Q3 2019 Earnings Call

July 10, 2019

Good morning, and welcome to the MSC Industrial supply company fiscal 2019 third quarter earnings results Conference call.

Anita: Good morning. Welcome to the MSC Industrial Supply Company's Fiscal 2019 Q3 Earnings Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key. Star, then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press pound, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. To ask a question, please press star then 1. Please note, this event is being recorded. I would now like to turn the conference over to John Corona, Vice President of Investor Relations and Treasurer. Mr. Corona, please go ahead.

All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key.

Star then zero on your telephone keypad.

After today's presentation there'll be an opportunity to ask questions to ask a question you may press the pound that one on your telephone keypad to withdraw your question. Please press Star then to ask a question. Please press Star then one. Please note. This event is being recorded.

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

Thank you Anita good morning, everyone.

John Corona: Thank you, Anita. Good morning, everyone. Today, I'd like to welcome you to our fiscal 2019 Q3 Conference Call. With me in the room are Erik Gershwind, our Chief Executive Officer, and Rustom Jilla, our Chief Financial Officer. 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.

John Chironna: Thank you, Anita. Good morning, everyone. Today, I'd like to welcome you to our fiscal 2019 Q3 Conference Call. With me in the room are Erik Gershwind, our Chief Executive Officer, and Rustom Jilla, our Chief Financial Officer. 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.

Today I'd like to welcome you to our fiscal 2019 third quarter Conference call with me in the room are Erik Gershwind, Our Chief Executive Officer, and Rustom Jilla, our Chief Financial Officer.

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.

John Corona: 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 US securities laws, including guidance about expected future results, expectations regarding our ability to gain market share, and expected benefits from our investment and strategic plans, including expected benefits from recent acquisitions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the risk factors in the MD&A sections of our latest annual report on Form 10-K, filed with the SEC, as well as in other SEC filings. These forward-looking statements are based on our current expectations, and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

John Chironna: 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 US securities laws, including guidance about expected future results, expectations regarding our ability to gain market share, and expected benefits from our investment and strategic plans, including expected benefits from recent acquisitions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the risk factors in the MD&A sections of our latest annual report on Form 10-K, filed with the SEC, as well as in other SEC filings. These forward-looking statements are based on our current expectations, and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

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 guidance about expected future results expectations regarding our ability to gain market share and expected benefits from our investment and strategic plans, including expected benefits from recent acquisitions.

These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.

Information about these risks is noted in our earnings press release and the risk factors in the Mdna sections of our latest annual report on Form 10-K filed with the FCC as well as in other SEC filings.

These forward looking statements are based on our current expectations and the company assumes no obligation to update. These statements investors are cautioned not to place undue reliance on these forward looking statements.

John Corona: In addition, during the course of 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, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik.

John Chironna: In addition, during the course of 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, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to Erik.

In addition, during the course of 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, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I'll now turn the call over to Eric.

Erik Gershwind: Thank you, John. Good morning, and thanks everybody for joining us today. To kick off this morning's call, I'll provide a brief overview of our fiscal Q3 results. I'll offer specifics about the environment and our recent performance, and I'll discuss our plan moving forward before turning it over to Rustom to review the details of the Q3 and provide our Q4 guidance. I'll wrap up before we open up the line for questions. Our fiscal Q3 results were disappointing. Sales were below our expectations for the quarter, while gross margin was at the low end of our guidance range. Although operating expenses were below anticipated levels, our earnings per share were below the low end of our guidance range. We'll dissect the reasons in detail this morning, and I'll share with you the actions that we are taking to address them.

Erik Gershwin: Thank you, John. Good morning, and thanks everybody for joining us today. To kick off this morning's call, I'll provide a brief overview of our fiscal Q3 results. I'll offer specifics about the environment and our recent performance, and I'll discuss our plan moving forward before turning it over to Rustom to review the details of the Q3 and provide our Q4 guidance. I'll wrap up before we open up the line for questions. Our fiscal Q3 results were disappointing. Sales were below our expectations for the quarter, while gross margin was at the low end of our guidance range. Although operating expenses were below anticipated levels, our earnings per share were below the low end of our guidance range. We'll dissect the reasons in detail this morning, and I'll share with you the actions that we are taking to address them.

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

To kick off this morning's call I'll provide a brief overview of our fiscal third quarter results.

I'll then offer specifics about the environment and our recent performance.

Now ill discuss our plan moving forward.

Before turning it over to Rustom to review the details of the third quarter and provide our fourth quarter guidance.

I'll then wrap up before we open up the line for questions.

Our fiscal third quarter results were disappointing.

Sales were below our expectations for the quarter, while gross margin was at the low end of our guidance range.

Although operating expenses were below anticipated level.

Our earnings per share were below the low end of our guidance range.

We will dissect the reasons and detailed this morning.

And I'll share with you the actions that we're taking to address them.

First I'll start with the environment.

Erik Gershwind: First, I'll start with the environment. We've seen a step down in industrial demand since our fiscal April. On the last call with you, we described the softer-than-expected March with a rebound during the first week of calendar April, which was the last week of our fiscal March. As we said at the time, we weren't sure what to make of it. As it turns out, the softness from March not only continued, but it has worsened since we last spoke. We've seen this softness evidenced in discussions with customers, and suppliers, along with data points coming from many sources, including manufacturing output numbers, distributor growth surveys, and the sentiment indices. In April and May, the last two months of our Q3, readings for the MBI were 53.6 and 51.6, respectively, and June was at 51.8.

Erik Gershwin: First, I'll start with the environment. We've seen a step down in industrial demand since our fiscal April. On the last call with you, we described the softer-than-expected March with a rebound during the first week of calendar April, which was the last week of our fiscal March. As we said at the time, we weren't sure what to make of it. As it turns out, the softness from March not only continued, but it has worsened since we last spoke. We've seen this softness evidenced in discussions with customers, and suppliers, along with data points coming from many sources, including manufacturing output numbers, distributor growth surveys, and the sentiment indices. In April and May, the last two months of our Q3, readings for the MBI were 53.6 and 51.6, respectively, and June was at 51.8.

We've seen a step down in industrial demand.

Since our fiscal April .

On the last call with you we've described the softer than expected March.

With a rebound during the first week of calendar April which was the last week of our fiscal March.

As we said at the time, we weren't sure what to make of it.

As it turns out.

The softness from March not only continued.

But it is worsened since we last spoke.

And we've seen this softness evidenced in discussions with customers and suppliers.

Along with data points coming from many sources, including manufacturing output numbers distributor growth surveys and the sentiment indices.

In April and May the last two months of our third quarter readings for the MBI were 53.6 and 51.6, respectively. In June was at 51.8.

The Rolling 12 month average for the MBI is now 54.7.

Erik Gershwind: The rolling 12-month average for the MBI is now 54.7. While still reflective of growth, there's a continued deceleration. With regards to the pricing environment, there continues to be an overhang of uncertainty, mostly due to tariffs and trade. In the fiscal Q3, realization of our mid-year price increase continued to be positive. As we look forward, our plan is to take our late summer increase, as we usually do, although it will likely be slightly later than last year, to give ourselves more time to understand how the tariff situation is shaking out. In terms of our performance within this environment, our core customers had growth rates in the low single digits, while national account growth was mid-single digits. Both were slightly lower than expected, impacted by the softness that I just mentioned.

Erik Gershwin: The rolling 12-month average for the MBI is now 54.7. While still reflective of growth, there's a continued deceleration. With regards to the pricing environment, there continues to be an overhang of uncertainty, mostly due to tariffs and trade. In the fiscal Q3, realization of our mid-year price increase continued to be positive. As we look forward, our plan is to take our late summer increase, as we usually do, although it will likely be slightly later than last year, to give ourselves more time to understand how the tariff situation is shaking out. In terms of our performance within this environment, our core customers had growth rates in the low single digits, while national account growth was mid-single digits. Both were slightly lower than expected, impacted by the softness that I just mentioned.

While still reflective of growth.

There is a continued deceleration.

With regards to the pricing environment.

There continues to be an overhang of uncertainly uncertainty, mostly due to tariffs and trade.

In the fiscal third quarter realization of our mid year price increase continued to be positive.

As we look forward our plan is to take our late summer increase as we usually do.

Although it will likely be slightly later than last year to give ourselves more time to understand how the tower. Its tariff situation is shaking out.

In terms of our performance within this environment.

Our core customers had growth rates in the low single digits, while national account growth was mid single digits.

Both were slightly lower than expected.

Impacted by the softness that I just mentioned.

As expected government sales growth declined mid teens this quarter weighing down our overall growth rate.

Erik Gershwind: As expected, government sales growth declined mid-teens this quarter, weighing down our overall growth rate. You'll remember that our fiscal Q3 was expected to be the peak of the government headwind, and while the headwind continues for another couple of quarters, it does begin to abate in this coming quarter. Let me now step back and share my assessment of our performance, along with an overview of our action plan moving forward. Clearly, the biggest difference between our actual results and our previous guidance has been a change in industrial conditions. Because of that softening environment, we've implemented a three-part action plan designed to achieve improvement in the following: one, field sales execution, particularly around new account implementation; two, profitability of our supplier programs, and three, expense control and productivity. Part one: improve field sales execution and new account implementation.

Erik Gershwin: As expected, government sales growth declined mid-teens this quarter, weighing down our overall growth rate. You'll remember that our fiscal Q3 was expected to be the peak of the government headwind, and while the headwind continues for another couple of quarters, it does begin to abate in this coming quarter. Let me now step back and share my assessment of our performance, along with an overview of our action plan moving forward. Clearly, the biggest difference between our actual results and our previous guidance has been a change in industrial conditions. Because of that softening environment, we've implemented a three-part action plan designed to achieve improvement in the following: one, field sales execution, particularly around new account implementation; two, profitability of our supplier programs, and three, expense control and productivity. Part one: improve field sales execution and new account implementation.

You'll remember that our fiscal third quarter was expected to be the peak of the government headwind.

And while the headwind continues for another couple of quarters. It does begin to abate in this coming quarter.

Let me now step back and share my assessment of our performance.

Along with an overview of our action plan moving forward.

Clearly the biggest difference between our actual results in our previous guidance has been a change in industrial conditions.

And because of that softening environment, we've implemented a three part action plan.

Designed to achieve improvement in the following.

One field sales execution.

Particularly around new account implementation.

Two.

Profitability of our supplier programs.

And three.

Expense control and productivity.

Ctwon improve field sales execution.

And new account implementation.

We are winning new accounts at a fast clip.

Erik Gershwind: We are winning new accounts at a fast clip. However, revenue growth from our new account wins is taking too long to materialize, as these new account wins have outpaced our expectations and hence our resource planning. I would have liked to have seen more contribution from these wins heading into our fiscal Q4. In response, we have focused one of our top sales leaders on new account implementation and have allocated additional resources to keep up with the rate of new account signings. This is one of the key actions that we're taking to improve field sales execution. Overall, I continue to have strong conviction in our plan. I should also note that Eddie Martin, who we recently announced as our Senior Vice President of Sales, has hit the ground running and is playing a significant role in field sales execution improvements.

Erik Gershwin: We are winning new accounts at a fast clip. However, revenue growth from our new account wins is taking too long to materialize, as these new account wins have outpaced our expectations and hence our resource planning. I would have liked to have seen more contribution from these wins heading into our fiscal Q4. In response, we have focused one of our top sales leaders on new account implementation and have allocated additional resources to keep up with the rate of new account signings. This is one of the key actions that we're taking to improve field sales execution. Overall, I continue to have strong conviction in our plan. I should also note that Eddie Martin, who we recently announced as our Senior Vice President of Sales, has hit the ground running and is playing a significant role in field sales execution improvements.

However revenue growth from our new account wins is taking too long to materialize.

As these new account wins have outpaced our expectations and hence our resource planning.

I would have liked to have seen more contribution.

From these wins heading into our fiscal fourth quarter.

In response.

We have focused one of our top sales leaders on new account implementation.

And they have allocated additional resources to keep up with the rate of new account signings.

This is one of the key actions that we're taking to improve field sales execution.

Overall I continue to have strong conviction in our plant.

I should also note that Eddie Martin, where we recently announced as our senior Vice President of sales.

He has hit the ground running.

And is playing a significant role in field exit sales execution improvements.

Action plan part two.

Erik Gershwind: Action plan, part two: improve the profitability of our supplier programs. We are working to deepen our relationships with our suppliers in a win-win fashion. Those that improve their programs and invest in MSC and our customers will be rewarded with focus and investment on our part. Suppliers that do not step up will see moves away from them and towards their competitors who choose to invest in our partnership. Related to this, the softening demand conditions and reductions in commodities prices have led us to reassess product cost increases. Whether it's tariff related or otherwise, we are pushing back when we don't think an increase is justified for our customer. When it comes to our own tariff exposure on direct imports, we're also pushing back on our Chinese suppliers to offset tariff-related increases. Action plan, part three: increase operating expense controls and improve productivity....

Erik Gershwin: Action plan, part two: improve the profitability of our supplier programs. We are working to deepen our relationships with our suppliers in a win-win fashion. Those that improve their programs and invest in MSC and our customers will be rewarded with focus and investment on our part. Suppliers that do not step up will see moves away from them and towards their competitors who choose to invest in our partnership. Related to this, the softening demand conditions and reductions in commodities prices have led us to reassess product cost increases. Whether it's tariff related or otherwise, we are pushing back when we don't think an increase is justified for our customer. When it comes to our own tariff exposure on direct imports, we're also pushing back on our Chinese suppliers to offset tariff-related increases. Action plan, part three: increase operating expense controls and improve productivity....

Improve the profitability of our supplier programs.

We are working to deepen our relationships with our suppliers in a win win fashion.

Those that improve their programs and invest in MSC and our customers.

We'll be rewarded with focus and investment on our part.

Suppliers that do not step up.

We'll see moves away from them.

And towards their competitors.

Who choose to invest in our partnership.

Related to this.

The softening demand conditions and reductions in commodities prices.

Have led us to reassess product cost increases.

Whether its tariff related or otherwise.

We are pushing back when we don't think it increases justified for our customer.

And when it comes to our own tariff exposure on direct imports.

We're also pushing back on our Chinese suppliers.

To offset tariff related increases.

Action plan part three.

Increased operating expense controls.

And improve productivity.

And we're taking three steps to do so.

Erik Gershwind: We're taking three steps to do so. First, curb hiring and clamp down on discretionary spending. Second, ratchet up performance management and review resourcing needs department by department. Third, reengineer inefficient processes to drive productivity. It's a bit too early to quantify additional details right now, but we will do so as part of our fiscal 2020 framework on our next call. I'll now turn things over to Rustom before I come back with some concluding remarks.

Erik Gershwin: We're taking three steps to do so. First, curb hiring and clamp down on discretionary spending. Second, ratchet up performance management and review resourcing needs department by department. Third, reengineer inefficient processes to drive productivity. It's a bit too early to quantify additional details right now, but we will do so as part of our fiscal 2020 framework on our next call. I'll now turn things over to Rustom before I come back with some concluding remarks.

First.

Kurt hiring.

And clamp down on discretionary spending.

Second.

Ratchet up performance management.

And review Resourcing needs Department by Department.

And third.

Reengineer inefficient processes to drive productivity.

It's a bit too early to quantify additional details right now.

But we will do so as part of our fiscal 2020 framework on our next call.

I'll now turn things over to roost them before I come back with some concluding remarks. Thank you Eric good morning, everyone.

Rustom Jilla: Thank you, Erik. Good morning, everyone. Before getting into the details, let me remind you that we provided Q3 guidance for both our total company and our base business, which is our total company, excluding the impact of the AIS acquisition and the Mexico business. Our Q3 average daily sales were $13.6 million, an increase of 4.6% versus the same quarter last year and below the low end of our guidance range. AIS and MSC Mexico contributed 260 basis points of growth between them, slightly ahead of guidance. The entire shortfall, therefore, was in our base business, which had ADS growth of 2%. Erik has already covered the reasons, so I’ll move on to gross margin. Our Q3 reported gross margin was 42.5%, 20 basis points below our guidance midpoint.

Before getting into the details let me remind you that we provided Q3 guidance for both our total company end up base business, which is our total company, excluding the impact of the acquisition and the Mexico business.

Our third quarter. The average daily sales were 13.6 million, an increase of 4.6% versus the same quarter last year and below the low end of our guidance range.

Yes, and MSC, Mexico contributed 260 basis points of growth between them slightly ahead of guidance.

The entire shortfall therefore was in our base business, which at Ats growth of 2%.

Rick has already covered the reasons, so I'll move on to gross margin.

Our Q3 reported gross margin was 42.5% 20 basis points below our guidance midpoint.

Rustom Jilla: The majority of this gap was due to base business customer mix and slightly higher than expected purchase cost escalation. Our total company gross margin was down roughly 110 basis points from last year, with about 40 basis points of this coming from AIS and MSC Mexico. Sequentially, our base business gross margin of 43.1% was flat with Q2, as the February price increase offset both mixed headwinds and purchase cost escalation. Total operating expenses in Q3 were $258 million, or approximately $4 million lower than the guidance midpoint, mainly due to actions taken to reduce discretionary spending and avoid planned cost increases, as well as lower volume-related variable costs and a lower incentive accrual.

The majority of this gap was due to base business customer mix and slightly higher than expected purchase cost escalation.

Total company gross margin was down roughly 110 basis points from last year with about 40 basis points of this coming from the us and MSC Mexico.

Sequentially, our base business gross margin of 43.1% was flat with Q2 as the February price increase offset both the mix headwinds and purchase cost escalation.

Total operating expenses in Q3, they were $258 million or approximately 4 million lower than the guidance midpoint, mainly due to actions taken to reduce discretionary spending at Hawaii land cost increases as well as lower volume related variable costs and a lower incentive accrual.

We slowed our rate of hiring in Q3, tempering, our headcount growth, which when combined with performance driven attrition resulted in field sales and service headcount reduction of 22 and an overall reduction of 31 heads from Q2.

Rustom Jilla: We slowed our rate of hiring in Q3, tempering our headcount growth, which when combined with performance-driven attrition, resulted in field sales and service headcount reduction of 22, and an overall reduction of 31 heads from Q2. Note that we do expect to end Q4 with close to the Q2 level of field sales and service associates. Operating expenses were up $13 million from last year's Q3. About $5 million of this year-over-year increase came from the acquisitions. Another roughly $2 million was attributable to volume-related variable costs, such as pick, pack, ship, and freight. Roughly $4 million came from higher field sales and service payroll costs, where headcount is up 63 versus a year ago.

But note that we do not expect that we do expect to end Q4 with close to the Q2 level of field sales and service associates.

Operating expenses were up 13 million from last year's Q3 about $5 million of this year on year increase came from the acquisitions. Another roughly $2 million was attributable to volume related variable costs, such as peak back ship and freight.

And roughly 4 million came from higher field sales and service payroll costs, where headcount is up 63 versus a year ago.

Opex to sales at 29.8% was up 10 basis points from last year's Q3, and 10 basis points above the midpoint of guidance as our cost control actions helped but did not fully offset the impact of lower than expected sales.

Rustom Jilla: OpEx to sales at 29.8% was up 10 basis points from last year's Q3 and 10 basis points above the midpoint of guidance, as our cost control actions helped, but did not fully offset the impact of lower-than-expected sales. Our fiscal Q3 reported operating margin was 12.8% within, but at the low end of our guidance range. This was down roughly 110 basis points from the prior year, with roughly 10 basis points due to AIS and MSC Mexico. Our base business operating margin was 13.2% at the low end of our guidance range and down about 100 basis points from the same quarter a year ago. Lower gross margins and the ongoing impact of people and project investments made earlier in fiscal 2019 both contributed to the year-on-year decline.

Our fiscal third quarter reported operating margin was 12.8% within but at the low end of our guidance range.

This was down roughly 110 basis points from the prior year with roughly 10 basis points due to isn't it must see Mexico.

Our base business operating margin was 13.2% at the low end the five guidance range and down about 100 basis points from the same quarter a year ago.

Lower gross margins and the ongoing impact of people and project investments made earlier in fiscal 2019 contribute both contributed to the year on year decline.

Rustom Jilla: Our total tax rate for Q3 was 25.0%, slightly below guidance and lower than our fiscal 2018 Q3 effective tax rate of 29.3%. The year-on-year decrease was primarily due to the lower corporate tax rate resulting from the Tax Cuts and Jobs Act. All of this resulted in reported earnings of $1.44 per share, $0.05 below our guidance midpoint. AIS and MSC Mexico combined had a $0.01 negative impact on reported EPS. Last year's reported EPS was $1.39. Turning to the balance sheet. Our DSO was 59 days, up 3 days from fiscal 2018's Q3, with national accounts continuing to be the main driver. Our inventory decreased during the quarter to $561 million, down $12 million from Q2.

Our total tax rate for the third quarter was 25.0% slightly below guidance and lower than our fiscal 2018 Q3 effective tax rate of 29.3%.

The year on year decrease was primarily due to lower to the lower corporate tax rate, resulting from the tax cuts and job effect.

So all of this resulted in reported earnings of one dollar and 44 cents per share five cents below our guidance midpoint.

He is at MFC, Mexico combined had a one cents negative impact on reported EPS.

Last year's reported EPS was one point 39.

Turning to the balance sheet.

Our DSO was 59 days up three days from fiscal 20, eighteens Q3 with national accounts continuing to be the main driver I inventory decreased during the quarter to $561 million down 12 million from Q2.

Rustom Jilla: Total company inventory turns were down slightly to 3.5 times from Q2. We have slowed purchasing and expect inventory levels to decline again in our fiscal Q4, but by a lower amount. Net cash provided by operating activities in Q3 was $89 million, versus $112 million last year. Our capital expenditures in Q3 were $13 million versus last year's $14 million. After subtracting CapEx from net cash provided by operating activities, our free cash flow was $76 million, as compared to a strong $99 million in last year's Q3. Note that we currently expect annual CapEx of $50 to $55 million in fiscal 2019. We paid out $35 million in ordinary dividends during the quarter and did not buy back any shares on the outside market.

Total company inventory turns were down slightly to 3.5 times from Q2, we have slowed purchasing and expect inventory levels to decline again in our fiscal fourth quarter, but by a lower amounts.

Net cash provided by operating activities in the third quarter was $89 million was 112 million last year, our capital expenditures in Q3 with $13 million versus last year's 14 million.

And after subtracting capex from net cash provided by operating activities. Our free cash flow was 76 million as compared to a strong $99 million in last year's Q3.

Note that we currently expect annual Capex of $50 million to $55 million in fiscal 2019.

We paid out 35 million in ordinary dividends during the quarter and did not buyback any shares on the outside market.

Rustom Jilla: In last year's Q3, we paid out $33 million in dividends and bought back $4 million in shares. As you saw this morning, we increased our quarterly dividend to $0.75 per share, a 19% increase. Based on fiscal 2019's expected EPS, this will result in a payout ratio of about 57%. Our strong balance sheet and high levels of free cash flow generation comfortably support this level. Erik will elaborate more on this in his closing. Our total debt as of the end of Q3 was $531 million, comprised of a $246 million balance on our credit facility and $285 million of long-term fixed-rate borrowing. Cash and cash equivalents were $239 million, and net debt was $492 million.

In last year's Q3, we paid out 33 million in dividends and bought back $4 million in shares.

As you saw this morning, we increased our quarterly dividend to 75 cents per share a 19% increase based on fiscal 2019 is expected EPS. This will result in a payout ratio of about 57%.

Our strong balance sheets and high levels of free cash flow generation comfortably support this level, Eric will elaborate more on this in his closing.

Our total debt as of the end of the third quarter was 531 million comprised of a 246 million balance on our credit facility and $285 million of long term fixed rate borrowing cash and cash equivalents with 20 39 million and net debt was $492 million.

Rustom Jilla: Our leverage decreased to 1.0, as compared to 1.2 times at the end of Q2, and was flat with last year's Q3. Let's move to our guidance for Q4 of fiscal 2019, which you can see on slide 4, and is shown with and without acquisitions. Please remember that DECO is in the base, whereas both AIS and MSC Mexico are included in the total company views. Note that when we get to fiscal 2020 guidance, we will move AIS into the base, but leave Mexico in the total company view. Overall, for Q4, we expect total company ADS to increase by approximately 1.2% to 3.2% versus the prior year period.

So our leverage decreased to 1.0 as compared to 1.2 times at the end of Q2 and was flat with last year's Q3.

Now.

Let's move to our guidance for the fourth quarter of fiscal 2019, which you can see on slide four and is shown with and with those acquisitions. These remember that deco is in the base, whereas both the various both Eas and MSC Mexico I included in the total company views.

And note that when we get to fiscal 2020 guidance, we've been moving us into the base, but leave Mexico in the total company view.

Overall for Q4, we expect total company adss to increase by approximately 1.2% to 3.2% versus the prior year period.

Rustom Jilla: This includes a range of 0% to 2% of organic growth and around 120 basis points from acquisitions. As you see on the op stats in our website, June's total average daily sales growth is estimated at 3.7%. Note that this year's June had 1 fewer selling day as we closed on the Friday following the 4 July holiday. Our Q4 total company gross margin is expected to be 41.8%, ±20 basis points. This is down 110 basis points year-over-year. Our base business gross margin is expected to be 42.3%, down 120 basis points from last year. While price realization has continued at expected levels, we anticipate higher purchase costs and sales mix to also continue as gross margin headwinds in Q4.

This includes a range of zero to 2% of organic growth and around 120 basis points from acquisitions.

As you see on the op steps in our website towards June total average daily sales growth is estimated at 3.7%.

Note that this year's June had one fewer selling day as we closed on the Friday following the July 4th holiday.

Our Q4 total company gross margin is expected to be 41.8% plus or minus 20 basis points.

This is down 110 basis points.

Year over year.

Our base business gross margin is expected to be 42.3%.

Down 120 basis points from last year.

While price realization has continued at expected levels, we anticipate higher purchase costs and sales mix to also continue as gross margin headwinds in the fourth quarter.

Rustom Jilla: Also, the higher sales growth coming from vending and direct ships comes in at gross margins below the company average. Gross margins for the base business are expected to be down 80 basis points sequentially from Q3. This is due to the normal seasonal Q4 decline, exacerbated by escalating product costs and a slightly later annual price increase. Let me provide some additional context on gross margin. Our gross margin formula is made up of 3 elements: price, cost, and mix. In recent years, we averaged a gross margin decline of 30 to 60 basis points. If price and costs are neutral, we would still expect year-over-year gross margin deterioration from sales mix. The past 2 years have produced quite a different picture, primarily due to the timing of price cost.

Also the higher sales growth coming from vending and direct ships comes in at gross margins below the company average.

Gross margins for the base business I expected to be down 80 basis points sequentially from the third quarter.

This is due to the normal seasonal Q4 decline exacerbated by escalating product costs and a slight delay to annual price increase.

Let me provide some additional context on gross margin.

Our gross margin Formula is made up of three elements price cost and mix.

In recent years, we average the gross margin decline of 30 to 50 basis points.

And if price and cost a neutral we would still expect year over year gross margin deterioration from sales mix.

The past two years have produced quite a different picture, primarily due to the timing of price cost.

Rustom Jilla: In fiscal 2018, we benefited from our price increases before the cost increases flowed through our PNL. As a result, the price-cost spread was positive, and our base business gross margins were flat. This year, fiscal 2019, we are later in the price-cost cycle. While price realization has been positive, the gap between price and cost has turned negative, as we are now bearing the full impact of escalating product costs from fiscal 2018. As such, at our Q4 guidance midpoint, fiscal 2019's base business gross margin would be down 80 basis points versus last fiscal year. On top of the price-cost timing issue, the demand environment, though still positive, discernibly softened in Q3. We don't see this changing in Q4 and are addressing the purchase cost side of the equation. Moving now to operating expenses.

In fiscal 2018, we benefited from our price increases before the cost increases flow through up BNL.

As a result, the price cost spread was positive and our base business gross margins were flat.

This year fiscal 2019, we are later in the price cost cycle, while price realization has been positive the gap between price and cost has turned negative as we are now bearing the full impact of escalating product costs from fiscal 2018.

As such at our Q4 guidance midpoint fiscal 2000, Nineteens based business gross margin would be down 80 basis points versus last fiscal year.

On top of the price cost timing issue the demand environment, those two positive discernibly soft and in Q3.

We don't see this changing in the fourth quarter and addressing the purchase cost side of the equation.

Moving now to operating expenses.

Rustom Jilla: They are expected to be around $258 million, up $6 million from last year's Q4, with the base business accounting for about $4 million of this. As you know, we added sales and service headcount over the course of the year, and total payroll and payroll-related costs account for about $3 million of the year-over-year increase. You might expect a sequential decrease in operating expenses in Q4, rather than sequentially flat operating expenses. There are 3 reasons why OpEx is flat sequentially. First, most of the actions taken in the last 2 to 3 months were to avoid planned headcount and cost increases rather than to reduce costs. To be clear, we will take cost reduction actions in the coming months, and the savings will kick in more meaningfully in fiscal 2020.

They are expected to be around $258 million up 6 million from last year's fourth quarter with the base business accounting for about $4 million of this.

As you know, we added sales and service headcount over the course of the year and total payroll and payroll related costs accounted for about 3 million of the year over year increase.

You might expect the sequential decrease in operating expenses in Q4, rather than sequentially flat operating expenses.

There are three reasons why opex is flat sequentially.

First most of the actions taken in the last two to three months were wide planned headcount and cost increases rather than to reduce costs.

To be clear, we will take cost reduction actions in the coming months and the savings will kick in more meaningfully in fiscal 2020 .

Rustom Jilla: Second, we had a roughly $1 million incentive compensation accrual reversal in Q3. Third, we are expecting depreciation costs to rise sequentially, driven primarily by the strong growth in vending signings this year. We expect the Q4's total company operating margin to be approximately 11.2% at the midpoint of guidance, a 170 basis point decline over last year's 12.9%. The year-over-year drivers are the roughly 110 basis point gross margin decline and a roughly 50 basis points operating expense expansion due to our growth investments and the acquisitions. Assuming the midpoint of our total company Q4 operating margin guidance, we would fall below the lower left quadrant of our 2019 annual operating margin framework for the full year. Before turning to taxes, I'll say a word on base business incremental margins.

Second we had a roughly 1 million dollar incentive compensation accrual reversal in Q3.

And third we are expecting depreciation cost to rise sequentially, driven primarily by the strong growth in vending signings this year.

We expect the fourth quarter's total company operating margin to be approximately 11.2% at the midpoint of guidance 170 basis point decline over last years, 12.9%.

The year on year drivers of the roughly 110 basis point gross margin decline and a roughly 50 basis points operating expense expansion due to our growth investments and the acquisitions.

Assuming the midpoint of our total company Q4 operating margin guidance, we would fall below the lower left quadrant of our 2019 annual operating margin framework for the full year.

Before turning to taxes, I'd say, a word on base business incremental margins.

Rustom Jilla: While we delivered a solid fiscal 2018, we will have taken a significant step back in fiscal 2019. Assuming the midpoint of our Q4 guidance, we expect operating profits to decline roughly $20 million on approximately $90 million of additional sales. This is, of course, unacceptable, and we are taking actions to improve our performance. Turning to our estimated tax rate for the Q4, it is 24.1%, slightly lower than our year-to-date tax rate of 25.1%. This is due to the typical release of state tax reserves that occurs in our fiscal Q4. Finally, our Q4 EPS guidance range is $1.21 to $1.27, with a midpoint of $1.24. This includes AIS and MSC Mexico, which together should be EPS neutral in Q4.

While we delivered a solid fiscal 2018, we will have taken a significant step back in fiscal 2019.

Assuming the midpoint of our fourth quarter guidance, we expect operating profits to decline roughly $20 million on approximately $90 million of additional sales.

This is of course unacceptable and we are taking actions to improve our performance.

Turning to our estimated tax rate for the fourth quarter. It is 24.1% slightly lower than our year to date tax rate of 25.1%.

This is due to the typical release of state tax reserves that occurs in our fiscal Q4.

Finally, our Q4 EPS guidance range is $1.21 to $1.27 with the midpoint of $1.24. This includes Iason, MFC, Mexico, which together should be EPS neutral in Q4.

Rustom Jilla: Our guidance also assumes a weighted average diluted share count of roughly 55.3 million shares. I'll now turn it back to Erik.

Our guidance also assumes a weighted average diluted share count of roughly 55.3 million shares.

Ill now turn it back to Eric.

Erik Gershwind: Thank you, Rustom. As I shared earlier, we're taking actions aimed at improving sales and gross margin and lowering expenses. You heard some of the details today, in summary, we are focused internally on improving execution. This also means that any M&A activity that we may consider over the near term will have higher hurdle rates, particularly as valuations remain historically high. You also saw that we are adjusting our capital allocation philosophy to return more capital to our shareholders via the quarterly dividend. As Rustom said, we have a strong balance sheet and generate high levels of free cash flow. This dividend leaves us with a comfortable payout ratio, and this would be true even if things soften further. Reflecting on the fiscal year thus far, we're disappointed with our performance, more importantly, we are taking action to address this.

Erik Gershwin: Thank you, Rustom. As I shared earlier, we're taking actions aimed at improving sales and gross margin and lowering expenses. You heard some of the details today, in summary, we are focused internally on improving execution. This also means that any M&A activity that we may consider over the near term will have higher hurdle rates, particularly as valuations remain historically high. You also saw that we are adjusting our capital allocation philosophy to return more capital to our shareholders via the quarterly dividend. As Rustom said, we have a strong balance sheet and generate high levels of free cash flow. This dividend leaves us with a comfortable payout ratio, and this would be true even if things soften further. Reflecting on the fiscal year thus far, we're disappointed with our performance, more importantly, we are taking action to address this.

Thank you Ruth them.

As I shared earlier, we're taking actions aimed at improving sales and gross margin.

And lowering expenses.

You heard some of the detail today.

But in summary.

We are focused internally on improving execution.

And this also means.

That any M&A activity that we may consider over the near term.

We'll have higher hurdle rates.

Particularly as valuations remain historically high.

You also saw that we are adjusting our capital allocation philosophy.

The return more capital to our shareholders via the quarterly dividend.

As Rustom said, we have a strong balance sheet.

And generate high levels of free cash flow.

This dividend leaves us with a comfortable payout ratio.

And this would be true even if things soften further.

Reflecting on the fiscal year, thus far.

We are disappointed with our performance.

And more importantly, we are taking action to address this.

That said.

Erik Gershwind: That said, I don't want the progress that we're making in some critical areas lost on all of this. We're winning new accounts and doing so at a very strong pace. Our vending implementations are growing more rapidly than they have in a long time. We are deepening our commitment to our valued supplier partners at a time when our shared goals are more important than ever. Our team of associates is working to deliver on our action plan. I thank each of them for taking it on with urgency and commitment as we continue our journey from a spot by distributor to a mission-critical partner on the plant floor. We'll now open up the lines for questions.

Erik Gershwin: That said, I don't want the progress that we're making in some critical areas lost on all of this. We're winning new accounts and doing so at a very strong pace. Our vending implementations are growing more rapidly than they have in a long time. We are deepening our commitment to our valued supplier partners at a time when our shared goals are more important than ever. Our team of associates is working to deliver on our action plan. I thank each of them for taking it on with urgency and commitment as we continue our journey from a spot by distributor to a mission-critical partner on the plant floor. We'll now open up the lines for questions.

I don't want the progress that we're making in some critical areas lost on all of this.

We're winning new accounts.

And doing so at a very strong pace.

Our vending implementations.

Our growing more rapidly than they have in a long time.

We are deepening our commitment to our valued supplier partners.

At a time when our shared goals.

Or more important than ever.

And our team of associates is working to deliver on our action plan.

I, thank each of them for taking it on with urgency and commitment.

As we continue our journey from a spot by distributor to a mission critical partner on the plant floor.

We'll now open up the lines for questions.

Thank you.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question today comes from Robert Barry with Buckingham Research. Mr. Barry, please go ahead.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

Any time your question is an interesting and you would like to withdraw your question.

Please press Star then tail.

The first question today comes from Robert Barry with Buckingham Research Mr. Barry. Please go ahead.

Hey, guys good morning.

Robert Barry: Hey, guys. Good morning.

Erik Gershwind: Rob, good morning.

Erik Gershwin: Rob, good morning.

Rob Good morning.

Rustom Jilla: Good morning, Robert.

Robert Barry: Actually, before my question, I just wanted a housekeeping item clarification on the ADS results estimate for how much you think Easter impacted April, and how much does having one less selling day benefit June ADS?

Actually before.

My question I, just wanted a housekeeping item clarification on the.

EPS results.

Estimate for how much you think Easter impacted April and how much does having one less selling day benefit June .

So the.

Rustom Jilla: The April impact washed out. I mean, we didn't in the quarter as we, as we looked at it. The ADS impact of the 1 less selling day in June, if you do it purely mathematically, right, would not be quite the way to do it, Robert, because effectively, if I just disclose what the number was in Friday, I mean, we had, like, just you know, a little bit over $1 million in sales. If we didn't have that $1 million and didn't have that day, we'd have really a negligible impact on the overall number.

So the APR impact washed out I mean, so we didnt in in the quarter as we as we looked at the.

As we looked at it the.

The impact of the one less selling day in June if you do it purely mathematically right would not be quite the way to do it Robert because effectively the last if I may just disclose what the number was in Friday I mean, we had like just a little bit over a million dollars in sales. So when you. If we if we didnt have a million dollars and didnt have that they will have really a negligible impact on the on the overall number.

I see so it's pretty minimal.

Robert Barry: I see. It's pretty minimal.

Rick you want.

Rustom Jilla: Erik, do you want to add anything?

Erik Gershwind: No, you got it.

Erik Gershwin: No, you got it.

You got it.

Robert Barry: Sorry. Yes.

Sorry.

Yes, no problem you can feel free to keep going if there is no. Okay. Okay I'll follow up afterwards.

Erik Gershwind: No problem. Feel free to keep going if there's other questions.

Erik Gershwin: No problem. Feel free to keep going if there's other questions.

Robert Barry: Oh, okay. Yeah, okay. I'll follow up afterwards. On the price cost impact to gross margin, what was that impact in Q3 in the quarter?

So on the price cost impact to gross margin what was that impact in threeq.

In the quarter.

So the price the price impact the price mix impact, we haven't disclosed the price cost impact specifically like that but the price mix impact that we had was roughly around 60 basis points.

Rustom Jilla: The price, the price impact, the price mix impact, we haven't disclosed the price cost impact specifically like that, but the price mix impact that we had was roughly around 60 basis points.

Robert Barry: Right. I guess it went negative, the price cost.

Right.

Well when negative price cost equation turned negative so I was curious how how much of it yes, Rob Rob So a little bit on gross margin. So essentially what happened was she's red Rooster Descried, we came in on the bottom end of our gross margin range. So effectively 20 basis points off the midpoint and what he highlighted is that two drivers behind that in the base business, one being purchase cost slightly higher than expected the escalation and then to being customer mix.

Rustom Jilla: Positive.

Robert Barry: equation turned negative, so I was curious how much of it...

Erik Gershwind: Yeah, Rob, a little bit on gross margin. Essentially, what happened was, as Rustom described, we came in on the bottom end of our gross margin range, effectively 20 basis points off the midpoint. What he highlighted is that 2 drivers behind that in the base business, 1 being purchase costs slightly higher than expected, the escalation, and then 2, being customer mix. He also put some context on price cost in terms of, you know, essentially what happens in our business when we take price, we get it right away. When we take a cost increase, it bleeds into our P&L slowly. What we were describing in the prepared remarks was how this fiscal year, price cost has turned negative as we're bearing the full brunt of the cost increases taken over this year and last year.

Erik Gershwin: Yeah, Rob, a little bit on gross margin. Essentially, what happened was, as Rustom described, we came in on the bottom end of our gross margin range, effectively 20 basis points off the midpoint. What he highlighted is that 2 drivers behind that in the base business, 1 being purchase costs slightly higher than expected, the escalation, and then 2, being customer mix. He also put some context on price cost in terms of, you know, essentially what happens in our business when we take price, we get it right away. When we take a cost increase, it bleeds into our P&L slowly. What we were describing in the prepared remarks was how this fiscal year, price cost has turned negative as we're bearing the full brunt of the cost increases taken over this year and last year.

He also put some context on price cost in terms of your essentially what happens in our business when we take price we get it right away when we take a cost increase it bleeds into our PML slowly and what we were describing in the prepared remarks was how this fiscal year price cost has turned negative is we're bearing the full brunt of the cost increases taken over this year and last year.

Robert Barry: Got it. I guess just lastly, curious about what the outlook is there for that price cost equation, getting back to at least neutral. I mean, is there a line of sight to that happening? Because it seems actually like maybe the inflation, at least from tariffs-

Got it and I guess, just lastly, curious about what the outlook is there for that price cost equation.

Getting back to at least neutral I mean is there a line of sight to that happening 'cause it seems actually like maybe the inflation at least from tariffs might continue to rise, especially if you're seeing more coming through from third party vendors.

David Manthey: ... might continue to rise, especially if you're seeing more coming through from third-party vendors?

Erik Gershwind: Yeah, Rob, you know, really good question, is where does it go from here as it relates to gross margin and price cost? Here's what I would say. On the pricing side, so right now, if we did nothing else and just trended things out, price costs would likely stay negative in 2020. However, an important however, two things could change. One is pricing, and as I mentioned, we're gonna be taking a summer increase. We would expect to see solid levels of realization as we did in the midyear. You raise a fair point that should still, for us, too early to say what's going to happen with tariffs, but should that stimulate inflation, there could be more coming on price.

Erik Gershwin: Yeah, Rob, you know, really good question, is where does it go from here as it relates to gross margin and price cost? Here's what I would say. On the pricing side, so right now, if we did nothing else and just trended things out, price costs would likely stay negative in 2020. However, an important however, two things could change. One is pricing, and as I mentioned, we're gonna be taking a summer increase. We would expect to see solid levels of realization as we did in the midyear. You raise a fair point that should still, for us, too early to say what's going to happen with tariffs, but should that stimulate inflation, there could be more coming on price.

Yeah, Rob.

Really good question is where does it go from here as it relates to gross margin and price cost here, Here's what I would say on the pricing side. So so right now absent if we did nothing else and just trended things out.

Price cost would likely stay negative in 20, however, an important however, two things could change one is pricing and as I mentioned, we're going to be taking a summer increase we would expect to see solid levels of realization as we did in the mid year.

And you raise a fair point that should still still for us too early to say, what's going to happen with tariffs, which should that stimulate inflation there could be more coming on price I think the second important thing that.

Erik Gershwind: I think the second important thing that we talked about this morning was the fact that we're taking aggressive actions on the buy side with our supplier community in a number of different forms. Still a little early to quantify, you know, exactly how much of the cost, the embedded cost that eats into, and we'll certainly follow up on the next call with the 2020 outlook.

Erik Gershwin: I think the second important thing that we talked about this morning was the fact that we're taking aggressive actions on the buy side with our supplier community in a number of different forms. Still a little early to quantify, you know, exactly how much of the cost, the embedded cost that eats into, and we'll certainly follow up on the next call with the 2020 outlook.

We talked about this morning was the fact that we're taking aggressive actions on the buy side.

With our supplier community.

In a number of different forms.

Still a little early to quantify exactly how much of the cost.

The embedded costs that eats into and we will certainly follow up on on the next call with the 2020 outlook.

David Manthey: Got it. All right, thank you.

Robert Barry: Got it. All right, thank you.

Got it alright, thank you.

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

Operator: The next question comes from Ryan Merkel with William Blair. Please go ahead.

Hey, Thanks, good morning, everyone.

Ryan Merkel: Hey, thanks. Good morning, everyone.

Erik Gershwind: Hey, Ryan.

Erik Gershwin: Hey, Ryan.

David Manthey: Hey, Ryan.

Rustom Jilla: Hey, Ryan.

Hey, Ryan.

So first off can you provide a little bit more context around that.

Ryan Merkel: First off, can you provide a little bit more context around the organic slowdown, daily sales? Was it broad-based, or did certain end markets drive the bulk of the weakness?

Organic slowdown daily sales was it broad based or get certain end markets drives the bulk of the weakness.

Ryan So what I would say is two two comments one is we saw some real pockets of weakness.

Erik Gershwind: Ryan, what I would say is 2 comments. 1 is we saw some real pockets of weakness. A few that I would call out, automotive, it's probably not gonna be a surprise to you. Automotive, oil and gas, and then the Midwest was hit pretty hard with agriculture, certainly. Pockets of strength, aerospace continues to remain strong. That said, what I would say, outside of the pockets of weakness, we did, through most of our customer base, see a change through the quarter. I would characterize the change as more uncertainty and shorter backlogs, along with some softening in export demand and concerns about more softening in export demand. That's how I characterize it.

Erik Gershwin: Ryan, what I would say is 2 comments. 1 is we saw some real pockets of weakness. A few that I would call out, automotive, it's probably not gonna be a surprise to you. Automotive, oil and gas, and then the Midwest was hit pretty hard with agriculture, certainly. Pockets of strength, aerospace continues to remain strong. That said, what I would say, outside of the pockets of weakness, we did, through most of our customer base, see a change through the quarter. I would characterize the change as more uncertainty and shorter backlogs, along with some softening in export demand and concerns about more softening in export demand. That's how I characterize it.

A few that I would call out automotive, it's probably not going to be a surprise to you.

Automotive oil and gas and then the Midwest was hit pretty hard with agriculture, certainly pockets of strength aerospace continues to remain strong.

That said, what I would say outside of the pockets of weakness we did through most of our customer base.

See a change through the quarter and I would characterize the change as.

More uncertainty.

And shorter backlogs.

Along with some softening in export demand and concerns about more softening in export demand. So that's how I characterize it.

Ryan Merkel: Okay. Yeah, that's kind of what I expected. As a follow-up, the 1% organic ADS guide for Q4, it looks like this assumes a little bit of further market slowdown, but not that much, right? Because you're going from basically a 2% run rate to a 1% in Q4. Is that the right way to think about it?

Okay, Yeah, that's kind of what I expected.

And then as a follow up the 1% organic EPS guide for Q. It looks likes this assumes a little bit further market slowdown, but not that much right because you're going from basically 2% run rate to a 1% in fourq is that the right way to think about it.

Yeah, I think that's right I mean, if you look at the if you look at the.

Erik Gershwind: Yeah, I think that's right. I mean, if you look at the June number that Rusta mentioned, the 3.7 is inclusive of a bit of acquisitive growth. I think without that, we're somewhere in the 2.5 range, slightly benefited by the 1 fewer selling day. You're right, Ryan, if you do the math and you did the forecast for July and on August, it would be less than that. Yes, what we have assumed is a modestly softer July and August than what we saw in June.

Erik Gershwin: Yeah, I think that's right. I mean, if you look at the June number that Rusta mentioned, the 3.7 is inclusive of a bit of acquisitive growth. I think without that, we're somewhere in the 2.5 range, slightly benefited by the 1 fewer selling day. You're right, Ryan, if you do the math and you did the forecast for July and on August, it would be less than that. Yes, what we have assumed is a modestly softer July and August than what we saw in June.

June number that roost dimensions. So the 3.7 is inclusive of a bit of an acquisitive growth I think without that were somewhere in the two and a half range.

Slightly benefited by the one fewer selling day and then you're right.

Ryan if you do the math and you did the forecast for July and August .

It would be less than that so yes, what we've assumed is a modestly softer July and August than what we saw in June .

Ryan Merkel: Okay. Just lastly, and I'll turn it over. You mentioned that the price environment is more uncertain. Can you just expand upon what you mean by this, and are there any implications for the P&L that we should think about based on that comment?

Okay.

And then just lastly, I'll turn it over you mentioned that the pricing environment is more uncertain can you just expand upon what you mean by this and are there any implications for the PNM, we should think about based on that comp.

In terms of what I mean, it's really right and what we were referring to is the tariff and trade situation. Unlike the last round of tariff increases in 2018, which were smaller in size and more telegraphed people saw them coming.

Erik Gershwind: In terms of Ryan, what we were referring to is the tariff and trade situation. You know, unlike the last round of tariff increases in 2018, which were smaller in size and more telegraphed, people saw them coming. This is larger in size and was not telegraphed and was a bit more of a surprise. The uncertainty, Ryan, is really about what happens with our supplier community and how much of that attempts to get passed through. I think as, or more importantly, what happens with the customer base, the end markets, and how much of that makes its way through and gets accepted. I think it's just the overhang of tariff and trade is what I would describe.

Erik Gershwin: In terms of Ryan, what we were referring to is the tariff and trade situation. You know, unlike the last round of tariff increases in 2018, which were smaller in size and more telegraphed, people saw them coming. This is larger in size and was not telegraphed and was a bit more of a surprise. The uncertainty, Ryan, is really about what happens with our supplier community and how much of that attempts to get passed through. I think as, or more importantly, what happens with the customer base, the end markets, and how much of that makes its way through and gets accepted. I think it's just the overhang of tariff and trade is what I would describe.

This was is larger in size and was not telegraphing was a bit more of a surprise. So the uncertainty Ryan is really about what happens with our supplier community and how much of that attempts to get passed through and I think as or more importantly, what happens with the customer base the end markets and how much of that makes its way through and gets accepted. So I think it's just the overhang of tariffs and trade is what I would describe I mean, I think in terms of the impact on the numbers. Ryan look you are seeing it acutely in our fourth quarter.

Erik Gershwind: I mean, I think in terms of the impact on the numbers, Ryan, look, you're seeing it acutely in our Q4, our fiscal Q4 guide with gross margin. You know, what you're also hearing is we're taking action. I would highlight, we did choose to push back the price increase a little bit, which obviously cost us a little bit of gross margin in Q4. We did that, so we get a little more line of sight into the tariff situation with customers and suppliers. As, you know, as we mentioned a couple of times here, we're moving aggressively with suppliers.

Erik Gershwin: I mean, I think in terms of the impact on the numbers, Ryan, look, you're seeing it acutely in our Q4, our fiscal Q4 guide with gross margin. You know, what you're also hearing is we're taking action. I would highlight, we did choose to push back the price increase a little bit, which obviously cost us a little bit of gross margin in Q4. We did that, so we get a little more line of sight into the tariff situation with customers and suppliers. As, you know, as we mentioned a couple of times here, we're moving aggressively with suppliers.

Our fiscal fourth quarter guide with gross margin and what you're also hearing is we're taking action so.

I would highlight we did choose to push back the price increase a little bit, which obviously cost us a little bit of gross margin in Q4, we did that so we get a little more line of sight into.

The tariff situation with customers and suppliers and then as you know as we mentioned a couple of times here, we're moving aggressively with suppliers.

Makes sense, Okay I'll pass it on thanks.

Ryan Merkel: Makes sense. Okay, I'll pass it on. Thanks.

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

Operator: The next question comes from David Manthey with Baird. Please go ahead.

David Manthey: Thanks. Good morning, everyone.

Thanks, Good morning, everyone.

David J. Manthey: Thanks. Good morning, everyone.

Erik Gershwind: Hi, Dave.

Erik Gershwin: Hi, Dave.

David Manthey: Thinking about the action plan here, step one, Erik, you said you're gaining customers, but not ramping them quickly enough. It's been years since you've given us any insight on the active customer data. I'm wondering if, just in the spirit of that part of the action plan, can you give us a spot update on the number of active customers today and sort of what that is year-over-year?

Hi.

So thinking about the action plan here, except one.

David J. Manthey: Thinking about the action plan here, step one, Erik, you said you're gaining customers, but not ramping them quickly enough. It's been years since you've given us any insight on the active customer data. I'm wondering if, just in the spirit of that part of the action plan, can you give us a spot update on the number of active customers today and sort of what that is year-over-year?

Eric you said, you're gaining customers, but not ramping them quickly enough and.

It's been years since you've given us any insight on the active customer data I'm wondering if just in the spirit of that.

Part of the action plan can you give us a spot update on the number of active customers today and sort of what that is year over year.

Dave I actually do not have that number handy to be perfectly honest with you. So we'll have to follow up.

Erik Gershwind: Dave, I actually do not have the number handy, to be perfectly honest with you, so we'll have to follow up. John's making a note for a follow-up. What I will, the color I'll add there, Dave, is I, you know, relative to my time in the business, the new account wins we're seeing now, and this is based on, you know, the changes that we've made in the sales force to put more focus on the hunter population, we are definitely seeing a greater rate of new wins than I've seen in a long time, maybe ever in the business. What we called out is, quite frankly, the rate and pace of the new account wins was a bit faster than we projected.

Erik Gershwin: Dave, I actually do not have the number handy, to be perfectly honest with you, so we'll have to follow up. John's making a note for a follow-up. What I will, the color I'll add there, Dave, is I, you know, relative to my time in the business, the new account wins we're seeing now, and this is based on, you know, the changes that we've made in the sales force to put more focus on the hunter population, we are definitely seeing a greater rate of new wins than I've seen in a long time, maybe ever in the business. What we called out is, quite frankly, the rate and pace of the new account wins was a bit faster than we projected.

John I'm, just really does make it a note.

For a follow up what I will the color I'll add there Dave is relative to my time in the business.

New account wins, we're seeing now.

And this is based on the changes that we've made in the Salesforce to put more focus on on the Hunter population. We are definitely seeing a greater rate of new wins than than I've seen in a long time, maybe ever in the business.

We called out is quite frankly, the rate and pace of the new account wins.

Was a bit faster than we projected and as a result.

Erik Gershwind: As a result, we need to play some catch up on implementation, and that's what we called out as action plan part one. We're investing, we're reallocating resources as needed to get the wins in, because, you know, what you heard from me is, I'd like to see the new wins translate into revenue faster.

Erik Gershwin: As a result, we need to play some catch up on implementation, and that's what we called out as action plan part one. We're investing, we're reallocating resources as needed to get the wins in, because, you know, what you heard from me is, I'd like to see the new wins translate into revenue faster.

We need to play some catch up on implementation and Thats, what we called out as action plan part one is we're investing we're reallocating resources as needed.

To get the wins in because you know what you heard from me is I'd like to see the new wins translate into revenue faster.

Okay, and then number two.

David Manthey: Okay. The 2 part of the plan here is the better realization from supplier programs. I'm wondering, are these conversations you've already had, or are those yet to happen? What about these is going to be different? You know, vendor management is sort of a key ongoing function of any distributor. I'm wondering, what do you plan to do differently than you've been doing over the past several years there?

David J. Manthey: Okay. The 2 part of the plan here is the better realization from supplier programs. I'm wondering, are these conversations you've already had, or are those yet to happen? What about these is going to be different? You know, vendor management is sort of a key ongoing function of any distributor. I'm wondering, what do you plan to do differently than you've been doing over the past several years there?

Part of the plan here is the better realization from supplier programs I'm wondering.

Are these conversations you've already had or those yet to happen.

What about these is going to be different.

Vendor management is sort of a.

The ongoing function of any distributor I'm wondering what what do you plan to do differently than you've been doing over the past several years there.

Erik Gershwind: Yeah, David, really good question. What I would tell you is the bulk of the conversations have already occurred. It's a bit early to provide results and outcomes because as you could imagine, it's not a one-time conversation. There's ongoing dialogue, and we're still sort of sorting through it, but most of the conversations have occurred. I would say that what's different is a heavier emphasis this time around on providing growth investment, sort of two-way growth investment, and sales and marketing programs that we would commit to those suppliers that step forward to give them heavy degrees of focus inside of MSC and in a way that would be stepped up from what we've done in the past.

Erik Gershwin: Yeah, David, really good question. What I would tell you is the bulk of the conversations have already occurred. It's a bit early to provide results and outcomes because as you could imagine, it's not a one-time conversation. There's ongoing dialogue, and we're still sort of sorting through it, but most of the conversations have occurred. I would say that what's different is a heavier emphasis this time around on providing growth investment, sort of two-way growth investment, and sales and marketing programs that we would commit to those suppliers that step forward to give them heavy degrees of focus inside of MSC and in a way that would be stepped up from what we've done in the past.

Yes really good question. So what I would tell you is the bulk of the conversations have already occurred.

So it's a bit early to provide results and outcomes because as you can imagine it's not a onetime conversation.

There is ongoing.

Dialogue and we're still sorting through it but most of the conversations have occurred I would say the what's different is.

Heavier emphasis this time around on.

Providing growth investment sort of two way growth investment and.

Sales and marketing programs that we would commit to to those suppliers that step forward to give them heavy degrees of focus inside of MSC and in a way that would be stepped up from what we've done in the past.

Okay. Okay, and then finally, Eric more of a strategic question here as you make this drive to become a mission critical partner on the shop floor.

David Manthey: Finally, Erik, more of a strategic question here. As you make this drive to become a mission-critical partner on the shop floor, do you feel that today you have the people, tools, technology, and, you know, products and services in order to do that? If so, I'm wondering, why hasn't the uptake been faster? If not, what do you need to get there?

David J. Manthey: Finally, Erik, more of a strategic question here. As you make this drive to become a mission-critical partner on the shop floor, do you feel that today you have the people, tools, technology, and, you know, products and services in order to do that? If so, I'm wondering, why hasn't the uptake been faster? If not, what do you need to get there?

Do you feel that today, you have the people tools technology and products and services in order to do that and if so I'm wondering why hasn't the uptake been faster if not what do you need to get there.

Yes, really good question I would say, Dave So let me start out by saying.

Erik Gershwind: Yeah, really good question. I would say, Dave, let me start out by saying, my conviction in the plan is high. My conviction in the team, our management team in particular, is high. Look, that said, there have been considerable changes in the sales organization in particular. We mentioned Eddie coming on board, beyond Eddie, really largely a new sales leadership team around Eddie, with several other members of the team. My conviction in the team and the plan is high. To your question about why the traction being slower, I think it's fair to say, look, I want to be clear. On the one hand, I'm excited and encouraged about the new account wins.

Erik Gershwin: Yeah, really good question. I would say, Dave, let me start out by saying, my conviction in the plan is high. My conviction in the team, our management team in particular, is high. Look, that said, there have been considerable changes in the sales organization in particular. We mentioned Eddie coming on board, beyond Eddie, really largely a new sales leadership team around Eddie, with several other members of the team. My conviction in the team and the plan is high. To your question about why the traction being slower, I think it's fair to say, look, I want to be clear. On the one hand, I'm excited and encouraged about the new account wins.

My conviction in the plan is high.

My conviction in the team.

Our management team in particular is high.

So look that said there have been.

Considerable changes in the sales organization in particular, we mentioned Eddie coming onboard and beyond any really largely a new sales leadership team around Eddie with several other members of the team.

But my conviction in the team and the plan is high.

So to your question about why the traction.

Being slower and I think it's fair to say look I want to be clear on the one hand, I'm excited and encouraged about the new account wins on the other hand, I want to be clear I'm disappointed with the results were producing and I'm disappointed in how fast the new accounts are materializing into revenues you heard us, making some adjustments, we'll continue to make adjustments as needed until we get it right but.

Erik Gershwind: On the other hand, I want to be clear, I'm disappointed with the results we're producing, and I'm disappointed in how fast the new accounts are materializing into revenues. You heard us making some adjustments. We'll continue to make adjustments as needed until we get it right. You know, for me, the headline is conviction in plan and team are high.

Erik Gershwin: On the other hand, I want to be clear, I'm disappointed with the results we're producing, and I'm disappointed in how fast the new accounts are materializing into revenues. You heard us making some adjustments. We'll continue to make adjustments as needed until we get it right. You know, for me, the headline is conviction in plan and team are high.

For me the headline is conviction in plan and team are high.

All right. Thanks, Eric.

David Manthey: All right. Thanks, Erik.

David J. Manthey: All right. Thanks, Erik.

Your next question comes from John inch with Gordon Haskett. Please go ahead.

Operator: The next question comes from John Inch with Gordon Haskett. Please go ahead.

John Inch: Oh, thank you. Good morning, everybody.

Thank you good morning, everybody good morning.

Erik Gershwind: Good morning, John.

Erik Gershwin: Good morning, John.

John Inch: Morning, guys. Hey, Erik, is part of the issue that suppliers have been raising their List 3 prices, but that the market, in terms of your peers, are lagging? Is that part of what's going on here? I'm just wondering if you could comment a little bit in terms of what suppliers are doing with respect to List 3 and what you're seeing kind of competitively in the market with respect to List 3.

Morning, guys, Hey, Eric is part of the issue that.

Suppliers have been raising their list three prices, but that the market in terms of your peers are lagging is that part of what's going on here I'm. Just wondering if you could comment a little bit in terms of what suppliers are doing with respect to list three and what you're seeing kind of competitively in the market with respective was three.

With respect to list three on the tariff situation, yes, correct, yes. The 20, yeah, I mean to be honest with respect to the latest round of terrorists.

Erik Gershwind: With respect to List 3 on the tariff situation, John?

Erik Gershwin: With respect to List 3 on the tariff situation, John?

John Inch: Yes, correct. Yes,

Erik Gershwind: Yeah. I mean, to be honest, with respect to the latest round of tariffs, still very early. Still very early. I would say too early to comment, and that's sort of part of what we described as the overhang and uncertainty. What I would say is the last round of tariffs, John, late 2018, most certainly triggered a greater incidence of list price increases from suppliers. So far, again, I think that's part of the reason why we're waiting and seeing, there has not been significant amount of movement, I think, in part because this was a surprise to many.

Erik Gershwin: Yeah. I mean, to be honest, with respect to the latest round of tariffs, still very early. Still very early. I would say too early to comment, and that's sort of part of what we described as the overhang and uncertainty. What I would say is the last round of tariffs, John, late 2018, most certainly triggered a greater incidence of list price increases from suppliers. So far, again, I think that's part of the reason why we're waiting and seeing, there has not been significant amount of movement, I think, in part because this was a surprise to many.

Still very early.

It's still very early so I would say too early to comment and that's sort of part of what we describe as the overhang and uncertainty what I would say is the last round of tariffs John .

Of late 2018, most certainly triggered a greater incidence of list price increases from suppliers.

So far so far and again I I think thats part of the reason why we're waiting and seeing.

There has not been significant amount of movement I think in part because this was a surprise to many.

John Inch: Do you think it has anything, Eric, to do with maybe there's a threshold of greater sensitivity, given the uncertainty in the economy, that all of a sudden there's just not gonna be quite the ability or perhaps greater resistance to push through some of these increases? I'm just curious how you think that maybe kind of ultimately nets out for MSC. Are you comfortable that the cost will ultimately be offset, or is there... I mean, you're obviously taking these supplier adjustments. I'm just curious how you're thinking. Are we reaching a bit of a threshold here in terms of how much, you know, customers are willing to accept?

Do you think it has anything to do with maybe there is a threshold of greater sensitivity given the uncertainty in the economy that all of a sudden there is just not going to be quite the ability or perhaps greater resistance to push through some of these increases and I'm. Just curious how you think that maybe kind of ultimately nets out for MFC are you comfortable that the cost will ultimately be offset or is there I mean, you. Obviously think the supplier adjustments I'm just I'm just curious how you're thinking are we reaching a bit of a threshold here in terms of how much you know customers are willing to accept.

Erik Gershwind: John, I would say, yeah, it's a good point. I would say anytime this is largely cyclical, and what we're seeing is, no question, a change in the demand environment.

Erik Gershwin: John, I would say, yeah, it's a good point. I would say anytime this is largely cyclical, and what we're seeing is, no question, a change in the demand environment.

John I would say, yes, it's a good point I would say any time. This is largely cyclical and what we're seeing is no question a change in the demand environment and many times there is a correlation between how the demand environment goes and how the pricing environment goes so softer conditions on the demand side will lead customers to be scrutinized of price and certainly will lead local distributors the that make up the bulk of the market to get more aggressive I think thats real and I think thats why you're seeing us.

John Inch: Mm-hmm.

Erik Gershwind: Many times, there's a correlation between how the demand environment goes and how the pricing environment goes. Softer conditions on the demand side will lead customers to be scrutinous of price, and certainly will lead local distributors that make up the bulk of the market to get more aggressive. I think that's real, and I think that's why you're seeing us, you know, pull out our playbook on the buy side. Absolutely.

Erik Gershwin: Many times, there's a correlation between how the demand environment goes and how the pricing environment goes. Softer conditions on the demand side will lead customers to be scrutinous of price, and certainly will lead local distributors that make up the bulk of the market to get more aggressive. I think that's real, and I think that's why you're seeing us, you know, pull out our playbook on the buy side. Absolutely.

You know pull out our playbook on the on the buy side absolutely no but.

John Inch: Yeah. No, no, it makes sense.

Rustom Jilla: You also, sorry, John, just to add. You also are seeing, as Erik alluded to, as with the demand weakening and everything, too, you're also seeing inflation in general and in commodities, also beginning to come down, so it could very well have peaked. Just one thing-

Sorry, John just to add you also are seeing as Rick alluded to when you as if the demand weakening and everything to you're also seeing inflation in general than in commodities and.

Also beginning to come down so it could very well have peaked just one.

John Inch: How by the way, guys, how is metalworking in general responding to this and the demand, obviously, a huge metalworking data point, right? How is metalworking in general, ex the MBI, how is the channel, both suppliers, customers, competitors, how are they responding to these fluctuating tariff price changes and demand softening? What are you seeing there?

Hi, guys how is metal working in general responding to this and the demand obviously, a huge metalworking data point right. How is metal working in general ex the M.B. I heard how does the channel both suppliers customers competitors how are they responding to these fluctuating tariff price changes in demand softening what did what are you seeing there.

Erik Gershwind: I would say in general, John, what we're hearing from, you know, look, the bulk of our customers are going to be broad-based metalworking-

I would say in general John .

Erik Gershwin: I would say in general, John, what we're hearing from, you know, look, the bulk of our customers are going to be broad-based metalworking is we're seeing uncertainty. There's more uncertainty, there's less confidence as there was. As I mentioned, is the backlogs are shorter, and an impact on you know, the export demand.

What we're hearing from you know look the bulk of our customers are going to be broad based metalworking.

John Inch: Mm-hmm.

Erik Gershwind: is we're seeing uncertainty. There's more uncertainty, there's less confidence as there was. As I mentioned, is the backlogs are shorter, and an impact on you know, the export demand.

Is we're seeing.

Uncertainty there is more uncertainty there is less confidence as it was as I mentioned is the backlogs are shorter and shorter and impact on X the export demand.

That makes sense I guess.

John Inch: That makes sense. I guess, lastly, Erik, you guys, MSC, have been on a multi-year ramp with respect to SKUs and expanding, you know, the big book and the product offering. I'm kind of assuming that this supplier initiatives are gonna result in some actual supplier rationalization. Where would you anticipate, like, what would you anticipate coming out of this in terms of maybe your supplier count? Do you give a thought process in terms of how much it may decline, and in turn, what would you anticipate for sort of an SKU product offering, kind of in totality going forward?

Lastly are you guys MSC have been on a multiyear ramp with respect to SK used in expanding the big book in the product offering.

I'm kind of assuming that the supplier initiatives are going to result in some in some actual supply rationalization, where would you anticipate Mike what would you anticipate coming out of this in terms of maybe your supplier count do you give a thought process in terms of how much it may decline and in turn what would you anticipate for sort of an S.K. you product offering kind of in totality going forward.

Erik Gershwind: Yeah, John, another good question. I, you know, the SKU effort has been successful, and actually, it's been an important part of the strategy to make sure that when a customer comes to us, they can get anything that they need that's industrial related. I don't see that changing, and I don't see the SKU count changing dramatically. To be honest, the supplier count may or may not change dramatically, John. Really, what we're talking about here is where we put focus, effort, and investment. It may not necessarily mean that it could, it'll really depend. It'll be circumstance and product line specific. In some cases, it may mean some pruning or rationalization of suppliers, but in other cases, it may just be about where we put focus, sales focus and marketing focus in particular.

Erik Gershwin: Yeah, John, another good question. I, you know, the SKU effort has been successful, and actually, it's been an important part of the strategy to make sure that when a customer comes to us, they can get anything that they need that's industrial related. I don't see that changing, and I don't see the SKU count changing dramatically. To be honest, the supplier count may or may not change dramatically, John. Really, what we're talking about here is where we put focus, effort, and investment. It may not necessarily mean that it could, it'll really depend. It'll be circumstance and product line specific. In some cases, it may mean some pruning or rationalization of suppliers, but in other cases, it may just be about where we put focus, sales focus and marketing focus in particular.

Yes, John another good question.

The S.K. you effort has been has been successful and actually it's been an important part of the strategy to make sure that when a customer comes to us.

They can get anything that they need that industrial related so I don't see that changing and I don't see the skew count.

Changing dramatically to be honest the supplier count may or may not change dramatically John really what we're talking about here is where we put focus effort and investment.

So it may not necessarily mean that it could it will really depend it will be circumstance and product line specific in some cases, it may mean, some pruning or rationalization of suppliers, but in other cases. It may just be about where we put focus sales focus and marketing focus in particular and when do you think this is.

John Inch: When do you think this is finished or most of the bulk of this work on supplier over? Is it gonna be six months? Is it, you know, a bit of a longer process, or how should we think about it?

Finished or most of the bulk of this work on supplier over as it can be six months of that.

A bit of a longer process or how should we think I would expect by our next call. We'll have a pretty good feel for what we can expect to see in terms of results and what moves will be making.

Erik Gershwind: I would expect by our next call, we'll have a pretty good feel for, you know, what we can expect to see in terms of results and what moves we'll be making.

Erik Gershwin: I would expect by our next call, we'll have a pretty good feel for, you know, what we can expect to see in terms of results and what moves we'll be making.

John Inch: Perfect. Thanks, Erik. Appreciate it.

Perfect. Thanks, Eric appreciate it.

The next question comes from Adam Uhlman with Cleveland Research. Please go ahead.

Operator: The next question comes from Adam Uhlman with Cleveland Research. Please go ahead.

Hey, good morning, everyone.

Adam Uhlman: Hey, good morning, everyone.

Erik Gershwind: Hey, Adam.

Erik Gershwin: Hey, Adam.

Hi, I was wondering if we could go back to the cost control efforts and in particular, what you're looking to do with with head count It sounds like most of the efforts here are.

Adam Uhlman: Yeah, I was wondering if we could go back to the cost control efforts and, you know, in particular, what you're looking to do with headcount. It sounds like most of the efforts here are focused on attrition and your hiring rates and not layoffs or the like. I'm trying to understand, you know, beyond that, what other levers you're pulling here in the medium term. You mentioned that there's more underway here in Q4. You know, assuming this flat demand environment persists for the next 6 months or year, whatever, what do you think your underlying rate of expense growth shakes out at?

Focus on attrition and you're hiring rates not lay offs or the like but I'm I'm trying to understand.

Got you.

Beyond that what other levers you're pulling.

Here in the medium term you mentioned that there is more underway here in the fourth quarter, but you're assuming that's flat demand environment persist for the next six months or year or whatever what do you think your underlying rate of expense growth.

Shakes out at.

Adam I'll take at least the first part of the question and touch a little bit about what we're doing and what you're seeing from us here in what roost and and I described.

Erik Gershwind: Adam, I'll take at least the first part of the question and talk to you a little bit about what we're doing and what you're seeing from us here and what Roustan and I described. What you can expect to see is number one, more aggressive performance management. You can expect to see, number two, a greater focus on productivity than we've had in the past. Look, I'll mention that over the past few years, we have made moves at times to align specific departments and make changes with the needs of the business. You're gonna see us step up those efforts. As a result of those things, certainly with the picture that we see now for the demand environment, you'll likely see headcount levels come down during fiscal 2020.

Erik Gershwin: Adam, I'll take at least the first part of the question and talk to you a little bit about what we're doing and what you're seeing from us here and what Roustan and I described. What you can expect to see is number one, more aggressive performance management. You can expect to see, number two, a greater focus on productivity than we've had in the past. Look, I'll mention that over the past few years, we have made moves at times to align specific departments and make changes with the needs of the business. You're gonna see us step up those efforts. As a result of those things, certainly with the picture that we see now for the demand environment, you'll likely see headcount levels come down during fiscal 2020.

What you can expect to see is.

Number one more aggressive performance management.

You can expect to see number to a greater focus on productivity.

Than we've had in the past.

Look I'll mention that over the past few years, we have made moves at times.

To align specific departments and make changes with the needs of the business, you're going to see us step up those efforts.

As a result of those things certainly with the picture that we see now for the demand environment.

You will likely see head count levels come down.

During fiscal 2020.

Yes.

Rustom Jilla: Yeah. Adam Uhlman, I mean, yes, just to, just to elaborate on that, I mean, it's more than simply attrition. I mean, we are looking at, you know, yes, we're looking at curbing, hiring, and clamping down on discretionary spending, but the ratcheting up on performance management and reviewing resourcing needs, department by department, is something that we will, you know, be doing more intensively than we've done. I mean, we have taken our OpEx down 200 basis points. I mean, this is now going up to another level. Also, reengineering inefficient processes to drive productivity. That's something else that we'll be taking up to another level. When we provide some of this as some further details as part of our, the fiscal 2020 framework when we come back and talk next quarter.

And Adam I mean, yes, just really just to elaborate on that I mean, it's it's more than simply attrition I mean, we are looking at yes, we're looking at curbing hiring and tamping down on discretionary spending, but the ratcheting up and performance management.

When reviewing Resourcing needs Department by Department is something that we will.

We'll be doing more intensively than we've done and we have taken a opex down a couple hundred basis points. I mean. This is this is now going up to another level also reengineering inefficient processes to drive productivity.

That's something else that we will be taking up to another level and when we provide some of this is some further details as part of the fiscal 20 frame look when we come back and talk next quarter.

Okay, and then just a clarification on vending it.

Adam Uhlman: Okay. Just a clarification on vending. It, you know, it sounds like the signings have been ramping for some time. I missed what the sales growth contribution was this quarter, if you could repeat that for me. I'm just wondering how that looks now for maybe the second half of the year. Should we be expecting an acceleration in the sales contribution, or is the, you know, the weak manufacturing environment gonna mute that?

It sounds like the signings have been ramping for some time I missed what the sales growth contribution was this quarter. If you could repeat that for me, but I guess I'm just wondering how that looks now for maybe the second half of the year should we be expecting an acceleration in the sales contribution or is the.

The weak manufacturing environment going on mute that.

So the Windiest still is still contributing I mean quite solidly in terms of the numbers you know it probably contributed about.

Rustom Jilla: No, vending is still contributing, I mean, quite solidly in terms of the numbers. It probably contributed about, you know, 1.4% or something to our sales growth in this quarter. I expect vending to continue to contribute, I mean, in terms of revenue. There's. It's an area of focus. It's something that we're, that we're doing. It's something that we've invested in. Along with vending, I mean, just one thing to remind you of is that-

1.4% to something to offer up on sales growth in this in this quarter I expect spending to continue to contribute I mean in terms of revenue.

There is a.

It's an area of focus its something that were that were doing and something that we've invested in by the end along with spending I mean, just just one thing to remind you off is that yes, I mean it comes at lower gross margins contribution margins do will be greatly by account.

Justin Bergner: Yes, I mean, it comes at lower gross margins. The contribution margins do vary greatly by account, I mean, one of the things is over the years, I mean, all the insights we've gained through our net profitability analysis have led to reductions in cost to serve, we continue working on that. Vending profitability also typically improves as the account matures. I mean, that's the past trend. Does that help?

Rustom Jilla: Yes, I mean, it comes at lower gross margins. The contribution margins do vary greatly by account, I mean, one of the things is over the years, I mean, all the insights we've gained through our net profitability analysis have led to reductions in cost to serve, we continue working on that. Vending profitability also typically improves as the account matures. I mean, that's the past trend. Does that help?

But I mean lot of the things as over the years I mean, all the insights we have gained through on that promise to be the analysis of led to reductions in cost to serve and so we continue we continue working on that and when things profitability also typically improves as the account matures I mean thats the Pos trends does that help.

Yes. Thank you.

[Analyst] (Aiera): Yeah. Thank you.

Adam Uhlman: Yeah. Thank you.

The next question comes from Chris Dankert with Longbow Research. Please go ahead.

Operator: The next question comes from Chris Dankert with Longbow Research. Please go ahead.

Chris Dankert: Hey, morning, guys. Thanks for taking my question.

Hi, Good morning, guys. Thanks for taking my question.

Erik Gershwind: Hi, Chris.

Erik Gershwin: Hi, Chris.

I guess, if we could kind of circle back to to government you were looking for that.

Chris Dankert: I guess if we could kind of circle back to government, we're looking for that headwind to kind of peak this Q3, mid-teens. You said that it does kind of trickle as we get into Q4 and fiscal 2020. Just, can you kind of help us size what that headwind is moving forward? Just, you know, it's lower than mid-teens. That's a pretty wide range, I guess.

Having the kind of peak this quarter mid teens.

He said that it does kind of trickle as we get into the fourth quarter and fiscal 20, just can you kind of help us size what that headwind is moving forward just deal it's lower than mid teens at a pretty wide range I guess.

Yes, so so look I mean, the headwind we talked about mid teens.

Erik Gershwind: Yeah. Look, I mean, the headwind, we talked about mid-teens. You know, you think about Q3 at its peak, mid-teens, and government is 7%-ish of our business, 7%, 8% of our business. Sort of you do the math there, Chris, and that is a point headwind to the growth rate right now. Looking ahead to Q4, we still have government negative, but less negative. It will be certainly, I believe, by the back half, so Q1 will still be slightly negative. As we move Q2 back half of the year, the headwind completely dissipates, which means that it's no longer negative.

Erik Gershwin: Yeah. Look, I mean, the headwind, we talked about mid-teens. You know, you think about Q3 at its peak, mid-teens, and government is 7%-ish of our business, 7%, 8% of our business. Sort of you do the math there, Chris, and that is a point headwind to the growth rate right now. Looking ahead to Q4, we still have government negative, but less negative. It will be certainly, I believe, by the back half, so Q1 will still be slightly negative. As we move Q2 back half of the year, the headwind completely dissipates, which means that it's no longer negative.

If you think about the third quarter at its peak mid teens and government is seven percentish of our business, 70% of our business. So it's sort of you do the math there, Chris and that is a point headwind to the growth rate right now.

Looking ahead to Q4, we still have government negative.

But less negative.

And it will be certainly I believe by the back by the back half. So Q1 will still be slightly negative as we move Q2 back half of the year the headwind completely dissipates, which means that it's no longer negative and if the work that's being done now in the program and I should add by the way I think there is some very good work going on in the government program right now I expect that piece of our business to restore to growth.

Erik Gershwind: If the work that's being done now in the program, and I should add, by the way, I think there is some very good work going on in the government program right now. I expect that piece of our business to restore to growth. That gives you a feel for the headwind and how long it lasts.

Erik Gershwin: If the work that's being done now in the program, and I should add, by the way, I think there is some very good work going on in the government program right now. I expect that piece of our business to restore to growth. That gives you a feel for the headwind and how long it lasts.

But that gives you a feel for the headwinds and how long or less.

Chris Dankert: Actually, yeah, thank you. That's very helpful. Then we talked a lot about kind of the hunters and their impact. I guess, you know, is the goal near term still to kind of get them to add about 100 basis points? I mean, I believe they're kind of hitting that maturation rate. Just any color on what your expectation is for the actual kind of sales growth contribution from them nearer term?

Actually yeah. Thank you that's very helpful.

And then we've talked a lot about kind of the hunters and their impact I guess it was the goal near term still to kind of get them to add about 100 basis points. I mean, I I believe they are kind of hitting that maturation rate just any color on what your expectation is for the actual kind of sales growth contribution from them nearer term.

Erik Gershwind: Chris, you remember from the last call, I had talked about, you know, what I saw from then in the next quarter or two, I think I described it as at least 100 basis points in growth contribution. Absolutely nothing has changed in terms of what I see as the size of the contribution from hunters. Our confidence is growing, the payback looks strong. What has happened is, quite frankly, I mean, this is good news, bad news. The good news is it does appear that the value proposition is working because the new wins coming in are greater than expected. The bad news is, it's more than we planned for, and as a result, the revenues are slower to materialize. In terms of size of the prize, absolutely nothing has changed.

Yes, So Chris you remember from the last call I talked about you know what I saw from then in the next quarter or two I think I described at least 100 basis points in growth contribution absolutely nothing has changed in terms of what I see as the size of the contribution from hunters. Our confidence is growing the payback look strong what has happened is quite frankly, we've I mean, so this is good news bad news. The good news is it does appear that the value proposition.

Erik Gershwin: Chris, you remember from the last call, I had talked about, you know, what I saw from then in the next quarter or two, I think I described it as at least 100 basis points in growth contribution. Absolutely nothing has changed in terms of what I see as the size of the contribution from hunters. Our confidence is growing, the payback looks strong. What has happened is, quite frankly, I mean, this is good news, bad news. The good news is it does appear that the value proposition is working because the new wins coming in are greater than expected. The bad news is, it's more than we planned for, and as a result, the revenues are slower to materialize. In terms of size of the prize, absolutely nothing has changed.

Is working because the new wins coming in are greater than expected. The bad news is it's more than we planned for and as a result.

The revenues are slower to materialize, but in terms of size of the prize absolutely nothing has changed.

Chris Dankert: Got it. Just the last thing from me, you know, thinking about pricing. Obviously, you guys waited a little bit longer than usual on the mid-year increase, tough to kind of get the full realization maybe, kind of waiting a little bit longer on the late summer increase. I guess, is there an opportunity to kind of revisit some of these price negotiations on a more quarterly basis rather than the biannual, given kind of how tariffs have changed the landscape a bit?

Got it got just the last thing from me, you're thinking about pricing, obviously, you guys weighted a little bit longer than usual on on the mid year increase tough to kind of get the full realization, maybe kind of waiting a little bit long run. The late summer increase I guess is there an opportunity to kind of revisit some of these price negotiations on a more quarterly basis, rather than the biannual given kind of half tariffs of change the landscape a bit.

So Chris one of its interesting I've thought about it you're right. That's a sort of two increases in a row with one of the things that we've done and I think we've put a strong pricing discipline in place in the company and one of our findings is that we'd rather wait a little bit and be really well prepared when we go and when we sit in front of a customer and talk about pricing and why the increase is justified.

Erik Gershwind: Chris, one of the interesting, I hadn't thought about it. You're right, that's sort of 2 increases in a row. One of the things that we've done, and I think we've put a strong pricing discipline in place in the company. One of our findings is that we'd rather wait a little bit and be really well prepared when we go and when we sit in front of a customer and talk about pricing and why the increase is justified. What we found, if it's buying ourselves a little extra time, the results have been really good in terms of the kind of realization rates that we're seeing, particularly if I look back at this last mid-year. I think as much as anything else, that's part of our improved pricing discipline and practice.

Erik Gershwin: Chris, one of the interesting, I hadn't thought about it. You're right, that's sort of 2 increases in a row. One of the things that we've done, and I think we've put a strong pricing discipline in place in the company. One of our findings is that we'd rather wait a little bit and be really well prepared when we go and when we sit in front of a customer and talk about pricing and why the increase is justified. What we found, if it's buying ourselves a little extra time, the results have been really good in terms of the kind of realization rates that we're seeing, particularly if I look back at this last mid-year. I think as much as anything else, that's part of our improved pricing discipline and practice.

And so what we found if its buying ourselves a little extra time. The results have been really good in terms of the kind of realization rates that we're seeing particularly if I look back at this last mid year.

And so I think as much as anything else, that's part of our improved pricing discipline and practice in terms of the frequency in cadence what we try to do.

Erik Gershwind: In terms of the frequency and cadence, look, what we try to do, Chris, as much as we can, is we know price is a sensitive subject for our customers and keep the cadence to some sort of regular time intervals and where it's not too often that we're introducing price changes. We would rather go, you know, once or twice and have a meaningful discussion than go all the time and continually kind of sort of opening up that wound.

Erik Gershwin: In terms of the frequency and cadence, look, what we try to do, Chris, as much as we can, is we know price is a sensitive subject for our customers and keep the cadence to some sort of regular time intervals and where it's not too often that we're introducing price changes. We would rather go, you know, once or twice and have a meaningful discussion than go all the time and continually kind of sort of opening up that wound.

Chris as much as we can as we know price is a sensitive subject for our customers and keep the cadence to some sort of regular time intervals and whereas not too often that we're introducing price changes we would rather go you know once or twice and have a meaningful discussion. Then go all the time and continue we are kind of opening up that will.

Yeah, Yeah. It makes sense always always tough to kind of have that discussion.

Chris Dankert: Yep. Yeah, makes sense. Always tough to kind of have that discussion. Thanks very much. That makes sense.

Thanks, very much that makes sense.

Erik Gershwind: Thank you, Chris.

Erik Gershwin: Thank you, Chris.

Thank you Chris.

Your next question comes from Justin Bergner with key research. Please go ahead.

Operator: The next question comes from Justin Bergner with G.research. Please go ahead.

You for taking my questions good morning, Justin.

Justin Bergner: Thank you for taking my questions.

Erik Gershwind: Good morning, Justin.

Erik Gershwin: Good morning, Justin.

Justin Bergner: I was curious as to what parts of, I guess, the sales disappointment in Q3 and in the Q4 guide you would attribute to, you know, company-specific challenges versus end markets? It seems like what you're saying, the company-specific side is that you're getting more account wins than you're expecting, but slower conversion to revenue, which would sort of be an offset. Is there anything else that you would sort of attribute to, you know, company-specific factors versus end market factors?

I was curious as to what parts of I guess the sales disappointment in Q3 and into Q4 guide you would attribute to company specific challenges versus end markets because it seems like what you are seeing the company specific side is that you are getting more account wins and you're expecting but slower conversion to revenue, which was sort of be an offset or is there anything else that you would you sort of attribute to company specific factors versus end market factors.

Erik Gershwind: Justin, look, two points I'd make. One is the biggest change, if you looked at the Q3, our actual sales number to the guidance, the biggest delta there was change in environment, that we didn't see. Where I was disappointed is not, obviously, we can't control the environment. What I would have liked to have seen was the new account wins begin to materialize into revenues faster, therefore buffering, some of that market downturn. Really, you hit on the two key factors that are the headlines of the story.

Erik Gershwin: Justin, look, two points I'd make. One is the biggest change, if you looked at the Q3, our actual sales number to the guidance, the biggest delta there was change in environment, that we didn't see. Where I was disappointed is not, obviously, we can't control the environment. What I would have liked to have seen was the new account wins begin to materialize into revenues faster, therefore buffering, some of that market downturn. Really, you hit on the two key factors that are the headlines of the story.

Justin.

So two points I'd make one is the biggest change if you looked at the third quarter, our actual sales number to the guidance. The biggest delta there was change in environment.

No we didnt see.

Where where where I was disappointed is not obviously, we can't control the environment. What I would have liked to have seen was the new account wins begin to materialize into revenues faster therefore buffering.

Some of that market downturn, but really you hit on the two key factors that are the headlines of the store.

Okay. That's good and then on the margin side.

Patrick Baumann: Okay, that's good. On the margin side, is there anything that's happening outside of sort of List 3 and the surprise impact of that on price cost? Is there anything else that is material that's affecting sort of the gross margin trajectory versus your expectations, be it sort of increasing mix headwinds or other factors?

Justin Bergner: Okay, that's good. On the margin side, is there anything that's happening outside of sort of List 3 and the surprise impact of that on price cost? Is there anything else that is material that's affecting sort of the gross margin trajectory versus your expectations, be it sort of increasing mix headwinds or other factors?

Is there anything that's happening outside of sort of list three.

And the surprise impact of that on price cost is there anything else that is material that's affecting sort of the gross margin trajectory.

Versus your expectations be it sort of increasing mix headwinds or other factors.

Erik Gershwind: No, I would say no other major change in terms of either inside or outside of the company in terms of environment. I think, you know, you hit on sort of the key overhang in the environment with the tariffs and trade. I think there's nothing else I'd call out.

Erik Gershwin: No, I would say no other major change in terms of either inside or outside of the company in terms of environment. I think, you know, you hit on sort of the key overhang in the environment with the tariffs and trade. I think there's nothing else I'd call out.

No I would say no no other major change interview inside or outside of the company in terms of environment. I think we hit on you hit on sort of the key overhang in the environment with the tariffs and trade I think there is nothing else I'd call out.

Okay. Thank you for taking my questions.

Patrick Baumann: Okay, thank you for taking my questions.

Justin Bergner: Okay, thank you for taking my questions.

The next question comes from Patrick Baumann with JP Morgan. Please go ahead.

Operator: The next question comes from Patrick Baumann with J.P. Morgan. Please go ahead.

Hi, guys. Thanks for taking my call.

Barry Haimes: Well, hey, guys. Thanks for taking my call. Just had a couple questions. Maybe, just to start, could you provide an update on, you know, the competitive intensity that you're seeing in the current environment? Maybe just broadly from this perspective, you know, how you see this, if it is a barrier to pricing, versus historical inflationary cycles.

Patrick Baumann: Well, hey, guys. Thanks for taking my call. Just had a couple questions. Maybe, just to start, could you provide an update on, you know, the competitive intensity that you're seeing in the current environment? Maybe just broadly from this perspective, you know, how you see this, if it is a barrier to pricing, versus historical inflationary cycles.

Just had a couple questions.

Maybe.

Just to start.

Could you provide an update on.

The competitive intensity that you're seeing in the in the current environment and.

Maybe just broadly from his perspective.

How do you see this.

If it is a barrier to pricing versus historical inflationary cycles.

Patrick I would say competitive intensity is high.

Erik Gershwind: Patrick, I would say competitive intensity is high, and it would be typical of what I've seen in past cycles, certainly, that as demand conditions soften, I think important to remember, 70% of the market is made up of local and regional distributors. Those distributors, when things get tight, will hang on to business and will certainly use price as a weapon and a lever to retain accounts. We're seeing competitive intensity as high, and I would, you know, specifically call out as the local distributors as to where the ratcheting up has come from primarily.

Erik Gershwin: Patrick, I would say competitive intensity is high, and it would be typical of what I've seen in past cycles, certainly, that as demand conditions soften, I think important to remember, 70% of the market is made up of local and regional distributors. Those distributors, when things get tight, will hang on to business and will certainly use price as a weapon and a lever to retain accounts. We're seeing competitive intensity as high, and I would, you know, specifically call out as the local distributors as to where the ratcheting up has come from primarily.

And it would be typical of what I've seen in past cycles certainly.

That as demand conditions soften I think important to remember 70% of the market is made up of local and regional distributors and.

Those distributors when things get tight will hang on to business and we'll certainly use price as a weapon in a lever to retain accounts.

So we're seeing competitive intensity as high and I would say.

Specifically call out as the local distributors as to where.

The ratcheting up has come from primarily.

Got it and then on the tariffs.

Barry Haimes: Got it. Then on the tariffs, can you just remind us once again, of the exposure as a percentage of your COGS for List 3 and then List 4, just the direct exposure?

Patrick Baumann: Got it. Then on the tariffs, can you just remind us once again, of the exposure as a percentage of your COGS for List 3 and then List 4, just the direct exposure?

Can you just remind us.

Once again to be exposure as a percentage of your Cogs for list three and then list for just the direct exposure.

Yes, it's up to the the original exposure I mean remember what we buy from China is about 5% I mean that was a fairly small.

Rustom Jilla: Yeah, I mean, the original exposure, I mean, remember, what we buy from China is about 5%. I mean, that was a fairly small number coming through. We are, by the way, going back to our suppliers in China as well, and specifically going to them and as they go on to List 3 and the higher 25% and going back and looking for alternative sources and working with them to be more efficient and not just pass through those numbers. That's part of what Erik talked about as well.

A fairly small number coming through and we are by the way any good going back to our suppliers and suppliers in China as well and.

And specifically going to them and as they go on for this three of them the Eni of 25% and going back and looking for alternative sources and working with them to be more efficient and not just pass through those numbers by the way we've talked about as well.

And so it's just 5% of Cogs and the recent increased to 25% that has yet to hit your PNM correct.

Barry Haimes: It's just 5% of COGS, and the recent increase to 25%, that has yet to hit your P&L, correct?

Patrick Baumann: It's just 5% of COGS, and the recent increase to 25%, that has yet to hit your P&L, correct?

Rustom Jilla: Yeah, that's Yes, I mean, that the recent increases are coming into PNL as well, the tariffs, and it would basically double it, isn't it, when you look at the further exposure, if all of it came through again, and that's why I've made the point that we're not really necessarily seeing all of it come through yet.

Yes, that's that's that's that's that yes. Some of that the recent increases are coming into BNL as well the tariffs and it's and it would.

Basically double digits and that when you look at the.

That the further exposure if all if it came through again and that's why I made the point that we are not.

Really necessarily see all of it come through yet.

So the 5% we've become 10% you're saying.

Barry Haimes: The 5% would become 10%, you're saying?

Patrick Baumann: The 5% would become 10%, you're saying?

Yes. So just just just to Patrick just to explain to you. What we have described was 10% is the total universe of what comes from China, what our direct impact.

Erik Gershwind: Yeah. Just to, Patrick, just to explain, I think what we had described was 10% is the total universe of what comes from China, what our direct impact, our direct sourcing is. The 5% is roughly what was covered by the first few lists that we had. What Rustom is describing is, if everything else were covered by List 3 and 4, there is a remaining 5% of potential exposure.

Erik Gershwin: Yeah. Just to, Patrick, just to explain, I think what we had described was 10% is the total universe of what comes from China, what our direct impact, our direct sourcing is. The 5% is roughly what was covered by the first few lists that we had. What Rustom is describing is, if everything else were covered by List 3 and 4, there is a remaining 5% of potential exposure.

Our direct sourcing is the 5% is roughly what was covered by the first few lifts that we had.

What rustom is describing is if everything else were covered by list three and four there is a remaining 5% of potential exposure potentially taking us up to 10 yet.

Rustom Jilla: Potentially taking us up to 10. Yeah, that's it.

Barry Haimes: Got it. Got it. The move on List 3 from 10% to 25%, that will start to be felt in your PNL in the Q4 and next year. That's not yet in the numbers, correct?

Patrick Baumann: Got it. Got it. The move on List 3 from 10% to 25%, that will start to be felt in your PNL in the Q4 and next year. That's not yet in the numbers, correct?

Got it got it and then move unless three from 10% to 25% that will start to be felt in European now in the fourth quarter and next year, that's not yet in the numbers correct.

Right right also depending on if those 25% come through right. That's that's that's the point them keep trying to yes, yes, yes, yes, yes, you're assuming it does come through in your guidance correct.

Rustom Jilla: Right.

Erik Gershwind: Correct.

Erik Gershwin: Correct.

Rustom Jilla: Depending on if those 25% come through-

Erik Gershwind: Right.

Erik Gershwin: Right.

Rustom Jilla: That's the point that I'm keep trying to make.

Barry Haimes: Yes. Yep. Yeah, you're assuming it does come through in your guidance, correct?

Patrick Baumann: Yes. Yep. Yeah, you're assuming it does come through in your guidance, correct?

We made it minimal in Q4 because of the way, we buy him and the time lag the Taco Bell the time lag for overseas sourcing it wouldn't be in our numbers right. Now I think rustom is hitting an important point. If we were to take a tariff related increase one would see that would not see that in our numbers now it would be next fiscal year.

Erik Gershwind: Look, minimal in Q4 because of the way we buy.

Erik Gershwin: Look, minimal in Q4 because of the way we buy.

Rustom Jilla: Yeah.

Erik Gershwind: The time, the lag, the time lag for overseas sourcing, it wouldn't be in our numbers right now. I think Rustom's hitting an important point. If we were to take a tariff-related increase, one would not see that in our numbers now. It would be next fiscal year. As I talked about, we are pushing back rather hard on the anything that's tariff related.

Erik Gershwin: The time, the lag, the time lag for overseas sourcing, it wouldn't be in our numbers right now. I think Rustom's hitting an important point. If we were to take a tariff-related increase, one would not see that in our numbers now. It would be next fiscal year. As I talked about, we are pushing back rather hard on the anything that's tariff related.

As I talked about we are pushing back rather hard on the anything that's towers related.

Understood understood and maybe just a kind of a different question.

Barry Haimes: Understood. Understood. Maybe just a kind of a different question. You know, the top-line environment is slowing, obviously, but we're not yet declining. I'm just curious if you could provide some perspective on how we should be thinking about decremental margins if we do, in fact, you know, see a, you know, a lower top line, I don't know, 5% or something, if, you know, the environment takes a turn for the worse, and your top line goes down mid-single digits or so. What's a reasonable range on decrementals? I mean, I looked back in 2009, and I think you guys did 30% to 40% or something like that. Just kind of curious if you could provide some perspective on that.

Patrick Baumann: Understood. Understood. Maybe just a kind of a different question. You know, the top-line environment is slowing, obviously, but we're not yet declining. I'm just curious if you could provide some perspective on how we should be thinking about decremental margins if we do, in fact, you know, see a, you know, a lower top line, I don't know, 5% or something, if, you know, the environment takes a turn for the worse, and your top line goes down mid-single digits or so. What's a reasonable range on decrementals? I mean, I looked back in 2009, and I think you guys did 30% to 40% or something like that. Just kind of curious if you could provide some perspective on that.

Yes, the topline environment is slowing obviously, but were not yet declining I'm just curious if you could provide some perspective on.

How we should be thinking about decremental margins, if we do in fact see a.

The lower topline I don't know, 5% or something if the environment takes a turn for the worse. Your topline goes down mid single digits or so what's a reasonable range on Decrementals I mean, I look back in or not and I think you guys did 30% to 40% or something like that.

Just quickly if you could provide some perspective on that.

Rustom Jilla: You know, you're really going into fiscal 20s guidance and, you know, we try to avoid giving that guidance. We try to avoid giving more than a quarter's guidance ahead. Maybe I can take it, take another angle at it and say in fiscal 20, and just say, if sales remain in low single digits, right? I mean, you know, our target would still be to grow earnings, and that would depend upon price realization, the supplier actions that Erik talked about, and the cost down actions which are being undertaken, and others that are being contemplated. We'll share much more of this on our next call.

So you know you are really going into into.

Fiscal Twentys guidance and you know, we try to avoid giving that guidance.

We try to avoid giving more than the quarter's guidance.

Ahead, but maybe I can put it maybe I can take it to take another angle that it and then say in fiscal 20, and just save sales remain in low single digits.

Right I mean, if we can still our target would still be to grow earnings and that would depend upon price realization the supply or actions that Eric talked about and the cost out actions, which are being undertaken and others that are being contemplated.

And new ship much more of this on our next call.

Yes, no I was just thinking hypothetically, if we had a recessionary environment, what kind of decremental margins would the company target.

Barry Haimes: Yeah, no, I was just thinking hypothetically, if we had a recessionary environment, what kind of decremental margins would the company target?

Erik Gershwind: Patrick, the real reason it's tricky to answer at the moment is Rustom just hit on three variables that we'll have a better feel for quantifying next quarter than we do right now. One being, even if things get softer, how does price realization hold up? Does it hold up as it did in the midyear? Two is quantifying the benefits of the supplier actions we're taking, and three is quantifying the benefits of the cost down actions that are underway. Right now, we don't have those quantified. We will next quarter. Without those, it would be an incomplete answer.

So Patrick the real the reason, it's tricky to answer at the moment is worse than just hit on three variables that are we'll have a better feel for quantifying next quarter than we do right now so one being even even if things get soffer softer how does price realization hold up does it hold up as it did in the mid year two ways quantifying the benefits of the supplier actions, we're taking and three is quantifying the benefits of the cost out actions that are underway and right. Now we don't have those quantified we will next quarter. So without those it would be an incomplete answer.

Erik Gershwin: Patrick, the real reason it's tricky to answer at the moment is Rustom just hit on three variables that we'll have a better feel for quantifying next quarter than we do right now. One being, even if things get softer, how does price realization hold up? Does it hold up as it did in the midyear? Two is quantifying the benefits of the supplier actions we're taking, and three is quantifying the benefits of the cost down actions that are underway. Right now, we don't have those quantified. We will next quarter. Without those, it would be an incomplete answer.

Understood. Okay, and then last one from me just the performance on recent acquisitions. Just curious was there any change to the hurdle rates due to results from these deals just wanted an update on you've done a bunch of deals over the last couple of years. Just curious can you give an update on performance of those.

Barry Haimes: Understood. Okay. Last one for me, just the performance on recent acquisitions. Just curious, was there any change to the hurdle rates due to results from these deals? Just wanted an update on, you know, you've done a bunch of deals over the last couple of years. Just curious if you could give an update on performance of those.

Patrick Baumann: Understood. Okay. Last one for me, just the performance on recent acquisitions. Just curious, was there any change to the hurdle rates due to results from these deals? Just wanted an update on, you know, you've done a bunch of deals over the last couple of years. Just curious if you could give an update on performance of those.

Erik Gershwind: Yeah, the, Patrick, let me just answer the second piece first, which is the hurdle rate is a function of two things. It's a function of what we're seeing on valuations, one, and two is, look, the company is focused on improving our performance, and you heard we're internally focused right now. Those are the two drivers behind the higher hurdle rate. In terms of the acquisitions in flight now, really not much to report. The only news I would report is that, you know, what drove the $0.01 in negative in Q3 was really around the AIS acquisition, and that is really focused on automotive. The business is solid, we have seen a stark change.

Erik Gershwin: Yeah, the, Patrick, let me just answer the second piece first, which is the hurdle rate is a function of two things. It's a function of what we're seeing on valuations, one, and two is, look, the company is focused on improving our performance, and you heard we're internally focused right now. Those are the two drivers behind the higher hurdle rate. In terms of the acquisitions in flight now, really not much to report. The only news I would report is that, you know, what drove the $0.01 in negative in Q3 was really around the AIS acquisition, and that is really focused on automotive. The business is solid, we have seen a stark change.

Yes, the so Patrick I'll, let me just answer the second piece first which is the hurdle rate is a function of two things. It's a function of what we're seeing on valuations one and two is look the company is focused.

On improving our performance.

And you heard we're internally focused right now so those are the two drivers behind the higher hurdle rate in terms of the acquisitions in flight now I'm really not much to report the only the only news I would report is that.

What drove the one cents.

In a negative in Q3 was really around the I.S. acquisition and that is really focused on automotive.

The business is solid, but we have seen a stark change that business is heavily exposed automotive in the Midwest than we saw star change in performance driven by automotive.

Erik Gershwind: That business is heavily exposed to automotive in the Midwest, and we saw a stark change in performance driven by automotive.

Erik Gershwin: That business is heavily exposed to automotive in the Midwest, and we saw a stark change in performance driven by automotive.

Barry Haimes: That's just the environment as opposed to share loss?

And that's just the environment as opposed to share loss.

Patrick Baumann: That's just the environment as opposed to share loss?

Erik Gershwind: Yeah, I mean, we go, and particularly, that's an OEM fastener business, so it's pretty easy to determine share loss or not, and we go in that business account by account. The answer is yes, it's environment.

Erik Gershwin: Yeah, I mean, we go, and particularly, that's an OEM fastener business, so it's pretty easy to determine share loss or not, and we go in that business account by account. The answer is yes, it's environment.

Yes, we I mean, we go and particularly that's an OEM fastener business. So it's pretty easy to determine share loss or not and we go in that business account by account. So the answer is yes its environment.

Barry Haimes: What is auto as a percentage of AIS?

Patrick Baumann: What is auto as a percentage of AIS?

What is the auto as a percentage of assets.

You know what I don't have the number handy I don't have the number handy. So it's one of their primary locations is right in Michigan, which is virtually all auto, but we could get back to what the number.

Erik Gershwind: You know what? I don't have the number handy. One of their primary locations is right in Michigan, which is virtually all auto, but we could get back to you with the number.

Erik Gershwin: You know what? I don't have the number handy. One of their primary locations is right in Michigan, which is virtually all auto, but we could get back to you with the number.

Barry Haimes: Yeah. Okay. Thanks a lot, guys. I'll follow up. Appreciate the time.

Patrick Baumann: Yeah. Okay. Thanks a lot, guys. I'll follow up. Appreciate the time.

Okay. Thanks, a lot guys a follow up I appreciate the time.

The last question today comes from Barry Haimes Sage asset management.

Operator: The last question today comes from Barry Haimes with Sage Asset Management. Please go ahead.

Please go ahead.

Thanks, so much and thanks for the info today. So I had a just quick question on the the Hunter situation, where you're getting more accounts, but not quite as much volume upfront as you had hoped.

Operator: Thanks so much. Thanks for all the info today. I had a just quick question on the, the hunter situation where you're getting more accounts, but not quite as much volume upfront as you had hoped. It sounds like that net is a slight negative, and I wanted to hopefully get a little color on the extent overall sales were below expectation. How much was from that factor versus just sales from existing customers? That's one question. Secondly, I was hoping you could talk a little bit about what you see in terms of inventories out there, both your own, but more importantly, customer inventories. Are they, you know, are they in line?

Barry Haimes: Thanks so much. Thanks for all the info today. I had a just quick question on the, the hunter situation where you're getting more accounts, but not quite as much volume upfront as you had hoped. It sounds like that net is a slight negative, and I wanted to hopefully get a little color on the extent overall sales were below expectation. How much was from that factor versus just sales from existing customers? That's one question. Secondly, I was hoping you could talk a little bit about what you see in terms of inventories out there, both your own, but more importantly, customer inventories. Are they, you know, are they in line?

So it sounds like that net is a slight negative and I wanted to hopefully hopefully get a little color on.

The extent overall sales were below expectation how much was from that factor versus just sales from existing customers.

That was that's one question and then secondly, I was hoping you could talk a little bit about what you're seeing in terms of inventories out there both your own but more importantly customer inventories are they.

Are they in line are they a little bit heavy still from what you hear.

Operator: Are they a little bit heavy still from what you hear as you speak to with customers? Thank you.

What do you hear us who speak with customers. Thank you.

Yes, so very what I would say is for the quarter. The biggest change if you're reconciling what happened in the third quarter revenues to guidance I mentioned earlier, the biggest changes environment. So the slower revenues coming from the new accounts was a factor and I was as I told you I was disappointed it didnt buffer the downturn, but environment was the biggest factor and that would of course when the environment softens. What happens is sales from existing customers go down.

Erik Gershwind: Barry, what I would say is for the Q3, the biggest change, if you're reconciling what happened in the Q3 revenues to guidance, I'd mentioned earlier, the biggest change is environment. The slower revenues coming from the new accounts was a factor, and I was, as I told you, I was disappointed it didn't buffer the downturn, but environment was the biggest factor, and that would, of course, when the environment softens, what happens is sales from existing customers go down. That was the primary factor. Secondary would be materialization of revenues from new account wins.

Erik Gershwin: Barry, what I would say is for the Q3, the biggest change, if you're reconciling what happened in the Q3 revenues to guidance, I'd mentioned earlier, the biggest change is environment. The slower revenues coming from the new accounts was a factor, and I was, as I told you, I was disappointed it didn't buffer the downturn, but environment was the biggest factor, and that would, of course, when the environment softens, what happens is sales from existing customers go down. That was the primary factor. Secondary would be materialization of revenues from new account wins.

That was the primary factor secondary would be materialization of revenues from new account wins.

Rustom Jilla: I think I picked up in your question, you're also checking on the economics of the program in there. I just want to cut in and point out that, no, actually, the initiative is already covering its costs. The economics are strong. I mean, you know, basically, these accounts, as they do come, they provide significantly more revenue per head than our old sales model, and using all the cost to serve insights that we've been learning over the past few years, we focus on making them profitable as well. Right now, from a P&L perspective, at the bottom line, there's no net negative coming from that. Erik answered the revenue end of it, specifically.

But I think that picked up in your question. It also checking on the economics of the program in this I just want to cut didn't point out that no I mean actually there. The initiative is already covering its cost the economics are strong.

I mean, basically leaves accounts as they do come deeper they provide significantly more revenue per head than I would sales model and using all the.

Cost to sort of insights that we've been building over the past few years, we focus on making them profitable as well so right now from a PNM perspective at the bottom line I mean, there is no net negative coming from that they reconsidered the relative into specifically.

Thanks, and just the inventory question, Yeah, I would say on inventories I mean, you see our inventories coming down a bit but more broadly I think that's reflective of what's happening in the channel.

Operator: Thanks. Just the inventory question?

Barry Haimes: Thanks. Just the inventory question?

Erik Gershwind: Yeah, I would say on inventories, I mean, you see our inventories coming down a bit, more broadly, I think that's reflective of what's happening in the channel. You know, manufacturer, distributor, end user. I guess, you know, not surprising given softening conditions, uncertainty, et cetera. I think what you're seeing from us is reflective of what's happening in the market, and I think if you spoke to others, you'd find inventory levels coming down.

Erik Gershwin: Yeah, I would say on inventories, I mean, you see our inventories coming down a bit, more broadly, I think that's reflective of what's happening in the channel. You know, manufacturer, distributor, end user. I guess, you know, not surprising given softening conditions, uncertainty, et cetera. I think what you're seeing from us is reflective of what's happening in the market, and I think if you spoke to others, you'd find inventory levels coming down.

Yes manufacturer distributor end user and I guess, not surprising given softening conditions uncertainty et cetera.

I think what you're seeing from US is reflective of what's happening in the market and I think if you spoke to others you'd find.

Inventory levels coming down.

Any feel for.

Operator: Any feel for, you know, is that another quarter, another couple of quarters to right size?

Barry Haimes: Any feel for, you know, is that another quarter, another couple of quarters to right size?

Is that another quarter another couple of quarters to rightsize.

Overall, I'm not sure and I'm not sure because I don't know you'd have to tell me what happens in the environment, whether things are kind of at a level now and they stabilize would be one answer where as if they were to pick up or if they were to fall further I'd give you a different answer on inventories.

Erik Gershwind: You know what, Barry.

Erik Gershwin: You know what, Barry.

Operator: For the overall?

Barry Haimes: For the overall?

Erik Gershwind: I'm not sure, and I'm not sure because I don't know. You'd have to tell me what happens in the environment, whether things are kind of at a level now and they stabilize would be one answer, whereas if they were to pick up or if they were to fall further, I'd give you a different answer on inventories.

Erik Gershwin: I'm not sure, and I'm not sure because I don't know. You'd have to tell me what happens in the environment, whether things are kind of at a level now and they stabilize would be one answer, whereas if they were to pick up or if they were to fall further, I'd give you a different answer on inventories.

Fair enough thanks very much.

Operator: Fair enough. Thanks very much.

Barry Haimes: Fair enough. Thanks very much.

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

Operator: This concludes our question and answer session. I would now like to turn the conference back over to John Corona for any closing remarks.

Thanks, Anita and thank you everyone for joining US today. Our next earnings date is now set for October 24th 2019, and we look forward to speaking with you over the coming months.

John Corona: Thanks, Anita, and thank you everyone for joining us today. Our next earnings date is now set for 24 October 2019, and we look forward to speaking with you over the coming months. Have a good rest of the day.

John Chironna: Thanks, Anita, and thank you everyone for joining us today. Our next earnings date is now set for 24 October 2019, and we look forward to speaking with you over the coming months. Have a good rest of the day.

Have a good rest of the day.

This conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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