Hello and welcome to the MSC Industrial Direct Reports Fiscal 2016 Third Quarter Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Thank you, Keith and good morning everyone. I would like to welcome you to our fiscal 2016 third quarter conference call. Erik Gershwind, our Chief Executive Officer and Rustom Jilla, our Chief Financial Officer, are here with me. 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 U.S. securities laws, including guidance about expected future results, expectations regarding our ability to gain market share, expected benefits from our investment and strategic plans, including the balance sheet recapitalization plans announced today. These forward-looking statements involve risks and uncertainties that could cause the 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 that are non-GAAP measures. Please refer to the table attached to the press release, which contained a reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I will now turn the call over to our CEO, Erik Gershwind.

Thank you, John and good morning, everybody and thanks for joining us today. We have a lot to cover with you this morning. The results of our fiscal third quarter, the capital allocation actions that we announced earlier today and our guidance for the fiscal fourth quarter. I will get started with current market conditions and our fiscal third quarter performance against the backdrop of what continues to be a very challenging environment. Conditions remained quite difficult and in fact grew even more challenging as we progressed through our fiscal third quarter and into June. On our last call, we described a tough environment. And in talking to our customers and looking at the macro indices, commented that we saw the potential for some stabilization on the horizon. Unfortunately, that did not materialize and in fact things weakened. After a meaningful improvement in the March MBI reading to 49.7, April and May readings dropped significantly to about the 45 level. On a rolling 12-month average, the MBI currently sits to 45.3, which implies the continued and significant contraction in metalworking manufacturing activity levels. This is consistent with what we are hearing right now from customers who are describing short backlogs, soft incoming orders and low visibility. It’s also consistent with what we are hearing from suppliers who were seeing very much the same thing. The root causes for this prolonged downturn remain the same, the ongoing effects of low oil prices and the strong U.S. dollar. The uncertainty around the impact of Brexit could serve to create further headwinds on U.S. manufacturing exports, given the stronger dollar as well as the potential slowing of underlying European demand. Overall, the sense that the industrial economy may have been stabilizing has given way to more belt tightening and less optimism among our…

Thanks, Eric and good morning everyone. As usual, I will cover our fiscal third quarter results and specifically gross margins and operating expenses in a bit more detail. But before doing so, let me speak about this morning’s share repurchase announcements. Our Board of Directors has authorized and we have announced our intent to repurchase up to $300 million in Class A common stock through a modified Dutch auction tender process. The company will offer the repurchased shares at a price per share of not less than $66 and not greater than $72.50. The tender offer will commence tomorrow on July 7 and will remain open for at least 20 business days. In addition, we have entered into a stock purchase agreement with the holders of our Class B common stock to repurchase the pro rata number of shares at the same price per share paid to Class A holders who choose to buy this bid in the tender offer. Such that the percentage ownership of Class B owners shareholders remain substantially unchanged. Our total outlays should therefore be around $390 million taking leverage to about 1.4x. We expect to finance the repurchase using proceeds from the sale of $175 million in new unsecured senior notes and by drawing down on our existing revolver, where we today have $400 million of capacity. In the coming months, we plan to take out additional term loan, replenish our revolver capacity and lock in a portion of our interest expenses. This tender offer will be contingent upon other customary items on successful closing of the sale of notes. And as we move forward, there will be additional disclosures. After completing these purchases and finalizing the new debt facilities, we will provide an update as to the EPS impact. However, we currently expect that…

Thank you, Rustom. Let me start by sharing with you the rationale behind the repurchase program that Rustom discussed earlier on. For over a year now, we have conveyed our willingness to operate with somewhat higher leverage in order to create a more efficient balance sheet and enhance shareholder returns. We have said that we are comfortable operating with at least 1x leverage on a steady state basis and that we would flex up further for the right opportunities. As we look out, we see an extremely strong balance sheet and very strong free cash flow generation. Additionally, several large infrastructure projects are now behind us. And so over the next few years, our CapEx should be below the elevated levels that we saw a couple of years back. As we have done periodically throughout our history, we see now is a good time to return capital to our shareholders, particularly given the extremely low interest rate environment. At a size of roughly $390 million, this repurchase will put our leverage ratio at about 1.4x, giving us plenty of flexibility for future opportunities, including acquisitions or additional share repurchase. It was important to us to maintain that flexibility as the current environment could create compelling opportunities, particularly if things were to erode further. And if they do, our business offers a nice built-in hedge as cash flow generation only gets stronger when sales decline as has been evidenced this fiscal year. I will now explain why we chose to do so through this particular mechanism, a modified Dutch auction tender. It returns a significant amount of excess capital to our shareholders and it does so in an equitable and transparent way. Given that we have two classes of shareholders, the two step approach allows all shareholders to participate as they…

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Matt Duncan from Stephens Inc.

Hi, good morning guys.

Hi Matt, how are you.

Good, Erik. Thanks. Just talk a little bit more if you would, about the monthly sales trend that you are seeing and what end markets do you think are most responsible for things starting to weaken a little bit again here as – it seemed like things were going to get better they didn’t, they are actually weakening, what’s causing that?

Yes. So Matt, I think what you are seeing, if you take a look at our monthly sales trends, they are reflective of what we are feeling, seeing, hearing in the environment. And that’s as measured by customer discussions, supplier discussions, looking at the macro indices. What I would say in terms of root cause is really it points you back to amazingly the same drivers that it’s been throughout this prolonged downturn and that’s the lagging and the ongoing effect of low oil prices and the effects of the strong dollar. The weakness is pretty widespread within manufacturing. I would say it is acute within our sphere of the world within metal cutting manufacturing, so many of the segments that we pointed to before heavy machinery, metal fabrications such as job shafts and machine shafts, etcetera. So really, not much of a change, I think you are right, from our perspective a quarter ago, our sense was that there was a chance of may be stabilization. I wouldn’t have called it an uptick, but stabilization. That is certainly not materialized. And so I would say that our sales trends are reflective of the environment. Yes, I think what you heard from us as I look at it, I think the company regardless of which way this thing goes is very well-positioned in some ways, the worse it gets the more opportunity there is for the company in capitalizing on local distributor weakness. But no question, what we saw a quarter ago as the potential for stabilization did not materialize.

Okay. And then the outlook for a 5% ADS decline at the midpoint of guide that the comps are going to get easier and actually you are going to start comping against negative months here from a year ago going forward. So that would imply further weakening. Is that really just the impact of the dollar strengthening in the wake of Brexit, the impact that, that would have on your manufacturing customers exports or what makes you think things continue to get worse here?

So, I will sort of give you the big picture, and certainly, Rustom if he wants to chime in on the specifics of their average daily sales implied for the quarter. But yes, you are correct, that a worsening growth rate in the phase of lower comps is the result of projection of lower average daily sales. And I think it’s just tracked right back to what I said to you about what we are sensing in the environment, which is weakening demand among our customers. I mean I can just anecdotally tell you that for the month of June, what we heard from customers and particularly, what I heard from some of our key supplier partners that June was a really bad month. So, what you see – the one caution I will give you is it’s always tough for us to sort out this time of year, how much of this as I said is a material step down that’s ongoing versus softening as we get into the summer and customers taking advantage of summer slowdowns in a more serious way. But yes, what’s implied in our guidance is lower average daily sales.

Yes, that’s right, Matt. Just, I mean, all I would add is look visibility is particularly bad right now as Erik pointed out, but we are assuming that July will come in probably around $10.5 million on average daily sales. And August will bounce back to around the $10.9 million type level. So, I mean that’s – hence, you see how we come up with our $10.8 million guidance. And so looking at the absolute average daily sales, it’s probably the easiest way to see how the business is performing.

Sure, Rustom. Okay. And then last thing just real quickly on the buyback and it’s really just as it pertains to capital allocation in general. Should we take this as a sign that maybe you are not seeing M&A at the right price of any meaningful size out there right now or am I reading a little too much into that?

Yes. Matt, I would say the perspective on M&A really I wouldn’t take much from this either way. If you look at Rustom took through the math on where this, if fully subscribed, where this brings us to a leverage ratio of 1.4x, we feel that’s a very comfortable range, gives us the ability to flex up for the right opportunity. So yes, look, our posture over the past several quarters on M&A has been – were open. We are looking, but we are also very selective. And I would say our posture is no different than it has been.

Okay, very helpful. Alright. Thanks, guys.

Thank you. And the next question comes from Sam Darkatsh with Raymond James.

Good morning, Erik, Rustom. How are you?

Hey, Sam.

Three questions if I might. First off, regarding the Dutch, I applaud the method and the scale. I frankly wish we would see more of these broadly speaking. But I am curious as to how the price and timing were determined? Last couple of quarters, you were buying stock at a much smaller scale than this obviously at lower prices. So, if you could help as to the thinking behind why now as opposed to perhaps a couple of quarters ago?

Sure, Sam. Let me take that. I mean, yes, as Erik said earlier, we have a history of returning excess capital, right? But we don’t try to time the market per se. So, we have excess capital now. And we have an opportunity to create a more efficient balance sheet with the outcomes being a little old. I am doing all this in a pretty low interest rate environment. So, looking at spending, roughly $390 million, if we will continue with open market buybacks that would take many months to execute or you accelerate and probably drive the price up. And it’s not as transparent and that’s pretty fundamental in the Dutch auction tender and thanks for the support. I mean, the Dutch auction tender offers all shareholders the same opportunity to participate within a communicated range, okay? And then, it’s also very equitable from our perspective, because of family, then only sales that is committed to sales, the number of shares that’s required to keep their proportionate ownership unchanged and they get the same clearing price that everybody else gets. So, we are seeing all that. So, the tender price itself, the other part of your question, I mean, it was basically a tender price to achieve our objective which is accretably return capital. So, the $66 lower end is actually – is actually the approximate midpoint of our 52-week high and low. The $72.5 upper end represents a 7.5% premium to our 1 year VWAP, the volume weighted average price. So, I mean, that’s pretty much how the range is. And of course, I mean, in keeping with our governance standards, the actual range is set by an independent committee of the board after inputs from advisers.

That’s very clear. Thank you for that. The second question, the OpEx in the quarter, I think you mentioned, Rustom that it was $9 million lower year-on-year because of payroll, but I think it was roughly what $8 million or so below your original plan or at least the plan that you vocalized to us. Where was those savings achieve specifically? And if you do intensify your productivity measures going forward, what specific areas within OpEx would get the most amount of attention?

So, that’s a good multifaceted question there, Sam. Look, $3 million of those savings come unfortunately from the fact that we – as we looked at the sharp – at the decline in Q3’s performance on sales and at the sharp decline that we envisage in Q4 versus what we were expecting just a few months ago, right? I mean, that basically means that we don’t require our bonuses to be as high as they would have been otherwise, right? The payroll savings have come from a focus on efficiency and really looking at every head as we have people that tricks out. And most of the headcount reduction, almost all of it has come through attrition. Yes, there has been a little bit of performance management, but in those cases, there have been replacements and it’s fundamentally through attrition, right? So, what we have done is we have across the company mobilized our team. And that’s why I keep using the – bringing this back to our team and giving our team the credit for this performance. Because really what you are seeing is you are seeing people everywhere looking to say, okay, as opposed in drops out, voluntary drops out, how could we achieve what we are doing better? And that’s the core of it and that’s why the bulk of the savings come from there. And of course, we are cutting back on discretionary stuff like travel and we are using videos and we are cutting back on the use of consultants and hitting every other lever that we possibly could do without jeopardizing the long-term health of the business. I mean, that’s really very important to us.

Yes. Sam, just to chime in for a second and add on top of what Rustom said. I can’t underscore enough what sort of – Rustom, the finance team and our executive team have really I think energized and mobilized the organization around a productivity mindset. So, as he pointed out, headcounts dropping just because of attrition and it’s really a testament to our team getting more creative, scrappier in terms of thinking for new – about new and different ways of doing things. So, as Rustom said, look, we are targeting some areas for productivity whether they would be freight or travel or things like that, but it’s really been an across the board mindset ramping up the productivity mindset that I think still has legs to it. I think we are still relatively early on in this process to the company.

That’s a good point. I mean, Sam, if you look at our year-to-date, if you look at the reduction in our OpEx and even if you take out 10% on sales as a rough approximation for variable and the impact of volume, I mean, that’s still the $21 million reduction in the – over the first 9 months of this year. So, it’s been a very sustained completely team-driven process.

Last question if I could. And I know this is a small part of your business, but it’s obviously particularly topical now. What are you seeing of late in J&L in the UK?

Good question. So UK, I would say, the – so very topical and very raw and fresh. And in fact, I know we had some folks from here, from the Melville area that we are just spending time with our UK team. And look, I would say as you would imagine, they are still sorting out what this means. So, I would say nothing really to report other than a lot of uncertainty, a lot of angst, a lot of questions, not a lot of answers.

Thank you, gentlemen. I appreciate it.

Thanks, Sam.

Thank you. And the next question comes from Robert McCarthy with Stifel.

Good morning, Rustom. Good morning, John. Good morning, Erik. How are you doing, today?

Good morning.

So, I guess going back to the share repurchase, I mean I think you highlighted what $0.23 to $0.24 in terms of your assumption, in terms of the assumption for the guide for the fourth quarter, is there anything material and obviously it’s happening midway through the fourth quarter so it’s going to be a fairly muted impact, but is there going to be any positive impact to share counts for the fourth quarter?

No, Robert. It’s Rustom, I will take this. I mean no because by the time the process actually works its way through, I mean the buyback occurs in two steps, right, first everybody else in the middle of August and then the family at the 10 working days later. And so yes, it will have no impact. So the guide – so there is no EPS benefit in the guidance. And any interest expenses that we have will be fairly small as well. And what we thought is that subsequently after we get – given after we finalize everything, we will provide an update on what impact it had.

Okay. And then shifting gears not to ‘17 explicitly, but just that we understand for modeling purposes, I think do you expect 253 days in ’17, in other words, consistent with I think your long-term pattern, not the five extra days you had in ‘16?

Yes. We don’t expect the extra week for sure. And that’s a one-off in this year’s number.

So 253 is for modeling process is how we should thinking about it, days?

Rob, I think you are right. But just let’s talk later in the day and confirm that.

Okay, alright. So at least I am thinking about it right. Okay. So away from the midst of perhaps a little more high level, in terms of – you said a very bad June and obviously, you have different [indiscernible] to different parts of the economy, maybe you talk about where you are seeing pricing pressure specifically and how do you kind of reconcile your comments overall to kind of what was at least optically a strong ISM for the month?

So let me – I will hit your last call, I will go in reverse order, Rob. The ISM, I would tell you that it’s been – to be honest we sort of scratched our head at the latest reading. But I think we have been – we and the rest of the industry have been scratching our head at the readings over the last several years, so really not surprising. And just if you ran regression analysis against our average daily sales levels in the ISM, you would find over an extended period of time and you would find virtually no correlation, very different from if you ran the regression analysis against the MBI on the rolling 12-months average. So not much do I make of that. I think more relevant with respect to June as you pointed out is we certainly look at the MBI, we will look at other indices and most relevant to us, is talking to customers and talking to suppliers. And boy I would tell you, as it relates to June and particularly, overall we made a comment like as amazing as it sounds, we do feel good about the share gain performance as measured by what’s happening with our growth rate relative to what’s happening to the end markets that we serve. And if June was any indication, it certainly would support the data point, because what we heard from suppliers and we will get pretty specific saying, what’s happening in your business ex-MSC and boy the numbers were really bad. And what’s interesting is I can’t really point to anything new, Rob. I mean it’s been the same sustained pressure from oil and the dollar. It’s been wide spread in manufacturing, acute in metal cutting manufacturing. And again, the one caution is we are not sure what the makeup yet, how much of this is kind of a new level and a new step down versus is it entering summer, people are just going to get clamped down over the summer, we don’t know.

Just a follow-up on the pricing question, I think in the quarter and this math may be wrong, probably because it’s coming from me, but I think you had a price, a negative price headwind of I think 0.7%, a little less than 1%, any specific areas or verticals you would call out in terms of pricing pressure?

Yes. Rob, it’s a good point. Look I think, if you pull back – so I didn’t hit pricing, apologies. If you pull back and look at the performance and my assessment is I think the team has done a really good job about maintaining price discipline. And over the course of the fiscal year, the last few quarters, roughly flat pricing and what’s really been a deflationary environment. You are right to note that our third quarter, there was a little tick up in the negative price realization, I think your numbers are right, a little less than 1%. I mean what I would say is the longer this thing drags on and particularly the longer the demand environment stays weak the way it is, the more intense the pricing environment gets. Because what happens is – and you may have noted my comment about local distributors, just now for the first time we are starting to hear the first signs of distributors laying off sales people that we have not heard to-date. And I think what it is indicative of is the longer this goes on the more difficult it gets for a local distributor to hang on and they get more and more aggressive with respect to pricing. So, I think the downside here certainly is that pricing gets tougher and tougher as time goes on. Obviously, the flipside to that is that if things really continue to stay this bad or if they even get worse, from our standpoint, our opportunities actually grow, because it’s really – for the last two years, in a sense, we have been in no man’s land, in that things have been lousy, but the step downs have been gradual and gradual enough that most of the distributors have been able to avoid laying off sales people. The longer this goes on, the more pressure they are under to layoff people, cutback inventories, cutback on service and I think the share gain opportunities will grow. And if you believe things will eventually turn as we do what that should do if things get worse in the near term is widen our gap to market on the way back up. And of course, with the built-in leverage we have got create an even better earnings story. So, that’s how we are viewing it.

Well, your cost actions have been admirable. I mean, I think you just did to press my luck with a one little more question. On the operating margin framework, any thoughts on where we are in terms of the quadrants right now given the superior execution on the cost initiatives?

You mean in the coming quarters or...

Page 5 for the full year. Just any further commentary around that or you think it’s consistent with what – where we are now consistent with your prior statements?

Yes, Rob. So I think, what we said is – so we are firmly in that lower left quadrant in environment, but on the high end of the range within that. So, I think it was 12.6 is the midpoint plus or minus 50 that we said were at the high end of that lower left quadrant based on the cost actions.

Understood. Thanks for your time.

Hey, Rob, I will also confirm the 253 days in real-time, that’s a good number.

Thanks very much.

Take care.

Thank you. And the next question comes from Ryan Merkel with William Blair.

Hey, good morning, everyone.

Hey, Ryan.

Hey, Ryan.

So first, I want to ask about the shutdowns in July. So, did you say that it’s going to be worse or more extended this year versus last year? And then can you comment is it widespread or is there particular end markets where it’s going to be more robust?

Ryan, so yes. So, to answer your first question, yes, I mean, if you see the ADS that Rustom mentioned, the ADS going from June of about 11.1 to July 10.5 is a pretty significant step down. That is mostly attributable to summer slowdown and shutdowns. And so I would say, yes, to the first question, more extensive than prior years. And if you look back over the past – and this by the way is never a perfect science trying to get at this. But if you look back, every time there has been any sort of holiday in the last several months. It’s been an excuse for customers to take time off and it’s been slowdown. We don’t see any reason why this is going to be any different. And we think we are probably in the midst of it right now, this week, next week, till first half of July with where it would be most acute. And then to your second question, look, I think there is a correlation between how extensive are these shutdowns and how soft is the end market? So, again, look, I think the softness is fairly widespread, but of course, we are coming from a world, Ryan, where our front porch is metalworking end market. So, it’s pretty acute in the metalworking end markets.

Got it. Okay.

And Ryan, if you do the math on that, if it treats you well on those numbers, I mean, we were minus 4.6% using the midpoints, right, in June. August is back to that minus 4.6%. And July was actually a messaging maybe down about 5.2%, 5.3%. So, you can see that we thought that July would be a little bit worse, but broadly in proportion.

Okay, that’s helpful. And then back to Sam’s question on intensifying the productivity, I am just wondering number one can you give us an estimate of how much you think cost-cutting is going to help over the next couple of quarters? And then sort of my second question is you have sort of been talking about it flat sales, you could kind of hold margins, maybe maintain them, you did a little bit better than that this year, obviously, because you look out the next couple of quarters, is that still a fair sort of framework to think about how you are going to manage the business, so sort of flat sales you can think about holding maybe even expanding margins?

Yes. So, let’s both take a crack at that. Maybe I will go first. So if you take June’s run rate of $11.1 million per day and you run that out for the whole year, next year and you just assume that we have – what will that translate to, that’s about 1% below ‘16 full year projection again at midpoint, right. So we are not talking a massive degradation, but what we have said is that we would need sales to be at least flat to hold operating margin, okay. We have taken out a lot of costs and we will continue sort of taking out costs, but we would – we need sales to be at least flat. And then yes, we would expect to generate margin expansion even on very low sales growth level, but it’s too early to provide specifics going forward, more than the – more than just a quarter ahead.

Yes. Ryan I mean I think that’s well. I mean obviously, we will come back. It will be next quarter when we will give you a full perspective on 2017. I think Rustom said it. Well, I mean directionally, not much changing, so look we would expect – expand out margins when we get into the growth levels. Obviously, with where the business is right now with the kind of growth rates for the fourth quarter, we would have a tough time doing that. So we would need to see an improvement in growth rate. So that could be the stabilization of average daily sales at the June levels or it take up different story, but obviously if things continue at the current growth great, different story. But directionally yes, I think that’s in the ballpark kind of where we have been, but we will refine the picture as we get to 2017.

Okay. And then just lastly, price is a little bit tougher now, I just wonder are your manufacturers starting to offer deeper discounts, it sounds like they are struggling a bit as well and in the past, has that led to worst pricing down the road if all of your competitors are getting lower prices, just talk about that if you would?

Ryan sure, so let me talk – so two things. One is on the pricing environment and then two is on the supplier perspective on this. So pricing environment remains quite weak, I mean the one – if there were a one little point I would like to point to that I mentioned in the prepared remarks, certainly if you look at many commodities, most commodities are the ones those are relative to our business and this is on the price side not the cost side. They are well off over, since the start of the calendar year. So if you looked on a three-month to six-month basis, most of those commodities are up, that bodes well. If you looked on a 12-month rolling basis, year-over-year, they are still down. But if the current push, kick off I should say and commodities were to sustain, we would potentially see what we have yet to see to-date and that is movement in distributor – manufacturer list pricing that would allow us and other distributors to pass along pricing to end users. So it hasn’t happened yet. Should commodities hold, we are hopeful that that could be maybe in the latter half of our fiscal year, who knows. As it relates to the cost side, look I mean we have been talking as it relates to MSC, Ryan about the aggressive actions we have been taking with our suppliers as best we can. And this is on the purchase cost side, doing it in a win-win way. And one thing I will say is that part of doing it in a win-win way means not just taking any sort of concessions or improvements in our deal, if we have a supplier that’s willing to do it, not just taking that and passing that through, because really that doesn’t help anybody. It’s certainly not good for manufacturers to see their sell prices go down. So who knows, it’s hard to say what others are doing. But I know from our discussions with suppliers, they would be very reluctant most, to pass along discounts just to see them bring pricing down the market.

And Ryan I mean let me just get in there. I mean the – what we have been doing on working with our suppliers, I mean the supplier initiatives isn’t totally about costs or anything like that too. It’s very much about working together to try and see what we can do and that could be in terms of training that could be in terms of additional support, ways in which we can grow sales for them and for us. So it’s very much as Erik said, aligned more on the win-win any day and I wouldn’t bring it down straight to the – straight to the price and cost. It’s a strong win-win relationship.

Okay. Thank you very much.

Thank you, Ryan.

Thank you. And the next question comes from David Manthey with Robert W. Baird.

Thanks. Good morning guys.

Hi, David.

First off Rustom, I am hoping you can shed some light on this. When you look at quarter-to-quarter, second quarter to third quarter, revenues were up $43 million and GP was up 18, that’s about 6% quarter-to-quarter increase. And if you look at even excluding these accrual reversals, your SG&A was down $4 million or about 2%. I am wondering if you could just bridge just the sequential change, in what areas, what costs were reduced just in the last 90 days from second quarter to third quarter? And particularly, it’s a big number relative to history particularly given your outlook last quarter was a little more positive. So, could you help us bridge the second quarter to the third quarter cost situation?

Sure. And Dave, I think you are holding in on those numbers really. If you look at what we had in the second quarter, it was $228.2 million; in the third quarter, it was $221.2 million, right? And then if you also look at the differences on our sales, $727 million coming through in the third quarter versus $684 million, I mean, so you will see that the – what we did was achieve that improvement despite the actual sales number being significantly higher. So, it was a combination of those things. I mean, it was very much the bonus accruals reversing, right? And it was a – which is the $3 million that you saw there. And actually, quarter-on-quarter, it would probably be exacerbated, because we probably have accrued for that in the second quarter as we were looking much stronger on performance. So, you see that’s a good part of the swing. And then the rest of it is just the good old fashioned blocking and tackling, just a whole bunch of initiatives, freight initiatives, working with suppliers, discretionary, professional fees, IT data cost savings, virtual meetings, I mean, it’s just – we are just very, very focused on keeping costs down, headcount, of course, which we mentioned earlier. So, that – I hope that helps.

Yes, it is truly remarkable. Because the last time you saw a sequential decline in second quarter and third quarter was 2009 when sales were down year-over-year like 20%, 23% to be exact. So, just it’s a remarkable decline in costs, where I just was hoping to get a little more clarity in terms of what specifically was reduced from second quarter to third quarter, but maybe offline….

So Dave, sorry, let me just comment again. And that if I think about it, I mean, the bonus was obviously the biggest one, because a) we accrued freight in the second quarter and b), unfortunately, it turned out that we didn’t need it in the third, right as we went through our numbers. So, that’s part of the swing. But if the others I am looking at professional fees, I mean, there was the salaries, fringe expenses, because as you know we have moved to a different healthcare plan 9 months ago or so, advertising. I mean, there is just a bunch of costs where we did better.

Okay. And then the second, on the tax rate, was the 36.8% guided tax rate for the fourth quarter versus 38.2% in the third quarter and year-to-date, is that because of the DC purchase?

No, no, that is actually because our fiscal fourth quarter typically benefits from the release of various state tax reserves and that’s just due to the timing of the cellular limitations. And it seems to occur every year in the fourth quarter.

Okay.

That’s what it is.

Hey, just to circle back to your OpEx question. So if you do the math and this is the math that you did, you are looking at sales, as Rustom says, the sales plus $40 million. You would generally expect given our variable expenses, OpEx on that sales base to be plus $4 million and then you are looking at a minus, what is it, minus $7 million on expenses, so, 7 and the 4 together, so effectively minus $11 million. Rustom pointed out, you do have to take out of that. So, the first thing I will say look, the big driver there is the productivity that’s going on. But that minus $11 million is bigger than what is sustainable. And I think that was the point Rustom made largely, because we had a bonus accrual in the second quarter and then unfortunately because of the results in the outlook, a reversal in the third quarter. So, that is artificially inflating the $7 million. But look, the majority of that $11 million is the productivity and it’s really coming from the areas that Rustom just rattled off.

Okay. And final question on the guidance share count, could you tell us what you are using to get to your EPS range?

For Q4?

Right.

For the guidance, it would be 61.4. I mean, without taking it down to another decimal. Right, yes.

That’s great. Okay, thank you very much.

Thank you. And the next question comes from Adam Uhlman with Cleveland Research.

Hi, good morning.

Hey, Adam.

Rustom, just a clarification, you had mentioned there was going to be a $2 million charge in the fourth quarter, that’s not in the EPS guidance, correct?

No, no, that is in the EPS guidance. That’s why I was mentioning all the swings and roundabouts. And that’s simply because we have to write-off the leasehold improvements and we get a write-back of deferred rent. And that’s in our numbers. We are not doing any pulling out of numbers and saying adjusted numbers, anything like that. We are just noting it and yes, it is in the guidance.

And then could you guys talk to your performance with national accounts, it sounds like the sales have slowed further there, I am wondering if you can talk to it in your performance in terms of the number of national accounts that you have pulled together, are you growing year-over-year on that basis and then the average spending is just down. And could you also talk to the vending sales in a similar way sales are flat, is your machine count growing and then the average revenue per machine is down or is the machine kind of actually flat as well?

Yes. So two good questions, Adam, let me hit national accounts first. So yes, what we mentioned is for the third quarter national accounts was ahead of company average, but slightly negative. I would tell you that seeing national accounts come down historically, when there is – if one would make the case that what we are seeing now is a further step down, national accounts are generally a leading indicator. What I would say there, performance on national accounts has been strong. Account base is growing and we get very specific on our view in terms of where the growth is coming from, where the erosion is coming from. The erosion is coming from basically the base of existing accounts that are simply – we can generally point to had there been share loss is this strictly environment. This is for the most part, existing customers spending less. So I feel like execution is quite good on national accounts, it’s still a share gain. If I look at that performance in our national accounts relative to what’s happening in the market, it’s still a driver of share gain for us particularly against the locals, but that’s been the story, it’s the base of spending coming down in existing accounts. Your second question was around vending, is that correct, vending?

Yes.

Yes. So the vending – the story of the vending in a quarter was basically what we gave you this quarter was that the growth rate on customers with vending machines was roughly flat. So ahead of company average, but basically flat and the story there once again is for us a lot of our vending installs are into metalworking accounts, given the weakness production metalworking items such as cutting tools consumption is down. So the number of units in place absolutely continues to grow quarter-by-quarter, month-by-month. This is a story of spend in existing accounts contracting due to the environment. And again I would point out, I think a flat performance relative to the environment is considerably ahead.

Could you quantify the growth that you are seeing in units?

So we have not broken out the number of units.

Yes. We haven’t done that, Adam. If you want to get more granular, you can call me afterwards and I can try to help you. But generally we have not disclosed like the number of machines, etcetera.

It’s a pretty healthy growth rate, though, Adam.

Yes. It’s still definitely growing for sure.

I mean it’s been a core focus of particularly in a downturn when customers are really worried about keeping inventory, freeing up cash, not adding inventory. Inventory management solutions are pretty powerful and that could be vending, it could be better managed inventory like we are doing through the Class C business. But that whole inventory management umbrella is a major area of focus for us.

Great. Thank you very much.

By the way, I will correct what I said a second ago. The share count was 61.46 so it would round to 61.5.

Thank you. And this morning’s last question comes from Andrew [indiscernible] with Credit Suisse.

Hi guys. Thanks for taking my question.

Good morning.

Good morning. Can you just talk a little bit about – you talked about your conversations with customers and suppliers on this call, can you just talk about if the tone has changed pre and post Brexit or some of the conversations you have more so post Brexit, if there are any concerns there?

Yes. I think post Brexit, what I would say is again, going back to the comments I made earlier on the UK, uncertainty. I mean I think like everybody else, our customer suppliers kind of scratching their head, not sure exactly what to make of it, so a lot of uncertainty. Look I think the general sense though is net-net a negative, not a positive and that it creates a headwind given both the potential for the stronger U.S. dollar, which hurts exports and then the potential for weakening underlying European demand that would also hurt exports. So, I think the sense would be net negative, but uncertain as to how big of a headwind and how much to make of it.

Got it. And then just a quick one on, I think on the last call you guys mentioned even without price given the pricing continues to weaken here, you can still get high single-digit sales. That’s going to be tough. But can you talk about what that environment in the past has been where you have gotten high single-digit sales on almost no pricing? Just how does that compare to today and is that still something you see potential for?

Sure, sure. So, I would say, if you go back in time and look at the company’s long-term CAGR. Over a 10-year period, a 20-year period, what you would see is organic CAGR in the high single-digits in what would average out to, what we call, a "moderate demand environment.” So, depending upon the metric that you use, it would indicate somewhat it would be a moderate sort of growth case whether it’s GDP, ISM, MBI, whatever that metric is that you will look at in a moderate growth environment, we produce high single-digits. Now in fairness, that has been with some degree of pricing. So, if you stripped out pricing and said, okay, there would be a moderate demand environment and no pricing, what would the business produce? You could probably shave a couple of points off of that due to price. But to me the punch line is even without price, in a moderate demand environment, certainly, there is positive growth even in a flat – in a flat environment, a no growth environment, but without contraction. So, if you have flat demand and no price, we would still expect, just based on outperformance, to be growing. And that growth, given the leverage that we have built up is going to produce our margin expansion.

Alright. That’s good color. Thank you, guys.

Thank you. And at this time, I would like to return the call to management for any closing comments.

Thank you everyone for joining us today. Our next earnings date is now set for November 1 and we will look forward to speaking with you over the coming months. Have a good day.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.