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MSC Industrial Direct Co Inc  (NYSE:MSM)
Q1 2019 Earnings Conference Call
Jan. 09, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the MSC Industrial Supply Company Fiscal 2019 First Quarter Results Conference Call. All participants will be in listen-only mode.

(Operator Instructions) Please note this event is being recorded.

At this time, I would like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead sir.

John G. Chironna -- Vice President of Investor Relations and Treasurer

Thank you, Denise, and good morning everyone. Welcome to our fiscal 2019 first quarter conference call. With me today are Erik Gershwind, our Chief Executive Officer and Rustom Jilla, our Chief Financial Officer.

During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments as well as our operational statistics, both of which can be found on the Investor Relations section of our website.

Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments on this call as well as the supplemental information we are providing on the website, contain forward looking statements within the meaning of the US securities laws, including guidance about expected future results, expectations regarding our ability to gain market share and expected benefits from our investment and strategic plans, including expected benefits from recent acquisitions.

These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and the risk factors in the MD&A sections of our latest Annual Report on Form 10-K filed with the SEC as well as in 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 Happy New Year, and thank you for joining us this morning. To kick off this morning's call, I'll provide a brief overview of our fiscal first quarter results. I'll then offer specifics about the environment and our recent performance before turning it over to Rustom to review the details of the first quarter and to provide our second quarter guidance. I'll then wrap it up before we open up the line for questions.

Our fiscal 2019 started with a slightly better than expected first quarter performance which included sales growth above the midpoint of our guidance range, gross margins in line with our guidance range, and earnings per share $0.02 above the midpoint of guidance.

Turning to the environment; despite some of the recent headlines and choppiness in the financial markets, the US industrial economy remains strong. Sentiment indices like the MBI remain in positive territory although down in recent months with readings of 57.7 in October and 54.7 in November. Adding the December reading of 53.4 brings the rolling 12-month average for the MBI to 57.7, which points to continued growth in metalworking end-markets.

And we continue to see this in customer order volumes and general industry sentiment, although there is more uncertainty than there was six months ago. Tariffs and lower oil prices are two overhangs with the potential to create macro headwinds. Another area of uncertainty is the government, as we're now well into a shutdown with no apparent end in sight. Historically, a shutdown initially softens demand, although it does create some pent up spending once the budget is approved and the shutdown ends.

With respect to tariffs; on our last call, we framed our own exposure as roughly 5% of our cost of goods sold. Reflecting those goods that are directly and indirectly sourced from China and that have exposure to the tariffs. Since that time, things have played out pretty much as expected.

We've seen the increases that we anticipated and we've generally been successful in passing those tariff increases along as they arise. As a result, tariffs have not had a material impact on gross margins to date. Of course we will, along with everybody else, watch and see what happens come March with respect to the potential step up to 25%.

And that's a good segue to the pricing environment. Since our last call, as expected, we've seen significant activity from our suppliers in raising their list prices and expect more to come this month in January, based on recent discussions. As a result, we anticipate implementing a meaningful price increase later this quarter, and more specifically, in the month of February. We decided to wait an extra month as compared to last year's mid-year increase in order to capture as many supplier moves as possible and so that we can begin notifying customers well in advance.

Turning now to our revenue performance in the first fiscal quarter, sales growth came in above the midpoint of our guidance range. Similar to last quarter's trends, core account growth continue to lift and was in the high single-digits, as was national accounts. As anticipated, governments saw a near double-digit decline. As we mentioned on the last call, this is the result of a couple of contract losses.

We expect government to remain a headwind to sales growth for the next couple of quarters with our third quarter being the peak of that headwind. Sales to vending customers contributed roughly 280 basis points to growth. More encouraging is that we've accelerated our vending signings and implementations which bode well for future growth prospects.

In fact, Q1 signings were up double-digit sequentially and more considerably over prior year. In support of this growing funnel, and as part of our high touch strategy, we've stepped up our vending service organization and have now brought the entirety of the service function in-house. We are now at headcount levels that are needed for the remainder of the fiscal year to support the growth. Finally, our net total active saleable SKU count was approximately 1.7 million, up from last quarter by roughly 20,000 SKUs.

Moving now to our recent salesforce transformation, it is now behind us. We continue to see improvements in our underlying growth rates, particularly in core, where most of the changes were aimed. Our recruiting efforts continued to deliver strong results in a tight labor market for the second consecutive quarter. We added a net 34 field sales and service personnel in the quarter. We now expect to add roughly another 40 or so through the remainder of fiscal 2019. This of course could move up or down, based upon the environment and based upon the performance that we're seeing.

The new additions will take a few quarters before they fully ramp up to speed and start contributing meaningfully to our growth rate. Finally, AIS continues to progress according to plan, delivering solid top line growth, in line with our expectations and beginning to make headway on cross-selling with MSC. We're encouraged by the nice start.

I'll now turn things over to Rustom.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Thank you Erik and good morning everyone. Before getting into details, let me remind you that we had provided Q1 guidance for both our total Company results and our base business, and that's total Company excluding the impact of the AIS acquisition. So I'll talk to both sets of numbers.

Our first quarter total average daily sales were $13.4 million, an increase of 8.2% versus the same quarter last year and above the 7.8% midpoint of our guidance. AIS contributed 230 basis points of growth while base business growth was 5.9%, also above the 5.5% midpoint of our guidance.

Our reported gross margin was 43% for the quarter, in line with the midpoint of our guidance range. This was down roughly 60 basis points from last year with about half of the decline coming from AIS. In our base business, price contribution remained positive. However, as expected, purchase costs continued to increase and mix remained a headwind.

Our next price increase will help mitigate this, but given the February timing, we will see very little benefit in our fiscal 2019 second quarter. We continue to drive productivity in Q1. And even with higher growth investments, OpEx to sales at 30.7% was flat versus last year's Q1.

Total OpEx was $255 million, up $19 million from last year's Q1 with about $5 million of this coming from AIS and roughly $5 million attributable to volume related variable costs, such as pick, pack, ship, freight and commissions. Another $5 million was growth investments, including additional field, sales and service personnel, stepped up marketing, the vending service initiative that Erik referred to earlier, and roughly $3 million of inflation, net of productivity.

Our base business OpEx to sales was also 30.7%, roughly flat with last year's Q1 and in line with our guidance, as the higher investments offset the benefits of sales leverage. With sales coming in above our guidance and gross margins and OpEx to sales in line with the guidance, the benefits of a stronger topline flowed through to our operating profit and our operating margin.

Our reported fiscal first quarter operating margin was 12.4%, down roughly 50 basis points from the prior year with approximately half of the decrease due to AIS. Our base business operating margin was 12.6%, that's down about 30 basis points from the same quarter a year ago and this was entirely due to lower gross margin as noted earlier, and both of these were slightly better than guidance.

Our total tax expense on a percentage basis for the first quarter was 25.1%, slightly favorable as compared to guidance of 25.2%. All of this resulted in reported earnings of $1.33 per share, $0.02 above the midpoint of our guidance. AIS had no impact on reported EPS.

Last year's reported EPS was a $1.05. However, if we apply the lower tax rate of 25.1% to last year's Q1, the net tax benefit would have amounted to $12 million and added $0.21 to last year's Q1 EPS. So therefore, excluding this benefit our Q1 EPS was up roughly 5% to the prior year's first quarter.

Now, turning to the balance sheet; our DSO was 58 days, up three days from our fiscal fourth quarter of 2018 and broadly in line with our typical seasonal pattern of collection slowing toward the end of the calendar year. Our inventory also increased during the quarter to $528 million, up $9 million from Q4, as we continued to buy ahead of likely supplier price increases and also to take advantage of calendar year-end rebate opportunities. Total Company inventory turns decreased slightly to 3.6 times.

Looking ahead to second quarter, we expect inventory to again increase as we protect against possible supply chain disruption and continue to buy ahead of further price increases. Should we see disruptions, our strong inventory position creates a competitive advantage for us, particularly versus the local distributors that make up the vast majority of the market. And in addition, the increases are coming almost entirely from our faster moving item classes, so we do not envisage any difficulties burning them off when we decide to slow down our rate of purchasing.

Net cash provided by operating activities in the first quarter was $77 million versus $82 million last year. Our capital expenditures in the first quarter were $10 million. And after subtracting capital expenditures from net cash provided by operating activities, our free cash flow was $67 million as compared to $73 million in last year's Q1. We paid out $35 million in ordinary dividends during the quarter and bought back 778,000 shares for $64 million at an average price of $81.71 per share during the quarter.

Our total debt as of the end of the first quarter was $523 million, comprised mainly up of $210 million balance on our uncommitted revolving credit facility and $285 million of long-term fixed rate borrowing. Our leverage remained at 1 times, unchanged both sequentially and versus last Q1.

Now, let's move to our guidance for the second quarter of fiscal 2019 which you can see on Slide 4 and is shown with and without acquisitions. Please remember that DECO is now in the base in FY '19 and it is only the AIS business that is included in acquisitions. Our fiscal second quarter, particularly December includes a larger than typical negative holiday impacts on total sales and operating profit.

We see this when Christmas Eve and New Year's Eve fall on Mondays. For this year we closed on Christmas Eve and New Year's Eve played out as expected with minimal sales. Through the first three weeks of December, growth was in the high single-digits before turning negative for the last two weeks during the holidays.

Overall, for Q2, we expect total Company ADS to increase by 8% to 10% versus the prior year period. This includes a 5.5% to 7.5% of organic growth range and another 250 basis points from AIS. You can see on the website offset that December's total average daily sales growth came in at 10.6%. That was boosted by one fewer selling day this year due to our closure on December 24th.

Our guidance forecast assumes January and February ADS growth at about 8%, similar to where we'd been running. When evaluating our Q2 ADS growth rate guidance in its entirety, it'd be fair to say that the higher ADS from one fewer selling day outweighs -- slightly outweighs the drag from holiday timing.

Our Q2 reported gross margin is expected to be 42.8%, plus or minus 20 basis points, and that's down 20 basis points sequentially and down 110 basis points year-over-year, roughly 20 basis points of the year-over-year decline is due to AIS.

On our last call, I noted that supplier cost increases would be a headwind until we put through a mid-year price increase. As Erik noted, we'll be taking our increase in February so as to include as many of the January increases as possible. Therefore, we do not expect significant incremental price contribution while the supplier cost headwind worsens in our fiscal second quarter.

So while we expect our mid-year price increase to be meaningful, it would have much more of an impact on our fiscal third quarter gross margin than on our second quarter. A sequential decline in Q2 is very typical in years where we don't have a mid-year price increase early in the quarter.

Operating expenses are expected to be around $256 million, up $17 million over last year's second quarter with AIS accounting for roughly $5 million of this. Variable expenses, associated with higher base business sales account for another roughly $4 million. Growth investments, including the higher field sales and service headcount should be another roughly $6 million. Recall that we added 35 sales and service associates in our fiscal fourth quarter, as well as another 34 in our fiscal first quarter and that we've added to our vending service team to support accelerated vending signing.

The remainder comes from inflation, net of productivity. After absorbing these costs, our expected OpEx to sales ratio in Q2 is 31.1%, flat with the prior year's Q2, and sequentially our OpEx is expected to be up around $1 million after allowing for volume movement, and again, primarily attributable to growth investment spending.

We expect the second quarter's total Company operating margin to be approximately 11.7% at the midpoint of guidance, a 110 basis point decline over last year's 12.8%. The largest driver is, of course, the gross margin decline; about 20 basis points is due to AIS, with another 20 basis points coming from -- roughly, coming from the more pronounced holiday timing in December. Finally, the additional sales and service headcount added in fiscal Q4 2018 and fiscal Q1 2019 reduced operating margin by roughly another 20 basis points.

Assuming the midpoint of our Q2 operating margin guidance, we would be at roughly 12% for the first half of fiscal 2019. This is below the bottom end of the range, in the lower left quadrant of our 2019 annual operating margin framework. However, our second half operating margins, on average, have been about 100 basis points higher versus our first half, due to seasonality. We expect to do better in the second half of this year and to be within the framework for the full year.

This is for a few reasons, including the lift from the meaningful mid-year price increase, continued traction in our sales program, front-end loaded investments, and the fact that we lapped the AIS acquisition in May. Keep in mind that AIS is contributing sales in the first half of fiscal 2019 with minimal operating profits.

Turning to our estimated tax rates for the second quarter, it is 25.1%, in line with the first quarter. Our guidance also assumes our weighted average diluted share count declines to roughly 55.3 million shares. And our fiscal 2019 second quarter EPS guidance range is $1.22 to $1.28. Note that this includes AIS with a roughly breakeven impact on EPS. Last year's Q2 reported EPS was $2.06, but this included a one-time tax benefit of $0.72 per share relating to the revaluation of net deferred tax liabilities and an additional $0.30 impact related to applying the lower year-to-date tax rate in Q2 of last year, the period of adoption.

As only part of the $0.30 applied to Q2 of last year to facilitate an apples-to-apples comparison, we simply applied this year's Q2 expected tax rate of 25.1% to last year's Q2 pre-tax income, and as a result, at the midpoint of our guidance, our Q2 fiscal year -- fiscal 2019 EPS would then be flat year-on-year.

I'll now turn back to Erik.

Erik Gershwind -- President and Chief Executive Officer

Thank you, Rustom. As I've said before, technical expertise is an important element of our competitive advantage. One way that this manifests itself is in documented cost savings for our customers which are particularly important now as we enter price increase discussions. A key reason that we've been able to sustain gross margins over the past few years in the face of a fiercely competitive environment is our ability to save our customer's money by engineering productivity on the plant floor.

I'll share a recent example that demonstrates this. Our metalworking specialists regularly conduct reviews of customer plant floors. During one such review for a customer on the West Coast, our specialist identified a drill that he felt was not the right choice. It was not strong enough to efficiently cut the raw material being used, and as a result, the customer was running its machines too slowly in order to avoid breaking the tool, and different shifts were actually running their machines at different speeds.

This resulted in extra costs tied up in machine time, labor, and even excess material. Our specialists recommended a different version of the cutting tool one that had a special coating on it. It was a much higher piece price, in fact 10 times higher than the drill that the customer was currently using. Fortunately for the customer, our specialist convinced them to run a test with a coated tooling and that test produced compelling results.

While the cost of cutting tools is generally somewhere between 3% and 5% of the total manufactured part, this one change drove annualized cost savings of over $200,000. For example, cycle times were reduced by about 3 times, tool life more than quadruple, and the number of parts produced per tool increased 4 times. Additionally, the customer was now able to standardize its speeds, and speeds across shifts and increased machine availability by almost a full shift per day. All of this, by the way, is based on the customers' calculation.

Based on this success, we're now working with this customer to replace the same tool in other sizes as well as other applications. These kinds of examples are routine among our metalworking group. Our team's expertise, combined with the broadest metalworking brand offering in the industry, allow us to bring a strong value proposition such as this to our customers each and every day. And all of this is only possible due to our teams' dedication to our customers and to our mission.

I thank you and we'll now open up the lines for questions.

Questions and Answers:

Operator

Operator Instructions) Your first question will be from John Inch of Gordon Haskett. Please go ahead.

John Inch -- Gordon Haskett -- Analyst

Thank you. Good morning everyone.

Erik Gershwind -- President and Chief Executive Officer

Hey John, how are you?

John Inch -- Gordon Haskett -- Analyst

Good morning guys, I'm fine, thanks. Happy New Year.

Erik Gershwind -- President and Chief Executive Officer

You too.

John Inch -- Gordon Haskett -- Analyst

Erik, are there product categories where you're expecting it to be, say, easier to raise prices versus others or the corollary is, are there categories where the channel, because of say competition or whatever dynamic, it's just going to be more difficult to raise prices. And if so, could you maybe give us some examples?

Erik Gershwind -- President and Chief Executive Officer

John, so what I would say, and I guess you're referring to the upcoming price increase?

John Inch -- Gordon Haskett -- Analyst

Correct.

Erik Gershwind -- President and Chief Executive Officer

Generally what happens is, so the size of the increase and then our success in realization, look it's a function of a number of factors. So, one factor is what's happening with the key suppliers in that product line. Another is what's happening with the raw materials that drive the costs. A third is of course our competitive position and the relative importance for the customer. So all of those factor into the mix and drive how big the increase would be and how successful we are in realizing it.

I mean just -- I'm going to be careful not to give too many specifics about the one upcoming since it hasn't hit the market yet. But just, as an example, looking back over the past couple of years, one of the things we've called out is we've had larger increases in our cutting tool business primarily because the commodities; tungsten, steel, metals have been up there more than they have in other categories and that's driven more suppliers to raise prices and has more of an increase for us.

John Inch -- Gordon Haskett -- Analyst

That makes sense. I mean, kind of looks like Grainger is raising prices by maybe 3% and I think your traditional mid-year is around 1% -- one-and-change. Is that just based because we're obviously in a different dynamic given the cost increases and supplier price increases? Is that kind of the magnitude of the overall increase we should be expecting or how would you frame it?

Erik Gershwind -- President and Chief Executive Officer

Yes, so John, the words we used in the prepared remarks were meaningful and the color I'd give on meaningful would be larger than the last few increases that we've taken. So if you go back and look over the last several we announced, we would expect this to be a bit bigger and that's based on the backdrop.

John Inch -- Gordon Haskett -- Analyst

Understood and maybe just one more, Erik, what's your recession playbook? I realize things are good debatably today, but we could be in a peaking time, it's not really clear, but I'm just curious what is your recession playbook? You must have talked about, as a management team. I mean, do you stop the sales hiring? Do you look for other costs to cut? Like, how do you -- how does this all been -- maybe even dovetail with sales effectiveness, does that have to get modified in some manner or does it actually still, do you think, let you return 200 basis points to 300 basis points above the market even in an economic downturn?

Erik Gershwind -- President and Chief Executive Officer

Yes, John, so look, we clearly and one of the benefits of growing up in this business is I've seen the business perform and I've been part of several cycles up and down, we certainly do have a playbook for a recession. What I'd tell you one thing out of the gate is, as a management team, we've not spent much time talking about it, because right now no sign -- from our standpoint, no sign of a recession.

Things -- if we look and what we wanted to get across is looking at the industrial market today, things are robust, things are very solid. What we did want to flag is a couple of yellow flags that are out there, that are certainly caution signs that if something could change, but at this point we don't see recession, should that occur? Yes, we would certainly move into a different operating mode. We'd certainly look to clamp down on expenses and discretionary spending as we've done before.

What I would say is our goal would be, as it always is John, to try to -- our gauge and our success measure on the growth side would be how are we performing relative to market? And our goal would be to outgrow the market. We would clamp down on discretionary spending and then what we would do is take a very careful look at investment spending.

There'd probably be some where we feel it would be responsible to modify and to reduce it. There'd be other things where we'd say, if they were really important to our future that we continue to plough through. So, broad strokes, that's how I describe it.

John Inch -- Gordon Haskett -- Analyst

Got it. Thanks very much, appreciate it.

Operator

The next question will be from Robert Barry of Buckingham Research. Please go ahead.

Robert Barry -- Buckingham Research -- Analyst

Hi guys, good morning. Happy New Year.

Erik Gershwind -- President and Chief Executive Officer

Rob, how are you?

Robert Barry -- Buckingham Research -- Analyst

Good, thanks. Just wanted to start actually by clarifying the comments on the December ADS, the 10.6%, how much was that number boosted by having one less selling day at 10.6%?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

So, if you -- I mean this is an estimate obviously, I mean coming to that, but it would be -- it would have been north of 4% if you look at that number. So the 10.6% number would have dropped down to...

Robert Barry -- Buckingham Research -- Analyst

Something just north of 4%.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Yes, north of 4% in the month -- in the month of December. In the quarter, the ADS boost from one day would be about 1.5%.

Erik Gershwind -- President and Chief Executive Officer

So Rob just to be clear, by the way, because you have a couple of moving parts with respect to what we refer to as holiday timing and the day. So there's the math on simply closing Christmas -- closing Christmas Eve day which we did because with it falling on a Monday there's virtually no activity going on in the business community. Okay. So there's the math of if you simply add back the extra day what happens? The second effect -- so that would be -- that would bring the growth down.

The second effect moves the other direction which is that with Christmas and New Year's falling on Tuesdays, we see a more pronounced holiday drag, so that actually takes the numbers down, which is why in the prepared remarks, Rustom tried to give some description of December as sort of a tale of two months. If you looked at the first three weeks which was the true picture pre-holidays, business was up high-single digits. It then turns negative the last two weeks. That turning negative is a result of the holiday timing.

Robert Barry -- Buckingham Research -- Analyst

Right. So, even on the day you were enclosed, you had some weaker open days.

Erik Gershwind -- President and Chief Executive Officer

Yes. So specifically, we had several weak days, but the one that was really dragged us down was so we were closed at Christmas Eve Day, New Year's Eve day was really, really slow and was a full day of -- counted as a full day in the numbers and really, really slow.

Robert Barry -- Buckingham Research -- Analyst

Got it, got it. So just looking at the revenue for 2Q excluding the M&A, it looks like the growth is going to be down about a point and a half versus 1Q. So is that all on the lost selling day or is something else going on against the line?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

No. And that's why -- I mean, that's why Erik stepped in to explain the second aspect. I just explained the mechanics of the -- gave you the mechanical answer to it right? No, if you look at the -- if you adjusted for the actual lost sales by having the two holidays coming on Tuesdays and the Christmas Eve is coming on the Mondays, right, the actual lost sales and you pull that out, I mean we felt that our number would be -- if you just looked at our base business number, I mean we were talking about closer to 5.9%, 6%; pretty much the number that we had in Q1.

Now the other factor that we have -- and that's the number, just the math of how it comes out. But the other thing here to be take account of is that the comparatives in last year were little stronger in January too, because we had post the tax -- all the changes with taxes and everything, we thought had at that time and talked about a stronger January last year. So that's of course incorporated into our number and that's why it makes it seem kind of flat growth, if you adjust it around the 6% number.

Robert Barry -- Buckingham Research -- Analyst

Got it. And just to close the loop, I guess then, some of the data has been, I guess a little less robust, the MBI, ISM et cetera. It sounds like you're still forecasting that the, I quote, organic growth ex the selling days and the M&A is similar in 2Q versus 1Q?

Erik Gershwind -- President and Chief Executive Officer

Yeah I think Rustom has described it exactly right, Rob, that basically when you net out the extra day, the timing effect of the holidays, the growth rate in Q2 for the base business looks pretty darn similar to Q1. I think that's a very fair description. And sort of the one point he's adding there is, so what we do this quarter in particular is always a tricky guide because we have one quarter under our belt, it's December and then we go into January and February. So we modeled January and February will normally look at to provide you with a guidance forecast, will more -- we look at our sequential historical pattern.

So how do November and the first part of December compare to January and February? And what we've modeled implicit in our guidance this year is slightly less of a sequential lift from November or first part of December into Jan, Feb this year. And the thinking there was, we got an outsized lift last year we think because of the tax change, we saw bigger than normal lift. So what we've modeled in is something closer to a normal lift this year.

Robert Barry -- Buckingham Research -- Analyst

Got it. All right, I'll pass it on. Thank you.

Operator

The next question will be from Hamzah Mazari of Macquarie Capital. Please go ahead.

Hamzah Mazari -- Macquarie Capital -- Analyst

Good morning and Happy New Year. My first question is just on pricing. You know it feels like some commodities have come off, oil, maybe some others. Maybe if you could talk about how quickly do commodity changes roll through in your price discussions? And is there anything different in your customer base that just makes price cost a lot more competitive to get this cycle than you know prior cycles?

Erik Gershwind -- President and Chief Executive Officer

So, what I would say regarding pricing is look, you're right to call out that there are certain commodities that have come off of -- what was a -- there was some really aggressive growth in commodities for a period of time and there's some that have come off. But I think overall, I would characterize the pricing environment as robust and as a good time for a pricing discussion.

When you look at sort of the broad landscape of business and you look -- so that would include tariffs; that would include freight; that would include wages, pressures that nearly every business is feeling now. I think the environment is actually quite good for pricing.

What I would say is that, with respect to commodities specifically, reductions in price is typically like the same way it works on the way up. You'd have to see that for a sustained period of time before that would, I think, really impact our suppliers, who in particular -- who are the ones passing us the list price increases on a change in strategy.

Hamzah Mazari -- Macquarie Capital -- Analyst

Got it. And then, just on the government side, you had mentioned contract losses I think previously, I believe most of your exposure is federal versus state, but anything in government that's going on in that segment? Are you pulling back on purpose? Aside from the shutdown, is there any competitive dynamic change in the government business which is causing you to lose share ex the shutdown?

Erik Gershwind -- President and Chief Executive Officer

No, Hamzah, no change in direction, and really no change in the program or our focus on it. I mean really what you're seeing from us in government is a function of the two contracts I mentioned on the last call. At this point it's just a matter of those working their way through the numbers and through our comps. Outside of that though, it's an important area for us. We're focused on it and I can tell you, inside the team, there's a lot of work going on to try to recapture some of that lost share from those two contracts with other contract wins and opportunities, so no change in approach.

Hamzah Mazari -- Macquarie Capital -- Analyst

Okay and just last question, I'll turn it over. Maybe if you can frame for us how investors should think about sales force execution risk? What I mean by that is, we integrated Barnes; there were some issues around sales force transformation, realignment. I think you just had a recent leadership change in sales as well. Now you're beginning to add headcount potentially late in the cycle. It's not a ton of head count, but just any thoughts on sales force strategy for MSM and execution risk going forward? Thank you.

Erik Gershwind -- President and Chief Executive Officer

That's a very fair challenge and very, very fair point. What I'd tell you on the sales force front is, I actually feel quite good about where we're at, at the moment and encouraged by what I'm seeing. So what I would say is execution risk was probably highest a year ago as we were going through the changes; we're really on the other side of the changes now; Dave leaving, timing -- with the way the timing worked out really is not a concern. We have the plan, it's in place. The changes have been made. We have a playbook. We have a strong team.

And, yes, look, we may be adding late in the cycle but I like what I'm seeing. And just some proof points there, Hamzah, would be; number one, is we had a pilot market that sort of predicted when we should start seeing improvements in some of the underlying pieces of the business, particularly in core and the improvements to our growth rate happened just as predicted from the pilot, that's point one.

Point two is the core which is really where the changes were aimed, is growing high single-digits. It's been a while since they're growing -- that was growing high single-digits. Didn't touch on it this time in the prepared remarks, we did last time are small accounts or marketing program, which is connected to these changes. The small accounts growing double digits, the strength there continues.

The last proof point I'll call out as to why I'm encouraged and I think the prospects are good on the sales force side is, we mentioned that the vending pipeline is growing and that's really a result of getting through the sales changes. With our sales force back and focused, more time in front of customers is leading to an increased demand for vending.

So net-net, I'm encouraged. Obviously, it's still early and I want to see us performing up -- by no means declaring victory here, but I think in terms of risk reward, I like the balance.

Hamzah Mazari -- Macquarie Capital -- Analyst

Great. Thank you very much.

Operator

The next question will be from Scott Graham of BMO Capital Markets. Please go ahead.

Scott Graham -- BMO Capital Markets -- Analyst

Hi, good morning. Can you hear me?

Erik Gershwind -- President and Chief Executive Officer

Yeah, loud and clear Scott.

Scott Graham -- BMO Capital Markets -- Analyst

Thank you and Happy New Year to you all. I was hoping if we can maybe go a little bit down the rabbit hole here on the end markets and I know that you called the industrial environment robust Erik. But obviously you've got a view on a lot of different end markets. Are there any out there that have either seen pretty meaningful slowdowns in growth in the last six months, perhaps even flipping to negative other than government that you would cite?

Erik Gershwind -- President and Chief Executive Officer

Right. So, obviously government, we hit on, I would say, Scott, generally strong. So again, there were yellow flags out there, right. So there's some caution signs that things could change; but right now, strong. I think if I were to call out a couple; one, no surprise, oil and gas. So I'm sure you'll remember from our last go around with oil prices that our direct exposure to oil is low, is low single-digits. The indirect exposure obviously way bigger with all of the trickle down.

Certainly, we've seen our oil and gas related customers' soften, no question; but that has not extended beyond direct oil and gas. So in areas in Texas where you know last go around when prices really came down, where the softness really extended, we've not seen that at this point. But oil and gas should be one and the other I'd call out automotive. More is levelling, I think, than acute softness, but those would be the two.

Scott Graham -- BMO Capital Markets -- Analyst

Got you. Thank you. I guess my follow-up question would be again on the pricing and not to beat this horse dead, but are you getting any pushback from customers. We've kind of heard in the channels little bit that customers would prefer to see on certain commodity related price increases, surcharges as opposed to list price increases. Are you getting pushed back in that way, and if so, in what pockets of your business?

Erik Gershwind -- President and Chief Executive Officer

Scott, no, we are not getting. So to answer your question specifically, we are not getting pushback in that regard and the proof point there is that when there was an increase that was a direct tariff related increase, those have been passed along, and our success has actually been quite good. Customers have understood, obviously we give them specifics, we give them documentation and they've understood.

So our success there has been good. More broadly, I'll let you know next quarter how we do. But look, I would expect that for most of our customers, look, no one ever likes to talk about a price increase. But it's important and if we're doing our job as -- we were in this case with this West Coast customer where we're delivering value and we're bringing documented cost savings, it becomes a much easier discussion. And so, I guess I'll let you know next quarter though how we do.

Scott Graham -- BMO Capital Markets -- Analyst

Yes, Erik, if I just may just tuck-in sort of a question 2A here, along those same lines, are your price increases in February going to contemplate the List 3 at 25% tariff? And to that end, are your discussions with customers going to allow that to sort of stay? I know that's a hard question to ask, that second one. But I mean, are you contemplating 25% tariff increase in your February price increases?

Erik Gershwind -- President and Chief Executive Officer

No, we're not. So I think, should that happen come March, that would then be sort of a new data point and we'd have to assess from there, but not. Even the tariff increases we have passed through to-date and we have passed them through very successfully, Scott; they have been different, specific and identified. So the idea there with the customers too is, hey look, this is a tariff increase and customers understand it. And if the tariff is rolled back, we'd roll that back as well. So that is kind of more the surcharge that you are referring to that approach.

Scott Graham -- BMO Capital Markets -- Analyst

Yes, very good. Thank you.

Operator

And the next question will be from Stephen Volkmann of Jefferies. Please go ahead.

Stephen Volkmann -- Jefferies LLC -- Analyst

Hi, good morning guys. Maybe just a couple of quick follow ups from me if I could. I want to understand sort of the cadence of the investments in operating expenses. And I guess that's mostly sort of sales force additions. It sounds like it'll be similar in the second quarter than it was in the first quarter. And then does it basically go away in the second half?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Well, when you talk investments, so we have built up. So we've added heads in sales and service, we've added in the vending -- in the vending service which includes insourcing over there. We've added some people in the CFC, so that -- do the demand that shows up in pick, pack and ship. Now the headcount cost increases that we put in are layered in. So I mean obviously -- and some of them would have occurred partly through the quarter. I mean clearly and on average when you hire through the quarter and so you'll see a higher amount of costs coming into Q2 right. That is layered in.

For the most part, except for the additional sort of small -- moderate really for a company of our size, sales and service hiring that Erik flagged, for the most part, there wouldn't be any other big sort of surge after that, that we're talking about and so -- and that's kind of reflected. So a little bit of that will occur in Q2 and some over Q3 and Q4.

In the second half you'd get much more leverage -- much more positive impact coming through, because by that point a lot of the people -- the sales transformation is way in history, the additional adds have been occurring and people have had time to build up and in fact as we've talked for a little while, we didn't expect to see the benefit from the sales headcount really showing up until the second half, right. So now we'll see that beginning to flow through at least for all the vending implementations and stuff as we brought in people and there's implementations and they roll. Is that kind of color what you're looking for?

Stephen Volkmann -- Jefferies LLC -- Analyst

Yes, right. That's exactly it. So, thank you for that. Next one, just switching to the government business I know you had the couple of contracts that you lost, but are you also seeing any significant impact of the shutdown or are the customer-specific sort of sites that you serve still open and working?

Erik Gershwind -- President and Chief Executive Officer

So far, the shutdown impact would be an early to tell -- hard to tell discreetly because most of it occurred during the holidays when it's hard to tell what the number is anyway. They're so funky during those holiday weeks. But so far from what we can see and our intelligence on the ground, impact is very minimal, because of where the shutdown is directed and versus where a lot of our spend is, impact appears to be minimal so far.

Stephen Volkmann -- Jefferies LLC -- Analyst

Okay, understood. Thanks. And then, just my final quick one. Rustom, you mentioned in your comments some additional inventory build around potential supply chain disruptions and I wonder if you can just give us a little more color on what you think might happen in terms of supply chain disruptions?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Just being cautious, if the 25% tariff increases go through in March, we'd like to have more of those products on the right side of US customs before that occurs. And that's why we also -- and this is deliberate and that's all there is to it, it's not that we're being told of any supply chain disruptions or anything like that, but we do have a strong balance sheet and we're willing to leverage it when need be.

The points I made and I'll repeat it again. I talked about it earlier. With the stuff that we're buying is inventory in the category as it moves very fast. So if, for instance, these tariff increases don't occur, OK, then there's resolution, then yes, we'll tune down our buying and burn it off fairly quickly.

Stephen Volkmann -- Jefferies LLC -- Analyst

Understood. Thank you very much.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Welcome.

Erik Gershwind -- President and Chief Executive Officer

Thank you.

Operator

The next question will be from David Manthey of Baird. Please go ahead.

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

Hi, good morning guys. Happy New Year.

Erik Gershwind -- President and Chief Executive Officer

Hey, Happy New Year Dave.

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

First off, looking at contribution margins here, clearly they've been below your expectations and I think the second quarter implies a negative result, but thinking about the second half of your fiscal year, when you look at the operating framework, it would imply clearly an improvement there, even as much as 20% with pull-through margins closer to 50-plus. And Rustom, in your comments, you mentioned price, sales force effectiveness, front-end loaded investments and acquisition contribution as factors that you hoped to get leverage on in the back half. Is there any way that you can quantify those factors to give us some clarity or comfort on the outlook?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Yeah, I mean look, it's just a normal sort of sequence. On average, if we look at the last four years, I mean just the normal average, there's like a 100 basis point difference between the operating margin in H1 and in H2, right. So no reason why we shouldn't, at a minimum, see that. But then, you add to that all these others the size and timing of the price increase, the AIS four months -- so only two months of AIS that compared to six, the full effect in there; the holiday impact, I mean don't forget that. I mean that's probably about 20 basis points. I mean just the -- and by that I mean again I'm getting away from the ADS that we talked about early, it's just the absolute loss of sales that we would have by having those two Monday, Christmas Eve and New Year's Eve. So, absolutely, and then the others, you talked about it and that's what gives us confidence that we'll be in the framework during the year.

Erik Gershwind -- President and Chief Executive Officer

But, Dave, I think a little tricky to try to -- you know like -- so Rustom mentioned the holiday impact was about 20 basis points in Q2 of a drag in Q2. Some of these others are hard you know, particularly with pricing, we're going to wait and see how we do roll it out. Growth will be a function of how strong the growth is in the back half of the year, how much leverage. It's tough to quantify other than to say if we looked at the four year average of a 100 basis point lift H2 to H1, there are several tailwinds here that say to us if we execute properly and nothing major changes in the environment, the push are considerably higher.

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

Okay, thanks Erik. And then second, when you think about the sales force effectiveness efforts, how would you expect them to most manifest themselves in the second half results? I mean, what financial metrics are you watching that you think will reflect the benefits the most?

Erik Gershwind -- President and Chief Executive Officer

Yes, that's a good question Dave. Look, over time, there's going to be metrics like sales force productivity. What I would tell you is given that we've just started, we hadn't added sales heads in a while because of all the changes we were making. We just started in the fourth quarter. That takes a little bit of time. Obviously internally, you can imagine we measure the new people 10 ways till Sunday. But in terms of seeing that evidence itself for you, it's going to take a little time.

Look, I think the biggest proof points that I'm going to be looking for that I think are tangible for you are going to be core growth rate, are going to be national accounts growth rate, because part of what we've done here is also free up some of the national account sellers and should translate into improved signings or signings that layer into growth there over time. And then I think, things like vending, which to be honest was a -- sort of an offshoot that we didn't necessarily anticipate coming out of the sales force changes seeing the acceleration in vending.

So what you'll see there over time if we execute properly is, you'll see the growth contribution from vending as these signings and implementations layer in, we should see improved growth contribution there over time. So those are the metrics for now and I think over time as the sales head count, as people settle in, we'll be looking at productivity measures.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

And internally, we look -- because we don't do a one-size-fits-all approach to our sales anymore, right. That was the whole sales transformation. So internally, we look at the different categories of sales people that we're hiring, all the way from inside sales to the hunters and things, and we look at whether they're achieving their plans in terms of revenue growth and new account signings.

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

Great. Thanks for the color guys.

Erik Gershwind -- President and Chief Executive Officer

Thank you Dave.

Operator

The next question will be from Adam Uhlman of Cleveland Research. Please go ahead.

Adam Uhlman -- Cleveland Research -- Analyst

Hi, good morning everyone and Happy New Year.

Erik Gershwind -- President and Chief Executive Officer

Happy New Year, Adam.

Adam Uhlman -- Cleveland Research -- Analyst

Hey, can we go back to the timing of the February increase? Could you maybe just expand a little bit more on why the price increase was delayed from January into February? Was it a function of the absolute number of price increases that you are seeing from suppliers or did the magnitude catch you off-guard relative to maybe what you were hearing several months ago. I guess, I'm just trying to better understand, are there -- was there an issue of just updating your price files in a timely manner that led to the delay of the price increase versus what you did last year?

Erik Gershwind -- President and Chief Executive Officer

Adam, absolutely, I'll hit this. Yes, it's pretty simple, which is when we go out with price increases we try as best we can to minimize the number of times that we hit our customers with increases, OK. So, look there are times, in a real inflationary period, where we could be taking pricing up three, four times a year. But usually, let's put tariffs aside because Rustom described, that's a very specific instance, but usually our cycle is two times a year, around the summer and around early in the calendar year, What we were seeing was late in the calendar year into January, meaning into this month, a significant number of list increases from our suppliers.

Look, that's what we've been hoping for, for a while. I think it came to fruition as we expected. But for us, the trade was to, by waiting an extra month what it allowed us to do was capture more increases coming in January and go to our customers one time as opposed to missing out on that opportunity. That's pretty much it.

Adam Uhlman -- Cleveland Research -- Analyst

Okay, got you. Thanks, that's helpful. And then, back to the gross margin on the quarter, I guess mix was mentioned as being a negative, but at the same time the discussion was that core customer growth was up high single-digits and small customers were up double-digits. Was this a product mix headwind that we experienced and how do you think about that through the rest of the year?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

It's also mix within categories. So, for example, national accounts. I mean we've had some of our lower gross margin accounts in national accounts that we have either won or renewed have been -- have lower gross margins relatively have been growing faster. So that's a negative mix in national accounts. Then look at vending, I mean Erik made the point about vending and vending is one of our sort of strong positives in terms of revenue growth, but vending does come through at a lower gross margin.

Erik Gershwind -- President and Chief Executive Officer

So Adam, look, you're right to call out and we saw the same thing, look in the numbers, mix is a pretty broad umbrella. Underneath our mix bucket there's like 10 or 12 moving parts that we're looking at. You are calling out two that within the mixed bucket would be tailwinds; core growing faster, government growing slower. What Rustom called out is a couple of others that offset that being the national accounts mix and vending being two in particular.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Now if I -- now having gone into a little bit detail, if I take it up the very top level, our desegregation or steps, I mean in the price/mix in this quarter was about 80 basis points. It was about 50 in last -- in Q4. So the price/mix from that perspective has actually been a positive too. So, I mean there are different ways to look at the business with as many products and customers as we have.

Adam Uhlman -- Cleveland Research -- Analyst

Okay, thank you.

Operator

The next question will be from Ryan Merkel of William Blair. Please go ahead.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Hey, thanks, good morning. Thanks for fitting me in.

Erik Gershwind -- President and Chief Executive Officer

Hey Ryan.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

Hey Ryan.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

So, I want to start with gross margins for the year. Erik, how likely would you say that we're going to be in that gross margin expansion part of the framework?

Erik Gershwind -- President and Chief Executive Officer

So, look, Ryan a lot of this is going to hinge on our price realization -- I mean obviously sort of stating the obvious, it's a little early. We put that framework out there and as you know what we did, kind of the middle of that line this year was basically the Q1 jump off point right. So the sort of the plus or minus range was around 43%, 43.1%.

So let's take a look at the first half, if we hit the midpoint of guidance in Q2 is s 42.8%; we hit 43%; that averages to roughly around 42 9%. We're sort of right underneath the line; close but underneath the line. So obviously I'm going to state the obvious one more time, to get above the middle of the line, we have to be north of 43% and north of where we were Q1, Q2.

On the one hand, costs are going to keep going up. But on the other hand, look we have a meaningful price increase that's coming late in Q2 and a lot of it is going to hinge on how we do in realization. So I hate to punt on you Ryan, but I think we'll have a better feel with the quarter under our belts to see how realization goes.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Yes I get it. Understood. All right, and then on price cost, I may have missed it, but what was a headwind there for the current quarter and then for the 2Q guide?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

In price/mix, it's actually a tailwind. If you look at the numbers we had about -- this segregation (ph) we have about an 80 basis point improvement. So I was making the point that it was actually better, compared to last -- sequentially, the quarter before that Q4, right. The point on cost was that because of our average costing system and the way things work and the lag effect of cost leading into our system, we have steady increase in costs going on each month, right, whereas price increases occur as you know every six months. So after the price increase that we put through last year in the summer, right, I mean the next point in time at which our prices go up is February, once we -- once we put through the...

Erik Gershwind -- President and Chief Executive Officer

So Ryan, take it real simple, from Q1 to Q2 the price, so you look at the decomposition of growth and the price, that price mix thing which is our best proxy on price is plus 70 basis points. Our models would assume that given pricing, our next increase comes late in Q2, not much changes on the price front in Q2 and yet costs go up. And those two things, the net of those are resulting in what you see, which is a 20 basis point sequential decline.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Yes, I'm really asking about price cost, just to quantify to sort of see the progression because my understanding was in the current quarter it was going to be about a 10 basis point headwind. Seems to me it's actually going to be a little bit bigger in 2Q, because you push back the price increase. But then presumably you could be positive in the second half, so that is roughly correct?

Erik Gershwind -- President and Chief Executive Officer

Yes. You've got it right.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Okay.

Erik Gershwind -- President and Chief Executive Officer

Yes. You've got it right. Price cost actually worsens a bit in Q2 for that reason that we don't get a lot more in price and we have costs going up and then again, the cost will go up again in Q3 Ryan, right. So if we had no pricing, price cost return more negative. If we get good realization on the price increase, I'd expect a much better result.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Right. Okay, just lastly and this is a question I get from investors but you have the national account contracts where typically there's a six month price window for you to pass along price. So, how are you navigating that? Is that a headwind and is there any offsets?

Erik Gershwind -- President and Chief Executive Officer

Look, so it depends and without, Ryan, getting too sensitive information with a lot of our commercial contracts, but there's different ways that it's -- each contract and each customer, there's different terms. So it's not a one-size-fits-all on the national accounts, is what I would say to start. And look, historically what we've seen for mid years is that there are cases where timing prevents us from getting all of the prize day one.

But in virtually all of our contracts there are set periods for pricing discussions and look, we expect, given what's going on when those times arise, we expect to get pricing through based on what's happening to costs, all the documentation we have and then what we're doing for customers in terms of cost savings, our expectation is that we get the pricing through when allowed for by contract and that various.

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Got it, very good, thank you.

Operator

And the final question this morning will be from Ryan Cieslak of Northcoast Research. Please go ahead.

Ryan Cieslak -- Northcoast Research -- Analyst

Thanks for fitting me in here. So, I just -- I don't want to go back. I hate to go back and continue to focus on pricing, but I just want to make sure I understand what you're saying Erik. You know obviously demand seems like there's a potential for it to slow here in the market going forward, your commodity costs have rolled over a little bit. What gives you the confidence that the realization, because ultimately that seems like that's the lynchpin here, if you could see the type of realization that you want to see that's going to benefit obviously the margins going forward. But what gives you the confidence that you can sustain at least the type of realization you saw this past year versus actually seeing maybe less realization just because the environment starting to slow a little bit?

Erik Gershwind -- President and Chief Executive Officer

Ryan. Yeah, no good question. Look I point to a couple of things. One is the backdrop, while commodities have softened again, go back to a lot of -- for many businesses one of the large inputs. The tariffs have been significant, wage inflation significant, freight inflation has been significant. So there is a backdrop of costs going up, one.

Two, when we bring a price increase to our customers, it's supported with a lot of detail and backup meaning that we're not just taking pricing up for the sake of taking pricing up, it's where we can point to our suppliers having passed along list price increases. So I think it's justified and we show documentation.

And then three, going back to value proposition, look, we invest a ton of time and money and effort into helping engineer savings for the customer and generally with most of our customers, in most cases there's a win-win relationship and an understanding that we're entitled to get paid if we're in fact bringing the value and documenting the values. If we're not, shame on us.

But I think in most cases we are and with most customer relationships, it's win-win. So those are the things that would give me confidence and again Ryan to be determined, we'll see how we do with the pricing under our belt, but those are the reasons I would have confidence in seeing solid realization levels.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay, and then, just to go back to the comment being made about the back half of the year margin trends being significantly higher, are you -- it seems like there's a lot of pieces that can drive that. If you assume that the market and demand stays stable; doesn't get better, doesn't get worse from here. Are you saying that you can actually get toward the higher end of your incremental margin outlook that you've typically given. What you think it's been like 20% to low 20% to high 20% type of range, is that what you're trying to say or are you saying actually even better than that, just based on all the different moving dynamics?

Rustom Jilla -- Executive Vice President and Chief Financial Officer

No, we're saying -- we're really saying that in the second half of the year -- well, most of the conversation that occurred earlier was all around operating margin and the difference in the operating margin between the expected H1 and the likely H2. I want to use the term expected because it's too early to call for it right. So that was what more of the discussion was about in terms of that.

I mean in terms of the incremental margins I mean we -- incremental margin is a factor many things. I mean gross margin is one of them, operating expense is the other, revenue growth I mean all the rest of it, but I mean we're not saying that we would be coming in at the high end of 20%.

Erik Gershwind -- President and Chief Executive Officer

Yes right, right a couple of points to make just to ground those. So one is, if you take that annual framework and you look at the midpoint of that annual framework, it implies incremental margin is actually slightly below our long term 20% range at the midpoint. As you've got high up in the high quadrants, you get north of 20%, but the midpoint was to begin with. The second thing is look just to be grounded in reality, let's assume we hit the midpoint of Q2, I think Dave Manthey mentioned it early, incrementals in the second quarter were negative.

If you look at the average, we're like low single-digits incremental margins for the first half of the year. That makes getting to 20%, which is the long-term range, and absolutely still I believe longer term where we could be. But for this year, I mean that would mean we'd have to do something like you know close to 40% incrementals in the back half. That's -- realistically that's unlikely. What we were trying to get across though is that the back half of the year, as Rustom said, should be considerably better. That was the point.

Rustom Jilla -- Executive Vice President and Chief Financial Officer

But looking past FY '19, there's no reason we shouldn't be back to the 20% to 30% range for incrementals.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay. And then just last one and I'll get off the line here. Any update on the timing of hiring a new sales lead. I know it's still early but I just wanted to see if you have just an initial thought directionally of when a decision might be made? Thanks.

Erik Gershwind -- President and Chief Executive Officer

Yeah, Ryan, what I would say there is search is under way. We have a strong interim -- very strong interim leader in the place. Search is in place in the interim and search is under way. One of those things that's tough to give you an exact timeframe but obviously a top priority for me. And we're going to move quickly but we're going to make darn sure it's the right person and not let that get in the way of finding the right -- a timeline get in the way of finding the right person, so in process.

Ryan Cieslak -- Northcoast Research -- Analyst

Okay, thanks guys.

Operator

And ladies and gentlemen, this will conclude the question and answer session. I would like to hand the conference back over to John Chironna for closing comments.

John G. Chironna -- Vice President of Investor Relations and Treasurer

Thank you, Denise and thank you everyone for joining us today. Our next earnings date is set for April 10th, 2019. We'll be attending a number of conferences and field trips over the coming quarters, so I look forward to seeing you and speaking with you over the coming months. Take care.

Operator

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.

Duration: 67 minutes

Call participants:

John G. Chironna -- Vice President of Investor Relations and Treasurer

Erik Gershwind -- President and Chief Executive Officer

Rustom Jilla -- Executive Vice President and Chief Financial Officer

John Inch -- Gordon Haskett -- Analyst

Robert Barry -- Buckingham Research -- Analyst

Hamzah Mazari -- Macquarie Capital -- Analyst

Scott Graham -- BMO Capital Markets -- Analyst

Stephen Volkmann -- Jefferies LLC -- Analyst

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

Adam Uhlman -- Cleveland Research -- Analyst

Ryan Merkel -- William Blair & Company, LLC -- Analyst

Ryan Cieslak -- Northcoast Research -- Analyst

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