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MSC Industrial Direct Co Inc  (NYSE:MSM)
Q4 2018 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to the MSC Reports Fiscal 2018 Fourth Quarter and Full Year Conference Call. All participants will be in a listen-only mode.

(Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. John Chironna, Vice President of Investor Relations and Treasurer. Sir, please go ahead.

John Chironna -- Vice President of Investor Relations and Treasurer

Thank you, Jamie and good morning everyone. I'd like to welcome you to our fiscal 2018 fourth quarter conference call. In the room with me are Erik Gershwind, our Chief Executive Officer; and Rustom Jilla, our Chief Financial Officer.

During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments as well as our operational statistics, both of which can be found on the Investor Relation 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 plans, including expected benefits from recent acquisitions.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the Risk Factors in the MD&A sections of our latest annual report on Form 10-K filed with the SEC as well as in 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 GAAP versus non-GAAP reconciliations in our presentation, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I'll now turn the call over to Erik.

Erik Gershwind -- President and Chief Executive Officer

Thank you, John. Good morning everybody and thanks for joining us today. As we've now completed fiscal 2018 and launched into fiscal 2019, I'd like to begin this call with the state of the Company and offer some perspective on our progress.

From there, I'll provide more specifics about the environment and our recent performance. I'll then turn it over to Rustom who will review the details of the fiscal fourth quarter and our full year, he'll provide our first quarter guidance and also our fiscal 2019 annual operating margin framework.

I'll briefly wrap up before we open up the line for questions. Over the past several years, we have repositioned MSC from a spot buy supplier to a mission critical partner on manufacturing plant floors across North America. We have done so by focusing on products and services that are technical and high touch. We have cemented our leadership in our core business of metalworking. We've gained solid traction in the Class C VMI space, and established a new platform in OEM Fasteners through our acquisition of AIS.

At the same time, we've built upon our success in inventory management channels by continued expansion of vending and VMI. The last leg of this journey was to redesign our sales force to better serve our customers as a mission critical partner. We've migrated our sales force from one design to sell a spot buy value proposition to one that is prepared to deliver upon the new, more complex and high-touch role that we play for our customers enabling them to achieve higher levels of growth, productivity and profitability.

This was the work that was completed during fiscal 2018. As we implemented these changes, our organic growth rate under-performs due to account transitions, sales rep transitions into new roles and declining sales headcount as we made the migration.

As we begin fiscal 2019, this work is behind us. Our sales team is settling into new roles and we are back to more typical levels of execution and customer focus in the field, and I'm encouraged by recent signs of progress. For example, our test pilot market continued its strong performance and momentum is building across the broader Company, particularly in important areas of our business, such as core customers.

And while we don't expect to return to historical growth rates right away, we are seeing the progress that we expected. Returning to fiscal 2018, while organic revenue growth under-performed, we executed well across other dimensions. We continued delivering gross margin stability in the face of a fiercely competitive environment.

In fact, excluding the impact of acquisitions, gross margins were flat with fiscal 2017. We achieved a roughly 70 basis point improvement in operating expense leverage as a result of our continued focus on productivity.

Our two acquisitions performed well with DECO continuing to exceed our initial expectations and AIS off to a solid start. Overall, there is a sense of excitement here about our direction and momentum. Turning now to our fiscal fourth quarter, it was a microcosm of the full year, with sales growth slightly above the midpoint of our guidance range, gross margins at the top end of our guidance range and earnings per share at $0.02 above the midpoint of our guidance.

I'll now turn to the environment. Conditions in the US industrial market remains strong, while sentiment indices, such as the MBI have moderated a bit in recent months, they remain at high levels.

The MBI was 55.8 in July and 58.1 in August, adding the September reading of 57.1 brings the rolling 12-month average to 58.0, pointing to continued growth in metalworking end markets. This is also reflected in customer order volumes and general industry sentiment.

Last month, we attended IMTS which is North America's largest manufacturing show. It occurs every two years in Chicago and it's a great chance for us to catch up with customers, suppliers and other important industry participants.

The energy, attendance levels, and outlook for continued strong conditions were all high. One uncertainty is of course the tariff situation, and it's on everyone's mind. So with respect to MSC, let me frame for you our exposure to Chinese sources of supply.

First, we have goods that we import from China directly ourselves, for example, some of our exclusive brands where MSC is responsible for paying any related tariffs. This exposure is only about 5% of our cost of goods and we expect the tariff impact to be passed along (ph). Then we have products from suppliers that either import directly from China or from countries of multiple origins where one of those countries is China.

And this indirect exposure, amounts to just above 5%. So put together, direct and indirect exposure comprised slightly more than 10% of our cost of goods sold. Of this pool of products, less than half are on the current tariff list, making our exposure to cost increases at under 5% of our total cost of goods.

What we've not captured here, as it would be nearly impossible to do so, are those goods from suppliers that may contain sub-components from China. Even so, it's fair to say that our exposure to China is low, and it will almost certainly decline as supply chains and sourcing adjust to the impact of tariffs.

Keep in mind that many of our suppliers have manufacturing operations in multiple countries, and we ourselves source from many different domestic and multinational suppliers. So there is some flexibility in the supply chain.

And with our extensive offering of numerous brands, we can give our customers many alternatives to products sourced from China. While it's still early to draw definitive conclusions about the impact of tariffs, let's talk about the likely outcomes.

In addition to higher costs from China, suppliers who produce in other countries will likely see growing demand and input cost pressures that could lead to price increases on their products.

Together, this will likely result in list price increases for manufacturers, which we would expect to pass along in the form of our price increases. If this materializes, tariffs would likely stimulate inflation across the broader economy, and this will be a positive for us, as long as demand trends hold and we achieve historic levels of price realization.

Returning now to the fiscal fourth quarter, the pricing environment remained relatively stable. We implemented a modest summer price increase during the fourth quarter, which averaged about 1.5%. As we mentioned on the last call, the number of suppliers that raised their list prices, since our January mid-year price increase was more limited than the inflation headlines would have suggested. Price realization now remain positive during our fourth quarter.

I'll turn now to our revenue performance in the quarter. Sales growth came in slightly above the midpoint of our guidance range, while that alone is not particularly noteworthy, several changes in trend under the surface have us encouraged.

First, we expect growth in the base business to improve from the fourth quarter at 4.5% to 5.5% at the midpoint of first quarter guidance. Second, our core customers. For most of last year, the mid-single digit growth in core lagged the company growth rate. We saw a noticable uptick though in August and September, where core growth was in the high single-digits.

This is particularly noteworthy because it is primarily core where our sales effectiveness changes were aimed. The third encouraging sign, National Accounts where high single-digit growth continued. We're encouraged by new account activity, which is ramping along with the other changes in sales and bodes well for future growth prospects.

The one trend that was not positive was government. Government growth was down mid-single digits in the fourth quarter and mid-teens thus far in the first quarter of 2019. This was due to a slower rate of government year-end spend along with the additional impact of a couple of recent contract losses.

The developments in government are muting the improvement that we're seeing in the rest of the business. We have taken swift actions to correct the issues in government, but I do expect it to remain a headwind over the next couple of quarters.

The fourth encouraging sign is growth in our smallest accounts represented by our direct marketing channel. As we have reengineered our sales model, we've done the same with our direct marketing channel, putting more resources behind it and transforming it to be less transactional and more relationship and loyalty based. Combined with the benefits of web pricing, these changes are translating into results.

During our fourth quarter, the direct marketing channel grew double-digits. That momentum extended into September with direct marketing up in the mid-teens, while representing less than 10% of sales, we view this as another encouraging sign as an indication that we can bring our new value proposition to life, even without a live person in the right-sized accounts.

Rounding out the results of our fiscal fourth quarter, sales to vending customers contributed roughly 200 basis points to growth, and our net saleable SKU count was nearly $1.65 million, up from last quarter by roughly $40,000. Given the success of our SKU expansion program, we accelerated it in our fiscal fourth quarter, and this should positively impact sales growth as we move through the year.

Turning to sales headcount, we mentioned on our last two calls that we had opened up our recruiting funnel, and we're pleased with what was a strong recruiting effort in the fourth quarter, and as a result, we added a net 35 sales people. You'll also see in our operating statistics posted on the website that we made a slight change to the field sales and service definition.

As we completed the sales effectiveness changes, we thought it was a good time to reassess our definition which now includes any associate who is in our customer's facility providing a sales or service function.

As a result, headcount numbers changed slightly and we've restated historical data accordingly. You'll see though that it has not changed the historic trends. Looking forward, we expect to add somewhere in the neighborhood of 50 sales associates across the balance of the fiscal year.

Of course, this could move up or down based upon the environment and the performance that we're seeing out of our new reps.

I'll now turn it over to Rustom.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Thank you, Erik. Good morning, everyone. Before getting into the details, let me remind you that we had provided Q4 guidance for both our total Company results and for our base business, which is total Company excluding acquisitions.

For the fourth quarter, our total average daily sales were $13.1 million, an increase of 9.5% versus the same quarter last year. DECO and AIS between them contributed 500 basis points of acquisitive growth and base business growth was 4.5%.

Our reported gross margin was 42.9% for the quarter at the top of our guidance range and down 130 basis points from last year with roughly 100 basis points of this coming from the acquisitions.

Excluding these acquisitions from both periods, our gross margin was 44.3%, down roughly 30 basis points.

In Q4, the lagged impact of product cost increases from earlier in the year exceeded the benefits of higher realized pricing and supplier rebates. We still ended fiscal 2018 with base business gross margin essentially flat with the prior year, but until our next price increase, which will likely be during our fiscal Q2, the net impact of price and cost should be a slight headwind, and you will see this reflected in our fiscal 2019 first quarter guidance.

We continue to drive productivity in Q4 with OpEx to sales reduced 90 basis points from last year to 30.1%. Total OpEx was $252 million, up $18 million from last Q4 with about half of this increase coming from the acquired businesses. Of the base business year-on-year increase, roughly $5 million is attributable to volume-related variable costs such as pick, pack, ship, freight and commissions, the balance is mostly from personnel-related costs and investments.

Base business OpEx to sales improved to 30.6%, roughly 50 basis points below last year's Q4. So once again, productivity and cost controls offset much of our investment spending and general inflation increases.

Our fiscal fourth quarter operating margin was 12.9%. It's worth mentioning that we incurred $3.2 million of AIS acquisition costs and purchase accounting charges required to amortize the stepped-up value of acquired inventory. This pulled our operating margin down by roughly 40 basis points.

Our base business operating margin was 13.8%, a 30 basis point improvement on the comparable result in the same quarter a year ago as we leveraged our OpEx.

Inclusive of the impact of the Tax Cuts and Jobs Act, our total tax expense on a percentage basis for the fourth quarter was 29.6% in line with guidance. All of this resulted in reported earnings of $1.29 per share, $0.02 above the midpoint of guidance. This included $0.03 of dilutions (ph) from acquisitions that essentially comprise of AIS acquisition cost and purchase accounting charges, and in Q2, due to the Tax Cuts and Jobs Act, we had a one-time net EPS benefit of $0.72 from the revaluation of tax related balance sheet items. In Q4, as we completed the year-end true-up of net balance sheet revaluation, the impact was a $0.01 negative reaction taking the full-year benefit to $0.71.

Now turning to balance sheet. Our DSO was 56 days flat with our fiscal third quarter. Our inventory increased slightly during the quarter to $518 million, that's up $6 million from Q3 and base business inventory turns remained sequentially flat at 3.5 times.

Looking ahead to the first quarter, we expect inventory to continue to increase as we protect against possible supply chain disruption and also buy ahead of expected price increases. Net cash provided by operating activities in the fourth quarter was $109 million versus $88 million last year. The main driver was a $12 million increase in net income.

Our capital expenditures in the fourth quarter were $14 million, and after subtracting capital expenditures from net cash provided by operating activities, our free cash flow was $95 million, that compares to $79 million in last year's Q4. We also bought back 680,000 shares for $57 million during the quarter.

Our fiscal 2018 free cash flow generation was very strong with $295 million generated versus $200 million last year. We ended fiscal 2018 with capital expenditure of $45 million, that's relatively flat versus fiscal 2017's $47 million, and most of the year-on-year improvement can -- is attributable to higher operating profits, lower cash taxes paid, and lower uses of cash for working capital.

We use this strong free cash flow to pursue our balanced, but opportunistic capital allocation philosophy. We spent $88 million on the acquisition of AIS, versus the $42 million acquisition spend in the prior year, $82 million in buying back 972,000 shares versus $49 million for 685,000 shares in fiscal 2017. And we also increased our ordinary dividends by 23% paying out $125 million versus $102 million in the prior year.

We still ended the fiscal year with a $28 million reduction in our net debt, going from $517 million to $489 million, and our leverage ratio also declined slightly over the year, ending fiscal 2018 at 1 times, so we continue to have significant balance sheet capacity.

Our total debt as of year-end was $535 million comprised mainly of $224 million balance on our revolving credit facility, and $285 million of long-term fixed rate borrowing. We also ended the year with $46 million in cash and cash equivalents.

Before turning to our Q1 guidance, let me briefly cover our full-year P&L performance. Revenue rose 11% or $316 million with $178 million of this growth being organic. We maintained our base business gross margin of 44.6% in a tough environment, and improved our total company OpEx to sales ratio by 100 basis points in fiscal 2018.

Our continued focus on productivity and reducing our cost to serve helped to offset inflation and helped us fund investments. Due to acquisitions, our total MSC operating margin remained flat at 13.1%, however, our base business operating margin rose by 50 basis points from 13.2% to 13.7%, and our operating profit grew by almost 11%. All of this resulted in a base business incremental margin of 23% for the year.

So now let's move to guidance for the first quarter of fiscal 2019, which you can see on slide 6, and it is shown with and without acquisitions. Now that DECO is in the base, it is only the AIS business that is included in acquisitions.

We expect total Company ADS to increase by 6.8% to 8.8% versus the prior-year period. This includes 4.5% to 6.5% of organic growth, and around 230 basis points from AIS.

Our Q1 total gross margin is expected to be 43% plus or minus 20 basis points, that's up 10 basis points sequentially and down 60 basis points year-over-year, roughly half of the year-over-year decline is due to AIS.

As I noted, when discussing our Q4 base business gross margins, supplier cost increases will be a slight headwind until we put through a midyear price increase in our fiscal Q2, and while price realization remains positive, it will not fully offset the expected cost increases in Q1.

Our operating expenses are expected to be around $254 million, up $18 million over last year's first quarter, with the acquired AIS business, accounting for roughly $5 million of this. Variable expenses associated with higher base business sales account for roughly $4 million, the remainder comes another roughly $4 million, the remainder comes mostly from inflation net of productivity, investment spending, like our increased field sales and service headcount, as well as our stepped-up direct marketing programs.

We are also incurring just under $1 million of severance cost this quarter that will not repeat. However, even after absorbing all of these, our expected OpEx to sales ratio in Q1 is unchanged from the prior year's Q1. Sequentially, our OpEx is expected to be up about $3 million after allowing for volume movement, and again this is primarily attributable to the increased field sales and service headcount, the stepped-up marketing and the severance costs.

We expect the first quarter's operating margin to be approximately 12.3% at the midpoint of guidance, a 60 basis point decline over last year's 12.9%, almost half was due to AIS, with the remaining roughly 30 basis points coming from the year-on-year gross margin decline.

Our productivity journey continues, but the difference this quarter comes from the impact of specific decisions. First, sales force expansion. While this has been telegraphed for a while, we saw a larger step-up in sales headcount than we are like in Q1, that we are likely to see in the next couple of quarters.

Second, the increase in direct marketing because of the strong growth we are seeing. Third, the severance costs which will offer future cost savings. All of these actions are to support growth and organizational alignment with our plan. While these actions may impact our reported operating leverage, the fact is that our productivity initiatives are still going strong, and we will continue to pay future dividends.

Turning to our estimated tax rates for the first quarter, it is 25.2%, in line with what we said in January. Our guidance also assumes that our weighted average diluted share count declines to roughly $55.9 million. Our fiscal 2019 first quarter EPS guidance range is $1.28 to $1.34. Note that this is after absorbing $0.01 of dilution from AIS.

Let us now move into our fiscal 2019 annual operating margin framework. As a reminder, this annual framework is our attempt to helping you understand how our business is likely to perform under various macro environments, with our specific initiatives also baked in. Given the short cycle nature of our business providing guidance beyond the quarter is extremely difficult. We also realized that individual quarters have swings and are players (ph) in both directions.

So this framework allows you to choose the likely macro environment affecting both demand and pricing and then see how our business will likely perform over the course of the year.

Like last year, we are providing potential annual growth rate scenarios on the horizontal axis, however, we are making a change to the vertical axis of our framework, moving from the price environment for the year to annual gross margin scenarios. We're doing this to provide greater clarity. Again this is the two-by-two matrix that you see on slide 7 and 8, the first for the base business excluding AIS, and the second for the total company.

Now, with respect to the gross margin axis, the big driver that will determine whether we fall into the contraction or expansion scenarios is pricing. If the tariff stimulate inflation in the form of broad-based manufacturer list price increases, then we'd likely move into the expansion scenario, assuming historic levels of price realization.

If tariffs do not stimulate broad-based list price increases, we'd likely move in the contraction scenario. This is because we will face cost increases if the calendar 2018 supplier price increases move -- work their way through our P&L.

Also as you can see, also as you can see, we are entering the framework on where we are guiding Q1 gross margins, as this represents our most current data points. In both the base and total Company frameworks, the contraction scenario assumes that price realization is insufficient to offset the impact of cost inflation and mix.

Conversely, the expansion scenario assumes that we realize price at a level sufficient to more than offset cost inflation and mix.

Now moving to framework themselves. For the base business, as you see on slide 7, the moderate growth scenario is 4% to 8% ADS growth, and our strong growth scenario has an ADS range of 8% to 12%. For the base business, our gross margin range in the contraction scenario is 42.5% to 43.3%, while it's 43.3% to 44.1% in the expansion scenario.

Our base business operating margins under these scenarios range from 13.2% to 14.4%, with an average of 13.8%.

Now is the total Company framework. As you see on Slide 8, AIS is expected to add roughly 150 basis points to our ADS growth. So the moderate growth scenario ranges from 5.5% to 9.5%, and our strong growth scenario ranges from 9.5% to 13.5%.

In the total company framework, our gross margin range in the contraction case is 42.3% to 43.1%, while it is 43.1% to 43.9% in the expansion case. Including AIS, reduces operating margins by about 20 basis points to 30 basis points in each quadrant, therefore they range from 12.9% to 14.2% with an average of 13.5%.

Stepping back, as you can see from our framework in 3 of the 4 quadrants, base business operating margins would likely expand over fiscal year 2018. The scenario in which they likely would not expand is the lower left quadrant. That would happen if revenue growth does not improve from current levels and if gross margin contracts from here, which means we do not see broad-based price inflation.

In two quadrants we will achieve 20% incremental margins. The driver to getting there would once again be pricing, if we see broad-based pricing, we likely hit 20%, if we do not, it would be likely -- it would be difficult to reach.

I'll now turn back to Erik.

Erik Gershwind -- President and Chief Executive Officer

Thank you, Rustom. As you've heard me say many times, technical expertise is an important element of our competitive advantage, and one way it is -- manifest itself is in documented customer cost savings. We delivered roughly $400 million in documented cost savings to our customers in fiscal 2017, and I'm happy to share that we did the same in fiscal 2018 delivering another $400 million.

These savings represent meaningful productivity gains for our customers. There is another equally important though element of our competitive advantage and that's our high touch customer service culture. Put simply, every single associate in our Company, puts the customer first. So before I close, I want to share a quick example that brings this to life.

A couple of weeks ago on a Sunday, an important Midwest-based customer that manufactures marine engines, called our MSC sales person early in the afternoon desperately needing help to keep their shop floor running. They had an important job to get out by the end of the next day, but were in need of a pretty obscure part that if not in hand would cease production.

Our team mobilized within 20 minutes of the call and by 5:00 PM, we had opened up one of our warehouses, found the part and shifted. It arrived at the customer's dock first thing Monday morning ensuring that they meet their production deadline. Our role with our customer was bigger the next day availability. We helped them get a critical job out the door and in doing so, helped them satisfy their customer.

Examples like this happen all the time across our Company and speak to our entire team's dedication to our customers and to our mission.

We'll now open up the line for questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions).

And our first question today comes from Hamzah Mazari from Macquarie. Please go ahead with your question.

Mario Cortellacci -- Macquarie Research -- Analyst

Hi, this is actually Mario Cortellacci filling in for Hamzah. So if I heard correctly, it sounds like you guys plan on passing through your cost increases that are due to the tariffs. Just want to clarify, I guess do you plan on passing through those price increases to cover 100% of the increase? And do you think there'll be any lag in this process and maybe you can provide any color on how those conversations are going with clients?

Erik Gershwind -- President and Chief Executive Officer

Yes, Mario, it's Erik. So look, the short answer is yes. We plan on passing along all of the increases that we're seeing. As we said, there's really two effects, the direct effect, where MSC pays the tariff, where we're doing direct importing and an indirect effect from suppliers who are doing the importing.

What I would say is, it's still relatively early. So as it relates to the direct effect where MSC is directly affected by a tariff, we are testing that along, we are doing so right away and do expect to recoup all of the costs.

With respect to the indirect, what I would say is the -- as I mentioned, it is still early. So while there have been some select suppliers that have moved, most have not yet. And that really speaks to the timing lag that Rustom talked about earlier as it relates to gross margin, where we are beginning to realize through our P&L right now, cost increases earlier in the year, many of these price increases that we likely expect to see have not yet happened and would most likely occur in the form of the manufacturer who makes lots of parts and the inputs may only be a portion of the final product that this would likely make its way through to the market in the form of a list price increase, our expectation would be like in a typical year that would occur early in calendar -- meaning January 2019 when we see the bulk.

So I would anticipate over the next month or two we are going to have a lot more discussions.

Mario Cortellacci -- Macquarie Research -- Analyst

Great. And, maybe you can also comment on how you think about your headcount growth longer term given the current demand environment and maybe you can touch on any existing capacity within your sales force as you guys approach your new sales force strategy?

Erik Gershwind -- President and Chief Executive Officer

Yes, sure, Mario. So look, the first thing I'll say is and hopefully you can tell by the tone, I am encouraged by the progress that we're seeing under the covers in terms of the sales, the sales effectiveness change is taking root particularly with what we're seeing in the trends in the core business which is an important part of the business for us, it's one that's lagged and it is starting to pick up momentum.

So I think that speaking to progress being made. As it relates to -- look, the whole rationale behind these changes was to move the sales force and keeping with the strategy and to create a more efficient model, so that over time, we expect to add headcount, but not at the rates that we have been adding in the historical formula.

What you saw from the fourth quarter to the first quarter, quite frankly was the result of a really strong recruiting effort. We have plans and projections and then there is the reality that hiring is not a precise science and you never know exactly how many you are going to translate in one quarter.

So that plus 35 from Q4 to Q1 is a bigger step-up than you're likely to see from us to the balance of the fiscal year with the one caveat being what you mentioned, which is the sort of two variables that we would look at to assess whether we -- I had shared from here on out somewhere in the neighborhood of plus 50, over the remaining 3 quarters, that could move up or down based on two variables, one being the environment as you mentioned and the second being the performance of the new reps (ph) under the new model, meaning if we really like what we're seeing in terms of performance, we could potentially move that up.

Mario Cortellacci -- Macquarie Research -- Analyst

Great, thank you so much.

Operator

Our next question comes from Evelyn Chow from Goldman Sachs. Please go ahead with your question.

Evelyn Chow -- Goldman Sachs -- Analyst

Good morning, guys.

Erik Gershwind -- President and Chief Executive Officer

Hi, Evelyn.

Evelyn Chow -- Goldman Sachs -- Analyst

Maybe just touching upon your expected price increase in fiscal 2Q. I understand that some of your suppliers have yet to sort of take incremental price actions thus far to calendar year end. But what are the potential prospects? Are you seeing an earlier than expected price increase? And also with the 25% step up in mine on Jan 1, would the magnitude of that price increase for your business perhaps exceed the 1.5 points you put up this quarter?

Erik Gershwind -- President and Chief Executive Officer

So, Evelyn, look, I think, as we -- the closer we get to year-end here, the less likely it is although possible that our pricing action would precede Jan 1, it is possible, so it could happen even earlier in Q2, meaning December, it would really be a function of what happens with our manufacturers.

As you've heard me say now, excuse me by the way, struggling with this little Northeast cold here, but as you've heard me say the inflation has been slower to move than I would have expected, I will tell you that there is a lot of discussion occurring obviously because of the tariffs.

So we are expecting there to be a meaningful supplier movement, but we'll see. I mean, I think the next 1 to 2 months are going to really bare it out and then obviously the next key will be once we take an increase which we would expect to, how we do on realization and look the environment right now is becoming more and more right for achieving solid levels of realization because certainly all suppliers, all customers are talking about input costs rising.

Evelyn Chow -- Goldman Sachs -- Analyst

Makes sense, Erik and then turning to the government declines, could you just elaborate on the nature of the contract losses and maybe give us some insight into the actions you're taking to recover this business in the line of say -- into doing so in the next couple of quarters?

Erik Gershwind -- President and Chief Executive Officer

Yes, sure, sure, Evelyn. Look the government -- so our government business, which we've described is in the neighborhood of 10% of sales is made up of a lot of contracts across a lot of different entities in the government.

So it's pretty well diversified and spread out across this entity called government. The contracts generally are multi-year terms with renewals at varying dates, and over time, here and there we lose one, generally, we've done well in government and we win more than we lose, but just recently, and the reason I called it out, we lost a couple, which is not an usual event for us and it's why you saw the growth rate, I mentioned than what it (inaudible) the growth rate in Q1 stepping down from Q4.

We made a couple of adjustments to be perfectly frank, the most significant is leadership. We changed that pretty quickly. In addition, we're taking some other countermeasures to go after some new business, to mitigate some of this headwind and recapture our share there.

So what I described is I think we'll probably see government as a headwind for the next couple of quarters, but if some of these countermeasures do their job that -- it would lessen.

Evelyn Chow -- Goldman Sachs -- Analyst

Great. And then finally, one last quick clarification from my end. Just on AIS and their impact to gross margins in 1Q, could you go into a little more detail as to what you're seeing there because I thought that inventory step up was probably supposed to rollout from 4Q to 1Q.

Erik Gershwind -- President and Chief Executive Officer

Yes, the inventory step-up has the amortization, Evelyn, that's finished. I mean that took place in the fourth quarter. What you're seeing is just fundamentally the impact of AIS being a business that comes in at a much lower gross profit, gross margin number than MSC's. I mean the gross margin is in the mid '30s basically, with -- in the low to mid '30s.

Evelyn Chow -- Goldman Sachs -- Analyst

Understood Rustom. Thanks guys and I feel better, Erik.

Erik Gershwind -- President and Chief Executive Officer

Thank you, Evelyn.

Operator

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

Ryan Merkel -- William Blair -- Analyst

Hey guys, good morning.

Erik Gershwind -- President and Chief Executive Officer

Hey, Ryan.

Ryan Merkel -- William Blair -- Analyst

So first on first quarter '19 core gross margin guidance down roughly 100 basis points. Can you quantify the impact of negative price cost for us?

Erik Gershwind -- President and Chief Executive Officer

You're talking -- Ryan are you talking about our guide?

Ryan Merkel -- William Blair -- Analyst

Yes, the guide for the first quarter ' 19.

Erik Gershwind -- President and Chief Executive Officer

To be honest, not yet, we'll do it after that -- given that -- look, it's still moving, we generally like to wait for the quarter, before we give you price cost.

So look, it will be slightly as Rustom said what's happening right, and maybe just would it be helpful just to talk about -- just step back and talk about the margin dynamic what we see happening right now?

Ryan Merkel -- William Blair -- Analyst

I think it would especially in the context that you got a 1.5 increase in the big book, yet you're negative on price cost, so maybe just explain on that.

Erik Gershwind -- President and Chief Executive Officer

Yes. So really, price realization, just to be clear, price realization has been fine this quarter, so based on the price increase, what you're seeing -- I'm sure you are reacting to is from Q4 to Q1, you're seeing a sequential movement of a minus 20 basis points, whereas typically you'd expect to see flat to up from us.

Price realization is fine and it has been solid, what you're seeing is 3 things going on. One is, as Rustom mentioned, purchase cost escalating and this is the timing issue that we generally have when these are going back to the start of calendar 2018 when the cost come in and we get pricing ahead of costs.

Two is we have a handful of national accounts that are a lower margin national accounts that happen to be growing robustly, and are creating a bit of a mix issue within national accounts for the moment. And then the third issue is, well, pricing which slightly -- and I say slight headwind to gross margin, but of course is helping fuel growth in the small accounts, which over time we see as a tailwind actually.

But that's what's going on. So the price realization, getting pricing in has been fine, those are three factors that are accounting for the 20 basis points.

Ryan Merkel -- William Blair -- Analyst

Okay, and then to follow-up 2019 framework you have scenarios where gross margins expand year-over-year. So what would you need to assume for that to happen, obviously, you need to put through a midyear, do you also need to assume that mix is positive? So the core outgrows national accounts, is that a possible outcome?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

So, Ryan, fundamentally it's pricing, right? I mean pricing would be the big one. So broad-based inflation with us putting through price increases. Now with mix, I mean, even though the core businesses has been doing much better and the core businesses, you know, inherently (ph) profitable there, and so mix would be a factor, but the fundamental is pricing.

Erik Gershwind -- President and Chief Executive Officer

Ryan, one point to clarify in the framework and Rustom hit this in the prepared remarks, just wanted to make it clear, so the midpoint is a little different from last year, the midpoint of that of that framework, if you go on the vertical gross margin access is -- so if you go to last years and let's take AIS out into our base business, if you're going to last year fiscal 2018's gross margin, for the year, it averaged 43.7%.

The midpoint of that line is not 43.7%, it's 43.3%. We chose 43.3% because it is the most recent data point we have in our Q1 guide, but, in other words, to get to that top half of the framework, we don't need to be above last year's average.

We need to be above Q1's 43.3%, and if you look back in time, look, you see some years where from Q1, it just -- margins just drift down, those are typical years where there is no pricing and kind of the natural headwinds in the business go down, but you will see other years where gross margins in a couple of years back, where from Q1 gross margins are flat or even up a bit and those would particularly be in years where there was a solid midyear.

So I just wanted to make that point that it's not off of last year's average, it's off of Q1.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

That's the first time that we provided gross margin on the Y-axis and so we decided, looking at that, that better to go off way, we're seeing ourselves running currently versus going off last year's number. You could do one or the other. We just happen to choose that.

Ryan Merkel -- William Blair -- Analyst

Got it. Okay. And just lastly, you mentioned general inflation could help your gross margins in '19, and I think you're one of the only distributors I've heard so far say that tariffs, I guess indirectly could help your gross margin.

So, can you just explain how this works exactly, because it feels like achieving positive price cost is tougher these days just given the transparency.

Erik Gershwind -- President and Chief Executive Officer

So, Ryan. Here is the dynamic in what I would split out is direct -- what we characterize is direct versus indirect. And I think on the direct -- and I think one of the thing is that the Company, MSC has a relatively low percentage compared to other distributors of direct China sourcing right at around, we sit around 5% of total, and I think there, the difference is in that case, we're paying the tariff.

In that case, I think you're right, I think it's a challenge and sort of best case is you get all the tariff through which is what we're going to aim to do, and best case is -- is it's a net neutral, right? The other side is where there are branded industry suppliers, who in most cases, in some, but not all of their product line is coming from China, and while they're realizing tariffs, unlikely, that these companies are going to go along and take to market a 25% increase that more likely in discussions that we're having with many industry partners, what we're likely to see is that gets blended in, and that gets blended in the form of an industry increase.

If that's the case, it's really not all that much different from when we see a normal list price increase from the manufacturer, except that the amount could be bigger and I think there will be more air cover around price realization, our customers, our suppliers, everybody acknowledges that input cost is going up.

So that's the difference between the direct and the indirect.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Just one point to add there. We can also adjust sourcing, just like suppliers, just like suppliers within, you know, particularly exclusive brands, while the rest we can offer our customers, alternative products are not affected, work on our supply chains, all the rest of that. So it is still early days and then the biggest part of the tariffs are I guess, not due to kick in for around a couple of more months, but there is multiple ways to address that.

Ryan Merkel -- William Blair -- Analyst

Very helpful, thanks.

Operator

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

David Manthey -- Robert W. Baird & Company Inc -- Analyst

Hi, good morning guys. First off, Erik, can you outline what specific changes were made with sales force effectiveness? Why they had such a negative impact on your growth and what are the key factors that are expected to drive productivity in the coming year?

Erik Gershwind -- President and Chief Executive Officer

Yes, sure David, so looking back on the last year, as I mentioned in the prepared remarks and let me put it very simply, if I had to describe our old sales or older prior sales model, which was really tied to a spot buy value proposition, it was more of a one size fits all model, meaning that we would hire the same profile of sales rep and that sales rep would have accounts on his or her portfolio that would span the range of lifecycle with MSC, meaning brand new accounts, all the way to highly penetrated complex accounts on the same portfolio.

The fundamental drift of the changes was to cluster and segment out our sales force, so that we have a few different roles tied to specific different types of accounts, so it is more focused. At it's simplest level, that was the change made, it was a lot of disruption last few days, because what we had to do to make that happen to get from where we were to where we are, is there was movement of people into new roles, there was movement of sales people across customer relationships, and as we went through these changes, our head of sales rightfully called out and said, hey, I've got to slow down, I've got to take sales headcount down because we were hiring into an old selling model, which would not have made sense.

So we took a pause on hiring to as we segment, so sales headcount came down which was sort of a double whammy on top of the disruption. We are now on the other side of it and I would say, we are starting to find our sea legs and see the kind of progress that the pilot test market would suggest.

So we had a pilot market here, before we put the whole sales force through this, that pilot market took a couple of quarters, I would say to settle in and then took a couple of quarters for it to reach double-digit growth.

So if I -- what we do is we track that pilot market's progression against the Company, the Company in Q1 is right on track, particularly, and look, the issues in government that I just mentioned earlier are muting what is pretty solid progress in specific areas such as the core, which is really where the bulk of these changes were aimed at the core, and so we're encouraged there.

David Manthey -- Robert W. Baird & Company Inc -- Analyst

Okay, thanks for clarifying, and Rustom, the second question is on expected contribution and pull-through margins, the framework seems to imply at the midpoint, full-year contribution margin, close to 20% and pull through around 40%, if I'm calculating it right, but the midpoint guidance in the first quarter is much lower than that.

I'm just wondering what do we have to bet on to believe that the remainder of the year in terms of read through margins are going to be better than what we've seen or that what we're going to see in the first quarter?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

So David one quick point here, I mean first of all, it's a quarter and quarters do move around, I mean we've had quarters in the past we've been almost 30% and that's like (ph) don't walk away thinking it's 30, it's an annual framework and you kind of run annually. Actually if you also look back at last year's Q1, just interest, I mean that was again, it was probably around 10%, I think from memory, the incremental margin in Q1 of last year.

So take the quarter factor out of there. So really -- so how do we deliver that 20%? I mean, first of all we are constantly driving productivity. Our OpEx to sales has improved 180 basis points over the last three years. We're driving functional productivity, we're reducing our cost to serve and yeah, in '19, you know, we are going to see the cost impact in Q1 as it comes in, in particular of the increased investments in sales and service headcount, we are continuing to do that and we are spending on marketing as well, right.

So we'll continue to see that. I mean that's the range there. But the other point that Erik made was really important, so I'm just going to repeat it, I mean it's the (Technical Difficulty) to deliver those 20% type incremental margins, we don't have to actually expand our gross margin, you know, provided the decent sales we've got to come in relatively close.

We've got to come in relatively close to the gross margin, the midpoint, if you will, that we have in there, but we're not really looking for expansion per se. So I mean, it's a combination of those factors as we go through the year, and I guess the final one, and I'll just repeat that again because it is important, it's realized pricing. I mean that's going to have -- would be a huge determinant in terms of the flow-through that it has, because we -- to quite an extent, we know what our costs are anyway at this point in time, certainly in the early months because we've got a lot of cost increases that have come through, others will happen but as those cost increases occur, it take -- it's a lag, just like, you know in our business, the average pricing, the fact that we buy ahead, all the rest of it, so the cost increases that come through to us later this year will take a while to work their way through our P&L.

So pricing is huge as well. Erik anything to add?

Erik Gershwind -- President and Chief Executive Officer

I think that will pretty comprehend. The only thing I'll add Dave is that the OpEx. So with respect to OpEx, you know there is a step up from Q4 to Q1. There is a bit of it in there that doesn't repeat, but then the other part of the step-up is growth investments, and if we look out across the balance of the year, it's not like OpEx goes down.

So OpEx goes up modestly through the year, but OpEx as a percentage of sales assuming we do on the revenues, what we'd expect to do on the revenues, OpEx as a percentage of sales comes down, so we actually do get leverage as we move through the year. That's the plan.

David Manthey -- Robert W. Baird & Company Inc -- Analyst

Yes, OK. Alright, thanks guys. See you next week.

Erik Gershwind -- President and Chief Executive Officer

Thank you, David.

Operator

Our next question comes from Ryan Cieslak from Northcoast Research. Please go ahead with your question.

Ryan Cieslak -- Northcoast Research -- Analyst

Can you hear me?

Erik Gershwind -- President and Chief Executive Officer

Now, we can Ryan.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay, great. Sorry about that. Yes, so I just wanted to make sure I understand maybe the impact from this loss of government contracts on the first quarter organic sales guidance, you guys were giving, as well as the framework for the full year. Can you quantify ultimately, how much of an impact that's maybe dragging on organic sales?

Erik Gershwind -- President and Chief Executive Officer

Yes. So looking in Q1, Ryan, just without getting too specific for competitive sensitivity, you could get a sense, so we had a step down from mid-single digits, and then we talked about mid-teens, what I would tell you is not all of that, there is a portion of that, that is a change in year-end spend activity year-on-year, but a decent portion of that is the headwind from the losses.

I've mentioned that a headwind will likely continue for the next couple of quarters, but look, there's a lot of countermeasures going on. Number one, so there is a decent chance that the headwind moderates from where it is in Q1 and sort of zooming out and looking big picture here, what I've been talking about Ryan is the expectation that the business should be performing in the high single digits.

And that we would expect as we move through the year that it wouldn't get there overnight but that we would see improvement and that we'd be able to get there and look there are a lot of tailwinds that I see with the ability to offset these headwinds and still get there. So those are look, we're just settling into the new sales changes. We're making sales hires that are not yet having an impact, we added new SKUs that are just starting to have an impact.

Rustom mentioned, we increased direct marketing investment because of the performance in the small accounts, we see momentum building there. So there is other tailwinds that have been pretty encouraging.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay. And and just to be clear, when they rolled off at the end of last quarter, was there -- are they fully reflected rolled off in the September number, in October numbers you guys gave just want to make sure.

Erik Gershwind -- President and Chief Executive Officer

They're fully reflected in Q1.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay, got you. Because when I look at the October sales, it looked like, when you look at it on a two-year stack trend or you take into account the comps were easier in October that the growth rate seem like it moderated a little bit, is some of that from these government contracts or is there anything else Erik that you would point out, of maybe how things are looking in the last 30 days or so within the environment and overall demand.

Has anything changed significantly?

Erik Gershwind -- President and Chief Executive Officer

No, Ryan. I would say environment seems solid and progress again on the core accounts, the small accounts, kind of the bread and butter of the business if anything is doing better, you know, so just take mid-teens and say government ballpark 10% of sales and say hypothetically, if we're just flat, what does that mean to the overall growth.

Now obviously, look, we own it at all, but my point is with the bread and butter of the business here, I am encouraged that the sales changes that we made last year is starting to take hold. So nothing else, and nothing else I'd note in the environment or other parts of the business now.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay. And then for my follow-up and I'll get back in the queue. I was a little surprised that right now you guys are sort of facing price cost headwinds and I get the lag in realizing the cost and but it seems like you're just -- on the surface that price realization maybe has fallen below what you were expecting, at least that's how it comes off? I just wanted to maybe Erik, get a sense of why would your price cost dynamics actually improve into next year based on what we've seen so far here year-to-date you know, certainly considering it's been a strong environment.

Supply chains is tight, lead times were extending, if you were able to really sort of maybe offset some of these cost headwinds that have rolled in this quarter, why or how can you offset that and maybe get some more into fiscal '19? Thanks.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

So one quick point before Erik comes in there. I mean, you just said Q4 as a date (ph) I mean, our price mix, the realization as we call it there was 0.5% basically rounded to 0.5%. So I mean, you know, we continue to see price realization. Ryan, the really important point with the -- of what you see with our cost as we moved, we took a price increase back in, I think it was in July, right? And we've had cost increases come through.

Some of those cost increases we actually deferred the impact of by pre-buying, OK? And with some of those, and with all of them in any case with the way the average costing system works, it takes a while for them to actually start showing up in our P&L.

That's what's behind my other point, if you look at several months out, we've got a pretty good sense of provided our sales mix remains relatively the same, we got a pretty good sense of how our costs will trend. Erik?

Erik Gershwind -- President and Chief Executive Officer

Yes, only thing to add there Ryan is sort of in an inflationary cycle and Rustom described the dynamic as to why, what typically happens is again, as I always say the, the trigger for us is, other than the tariff situation is manufacturer list price movement, and that gives us the opportunity to pass along pricing. We take a timing benefit where we get -- we realize price ahead of costs, primarily because of the average costing system that Rustom mentioned and you saw that from us.

So if you go back to a couple of quarters ago, we had a couple of quarters there where price turned from negative to positive and costs were still in the flat range and that created positive variance.

Over time what happens is, the costs worked their way through our P&L and in an inflationary cycle, what then happens is there, there is a next round of pricing and we get another benefit, and then the cost catch up, et cetera, et cetera. So that's basically what you're seeing here.

Look, our summer increase here at 1.5% was not as big as I would have thought given the headlines, but the opportunity, hopefully, this is temporary and specifically temporary if the tariffs stimulate manufacturers to move as we suggest.

That's really the story.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Turning it back to me for a second. I mean we're pretty focused on gross margin stability, if you think about it, I mean the -- just want to make sure it doesn't get lost in this. If you look at our base business over fiscal '18, right, our gross margins for the year are pretty much in line with '17, I mean I think in this environment, that's actually being not too bad at all, and that gets achieved by a bunch of discipline in how we approach business, I mean, the focus on mix, the focus on customer profitability, that's the gross margin end of it, so the cost to serve doesn't impact that, but we also spend a lot of time and efforts on cost to serve, that shows up in our productivity and helps us in our operating margins.

So I just want to make sure that, that was out there as well as we focus on Q1, how we've done in '18.

David Manthey -- Robert W. Baird & Company Inc -- Analyst

No, that's fair. And I appreciate the color. I just want to be clear though. So there's something that you think Erik, that is impacting your ability to get price today, may be related to some of these sales force initiatives and certainly there's been a balance between top line growth and margin, but as you move forward, as this is now behind you with the sales force initiatives, you have some new guys coming in and that should not impact your ability ultimately to continue to get price and offset these costs that are rolling through. Thanks.

Erik Gershwind -- President and Chief Executive Officer

No, No Ryan, the only other two factors I'll call, the answer is no. It should, the new sales model should not impact our ability to get price. The only two other factors that I mentioned in the gross margin, while Q4 to Q1 beyond the purchase cost that we talked about were one, national accounts, so we did have a handful of accounts that are lower margin accounts that grew a lot.

Two is, right pricing which we've been working on and we talked about it last couple of quarters, which is a slight -- it's not a major needle mover, a slight headwind. But a slight headwind near-term, it is helping to fuel the growth in the small accounts that we've been talking about the direct marketing channel, which if that continues, actually over time becomes a tailwind for us.

But those are the only two other factors I'd call out.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay, thanks guys.

Operator

And our final question today comes from Steve Barger from KeyBanc Capital Markets. Please go ahead with your question.

Ryan Mills -- KeyBanc Capital Markets -- Analyst

Good morning, guys. This is Ryan Mills on for Steve.

Erik Gershwind -- President and Chief Executive Officer

Hey, Ryan.

Ryan Mills -- KeyBanc Capital Markets -- Analyst

Yeah. My first question, you added 35 field reps this quarter and Erik, I believe you said you're going to add 50 more by the end of the year. Can you maybe talk about the impact on your operating margin framework in regards of that, because I assume it -- there is a fixed cost component tied to that, where you start them as a salary and then transition them on a commission-based pay structure?

So is there any impact to your operating margin framework from adding field reps?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

So let me take that actually. It's already built in there. Yes, it does add to our costs, and the way this works is the, so like the people that we hired in Q4, for the most part, because they come in during Q4, they fully obviously hit for all of Q1, right?

Like that for the remaining 50 or whatever numbers it is that we actually bring on Board and the service people you have that factored through. But all of that is already factored into our sort of plans for the year and our operating margin framework.

Now one other point that we made and we made it in prior calls and remember is that the sales impact of this when you hire, there is always a lag when you bring in field sales people, there is always a lag before they actually start to drive enough sales to a, pay for themselves and then start to really do well.

So we'd assume that the hiring that we've started with at the end of Q4 and that's ongoing today, it's not really going to show up too much in our revenue until the latter part of fiscal '18 or fiscal '19 and then of course definitely in fiscal '20, right, so and all the stuff by the way is factored into the op margin framework.

Ryan Mills -- KeyBanc Capital Markets -- Analyst

Okay, and then going into your September and October trends, I know you called out government as a headwind. Sorry if I missed this in your prepared remarks, but were there any impacts that you could point out from Hurricanes?

Erik Gershwind -- President and Chief Executive Officer

Minor, yeah, it's a good question, Ryan, yes, I mean, look, there was probably, it gets really tricky to quite to -- to try to quantify it, so we didn't bother, look, there was probably some headwind in September and October to be honest, but we didn't make too much of it.

Ryan Mills -- KeyBanc Capital Markets -- Analyst

Okay, and then my last question, you reaccelerated your SKU count growth, can you talk about the decision-making process there, is it more focused on high turnover products or higher margin products?

Erik Gershwind -- President and Chief Executive Officer

So we will generally look at new -- so the new SKU program, which has been, you could see our SKU count has been growing for quite a while. We are generally, it's a pretty data-driven process where we are looking at products that are selling in the market, that customers are requesting that we may be sourcing adhoc, and looking to bring those in and create a more formal marketing program around them.

We will look for in terms of financial criteria -- we look across a number of metrics, primarily, we're looking at returns on capital, these tend to be efficient ways to add products because we will market them and bring them into inventory only after we see line of sight into revenue.

Of course, we'll look at margins, but primarily return on capital and tend to be very strong. So what we did in the fourth quarter, by the way is we saw an opportunity where we saw some recent success in certain pockets and we just, we hit the accelerator, so there was some Q4 expense, a little trickle over expense into Q1 it doesn't repeat, not that much, and from there, beginning this quarter, there is a little bit of contribution in Q1 and you imagine it builds over time as we move through the year.

Ryan Mills -- KeyBanc Capital Markets -- Analyst

Thanks for taking my questions.

Erik Gershwind -- President and Chief Executive Officer

Thank you, Ryan.

Operator

And ladies and gentlemen, at this time, that will conclude today's question-and-answer session. I would like to turn the conference call back over to Mr. Chironna for any closing remarks.

John Chironna -- Vice President of Investor Relations and Treasurer

Thank you, Jamie and thanks everyone for joining us today. We will be on the road, over the next coming months before the holidays attending some conferences and road shows, so we look forward to seeing you out there, and if not, we'll report our next earnings on January 9th, 2019. Have a good day.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Duration: 68 minutes

Call participants:

John Chironna -- Vice President of Investor Relations and Treasurer

Erik Gershwind -- President and Chief Executive Officer

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Mario Cortellacci -- Macquarie Research -- Analyst

Evelyn Chow -- Goldman Sachs -- Analyst

Ryan Merkel -- William Blair -- Analyst

David Manthey -- Robert W. Baird & Company Inc -- Analyst

Ryan Cieslak -- Northcoast Research -- Analyst

Ryan Mills -- KeyBanc Capital Markets -- Analyst

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