it's been done more reactive we are on a case by case basis and has built to a point where you know currently it's in the range of around 5% of company sales and so the doubling it over three years, yes that would mean around 10% and the difference is it's going to become a proactive program and investment area as opposed.
Being done on a case by case basis.
Got it got it Super helpful. And then again getting back to the high single digit growth rate target overtime here again strong goal I assume that means we've got a really kind of national account focus to kind of generate that level of growth.
Well, we kind of providing some some guidelines or benchmark for the sales people on the ground to make sure that we're really capturing.
Margin accretive business and not just kind of bringing in stuff that that ends up being difficult to it to really get the return on it.
Yeah, Chris you know, what you're raising has been a big focus of Eddie of sales team. The sales management team and specifically around I think the words. He uses are not bringing in empty calories, where we get revenues, but don't make money from it and you know what I would tell you is that the ways, we ensure that our number one aligning compensation.
Rewards and incentives around not just top line growth, but profitable topline growth and we have several ways. We do that and then training and awareness and also some some more intelligence that we're arming our sales team with more analytics smart of being able to make smarter pricing decisions.
Using the full power of our database. So I would say all of those dimensions are in place to make sure that the.
The growth is profitable.
Got it got if we could just dig on that just a tiny bit as far as incentivizing for for profitable growth are we benchmarking to gross margin at the op margin just any any color there for the actual sales people on the ground would be would be great.
Yeah, what I would say without you know sales comp is sort of a sensitive subject I won't get too specific other than to say a little bit of both of those things.
Understood. Thanks, so much for the color I appreciate it thanks.
Thanks, Chris.
The next question comes from the line of John inch with Gordon Haskett. Please go ahead.
Hi, Good morning, everyone, it's Caroline dialing in for John.
Aaron Yeah, Hey, Eric I was wondering in your pillars for.
For the growth pillars with mission critical how or if any does event or that's pricing come into play because I asked because obviously you are a key competitor.
Years ago, we took a price down to try to accelerate growth and looking at some of the initiatives that you're talking about expenses Winston expanding into eat like relatively new custom category. I was just wondering you know how are you thinking about pricing going forward.
So what I would say and it's one of the look at pricing is another one of those enabling.
She lives in the company that sort of underpin everything we do and I think there is there's still do I'll give you two answers that cut in different directions number one of course.
We're mindful of being competitive with the market and making sure. We're competitive that's the first thing I'd say on the other hand, what I'd also say is that we think our value proposition.
Is a pretty unique and differentiated we think we're bringing some new things to market in the way of you know one example was that I Miss email Maxwell, we're saving our customers a lot of a lot of money improving their productivity, we want to make sure that we are.
Getting rewarded for that and so towards that end we're selling.
Over a million SK used to hundreds of thousands of customers. There's lots of permutations, there and it's very difficult for a salesperson to price right. All the time. So we are bolstering our efforts into pricing to get smarter in how we price to use more science as opposed to just got and so you know on the one hand, certainly there's competitive.
Headwinds to price as there always are.
On the other hand, we see a lot of opportunity to price smarter and just be more sophisticated and leverage the data and the science and I think the proof in the putting there has been you know weve talked about are the realization on the summer increase that we just took it was strong and we go back. If you go back you remember to the mid year that we took during fiscal 20, we said.
Same thing really strong levels of realization and we think part of that is being aided by just being smarter.
Mr inches line has been dropped I'm moving on to the next question. The next question comes from the line of Patrick Baumann with JP Morgan.
Please go ahead.
Oh, good morning, or good morning, John and welcome Christine.
Just wanted to Uh huh.
Hey, good morning.
Congrats on getting this outcome.
Just wanted to start with kind of a.
Big Picture strategic question can you talk about the September and October monthly sales trends and just.
The difference between 50, Jan San and the rest of the business you mentioned something about large orders in October I think any implication on near term gross margins from that.
So let me start I'll give I'll give you some more color on the growth trends and then talk gross margin pets. So I'm on the growth trend what weve seen safety janitorial, you know still hovering in nice growth territory, not where it was during the surge, but you know roughly in the 20 percentish range year on year growth and it stayed there.
For now base all other so everything other than safety janitorial basically what's going on is if you go back to May was our trough, where we were down all other was down in the high Twentys. It's been you know steadily improving and I would say the last couple of months the pace of improvement picked up a little bit so all other sub 10.
For October down low double digits.
Okay and then the other part of your question was gross margin yeah. The color I'd offer for gross margin.
For Q1 is probably more of the same ish with what you saw for Q4 and so the levers there pricing continues to do well.
Cost continued to move in the right direction as expected. So we're pleased with the gross margin performance I think the one thing is we do see some lingering P. P mix headwinds into Q1, as well and what I've said in the prepared remarks call. It similar impact to what you saw in our fiscal fourth quarter.
And you're talking year over year, though right I mean, its steps that should step up sequentially like it normally does.
I would say similar you know we were more similar sequentially.
Okay. So first quarter similar to fourth quarter sequentially, similar yes, and again the big driver there is the pp otherwise what was missing.
I'm sorry, what was the comment on large orders, though you said so the rest of the business downloadable as it was the large orders that was that the saved in safety Jan San or what was that yeah in October mostly safety Jensen okay.
Okay got it got it.
And then on the a 400 basis points of share gains that you're targeting to get to the 6% to 7%. So sales go I mean this is another way of asking investment question I guess, maybe it's not price I don't know if there is an investment.
I'm just curious what what's required or what are your what's embedded kind of basically from a gross margin perspective in that high teens incrementals.
You think about that.
You know what the growth rate and I assume is that a 2023 target or is that like a over.
Over this period sequentially when expenses and want to be so basically look we realized from where we're starting we have work to do to get to 400 plus basis points and so basically what im saying is by by 2023, that's where we want to be and we're going to have markers along the way. So we want to exit 2021, it plus 200 over IP and see a steady climb up in terms of the share cap.
Sure you know I think our feeling on gross margins than what we had modeled out was you know sort of similar degradation year on year that if you took our last few year averages it somewhere under 50 basis points, but some sort of primarily driven by mix.
That that's our assumption hopefully, we can do better and we'd outperform if we really do well on price and cost et cetera, but that was the assumption.
Yes, Okay that makes a lot of sense Super helpful. And then last one for me is the restructuring.
This vision 2021.
Is that is the adjusted framework and earnings kind of a 2021 thing or you think this is going to be a multiyear program and this will continue for kind of a number of years from a restructuring perspective.
Yes on the restructuring I'd I'd say based on kind of how we keep things up now we're likely to see a heavier volume of that in the first few year tapering in the second and third bite you know our goal here is to kind of continually refresh the pipeline. We're yeah, we're giving for your guidance, but this is really about ongoing.
And transformation of how we think about you know continuing to evolve the business both from a growth and cost perspective. So yeah, I would say, it's never out of the range a possibility that new things come into play in your queue in year three.
Okay I'll pass it on thanks, so much for the time and the best of luck. Thank you thanks for that.
The next question comes from the line of Steve Barker with Keybanc capital markets. Please go ahead.
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Steve.
Hey can you hear me Oh, no. They are positive okay, sorry, yeah.
Just can you square the centralized logistics model with the push towards more vending VMI in implant solutions I'm, just trying to understand how to work on the ground is this hiring more specialists to get deeper with customers of a type or hiring more generalist. It can work across end markets to drive diversification. Now is are we narrowing focus or expand.
The focus.
So what I would say is we are look there's five levers here, Steve and what I would say we're focused on each of the five and I would say for the most part it's a re.
Investment into the core of the business with diversified end markets being a little bit new but for each of the five theres going to be discrete focus.
I do think or we do think it obviously, we're pressure testing to your first part of your question, we pressure test the logistics model all the time and we do think that decentralized model works fine with vending. It works line with the if I'm with you in plan solutions and in fact look it's been.
A big part of the growth of the company in the past, we think we can do it better for sure and that's a big part of mission critical but we think it works just fine.
Okay.
And Christian I know, it's early days for you were you able to participate in the planning process and how do you see the finance arm supporting this new focus on share Reacceleration.
Yeah, Yeah, So I was able to participate in on some of the planning on.
Where I think finance has a really great opportunity to engage here is how our partner in the business partnering with the business to really drive that performance on how we're thinking about the modeling how we're tracking the programs I'm not an area I you know just under two months and now by as I think about kind of what my priorities are near term.
That's an area, where we're really going to strengthen our focus from a functional perspective.
Got it thanks.
Alan and thank you Steve.
This concludes our question and answer session I would like to turn the conference back over to John Chironna for any closing remarks.
Thank you Constantino.
A quick reminder, that our fiscal first quarter 2021 earnings date is now set for January 620 21.
Before we get there we'll be at several equity conferences over the coming months. So we look forward to seeing you there I want to thank you all for joining us today and please continue to stay healthy and safe.
Bye for now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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