MSC Industrial Direct Co., Inc. (MSM) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to MSC Industrial Supply 2015 fourth quarter and full-year conference call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead. John G. Chironna - Treasurer & Vice President-Investor Relations: Thank you, Ed, and good morning, everyone. I'd like to welcome you to our fiscal 2015 fourth quarter and full-year 2015 conference call. I'd also like to apologize for the brief delay this morning. We did have quite a few callers and we wanted to wait until everybody was on the line. 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 specifics, 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. 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 plan. 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 our 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. 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 tables attached to the press release and 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 our Chief Executive Officer, Erik Gershwin. Erik David Gershwind - President, Chief Executive Officer & Director: Thanks, John. Good morning and thank you for joining us today. Rustom Jilla, our Executive Vice President and CFO, is also in the room, and this will be his first earnings call with us. Rustom joined MSC on July 20, and as expected, he's been a great addition to our team, bringing a new perspective and energy at this important time in our journey. I'll begin by covering the deteriorating and quite difficult demand environment. I'll then turn to recent business developments, which within the context of the environment, were highlighted by four important results – one, solid share gain performance; two, continued stabilization of gross margins; three, very strong expense control; and four, as a consequence of the first three, earnings per share slightly above the midpoint of our fourth quarter guidance. Rustom will provide additional detail on our financial results, he'll share our first quarter 2016 guidance, and then discuss our fiscal 2016 operating margin framework. I'll conclude with some additional comments on our expectations for the year, and reinforce the opportunity we see going forward, particularly in the increasingly challenging environment. We'll then open up the call for questions. So, let me begin with market conditions and our performance against the challenging backdrop. We remain in a difficult environment where conditions worsened as the quarter progressed. The root causes for the slowdown remain the same. The prolonged impact of the rapid drop in oil prices, the strong U.S. dollar and its impact on export demand, and foreign exchange headwinds, all of which are negatively impacting broader manufacturing activity. Looking at macro indicators, they reflect a sharp slowdown in manufacturing, with U.S. factory activity hitting more than a two year low in August. The resulting volatility in the stock markets has not helped confidence either. Looking at the ISM, it's now at its lowest level in two years, having declined for the past three months. As for the MBI, the September reading was 44.1, which makes it the sixth month of continued deterioration and readings below 50. These indicators confirm a considerable slowdown in metal working activity as the quarter progressed. They're also very much in line with what we heard from customers and other industry participants. With the exception of pockets like Aerospace and Automotive, customers have seen significant slowdowns in their volumes, their backlogs and their quoting activity. In addition, visibility remains extremely low. We're now beginning to hear of layoffs for the first time in quite a while. We also believe that some of the slowdown can be attributed to destocking of customer inventory levels, although this is very difficult to quantify. With respect to the pricing environment, conditions remain extremely soft, due primarily to the lack of commodities inflation. Supplier or manufacturer pricing activity, which is the primary driver of distributor pricing movement, remains well below historical levels. As such, and as expected, our annual catalog increase was modest, at about 1%. Within the context of this difficult environment, our business performed well. As our share gains continued, we maintained progress on gross margin stabilization and the organization heightened its focus on operating expense reductions. Organic net sales were essentially flat for the fourth quarter on a year-over-year basis, slightly below the low end of our expectations. The monthly trend deteriorated through the quarter, with low single digit growth in June, decelerating to a low single digit decline by August. In general, the growth rates for each of our customer class has moderated. Our Government business grew at a low double digit pace, while National Accounts growth came down to low single digits. Our core customers lagged the company average and were slightly negative for the quarter, reflective of the particularly soft metalworking market. CCSG also lagged the company average and declined mid-single digits, impacted by market conditions and foreign exchange. The combination of these factors means that customer mix remained a gross margin headwind. Despite the overall slowing growth rate in the quarter, our share gain performance was solid. Both Vending and eCommerce remain strong, as our customers continue to leverage our technology platforms. eCommerce reached 56.7% of sales for the fourth quarter, up from 55.9% last quarter, and 53.7% the year ago. Sales to Vending customers added roughly 2 points to our growth rate. We also added approximately 150,000 SKUs net of removals to our web offering for the last fiscal year, and now have about 1 million SKUs available online. Continued growth in these areas bodes well for future share gains. With respect to sales force expansion, as we indicated we would do last quarter, we continued moderating head count growth. Our full year expansion came to about 2.5%. Sales forces expansion remains one of our important growth levers, and in the current environment we anticipate increasing sales head count in the low single digit range for the upcoming year. As I mentioned earlier, we maintained our progress on gross margin stabilization. On our last call, we shared that we expected a sequential decline in the fourth quarter, due primarily to the anticipated step down in supplier rebates. While this step down did have the expected impact, our fourth quarter gross margin was slightly above the high end of our guidance range. The overall stabilization continues to be largely a function of the purchasing and selling countermeasures that we've taken. I also want to note the strong expense control in the quarter. The organization once again responded to our call to action, bringing operating expenses down to levels flat with last year and considerably lower than guidance and this was despite continued spending on ongoing growth initiatives. I'll now turn things over to Rustom. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Thank you Erik, and good morning, everyone. Let me start by saying I'm delighted to be part of the MSC team. It's a company with an ethical, collaborative, caring, and very customer focused culture. This is a great foundation to build upon as industrial distribution and the manufacturing sector that we serve are both changing rapidly and we need to adapt to successfully meet the challenges and fully benefit from the opportunities ahead. Now let's turn to our fourth quarter in greater detail. Erik covered sales quite thoroughly, so I'll simply recap that our sales growth for the quarter on an average daily sales basis was flat, compared to same period last year, and below the low end of our guidance range, as the demand environment deteriorated rapidly between June and August. With regards to gross margin, we posted 45% for the quarter, just above the high end of our guidance and about 60 basis points lower than the fourth quarter last year. The year-over-year reduction reflects headwinds from customer mix and the soft pricing environment, partially offset by the continued benefit of gross margin countermeasures such as discount optimization, various freight initiatives, and supplier cost reductions. These cost reductions will have an increasing impact as we move into fiscal 2016. Our adjusted EPS for the quarter was $0.96, just above the midpoint of our guidance range of $0.93 to $0.97. Note that there were minimal non-recurring cost this quarter, so adjusted and reported EPS were both $0.96. As seen in recent quarters, despite sales coming in below the low end of our guidance, our focus on gross margin stabilization and control of our operating expenses enabled us to post EPS within our guidance range. In fact, our adjusted operating expenses came in roughly $3.8 million lower than our guidance, and up approximately $1.2 million from fiscal 2014. This was despite continued investments. We increased the intensity and focus of various cost down measures that began last year in response to change in macro conditions. Our focus on reducing discretionary spend, lowering head count, optimizing freight programs, and implementing other productivity initiatives continues to pay off. As a percentage of sales, adjusted operating expenses were just 10 basis points higher than last year's fourth quarter, despite flat sales and increased investment spending. Now the site (12:40) control has intensified as we have entered fiscal 2016. Finally, our tax provision came in at 36.9%, slightly better than our guidance of 37.4%. Now turning to the balance sheet, our DSOs were 50 days, up from last year's fourth quarter, reflecting continued growth in our national accounts, but down one day sequentially. Inventory turns were down to 3.19 from the prior quarter level of 3.29. However, inventories actually declined by roughly $4 million over the quarter, so the lower turns are a function of the 13 point average turn calculation and reflect the previous inventory buildup related to expected future sales growth, stocking at the Columbus CFC, and improving service levels. Our high cash conversion ratio turned 147% of our fourth quarter net income into cash flow from operations, this compared to 73% for the same quarter last year. For the full year 2015 our conversion ratio stood at 108% versus 115% for 2014. In terms of other uses of cash, we paid out approximately $24.7 million in dividends in the fourth quarter; total capital expenditures were $13.2 million for the quarter, bringing our total for the year to $51.4 million. Capital expenditure were slightly lower than expected in 2015, as some projects were pushed into next year and 2016 capital expenditure is envisaged to be in the $60 million to $70 million range. We remain committed to consistent and steady increases in our dividend and announced last week that the board of directors have declared a $0.43 quarterly dividend, up 7.5%. At the end of Q4, we had roughly $428 million in debt, mostly comprised of $212 million on our term loan, and $188 million balance on our revolving credit facility. We closed the quarter with $38 million in cash and cash equivalents, which resulted in a leverage ratio of 0.87 times. Our cash flow generation remains strong and we've repaid another $55 million on the revolver in September, such that our leverage ratio at the end of September stood at 0.74 times. Now, to our guidance for the first fiscal quarter of 2016, and please note that our visibility is limited in the current environment. So, the envisaged first quarter revenues to decline on average daily sales basis by 2% to 4% versus the prior year. Through last Friday, our quarter to sales – our quarter-to-date sales decline was approximately 2%, but we have seen the rate of decline accelerate in October and are projecting a mid-single digit decline in November. We expect the gross margin of 44.9%, plus or minus 20 basis points, basically, flat sequentially and down slightly versus the same quarter a year ago. While this reflects the headwinds from the soft pricing environment and customer mix, not to mention lower supplier rebates, it also reflects the sustained impact of our gross margin initiatives. As I noted earlier, the initiatives on discount optimization, supplier cost reductions, and freight are giving us a sustained benefit. In addition, as the market environment has grown increasingly challenging, we expect more from our suppliers in terms of cost reductions over the coming quarters. We also expect adjusted operating expenses in absolute terms to be about $3 million lower sequentially, despite a roughly $2 million increase in medical claims experience. Absent the increased medical claims which generally fluctuate by quarter, expenses are expected to be down $5 million sequentially. Roughly $2 million of this is expected to be the result of a reduction in variable expenses associated to lower volumes. So the remaining $3 million is expected to be attributable to cost reduction actions net of growth investments. Our growth investment priorities for 2016 include continued modest sales force expansion, SKU expansion, vending growth, digital marketing and eCommerce, along with a couple of new technology based sales force effectiveness initiatives. And, as such, we expect an operating margin of about 12.6% at the midpoint of guidance, which is firmly in the lower left quadrant of our fiscal 2016 operating margin framework, which I will discuss in just a minute. Finally, our EPS guidance for the first quarter is a range of $0.85 to $0.89, and this assumes a tax rate of 38.4%. Now, turning to our fiscal 2016 operating margin framework. So, based on the feedback we've received the past couple of years, we continue to look beyond our first quarter, and so we'll provide you with a framework on how we expect our operating margin to perform under various scenarios. We've summarized it on slide 5 in the presentation. Similar to last year, the operating margin scenarios are based on two factors, MSC's growth level and the pricing environment. However, given the current macro environment, our 2016 framework will encompass more challenging scenarios than before. For MSC growth, our framework now envisions slightly negative and low as the likely scenarios. The slightly negative scenario would correlate with sales declines in the low single digits. The low growth scenario would envision growth – sales growth in the low single digits. As I mentioned for our first quarter guidance, the slightly negative growth scenario is where we are today. Note that both these levels would be consistent with significant market share gains for MSC in 2016. Then, with respect to pricing, we also contemplate two scenarios, as the environment is generally weakened compared to start of fiscal 2015. The first scenario is what we call flat, and it assumes exactly that, roughly zero realized pricing. A low price environment is the second scenario, which assumes roughly 1% of realized pricing. In a flat price environment, with slightly negative sales growth, we see operating margins declining from fiscal 2015's adjusted operating margin of 13.2%. You can see this represented by the lower left quadrant in slide 5. And unfortunately this is where we are today. As we move to a low growth case along with a low pricing environment, which is similar to our fiscal 2015, operating margins will improve nicely year-over-year. This is represented by the upper-right quadrant. Let me make a very important point here, not only are we improving leverage over fiscal 2015 under any scenario, but even at zero sales growth, we expect to maintain our operating margin level. This demonstrates our rigorous cost control in these challenging times. As noted before, we are continuing to spend on growth initiatives, but they are being funded by cost savings. These cost savings include temporary cost-reduction measures, like clamping down further on discretionary spend, and also more permanent productivity initiatives. The productivity efforts range from line items like freight, to broader company-wide efforts to reduce waste and inefficiency. Our team has rallied very well to identify areas of spend, including some roles and job functions that are no longer needed. Since a good portion of this cost-cutting is permanent, which allows us to better leverage sales growth. In fact, under any positive sales growth scenario, earnings will expand faster than sales. Finally, I'll note that our cash flow conversion is expected to be over 100%. And I'll now turn it back to Erik. Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, Rustom. As I look beyond fiscal 2016, I remain excited about this business. Historically, economic slowdowns are the times when MSC makes its greatest strides and we expect to do the same this time. While the 70% of the market that's made up of local and regional distributors is on its heels, we are on our toes. While others are cutting inventories and receivables to preserve cash, our strong free cash flow generation allows us to invest and to provide customers with industry leading service. While others are retrenching and only focusing on a handful of accounts, we're attracting new accounts and increasing our share of wallet with existing ones. While others are hanging on to what they have, we're aggressively pursuing improved purchase cost and supplier deals and pursuing new supplier relationships that will add to the strength of our product portfolio. If you look at our track record over long periods of time, you will find that MSC outperforms the market when the economy recovers. We historically deliver disproportionate revenue growth and disproportionate earnings leverage. For example, if you look at the last – that's a three years to four year period following the end of previous cycles, we grew on average at strong double digit compound annual growth rate and we expanded our operating margins. And today, with our recent infrastructure projects complete, we have significant earnings leverage potential. I'd like to thank the entire team of MSC associates for their commitment and their strong execution and customer focus during fiscal 2015, and I look forward to more of the same in the year to come. We'll now open up the line for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Matt Duncan of Stephens, Inc. Please go ahead.

Good morning, guys. Erik David Gershwind - President, Chief Executive Officer & Director: Hey, Matt. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Hey, Matt.

Rustom, welcome. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Thanks, Matt.

First question I have just, Erik, on sort of your end markets. Where are you seeing weakness, sort of, get worse than it has been? Where are things sequentially getting worse? Erik David Gershwind - President, Chief Executive Officer & Director: Matt, I would say the answer is more about where it's not getting worse. It'd be easier to find where it's not getting worse than where it is. Seriously, I think, we're seeing pretty much, with the exception of a couple of pockets that I mentioned, it's pretty broad based. It's particularly acute within our core metalworking-related markets, heavy equipment and machinery, primary metals guys, machine shops, and I would say, it's also more acute in the mid-size and small customers than it is at the larger customers. But, it's pretty broad-based everywhere. And it's just more acute in pockets.

Okay. So, I guess, keeping that in mind then what I'm trying to understand, the framework you guys have laid out for FY 2016 operating margin, sort of the low end-- the low end scenario is slightly negative sales growth. It sounds like that's where we are in October. Maybe November is more like a mid-single digit decline. So, how do we get back to sort of slightly negative from here? Just walk us through what you guys think the shape of the year is going to look like here. Erik David Gershwind - President, Chief Executive Officer & Director: Matt, so, I'll take this. I think the reality is, and let me be clear, Rustom made the point, our visibility is really low. So, it's tough for us to look out beyond a month, let alone a year. What I'll tell you is that we would characterize our fiscal quarter guidance, which was revenues between minus 2% and minus 4%. To us, that would fit into the slightly negative bucket. And that's about where we see things today. Should they get considerably worse, obviously, it would be outside of this framework. But, right now, with our limited visibility we have in front of us, we would put ourselves squarely in the lower left.

Totally understood. Okay, last thing. On the cost side, can you maybe give us a little more detail on, Rustom, what sort of things are you guys getting more aggressive on taking out on the cost side? And, can you quantify in dollar terms what the annual savings are from the more permanent actions that you're taking? Rustom F. Jilla - Chief Financial Officer & Executive Vice President: So, yes, we can. I won't quantify that, in dollar terms, what we're doing there. But I can certainly talk about what we're doing. We've got various freight initiatives, supplier cost reductions, a whole bunch of professional – of discretionary costs, things like professional fees, IT data cost savings, using virtual meetings, which actually not only sort of cutback on our travel and our T&E costs, but sort of enhance productivity, and some small head count reductions, just to name a few. Probably one to make the point, and there – and you can see that looking at our head count, right? You see that, in the quarter, we added roughly -- I'm rounding -- roughly 30 heads in sales, right? But our net sales head count overall is down 50. So, you can do the math on what we're doing there. Now, important to point out the team has been focusing on costs since earlier in the year, since earlier in 2015. But, in the last two months to three months, we've really ratcheted up our intensity. And the whole objective is to be able to grow EPS faster than sales in pretty much any environment. So, a great team effort, actually. People, I think, are with me, at this point, as well. People are rising to the occasion, as a team.

Okay. Very helpful. Thanks, guys. Erik David Gershwind - President, Chief Executive Officer & Director: Thanks, Matt.

Our next question comes from Ryan Merkel of William Blair. Please go ahead. Ryan J. Merkel - William Blair & Co. LLC: Hey, guys. Good morning. Erik David Gershwind - President, Chief Executive Officer & Director: Good morning, Ryan. Ryan J. Merkel - William Blair & Co. LLC: So, first question from me. Pretty impressed with gross margins. You stabilized that nicely. Just wondering what does the full year framework assume for gross margins? And then, second part of that question, what's the mix headwind you're expecting in fiscal 2016? Erik David Gershwind - President, Chief Executive Officer & Director: Yeah, Ryan, thanks. Look, I think you're pointing out something that Rustom and I are pleased with seeing the sequential stabilization in the face of what's really a difficult pricing environment. So, let me get right to the point. To your question, what's implicit in this framework, at least, particularly with where we are today, which is essentially getting nothing from price, would be modest gross margin declines over prior year. So, fiscal 2015 ended at 45.2%, contemplated here would be with no price, modest declines. And modest, to give you a feel, would be 50 basis points or less, would be modest. The formula, in terms of what you laid out, you touched on customer mix. Let me sort of pull back and tell you what I think the story – what's happening, in gross margins, we've a couple of headwinds right now. One is customer mix; two, supplier rebates, which we flagged on the last – probably not surprisingly, what we flagged on the last call as revenue growth decelerates; and the third would be competitive pricing environment, very typical as the demand environment gets worse we see a lot of pressure from the small – 70% of the market, that small distributors, so not surprisingly either that the pricing environment and the competitive environment gets tougher on the pricing front. To your point with respect to customer mix, really the – what we touched on is in this environment the small accounts and the mid-sized accounts are faring particularly poorly relative to large accounts. So to the extent the gap widens between how the larger accounts fair and the small guys fair you could imagine on a gross margin basis that's going to the be the other headwind. The way we're offsetting that headwind is pretty much what I – what we've been talking to in the last couple of calls as countermeasures on the sales side, i.e., discounting optimization and disciplines, and then on the buy side, i.e., aggressive focus on supplier cost reductions and I think you could expect to see, we expect to see that ratchet up as the year goes on. Ryan J. Merkel - William Blair & Co. LLC: Perfect. That's helpful. And then the second question, you know, the high end of the framework has some, in my opinion, pretty nice operating leverage, even with low growth and low inflation, maybe just talk about this a little bit. I assume it reflects the end of invested spending and then possibly starting to see some returns on that investment. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Yes, Ryan, it does. And it does reflect that. But it also reflects the fact that we are taking out costs. So I mean we're really taking out costs so the idea is that at any level of sales, we'll be able to have operating margins and sales growth, any level of sales growth we'll have operating margins and EPS begin to expand and that's really what that shows you. Erik David Gershwind - President, Chief Executive Officer & Director: Ryan, just to call out, Rustom had made the point that this is really a function – I think he's absolutely right. This is a function of the aggressive cost-down actions that have been taken and really under Rustom's watch now have been accelerated over the past couple of months. Because if you think about it, even though it's the upper-right quadrant of our scenario this year, the environmental conditions are actually reflective of what we had as our lower-left quadrant in 2015, because the environment's worsened. So to think about it, in a low-price, low-demand environment, so top line growing low-single digits, we're still expecting op margin leverage and I think, yes, that's a function of the headwinds of the infrastructure investments falling off, which we had talked about over the last year, that those would fall off, they have. And then really the aggressive cost actions that Rustom described. Ryan J. Merkel - William Blair & Co. LLC: Right, yes, I mean bottom line, I think it's a positive change or positive inflection, so it's good to see. Thanks for taking the questions. Erik David Gershwind - President, Chief Executive Officer & Director: Thanks, Ryan. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Thank you.

Our next question comes from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, guys. Good morning. Erik David Gershwind - President, Chief Executive Officer & Director: Hey, Adam. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Hey, Adam.

Hey, I have a question on the revenue trends for the quarter in the supplemental data. You guys do a great job of breaking it down by region and by customer category, and I guess I was surprised to see the pace of the slowdown was really led out on the West Coast where demand slowed the most and then when you split out the revenue growth by customer type, it was not the (32:17) non-manufacturing customers that – they are still growing pretty decently but slowed a lot from last quarter. And so I'm wondering if you could just break that down a bit more or any other granularity that you might have on what's happening with the West Coast and the non-manufacturing customer types. Erik David Gershwind - President, Chief Executive Officer & Director: Adam, I would tell you that – let me talk customer segment, first, manufacturing, non-manufacturing. What I would say there is both have slowed, but in terms of the absolute growth delta, you are right. Non-manufacturing slowed more. A couple of things, one is I feel it shows as a minus 1.8%. I feel quite good about our share gain performance in the manufacturing sector, because realize our manufacturing business is concentrated in highly metal working centric manufacturing market which has really been hit hard. So I think that's a really good result. I think that's one thing you are seeing. The other thing I'd call out is no question as the quarter progressed, the government which really had been, we have been talking for the past year, the government had been performing at very high rates, still low-double digits is what we described, but coming down through the quarter, and I think what you're seeing there is the debt ceiling issue trickling its way into government spending. So those are the two things I'd call out with respect to the segment. With respect to the – do you – sorry, John. John G. Chironna - Treasurer & Vice President-Investor Relations: No, I was just going to say, Adam, from a regional perspective, they all declined, with the exception of Northeast, which kind of held its strength there. Unless there is something specific, I would say why don't you get with me after the call and I can see if there is anything special going on in the West, why it came down more than the other regions.

Okay, got it. Erik David Gershwind - President, Chief Executive Officer & Director: Adam, the one thing I would add is, regardless of the region as broken out here, the one thing when you get under the covers that you see is any area, and how we define West I believe has some of those areas captured that had anything to do with oil and gas is down dramatically. So we see wide swings, even though these are kind of smoothed out averages in specific markets.

Okay, got you. Great. Thanks very much. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: You are welcome.

Our next question comes from Robert McCarthy of Stifel. Please go ahead. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Good morning, everyone. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Hey, Rob. Erik David Gershwind - President, Chief Executive Officer & Director: Hi, Rob. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Yes, I guess just looking at some of your operational statistics, it looks like there was a slight sequential decline for total eComm, which is not surprising given the environment, and you look at the run rate flattening out. Maybe if you could just give some context around that to kind of start. Erik David Gershwind - President, Chief Executive Officer & Director: Rob, I think the highlight, the sequential decline in dollars, you're right, is more a function of environment. I think the bigger story on eComm and the way we gage progress is as a percentage of sales. And on a percentage of sales basis, eComm is up year-over-year and sequentially and it's actually really been one of our strong investment payback stories as we've flagged it as an area of investment. E-commerce, as we've described, encompasses a number of efforts, particularly the one I'd call out, we're really pleased with the performance of the website, MSCDirect, and the way that's working, a lot of the investments that we've made into functionality have worked out quite well in integrating into our customers. And so I think it's a really good story and I think the absolute dollars is just a function of the environment. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Yes, and then just drilling into International & Other, obviously, I think the Canadian exposure is in there. But maybe just give some context around the sequential. I mean, there is an obvious reason for that sequential decline and that deterioration, but maybe you could just give a little narrative around that. Erik David Gershwind - President, Chief Executive Officer & Director: Yes, I think you got it. It's primarily foreign exchange and it's primarily Canada that's been the biggest influence there, which is a relatively nice size of the Class C business. So I think you hit the nail on the head. John G. Chironna - Treasurer & Vice President-Investor Relations: Actually... Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Go ahead. Erik David Gershwind - President, Chief Executive Officer & Director: Sorry, John. John G. Chironna - Treasurer & Vice President-Investor Relations: On our overall business, the FX impact was roughly about 40 basis points in the quarter. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: 40 basis points. Okay. And then just the last question I would have is just qualitatively thinking through your matrix, I mean, does the low-end kind of take into account – and you kind of spoke to, obviously, the investments that you're going to be making net of the cost initiatives and the investment continues for share gain and I understand that. But does the bottom end of the range kind of contemplate kind of qualitatively what you all talked about in the past, which is really just injecting the system with a lot of, perhaps, sales force or feet on the street to kind of take a lot of share in a pretty tough recessionary environment? Or is that something below what the matrix is right now in terms of how you're thinking about things? In other words, are you in a scenario right now where you see the prospects for even accelerated share gain in a distressed environment contemplated in this framework? Erik David Gershwind - President, Chief Executive Officer & Director: Yes, Rob, it's a great question, and it's one of the things that we have talked about. And, quite frankly, one of the most exciting things, if you could call it exciting, about a downturn is the opportunity to acquire some great talent, to make some great investments that really juice the returns coming out of the recession, and we've said this time will be no different. A couple of things. One, to answer your question directly, the framework does contemplate that, yes. Two, I would say, we're not quite there yet in the current environment. And, really, the when we'll know we're there yet is when we see industry talent that otherwise we couldn't get become available. We may be getting close, who knows. But we're not there yet. And just to put some framework around this. Hypothetically, if we were highly successful with our efforts and we were able to add an incremental, call it, 5% to our sales force, something in that neighborhood, we would consider that to be a pretty good result. That 5% is something like in year a 15 to 20 basis-point op margin impact. So that kind of gives you some flavor of it doesn't dramatically change the picture and why I could tell you, yes, it's contemplated within the framework that we laid out. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Right. And then on the Chief Customer Officer or any of the C suite additions, is there any updates there? Erik David Gershwind - President, Chief Executive Officer & Director: No further updates. I mean, the update that I will tell you is for right now I sent an email out to – an announcement to our organization internally that I have assumed the role given the current environment, given the incredible opportunity I see right now to accelerate share gains, I have assumed and stepped into the Chief Customer Officer role. I think it's a function of the opportunity I see in front of us and also the confidence I have in our leadership team right now as this new team is coming together and really gelling. Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.: Appreciate your time. Keep punching. Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, Rob. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Thank you.

Our next question comes from Ryan Cieslak of KeyBanc. Please go ahead.

Thanks. Good morning, guys. Erik David Gershwind - President, Chief Executive Officer & Director: Hi there.

I guess, first, I wanted to follow up on the operating margin expectations going into next year, and maybe if there is any way you could talk a little bit about or quantifying the actual headwind from some of the infrastructure investments you've made and what the headwind was, or maybe even directionally in 2015 how much of a headwind that actually was and how that's rolling off into fiscal 2016. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: If I followed that, I mean, there is pretty much no additional infrastructure investments that are flowing through into 2016, right? So whatever we had in terms of stepped up infrastructure spending, is now in the base. It's in the comparative period. So we are getting nothing from that. What the company has done is over several years, I mean, has continued to build up and enhance its capacities. The focus much more right now, in this period in time, is to continue to make investments but to make investments that we are funding by taking out costs. So, on a net basis, that's why you are looking at us sort of being fairly confident that we will see sequential cost reduction even in the quarter, despite continuing to invest. And that's why we see that quadrant in the top right, as Erik very nicely pointed out. I mean, the 13.7% op margins coming with the top right are better than what that environments would have suggested last year.

Rustom, is there a way of quantifying what the headwinds were in 2015 in terms of the infrastructure investments on margins? John G. Chironna - Treasurer & Vice President-Investor Relations: Ryan, this is John. I think we've said in the past that, between the Columbus CFC and the CFC down in Davidson that those are – if you went back to a point in time where you didn't have them at all, that would have been adding somewhere in $15 million to $20 million range of incremental cost. But, remember, this took place over a several year period. So if you're asking 2015 specifically over 2014, I'd have to go back and see what the timing was for those. But it was more from the CFC last year, because the CFC was done in 2014 or end of 2013. Does that help?

Okay. Yes. John G. Chironna - Treasurer & Vice President-Investor Relations: Okay.

That's fine. Maybe I could follow up with you offline. And then my second question is, I think last quarter you guys gave some nice color on CCSG with regard to some of the cross-selling initiatives that seem to be gaining traction. It sounds like the overall sales for that business was down. I think you said mid-single digits or so. But maybe talk a little bit about the traction you are seeing, or some of the results on the cross-selling with regard to CCSG. Erik David Gershwind - President, Chief Executive Officer & Director: Yes, Ryan, so, yes, we gave a little color this time that down mid-single digits. What I would tell you on CCSG, still highly confident in this business. It is a critical part of the MSC story and one we're investing in heavily. Obviously, I'd like to see the growth rate better and perform better. I think a big driver there has certainly been what's happening in the marketplace. Just like MSC, CCSG is being influenced by pretty much the same headwinds with the added impact of foreign exchange because of the Canadian exposure that MSC has lesser. Look, the three performance levers that we've called out, that continue to be area of focus are: number one, improving service, basic customer service, getting it to MSC levels of service; two, cross selling products; and then three, sales force retooling efforts. And what I would tell you, the color I'd offer there is on the service front, really pleased in the customer service experience and the metrics. I think we're doing a real nice job there. Cross-selling, as we've described, came out of the gates slowly and has picked up pace. And I expect it, based on the work being done, to continue picking up pace as we move through the year. And the third one, sales force retooling, is very much a work in process and I'm encouraged by what I'm seeing there as well.

Okay, great. And then, if I may, just really one last question. Vending seems to be adding some nice offset to some of the broader fundamental weakness we're seeing for you guys. I think you mentioned two percentage points or so this quarter. Is there something going on different with the way you guys are approaching the market with vending today than maybe where you were a couple years ago? Maybe just talk about the vending initiative that you guys have and what you expect from that from a sales growth standpoint into next year. John G. Chironna - Treasurer & Vice President-Investor Relations: Ryan, sure. So I would say vending, first of all, to take your last question first, we expect to be, and you hear as part of our investment program, and we expect it to be a continuing growth contributor. I would say our approach to vending has been more or less consistent since we started the initiative. And, for us, vending is really just a tool. It's a tool aimed at helping improve our customers' operations, streamlining inventories, improving their production process, speeding up cycle times, that's really our focus and vending is just a means to an end, if you will. And I think that's part of the reason why our focus has been pretty consistent, our approach has been pretty consistent, and why it's done well for us is it's been a means to an end. So, that's how I'd describe it and we expect it to be a continuing growth driver in the coming year.

Okay. Good luck guys, appreciate it. Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, Ryan. John G. Chironna - Treasurer & Vice President-Investor Relations: Thank you.

Our next question comes from John Inch of Deutsche Bank, please go ahead.

Thank you. Good morning, everyone. Erik David Gershwind - President, Chief Executive Officer & Director: Hi, John. John G. Chironna - Treasurer & Vice President-Investor Relations: Hi, John.

Hey, Erik. If the current environment – it's obvious – based on the short cycle nature of your business, right, there's not a ton of visibility. So, I guess my question is if current environment is in the lower left quadrant, why isn't the lower left quadrant the midpoint of the framework? And I apologize if you answered that before, just – I mean, why would – you see my point, right? Because if you go back a year ago, the midpoint wasn't what you realized, you realized the lower left. So, now we're starting out with the thing at the lower left. Why not just present a framework that slides the cross-hairs into the 12.6%? I guess that's my first question. Erik David Gershwind - President, Chief Executive Officer & Director: John, what I would say is, right now, given the limited visibility, we wanted to start with a framework that contemplated where we are today, which is squarely in that minus 2% to minus 4% guide is what we would consider to be in that lower left box. Look, we're mindful that as we move through the year, the comps – even if average daily sales don't grow over time, the comps in the back half of the year, right now we're facing comps of relatively high growth comps during the first half of the fiscal, those declined. Could things get worse than they are today? Sure, they could. But given the limited visibility and given we wouldn't even – it would be tough to predict, we felt like this was the most appropriate way to outline the business. And I think the other point we wanted to make was that in most scenarios contemplated, given the cost reductions taken out, operating margins hold or under any growth scenario, they grow. Now, if things were to get worse, would the operating margins come down? Sure, but at the same time, we would really step up the cost take out.

Yeah, no that makes sense. Can I ask you, Erik, so the price environment contemplation has flat at sort of the down side. But if I remember correctly, I think you actually had negative price incurred in the first fiscal quarter of this past year. So, is there something that you're seeing in the environment that you believe can sustain a flat result? Because, I realize it's not apples-to-apples to Grainger, but they and others are actually incurring negative price. Maybe you could just address that point. Erik David Gershwind - President, Chief Executive Officer & Director: Yeah, John, so the reason we put the two price scenarios here, if you go back, you're absolutely, right, if you looked at our last year at the pricing contribution, we had quarters where I think this past quarter the price contribution was slightly up. We've had quarters where we were slightly down. To us, we would consider all of that to be flat, meaning around zero, not exactly zero, but roughly. So we've seen it now for several quarters in a row where it's been pretty much a consistent pattern of hovering around zero. We don't get too excited that it's plus this quarter and it was minus the quarter before. So that was why. So what we see today, that's been the pattern. We don't see anything radical changing. Again, could there be a case of significant deflation? Maybe. We don't see it today, which is why we didn't put it in the framework.

No, that's fair, although you did call out pretty significant sequential macro deterioration right from August through to October, and the 70% of the market cutting price. So in theory, right, that's not a dynamic that would have been in the past, but your point is well taken. At the end of the day, why forecast a bunch of stuff that you haven't really realized in the past I think is what more or less you're saying. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: That's right. Hey, John, it's Rustom, there's one more point to add there that if that really becomes such a strongly deflationary price reducing environment all around, well, that would also work for our inputs, right, for what we buy. But it's not going to be only price reductions on the selling end, so...

I agree, there's an element of pass-through, right, is kind of what you're saying. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: Yeah.

Hey, can I ask one more point. John Chironna has tried to explain this to me before, and I think he's done a good job, I'm a little thick. If you've got vending up 2% and the results are flat and you've got government up double-digit and you've got the national account still in positive, doesn't that suggest kind of the business is expanding, government and national accounts are down high single-digit or is that just not the way to think about it? Erik David Gershwind - President, Chief Executive Officer & Director: John, let me just step back, so there's a few different cuts that we take to our business, and I think part of the issue there is it's a bit of apples and oranges. So one cut would be by customer type, which we break out for you as national accounts, government and core. Another cut would be by channel: vending, non-vending; eCommerce, non-eCommerce. So the only chink in the armor and the logic there is, we have vending that's going into government accounts. So it's not quite as clean as splitting those apart. I think to your point what I would say is, if you take – so when we break out vending growth, remember what we're doing is describing the growth at customers that have vending machines. Okay, that's many, many thousands of customers, and what is true is those customers are adding 2 points to our growth rate. The overall growth was flat. So, yes, it would be fair to say that all non-vending customers were minus 2%. Yes, that would be correct, and I think from our perspective that's a function of what's happening particularly, for our core markets – they have been bad all over, but core metalworking markets, particularly acutely bad, but that's the story.

Yeah, and just last, do you feel vending can hold at the 2%? Because I think it's pretty impressive, I guess what I don't fully appreciate is why vending doesn't face some sort of, maybe not for MSC, but in general, right, because lots of distributors are introducing these machines and programs, why doesn't it face a limiting return if you sort of tap into all the customers that could theoretically adopt these things. So, do you think that 2% can still hold because it seems pretty impressive to me? Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, John. Yes, we agree, I would say it's somewhat a function of what happens in the overall environment. So, if you think back a couple of quarters ago, we were talking about vending at 3 points or 4 points of contribution. Nothing's really changed in our execution of vending, it's really been a function of – so if the demand environment were to come down further, is it possible that the plus 2% comes down? It's possible. I think our execution though of the vending initiative has been strong and the other thing I'd say, John, in terms of runway is, I think there is still plenty of runway left. Somebody had asked the question, it was Ryan who asked the question earlier about vending, and one point I missed and this is more of a macro landscape change than an internal change, which is that vending is becoming a lot more ubiquitous in the market. And what I mean by that is, a few years ago we would be introducing the concept to our customers. That's no longer the case. I mean most customers are familiar with it. They may have a program in place with another distributor and they are looking to upgrade. So I think what that does is opens up the pool or runway. It's pretty broad now. So I do think the program has got a lot of legs.

Got it. Thanks much, appreciate it.

And our last question comes from David Manthey of Robert W. Baird. Please go ahead. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Good morning. Thank you. Erik David Gershwind - President, Chief Executive Officer & Director: Hi, David. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Good morning. First off, did you say low single digit increase in price in the big book? Did I catch that correctly? Erik David Gershwind - President, Chief Executive Officer & Director: Around 1%. So, I guess that would be very low single-digit, but around 1%, David. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): The lowest possible single digit. Second, I think in your matrix you are looking at flat to higher pricing generally, so I guess you are assuming that you are going to net that out fairly successfully in 2016. But I think you also mentioned that you are expecting more reductions in price from suppliers in coming quarters. I want to make sure I heard that right, and just how do I put those two pieces together? Rustom F. Jilla - Chief Financial Officer & Executive Vice President: So, David, yes. It's Rustom. Yes, we would be expecting and seeking supply and cost reductions as we move forward. We are initiating or continuing constructive dialogues with these suppliers. And, look, basically, the suppliers that see our value add as a driver of growth and brand building, they are investing in us and, obviously, getting strong focus for doing so. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. So your assumption is, you will be able to capture and maintain the pricing while you're getting concessions on the cost side? Erik David Gershwind - President, Chief Executive Officer & Director: Yeah, Dave, so, remember, for the framework, if you take the where-we-are-now scenario on price of flat, so what's contemplated in the model here that's driving this framework is, as I called it, slight erosion in gross margin, which we define in the slide as 50 basis points or less. So what you have going on is, on the headwind side, would be the customer mix that I described earlier. It would be, if the demand environment continues, step down rebate program. And then the third one would be just the competitive pricing environment with local distributors. Counterbalancing that, obviously, in flat pricing, pricing is not as much of a tailwind as it normally would be to counterbalance it, and what Rustom is calling out is, we would have an additional tailwind that would be bigger than normal, which would be cost reductions that we're expecting from suppliers. Rustom F. Jilla - Chief Financial Officer & Executive Vice President: And, David, yes, just to add to what Erik just said. I mean, look, as we look at this, right? First of all, tough environment, right? So, we are looking at on the sales line, I'm trying to outperform the market. In terms of margins, we are trying to maintain margins through a combination of pricing discipline, supplier, all the gross margin optimization initiatives that Erik spoke about and I built on. And, finally, on the operating expenses through cost reduction. So, we are trying to hit all three aspects of it. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): That's very helpful. Thank you. Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, Dave.

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Erik David Gershwind - President, Chief Executive Officer & Director: Thank you, everyone, for joining us today. Our next earnings date is set for January 6, 2016, and we will look forward to speaking with you over the coming months. Thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.