Q4 2022 MSC Industrial Direct Co Inc Earnings Call
[music].
Good morning, and welcome to the MSC industrial supply fiscal 2022 fourth quarter and full year conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad after today's.
His presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two 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. Please go ahead.
Thank you Andrew and good morning to everyone.
Erik Gershwin, our Chief Executive Officer, and Christian I, just Grande our Chief Financial Officer are both on the call with me today.
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 our investor Relations webpage.
Let me reference our Safe Harbor statement under the private Securities Litigation Reform Act of 1995, a summary of which is on slide two of the company's presentation.
Our comments on this call as well as the supplemental information we are providing on the website contain forward looking statements within the meaning of the U S Securities laws.
<unk> statements about the high inflationary environment and global economic conditions on our business operations results of operations and financial condition expected future results expected benefits from the investment and strategic plans and other initiatives and expected future growth and profitability.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those stated by these statements.
Information about these risks is noted in our earnings press release, and the risk factors and the MD&A sections of our latest annual report on Form 10-K filed with the SEC as well as in our other SEC filings. These risk factors include our comments on the high inflationary environment in global economic conditions.
These forward looking statements are based on our current expectations and the company assumes no obligation to update these statements except as required by applicable law investors are cautioned not to place undue reliance on these forward looking statements.
In addition, during this call we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the lease directly comparable GAAP measures I'll now.
I'll turn the call over to Eric.
Thank you John Good morning, everybody and thank you for joining us today.
Hope, you're all doing well.
We had an exciting year and our fiscal fourth quarter was definitely no different.
On today's call I'll reflect on our recent performance.
Sure My perspective on the current environment.
Outline our goals for fiscal 'twenty three.
I'll also discuss our fourth quarter acquisition of tower fasteners.
Christian will provide more specifics on Q4 and on our fiscal 'twenty three framework.
Then wrap things up and we'll open the lineup for questions.
Before I get into our performance.
I'd like to mention our newest member of the MSC executive team.
<unk> operating officer, Martina MC Isaac.
Martina started at the beginning of this month.
To us from Hilton Corporation.
With a proven track record of driving both topline growth and profitability improvements.
Her experience in implementing inorganic revenue growth engine.
And expanding share of wallet in.
In adjacent products and services.
Fits perfectly with our strategy.
Equally exciting.
Is her experience with using lean and six sigma to improve productivity.
Operating rigor and execution.
We're thrilled to have Martina on board.
Over the past year, we've made our culture and talent development, a core focus of our business.
The addition of Martina.
Further emphasizes our growth on this front.
Martina is live by values and principles that line up perfectly with MSC.
She is a strong leader of people at.
And a strong advocate of DNI.
We're also in the midst of refocusing our ESG program.
And more clearly communicating our progress.
Building on our legacy of good corporate citizenship.
Since the founding of our company.
We'll be releasing our annual ESG report next month.
And I look forward to further discussing our ESG goals moving forward.
Now on to our recent results.
Our fiscal fourth quarter continued our string of strong financial performance and execution.
We achieved average daily revenue growth of 14%.
Which is well above the IP index.
We expanded adjusted operating margins by 190 basis points over prior year.
Driven by a 200 basis point reduction in operating expenses as a percentage of sales.
Zooming out from the quarter and looking at the full fiscal year of 'twenty two.
Equally please.
We achieved average daily revenue growth of nearly 11%.
Roughly 600 basis points above the IP index and.
And above our goal of a 400 basis point spread.
This was aided by strong price contribution.
OLT on acquisitions.
And successful execution of our growth drivers, which I'll speak to shortly.
We expanded adjusted operating margins by 140 basis points over prior year.
In fact adjusted.
Adjusted operating expenses as a percentage of sales.
Alright, their lowest mark since fiscal 2012.
This was aided by our mission critical initiative.
Which has already yielded $85 million of structural cost reductions and productivity.
That is on track to exceed our original goal of $100 million by the end of fiscal 'twenty three.
Finally.
Adjusted ROIC.
It's already into the high teens at nearly 18% a year.
Year ahead of schedule with our fiscal 'twenty three target.
Our growth Formula remains anchored in the five priorities that we've been discussing as part of the mission critical initiatives.
And those are metalworking solutions.
Solutions.
Selling the portfolio.
Digital and.
And customer diversification with an emphasis on public sector.
I'll now update you on each of those growth drivers.
Metalworking remains the cornerstone of our value proposition.
We use a combination of our broad and deep product offering.
An extensive network of technical metalworking expertise.
And digital innovation to drive productivity and cost savings for our customers.
And this leads to high customer retention rates and.
And to new growth opportunities.
In many cases.
We also help our customers to reduce waste.
Helping them achieve their sustainability goals.
A recent example illustrates this.
We just want a proposal to supply cutting tools and broad line MRO.
Component producer for the energy industry.
In doing so we.
We identified over $200000 in annual savings of just one of their many locations.
The savings come in the form of increased metal removal rates.
<unk> wait.
Car by carbon recycling and reuse opportunities.
We also found safety improvements.
As a result, the customer has now asked us to implement the same process at a different location.
Where we've since identified another $300000 in savings.
Our second growth driver risk solutions.
This includes our vending and implant programs.
Both of which continue gaining traction and adding to share gains.
Vending signings were up 21% in our fiscal fourth quarter year over year.
And vending sales now represent 15% of total company sales.
Likewise.
Implant signings increased 42%.
And now represent 11% of total company sales.
You may recall that our original goal was to reach 10% by the end of fiscal 'twenty three.
So we've surpassed that goal a year early and.
And we will continue to push on that program.
Sales to customers with our solutions offerings now represent 56% of total company sales.
Up nearly 200 basis points from prior year.
The third priority is selling the portfolio.
Which is about increasing share of wallet through ancillary products.
Especially our Ccs business.
Here, we provide an outsourced vendor managed inventory service for the seaport consumables to keep plants running.
For our customers.
Were taking over a difficult to manage category that can shut down a plant.
For MSC. These are high margin items that because of the via my solution result in high retention rates.
We've been focused on this business and we're seeing nice momentum with Q4 ABS growth rates in the mid teens.
Our fourth priority is digital.
Also referred to as ecommerce.
As you May recall, we hired a new chief digital and information Officer, John Hill, a few quarters back.
He and team have been quite busy improving our website and reviewing our entire digital offering.
So far the feedback we've received from the field is excellent.
Our ecommerce sales grew by 20% in our fiscal fourth quarter on an <unk> basis.
And reached 63% of total company sales.
Up roughly 300 basis points compared to prior year.
Our fifth growth driver is customer diversification through our public sector business.
Over the past few quarters I've described the building momentum.
Including several contract wins, such as the four P. L contract, serving U S marine basis.
That contract is ramping up.
And as a result.
Our Q4, ABS government growth rate was over 30%.
We expect strong growth to continue into fiscal 'twenty three.
Yeah.
Outside of our organic growth drivers. We also added two tuck in acquisitions in our fiscal fourth quarter and.
And both are tracking to performance targets.
They will each be nicely accretive to earnings in fiscal 'twenty three.
And we expect ROIC.
To exceed our weighted average cost of capital within the first full year of operations for each.
Most recently.
We acquired tower fasteners.
Our long Island, New York based distributor of OEM fasteners <unk> components.
Tower will be joined with AI, yes the.
The OEM fastener business, we acquired in 2018.
You'll recall that we identified OEM fasteners as a natural extension.
Our mission critical value proposition on plant floors across North America.
OEM fasteners like metalworking and like class C consumables.
Both technical and high touch.
We've spent the past few years shoring up the Aaas Foundation by bolstering its management team systems and cross selling capabilities with MSC.
With those strengths now in place.
We're turning our attention to growth.
And tower is a great start.
Mark Shannon and his team are a terrific addition to this platform.
And we expect to see continued growth.
Turning to the external environment.
The headlines are filled with the growing likelihood of a recession.
This is also reflected in eroding readings on the sentiment indices and declining IP forecasts.
While we do see some pockets of softening in consumer facing industries.
The majority of our customers.
Are still seeing stable order levels.
Manned and general activity.
We do however, you're more caution expressed by our customers when it comes to calendar 2023 conditions.
We're going to keep a careful eye on the environment.
And keep our ear to the ground with respect to both customers and suppliers.
At the same time.
Need for our customers to find productivity.
To offset their own cost headwinds is as high as it's ever been.
And this plays really nicely into our value proposition.
So we remain focused on delivering that productivity.
For our customers.
With that as the backdrop.
I'll now look ahead.
Outlined our fiscal 'twenty three goals.
And they were largely a continuation.
All of our current mission critical objectives as.
As we look to build on our recent momentum.
Burst.
We remain focused on capturing market share.
Specifically, we aim to continue outperforming our original growth target.
400 basis points above the IPD index.
Just as we did in fiscal 'twenty two.
As of now we foresee average daily sales growth of between five and 9% for the fiscal year.
This range assumes a contracting industrial economy at the low end.
And a flat economy at the higher end of the range as an average across our fiscal 'twenty three.
Now given that we've started the fiscal year in positive territory.
The bottom end of the range implies significant erosion through the year.
The top end of the range.
<unk> more modest erosion in the environment during the rest of our fiscal year.
If conditions do not deteriorate.
We would expect to come in above the guided range.
Inside the company.
I can tell you that were rallying to even higher rates of market share capture.
Particularly if the market softens.
As the bulk of our competitors are local and regional distributors, who will struggle disproportionately.
Our second goal.
Is to continue expanding adjusted operating margins.
We do this by leveraging revenue growth.
And by executing our mission critical initiatives.
Which will yield at least an additional $15 million in cost savings.
Keeping our goal of at least $100 million by the end of fiscal 'twenty three.
Christian will go into more detail on our guidance range shortly.
And third we aim to further improve adjusted ROIC C.
Lifting it beyond the current 18% and closer to 20%.
We've set these goals amidst an uncertain environment.
Should things softened even further than what we've currently envisioned.
We have identified multiple levers to pull.
And we're prepared to adjust quickly.
Our downturn playbook.
Kristian will also say a few more more words on that shortly.
In addition, our balance sheet remains strong and our cash generation will continue improving leaving.
Leaving us well positioned to capitalize on any opportunities that emerge.
Christian will now take you through the financials, including our new annual guidance range.
Thank you Eric I'll begin with a review of our fiscal fourth quarter, and then update you on the progress of our mission critical initiatives.
Before I turn it back over to Eric I'll close with our thoughts and guidance on fiscal 2023.
On slide four and five of our presentation you can see key metrics for the fiscal fourth quarter and full year on a reported basis.
Slides six and seven reflect the adjusted results, which will be my primary focus this morning.
Our fourth quarter sales up 23% versus the same quarter last year and came in at one point or $2 billion.
This includes a 50 <unk> week this fiscal year. So on an 80 S basis, our sales were up 14% for the quarter.
As compared to the same quarter last year.
Our fourth quarter acquisitions represented nearly 250 basis points of the growth.
Looking at growth rates for average daily sales by customer type.
Government sales increased over 30% fueled.
Fueled by fulfillment and our four P. L contract for the U S marine bases and other public sector spending.
National account growth was high teens.
Core customers grew high single digits.
Our gross margin for the fiscal fourth quarter was 41, 9% down.
Down 100 basis points sequentially from our third quarter and down 10 basis points from last year to fiscal Q4.
The quarterly decline includes approximately 60 basis points from the seasonal product mix of summer good.
Headwinds from the acceleration in the public sector growth rate and.
A 40 basis point impact from our recent acquisitions.
We continued to see inflation from our suppliers, particularly on the metalworking side of the business, albeit at a slower pace than in the past year.
In response to supplier moves we implemented a roughly 1% price increase in August .
Utilization rates remained strong as our customers are hungry for product availability and for tangible productivity gains.
MFC continues to deliver on both fronts.
Evidenced by the example that Eric shared earlier.
Reported operating expenses in the fourth quarter or $290 million versus last year as reported operating expenses of $253 million.
Adjusted for acquisition related costs adjusted operating expenses were also $290 million or 28, 3% of net sales.
Versus last year's adjusted operating expenses of 252 million or 33% of net sales.
This 200 basis point reduction in adjusted Opex to sales year over year is a testament to the continued success of our mission critical initiatives.
We incurred approximately $4 1 million of restructuring and other costs in the quarter as compared to $4 4 million in the prior year quarter.
We also recognized a $10 1 million gain on the sale of our Melville, New York facility, and we have adjusted that out as well to improve comparability.
Our reported operating margin was 14, 1% compared to 11% in the same period last year.
Adjusted for restructuring and acquisition related costs.
As well as the current year gain on sale of property.
Adjusted operating margin was 13, 6% as compared to adjusted operating margin of 11, 7%.
Nearly 200 basis point improvement in year over year.
That resulted in an adjusted incremental margin for our fourth quarter of approximately 22%.
For the full year fiscal 2020, Hugh we achieved a reported operating margin of 12, 7%.
And on an adjusted basis to 12, 9%.
Which was squarely in the top tier of our annual operating margin framework.
I'll note here that the extra week added roughly 60 basis points in the fourth quarter and 20 basis points to our full year adjusted operating margin.
Our full year adjusted incremental margin was just over 23% exceeding our original fiscal 2022 adjusted incremental margin goal of 20%.
Reported earnings per share were $1 86 for the quarter as compared to $1 18 in the same prior year period.
Adjusted for restructuring and acquisition related costs as well as the current year's gain on sale of property adjusted earnings per share were $1 79, as compared to adjusted earnings per share of $1 26 in the prior year period, an increase of 42%.
This continues to reflect strong execution at all levels self performance gross margin levels and Opex leverage.
Turning to the balance sheet, you can see that as of the end of the fiscal fourth quarter, we were carrying $716 million of inventory up $36 million from Q3s balance.
Inventory build is consistent with our double digit revenue growth.
Ongoing supply chain disruptions and continuing inflation.
Accounts receivable are also rising with the current sales growth.
As expected we saw continued sequential improvement in our cash flow conversion or operating cash flow divided by net income.
Q4, cash conversion was 106% compared to 78% cash conversion last quarter.
This brings our annual cash conversion rate to 72% in the range of 70% to 80% we communicated earlier this year.
Our capital expenditures were $16 million in the fourth quarter, bringing our full year capex to roughly $60 million.
Moving ahead to slide 10, you can see our free cash flow is also up year over year at $95 million for the current quarter as compared to $69 million in the prior year quarter.
Note that we also spend about $22 million buying back shares during the quarter just over 300000 shares at an average price of $73.75.
Finally, we also announced a 5% increase in our ordinary dividend to be paid in November .
Our total debt at the end of the fiscal fourth quarter was 795 million.
<unk> 5 million increase from our third quarter.
The composition of our debt roughly 57% with floating rate debt and the other 43% with fixed rate debt.
Cash and cash equivalents were $44 million, resulting in net debt of 751 million at the end of the quarter.
From $761 million at the end of the third quarter.
Let me now update you on our mission critical productivity goals on slide 11.
In our fiscal fourth quarter, we achieved additional savings of 5 million and invested another $2 million.
That brings our fiscal year, 2022 savings and investments to $25 million and $15 million, respectively and right in line with our guidance for the year.
One of the programs, we're quite pleased with the continued automation enhancements of our distribution centers that strengthens our operations and mitigates the effects of labor inflation.
For the total program to date, we have achieved gross savings of $85 million and we remain on target to hit at least 100 million of gross cost savings by fiscal 2023.
Now, let's turn to fiscal year, 2023 guidance, which is shown on slide 12.
We are estimating average daily sales growth of 5% to 9%.
On an adjusted operating margin between 12, 7% and 13, 3%.
Let me point out a few factors and assumptions to keep in mind.
Specific to the ABF growth range for fiscal 2023 has 252 days.
Six fewer days in fiscal 2022.
Full fiscal calendar or can be found on our website.
As we mentioned before we made two acquisitions during our fourth quarter.
These are included in the guidance and add roughly 200 basis points to our <unk> growth for the year.
In terms of our economic assumptions, most readings and forecasts point to a softening environment.
While our growth is currently strong as evidenced by our September growth rate of 13, 5% and October similar trend, we do assume the industrial economy slowed sequentially through fiscal 2023, and our growth rates will slow accordingly.
At the gross margin level, we expect benefits from a favorable price cost spread.
Offsetting most of the typical 30 to 50 basis point headwind, we experienced from customer and channel mix.
On a year over year basis acquisitions will pose a 30 to 40 basis point headwind.
Overall, we expect full year gross margins to be down 40 to 70 basis points versus fiscal 2022.
On the operating expense line, we expect continued reduction on a percentage of sales basis, despite ongoing headwinds from freight and labor inflation and we will continue strategic to strategically invest in the business in support of our mission critical growth strategy.
As I mentioned earlier, we expect to achieve additional cost savings you are mission critical program of at least $15 million.
Factoring in those assumptions, we expect adjusted operating margin to be in the range of 12, 7% to 13, 3%, excluding the 20 basis point benefit of the extra week from fiscal 2022. This would reflect operating expansion operating margin expansion at nearly all points within our range.
<unk>.
Also note that the recently completed acquisitions dilute operating margins by approximately 20 basis points in fiscal 'twenty three their first full year with us.
While dilutive to operating margin in the first year, both acquisitions are accretive to EPS and on track to achieve an ROIC.
Above whack in their first full year of operation.
Lastly on operating margin.
On operating margin and as I mentioned earlier, please keep in mind that the 50 <unk> week added about 20 basis points to our full year fiscal 2022 operating margin.
For modeling purposes, I'd like to give some additional color on the quarterly progression through the year.
We expect gross margins to remain at a consistent level plus or minus 20 basis points.
Additionally, as we continue to benefit from our mission critical initiatives, we expect our adjusted operating expense as a percent of sales and adjusted operating margin to improve sequentially as we progress through the year.
A couple of additional and important point.
Please note that given the current interest rate environment and expectations for further rate hikes interest expense will rise significantly.
Holding fiscal 'twenty three that constant with current levels, we would expect roughly $8 million to $10 million of interest expense per quarter and tax rate of slightly under 25%.
Given our expectation for operating cash flow conversion over 100%, we will have flexibility to deploy free cash into debt reduction buybacks or accretive acquisitions.
One final area I'd like to discuss is our downturn playbook.
We are not yet experiencing any signs of a slowdown we are well positioned to navigate a change in the environment.
We have clearly defined the triggers for changes in our actual our forecasted revenue and operating profit.
That initiate a series of actions we will take across the business. This includes everything from pull back on discretionary spending changes in staffing levels and re prioritization of investments and.
In addition, our balance sheet remains strong and when the economy slows we generate high levels of cash flow as working capital becomes a source of fund.
This will enable us to pay down debt and or to strategically invest through the downturn.
So while we certainly prefer the current environment, we feel well positioned regardless of whatever happens I will now turn it back over to her.
Thank you Kristen.
As we wrap up fiscal 'twenty, two and we're full speed ahead into fiscal 'twenty three.
I remain quite pleased with our company's performance.
We are tracking to each of our mission critical goals for the end of fiscal 'twenty three.
And we're seeing momentum build with inside inside the company.
Regardless of the macro environment will.
We will remain squarely focused on what we can control.
Capturing market share and hence scrubbing well above IP.
And then translating that growth into.
Into profit profit expansion.
I'd like to thank our entire team for their hard work and dedication and.
And we will now open up the line for questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
Youre 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.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, good morning, everyone.
Hey, Ryan how are you.
Well let.
Let me say first off thanks for all the details on the outlook I know, it's a it's a tricky time. So we appreciate it.
Can I start with price I think it was contributing 7% in the quarter and I know you don't want to give.
Price and volume assumptions for 'twenty three but.
Should we assume that there is more price at sort of the midpoint of the sales guidance versus volume.
Yeah Ryan.
The first of all the 700 basis, a little bit lower closer to closer to 600.
23 contribution from price, yes, I would say thats fair to assume that the lower end of the range that is there is a disproportionately higher contribution from price right.
Got it Okay, and then on the macro assumptions make.
Makes sense.
What you provided when you say that contracting industrial economy can you just.
Put a finer point on that or are you thinking IP down in the 5% range or would it could it be worse at that lower end how are you thinking about that.
Yeah, Ryan So it's certainly an interesting time, because you always start by if you look at the current results. The current conditions with our customers are still solid and you could see September as growth rate. Good October Christian mentioned is trending similarly, so we're starting the year off in positive.
Territory, obviously double digit growth territory. So the assumptions, we're making and look at our guess is as good as yours right. This is really uncertain times base.
Basically you have the high end of the range. The low end of the range. Yeah. So we're indexing it on I P. Ryan and effectively where we're at is the high end of the range assumes.
Flat IP now this is through the course in average of our fiscal year. So realize that we're starting in positive territory, even the higher end of our band here is assuming that conditions erode in that the IP erode so that such that by the back half of our fiscal the math would work out that at some point.
It turns negative, but just would be modestly negative to get you to an average of flat the low end of the range on the other hand assumes more aggressive erosion in the environment such that the average of the full year was negative IP. So you could imagine if we're starting the year in positive territory to get to a negative average for the year by the back half of our FIS.
So we're in a pretty healthy negative territory.
That's the assumption.
Okay, and then just last one.
Heavy manufacturing as pasture sales and from what I hear that those customers have big backlogs higher than normal is that something youre hearing and is that something that is a little bit different this cycle that could help sustain sales, maybe a little bit longer than we are.
Thinking.
Ryan I do think it's possible. So what we're hearing from customers is yeah conditions now we're stable and I do think part of that is you take industries Ryan that had been on their back.
So long like aerospace and even automotive where there's just it's been such a supply constrained industry that there is a larger yeah I think that's a fair point.
So yeah. There is the potential that that could carry us for a while we'll see but I think it's a fair observation.
Got it alright, thanks congrats.
Thanks Ryan.
Thanks.
The next question comes from Stephen Volkmann with Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for taking the question, maybe just building off of that Eric It sounds like what you're saying is that you're sort of looking at the big broad macro picture and trying to be sort of a prudent but you're not actually hearing any real issues from any of your customers I think maybe you mentioned.
Some of the consumer facing guys just any more color on what your customers are actually saying.
Yes, Steve So in general I would say right now.
Our revenues feel solid when we look at our own internal trends feel solid.
Customer activity levels are solid with some isolated pockets so anything touching consumer right now that's where they're feeling some softening. So for instance, you know the food processing sector is feeling it a bit RV industry, you could imagine is actually down quite a bit but for the bulk of our customer base with heavy industry, it's still solid.
What we are hearing in fairness, Steve is we're hearing caution. So you know a lot of our customers as they look ahead, they're not seeing it in their business, but I think you know some of that just could be self fulfilling everyone's reading the headlines everybody's seen the sentiment indices. So theyre expressing caution for 'twenty, three which is why we're taking a somewhat.
Cautious stance in our in our guidance range, but in terms of what we're seeing now no. It's still good.
Okay. That's helpful. Thank you and then is it possible that you may not be a fair question, but what do you think your exposure is to sort of consumer type end markets just roughly.
Really it's it's one of those that's really tough to give you a number is because so many of our customers' job shops machine shops that are doing work for multiple industries, it's tough for us to get to a number but what I would tell you is it's pretty small.
The bulk of our business is heavy industry and not consumer facing.
Yeah, that's what I thought and then a final one and I'll pass it on I'm just curious how we should think about.
We're seeing the declines and lots of input costs, whether its metals or other commodities I mean, you've been energy lately transportation and logistics costs are down at least on the big indexes and how do we think about how that sort of plays through to you guys.
Yeah, Steve So the first thing I'll say is youre correct on all of those things coming down. This is a bit of an unusual cycle in that you have other factors that are sort of bullying costs and you're you're you're seeing inflation numbers continue to outpace what expectations are every month, we're still seeing cost increases.
Coming from our suppliers.
Late through late calendar 'twenty, two and we're hearing it may even be early calendar 'twenty three certainly not at the rate and pace. It was with the size, but still there you have with <unk>.
Labor is a major issue and a major input cost for most companies and wage rates are still high.
Oh, that's booing it a little bit I will tell you in terms of ultimately if things really do come down historically, yeah, you can never say never but historically our product lines for the most part do not see price deflation you know there there could be a period, where we don't get price, but they don't come down in past cycles that the reason.
Typically most of what we sell but the raw material itself.
It's a relatively small percentage of the finished good.
And so you have lots of other factors now again never say never but historically it has not been price deflation.
Super I appreciate the time.
Thanks, Dave.
Again, if you have a question. Please press Star then one.
The next question comes from David Manthey with Baird. Please go ahead.
Yes, Thank you and good morning, everyone.
Hey, Dan first off.
Eric when you talked about the the framework.
And you said it would.
<unk> report above framework in theory, if conditions do not deteriorate just to be 100% clear here. When you said did not deteriorate you mean IP does not slow from the current mid single digit growth rate you don't just mean, it's positive right.
Yeah, well basically what we meant Dave is if I look if I piece part the top of our framework assumes roughly a flat IP plus or minus a bit. So if I piece for the year were nicely positive what were saying is you know, meaning a couple of points or more yeah that we would expect to be on top or above the framework and you know look proof point is.
Take a look at September you know positive.
Positive nicely positive IP, and where the growth rates tracking is obviously well above the top end of the ranges and we're seeing the same thing for October roughly plus or minus so that's where we met.
Alright, thank you for that.
And then relative to the framework.
You mentioned that E T and power are going to add a couple of points of growth via acquisition.
Did you mention Chris.
Chris and what of.
The remaining 3% to 7% is price mix at this point and then a related question there is within that assumption.
And I guess you were talking about a sliding scale because you sort of straddle. The calendar year are you assuming that price goes goes flat at some point in your framework methodology.
Yeah, David just a few thoughts first we did we didn't break down the growth and it does kind of vary whether youre at the low end of the framework of the high end and that's because of the assumptions around pricing, but you got price carryover.
It's it's definitely fair to assume we'd be targeting that 400 basis points of share gain regardless of where it falls and then there'd be potentially some upside too.
Perhaps share gain volume assumptions the I think the second part of your question was on whether or not price.
Flat in the year.
Did I catch that right.
Yes, yeah. It does not so we're still probably most positive for the year.
We're expecting not to flipped to a headwind in that regard until fiscal 'twenty four based on everything that we're seeing right now in the timing of the cost roll off on the balance sheet.
Got it Okay and then just.
One small one here in your segment breakdown or your customer breakdown you.
<unk>. Some previously other nonmanufacturing customers I think it looks like a lot of land and heavy manufacturing I'm confused by that could you just talk about what the <unk>.
Definition change to other was.
Yeah, so not not so much a definition change to Oliver what happened there David we have a process where we.
We use a third party to help us account for which are those segments, our customers fall into and a lot of times, it's kind of difficult to attribute them to one or the other because it's as Eric mentioned before you have oftentimes like job shops coming in you don't necessarily know where to apply them. So we actually have a manual process that happens like after the third party kind of does it.
First path, we go in and we say, Okay, where do we actually think the best end market or segment as to attribute this customer too.
And we've we basically gotten backlog this year with the number of new customers that have come in and we did a big kind of profit improvement on that in the fourth quarter and Thats why you saw that shift out of other and then to the other buckets. So we feel pretty good about that the change that we made and the ability to do that on a much more regular basis going forward.
Okay got it.
Alright, Thank you see in a couple of weeks.
Thanks, Dave.
And our last question today comes from Ken Newman with Keybanc. Please go ahead.
Hey, good morning, guys.
Hey, Ken Good morning, Ken.
Hey, I just had a clarifying question on right.
From a price.
Or maybe just any color on how much of sales growth guide.
Aerie over effect from the pricing.
Bob here.
And I think you really see that that youre, a little bit hard to hear it's kind of breaking up a little bit.
Yeah, I was just asking.
What's been the sales growth side.
Colorado, how much that is at aerie over it back from increases that you've enacted last year.
Yeah. So we didn't give a specific range on that can't be the way I'd tell you to think about it is if you go back and look at the timing of the price increases in 22, you're still getting a healthy benefit from price like if you kind of think sequentially through the year I would expect price to be peaking in the first quarter based on the timing and the amount of those increases that went into effect in 'twenty, two and then because.
Cause that the price carryover, which is pretty healthy at the low end of the framework you should assume a disproportionately higher contribution from price and at the high end of that.
Got it.
Yeah.
But for my follow up Youre expecting strong free cash flow this year and you've already done a few deals a lot orders, maybe talk a little bit more about the M&A funnel expectations for more deals this year.
Yeah, Kevin and happy to do that and maybe what I'll do is even zoom out a bit from M&A and just just talk capital allocation philosophy and are in a fairly unique time look so we're sitting we feel very good about our position right now we're sitting at you know plus.
Plus or minus to turn a half of leverage which is at a comfortable spot for us.
What I would say is this year more than others, given what's happened with interest rates were going to be really scrutinize about how we use cash.
Look priority one remains reinvestment into the core business, which we're pleased we've got some areas. We've highlighted that we think are really working we're pleased there are priority two is going to be continued steady growth of the ordinary dividend.
And then we've got three things on our mind in terms of what we do with excess free cash flow that we expect to generate and those three are debt reduction share buyback and M&A and we're going to look at all three and evaluate returns carefully what I would tell you with respect to M&A can is what youre seeing.
Let's do as part of our strategy here, we've built out a couple of platforms that really fit into our brands of being on the plant floor technical and high touch obviously metalworking D. The roots of the business the.
At the seaport consumables or <unk> business being a second platform and OEM fasteners being a third what you saw us do in the last quarter was tuck in deals so relatively small compared to company size into those platforms and I think if you see us do M&A. This year it will be a continuation of that theme, which will be relatively.
Small and tuck ins to existing platforms. So given the current environment.
I would not expect US I mean, you never say never again, but the hurdle would have to be really high to do something big and really high to do something that's outside of one of those core platforms.
Right.
Just one more follow on to that.
Maybe a little bit more color on that.
<unk>.
Hum.
Do you expect operating margins.
It's Scott here.
Do you expect the margin profiles for our and Amy Taylor.
Your color in terms of where you would expect.
Scott.
Yeah, Ken you you were breaking up a little but I think we'll we'll spit back to your question here tell us if we get it right as where you were going is the margin profile on these small on the Brent did tuck in acquisitions.
And how it performs over time.
If I've got that right typically it's very typical what we see with a smaller distributor that their gross and operating margins are going to be well below.
MFC to start.
And that's very typical of the industry and so what happens is out of the gate year, one as Christian highlighted in arm a larger framework do you see an immediate dilution affect our margin percentages what happens over time, though is we have a great opportunity to lift those margins, both gross margins and operating margins with all the.
Synergy cases, and those are purchasing synergies those are cross selling synergies those are all kinds of cost synergies like freight opportunities and things to take advantage of of MFC scale.
And so what we see is the incremental margins once we owned the business the incremental margins are actually quite good and we can get those those businesses is really to grow maybe not quite to MFC level company average margins, but well above where they are today and so the deal economics actually become really good, especially when we're looking at return on capital.
As we highlighted where we should be above whack within the first full year.
They're pretty compelling.
Okay.
I appreciate it thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to John Corona for any closing remarks.
Thank you Andrew a quick reminder, that our fiscal 'twenty three first quarter earnings date is now set for January 5th 2023 and.
Over the next few months, we'll be attending several investor conferences. So we look forward to seeing you in person. Thanks again for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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