Good morning. And welcome to the MSC Industrial Supply 2019 Fourth Quarter and Full Year Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Branden, and good morning to everyone. Today, I'd like to welcome you to our fiscal 2019 fourth quarter earnings call. With me in the room 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 results from 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 and the MD&A sections of our latest Annual Report on Form 10-K filed with the SEC, as well as in our other SEC filings. These 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 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.

Thanks, John, and good morning, everybody. Thank you for joining us today. To kick off this morning's call, I'll provide an overview of our fiscal 2019 fourth quarter results. I'll then discuss the environment and our recent performance before turning it over to Rustom who will review the details of the fourth quarter and provide our fiscal first quarter guidance for 2020, as well as our fiscal 2020 annual operating margin framework. And I'll then wrap up before we open up the lines for questions.Our fiscal fourth quarter performance represents solid execution in a decelerating demand environment. Sales were roughly in line with the midpoint of our guidance and gross margin was at the top end of the guidance range. And although reported operating expenses were above anticipated levels, they included cost related to the productivity improvement actions that we took during the quarter. Excluding these costs, our operating expenses were lower than guidance.As a result, our adjusted operating margin and adjusted earnings per share came in well ahead of guidance. Rustom will share more details on all of this in just a couple of minutes.Turning to the environment. Industrial demand deteriorated as the quarter progressed. The softness was evidenced in the data points coming for manufacturing output, distributor growth surveys and sentiment indices. In June and July, readings for the MBI were 51.8 and 47.9 and then August was 48.3. The September MBI reading came in at 48.6 which takes the rolling 12-months average to 52.5. And while the rolling 12-months average is still positive, it is been declining steadily which is indicative of weakening manufacturing and metalworking markets.We are seeing some customers and suppliers eliminate shifts and in some pockets restructure including layoffs. We are also hearing of shrinking order backlog. In terms of end markets, the weakness…

Thank you, Erik. Good morning, everyone. Before getting into the financial details, let me remind you that we provided Q4 guidance for both total Company and our base business, i.e. our total Company excluding AIS acquisition and our New Mexican business. Additionally, in our fiscal fourth quarter, we incurred $6.7 million of severance and separation expenses related to our OpEx reduction and performance improvement initiatives. As such I'll speak first in terms of our reported results and then in terms of our adjusted results which reflect the exclusion of these costs only.Our fourth quarter total average daily sales were $13.4 million, an increase of 2.1% versus the same quarter last year, and roughly in line with 2.2% mid-point of our guidance range. MSC Mexico contributed just over half of that growth.Our Q4 reported gross margin was 42%, at the high end of our guidance range and down roughly 90 basis points from last year. Versus last year Mexico accounted for roughly 25 basis to the decline and the remaining 65, roughly 65 basis points came from mix and negative price cost.Total reported operating expenses in Q4 were $263.1 million, which resulted in a reported operating margin of 10.7%. Our tax rate for the fourth quarter was 23.1%, approximately a 100 basis points below guidance due mostly to the favorable resolution of state tax audits. Our effective tax rate was also lower than last year primarily due to the Tax Cuts and Jobs Act. All of this resulted in reported earnings per share of $1.20.Now let me move to the adjusted results. Excluding the $6.7 million of severance and separation charges incurred in Q4, adjusted operating expenses were $256.4 million. Approximately $1.4 million or 20 basis points as a percentage of sales lower than the midpoint of our guidance. This was…

Thank you, Rustom. Against the backdrop of deteriorating condition in the industrial demand environment, we've taken initial actions to reshape and resize the organization. You are now seeing early results. Moving forward, we will continue to focus on streamlining our cost structure and transforming our operating model to be leaner, more agile and more effective. We've also made good progress in addressing the issues relate to the conversion of new business into revenue. Work remains to be done including making investments into program such as business development.They should also improve our market share gains moving forward. In times when industrial demand deteriorate, a local and regional distributors that make up the majority of our market go back on inventory, credit, people and more. This creates an opportunity for us to capture market share while forging new relationships and implementing new supplier programs such as the ones that we initiated recently. Should industrial demand conditions remain at the levels that we are seeing right now, will even deteriorate further. I expect MSC to be well positioned to benefit just as we have in the past.The recent progress on our sales initiative as well as the actions that you've seen in terms of productivity are the beginning and not the end of our journey for fulfilling our mission to be the best industrial distributor in the world.We will now open up the line for questions.

[Operator Instructions]Our first question comes from Adam Uhlman with Cleveland Research. Please go ahead.

Hey, guys. Good morning. Erik, I was wondering if you could start with the supplier savings that you are targeting with the program, the $20 million. I am wondering what you have to deliver on to be able to earn those funds. And I am sure there is top line growth and new account wins are associated with that but I was wondering if you could maybe put some more meat on the bone and does that expand, it obviously does beyond the framework that you provided this year kind of -- what kind of commitment to be laid out.

Yes. So, Adam, I'll take it. Regarding the supplier initiatives, what I would emphasize is that and as you could imagine the characteristics of the program span a wide range of scenarios depending upon the supplier, the product line and circumstance. The spirit behind and I think the common theme was around win-win. Meaning that if there is investment coming from the supplier, it is in exchange for a return of focus, share capture investment from MSC.Now the number that we are giving you is a number, look, that's a number we feel comfortable we are going to deliver on. So certainly some of that profit improvement would be in the form of guarantees, some would be contingent on certain action. But that's a number that we feel confident in. In terms of the framework and I think this is an important thing to emphasize that Rustom and I hit on briefly is timing. So that number is factored into the framework but the reality is that the majority of that savings due to timing are going to be achieved towards the end of fiscal 2020 into fiscal 2021.So that is a number that is an annualized number that we reach for run rate in 2021 and not in 2020. And the reason is really twofold. One is timing of our average costing system as changes to our deal work that way through our P&L. And the second is the timing of our rebate program. Many of these programs are done on a calendar year, a calendar year 2020 rebate and so it doesn't quite sync up with our fiscal. So you'll see benefit towards late the latter quarters of fiscal 2020 and then into 2021.

Okay, got you. Thank you. And then somewhat related to that. I was wondering if you could just share an update on your new customer win progress and anything that you could share along the lines of active customer account or national account wins or any feeling of how the traction is building there.

Yes. Adam, so this was the key focus of last time obviously and just to refresh everyone what we've talked about is part of the sales transformation that had been done was a build out focus on new business wins with a hunter or business development function. And what we've been seeing is good traction from that group in terms of not only a funnel building but conversion to win. And what we called down on the last quarter is that the wins have come in at or above the expectation, we were too slow to turn those wins, move them through the implementation cycle and start getting revenue.So as I described on the last call, we put full court press on it. I think there has been progress and really the way we manage this process, we use the CRM and we can track essentially each account at every single stage all the way from opportunity through revenue realization. What we saw last quarter was too many accounts stuck in the same stage for too long. We relieve those bottlenecks and what we are now seeing is the accounts appropriately moving through the stages of implementation to revenue conversion.Now what I'll say, Adam, is it takes time. So we have target on full annualized run rate per account. It takes time to ramp to that even when we get through implementation. So we are starting to see revenue traction on those. Obviously, masked by what’s going on in the macro but that will continues to build over the next quarters. We have not come close to full revenue realization.

Our next question comes from John Inch with Gordon Haskett. Please go ahead.

Hi, good morning. It's Karen Lau dialing in for John. Good morning, everyone. So I guess first on the cost savings action, apologize if I missed it but did you quantify how much savings you are going to generate for this year. And I am looking at, you guys spending maybe $9 million to $10 million of charges between these quarters. Are you expecting sort of one year payback on those costs?

So, Karen, let me answer that and then I'll clarify the numbers. So, yes, the $6.7 million is in Q4 and the savings of all of that what are baked into Q1 and into the framework right now, right. So what we have is we expect net savings in Q1 to be up from the Q4 actions to be roughly around $2 million. And roughly around $6 million for the full year. And that's a net savings. So, absolutely, it is a payback within the one year. And note that our gross savings are significantly higher, but will also be replacing roughly half of the reductions over the course of the year. So--

Okay. It doesn't - I mean, I'm just looking at the operating framework. It doesn't appear from the operating framework that a lot of the-- you're receiving much uplift from -- in the operating margins from these savings. I guess to your point in the first quarter a lot of that savings get offset by just regular costs increase in other areas. Is that some of the expectation for the year that most of these savings will get offset by hiring back people and just ongoing, just hire sales talent year-over-year, things like that?

Yes. We are continuing to invest appropriately like Erik mentioned business development when he was talking earlier. I mean we also have some selective field sales and service headcount in increase this plan as we expect to get more sales, more benefits coming out of this. But look in Q1, I went through the Q1 numbers, right. So in Q1, what we've got is we've got these savings coming through which we should have lower volume related expenses. And then we also have higher bonuses come because we’re accruing more in line with budget, obviously, as we kick off the year. We've got higher bonuses; we've got the wage inflation from before. We've got some additional depreciation, amortization costs. All that's baked into our numbers.But let me come to the framework and I'll take that and answer the framework for a second. If you think about the midpoint of our framework of what we've got out there. That's basically about 11.3%. If you look at the size that's out there just go into midpoint 11.3%. And if you take 12.1% number that we end this year at, take about 10 basis points for Mexico, right, coming out of the number and about 60 basis points of gross margin I mean that takes us very close to where we are and then slightly higher. That's slightly higher, but very close to where we are in the OpEx. Does that help?

Yes, yes. Appreciate the color. And I guess on gross margin, you made the point that the saving from, where there's moderating inventory inflation and also the supplier initiative, that is more backend loaded. I mean, historically, I guess in an inflationary environment, your gross margin typically goes down sequentially throughout the year. Given the dynamic this year, do you expect that you'll be able to hold gross margin steady throughout the year or even maybe improve it a little in the back half given the rebates and so forth? Or do you given the the weak environment, do you have to give back some of these savings to in terms of more attractive pricing to your customers to kind of boost volume, how you are thinking about that?

So complex question. So I'll handle a little part of it. And then Erik can even chip in and do more. So, yes, first of all, yes, I mean the supplier summit initiatives that we're talking about do benefit later. Because most supplier rebate programs are calendar year programs given our inventory terms. The benefits of these new deals will mostly materialize in our P&L. I mean from Q4 really as it comes in and continue well into '21, right. I mean that's what you see there. The only other factor to remember-- and I think I mentioned it, the only other factor to remember is that we also have the price cost escalation that's flowing through is beginning to abate, and will be abating more as you get into the second half of the year.

Karen, just to weigh in and I think, Rustom, answered it perfectly. The only thing I'd say is you are right to point out that if you looked at our historic pattern without significant inflation, you are correct and generally Q4 by the time we get to Q4 it drifts down versus Q1 and look, hard to give guidance out that far right. I mean hard to know exactly what happens but absent a change, Rustom describes it well. There are two dynamics this year that are a bit different from a typical year. One being the fact that purchase cost abate and then add-on to that the back end loaded supplier benefits that we see coming. So I think he answered it well.

Okay. So it's fair to say that the gross margin trying to be more stable versus what you -- what we had witnessed maybe in the past two years?

So we provided a range. I mean the frameworks are range. We us 42 as the midpoint and then we've got the range going in there.

Our next question comes from Stephen Volkmann with Jefferies. Please go ahead. Stephen, your line is now live.

Sorry about that. Can you hear me now?

Now we got you, on mute.

Yes. Well, we keep mute to avoid any embarrassment but then we forget. So anyway. Can we pull on the string just a little bit more specifically on price cost? What are you thinking for that in 2020?

So, look, Stephen, what I would say is let me start and I'll answer your question. Let me start high level and drill. And I think what we would see is over a cycle, okay, over an inflation cycle, what we've seen if you take the last few years, price cost has been roughly flat. We are now late stage and we have been for the last couple of quarters and we've been pointing out price cost turned negative. We are price cost negative now, if you look over time, and I'll sort of lay out a gross margin formula for you with price cost about a watch what we have been seeing is somewhere in the neighborhood of 40 to 50 basis points of gross margin erosion due to mix, a mix headwind, okay. So right there 40 to 50 basis points, if price cost were equal, we would therefore obviously be looking at a 40 to 50 basis points year-on-year gross margin erosion.When price cost is positive, that gets better reference FY'18 when price cost is negative, that gets worse look at the tail end of FY'19 and look at right now. So, net-net as Rustom said, we can't give you a precise number for 2020, but if you take the middle of our framework of 42.0%, what that says is for the year, price cost would be slightly negative. But with the buzz that Rustom talked about earlier, it's going to be much more heavily negative in the first half and it's going to look a lot better towards the end of the fiscal year for the reasons we described.

Okay, great, that's helpful. And then just as we think about the top line, you sort of have the 0% midpoint on your framework. But I guess I would assume that based on some of the new contract wins et cetera you outperformed the market. So is it accurate to say that the midpoint of your guidance sort of looks at market growth being negative and kind of how much outgrowth do you think you could get relative to end markets?

Yes. Stephen, so look what I would say as we look at our performance right now, what I would tell you in terms of our performance relative to market, what we've been saying for the last couple of quarters is we're right in line with market. And that's due to a bunch of the factors that we've talked about, including some of the disruption from the changes we've made from the couple of government contract losses that you reference, roughly in line. I don't think much has changed this quarter. Certainly what you're seeing is deterioration in the growth rate that is reflective of what's happening in heavy manufacturing and metal working.Those have definitely turned sharply down and I think we're feeling the effects. What we're seeing in terms of the framework for now, it's basically assuming business as usual, now you are right, as we look out, I certainly expect us over time here to re-establish our share gain gap to market, our growth gap to market which historically, we've talked about as being the 300 to 400 basis point range. And yes you're hitting on one of the levers; you hit on a couple of the levers that we're focused on.And really there are three, one is business development. We like what we see. We like to win and we are not only going to continue focusing on implementation of existing wins. We're ramping up the team to accelerate the wins. Two is government and turning that program around and hopefully once again making that a tailwind. I think we're making some nice changes to the program, which should materialize. And then the third is just some of the refinements that I described that Eddie and team are making to the plan. It was a sound plan, but it's being refined over time we expect that gap to grow.Now, what I can't determine is what happens to the environment, certainly, but as we move forward I absolutely we would expect the growth gap to restore over time.

Great, great, that's helpful. And then maybe just a real quick one for, Rustom. If we do have sort of a flattish year at 2020, what does that do, do you think to working capital? You mentioned potentially some opportunity there.

Yes, we'll -- so typically when in this business when the economy is weak, I mean, working capital reduces and you'll see some cash coming back, so our free cash flow will go up.

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

Hey, good morning, guys. So just mathematically the $20 million in incentives on the gross margin line, it's about 50 to 60 basis points annually, and I guess you're saying you should get some fraction of that maybe half in fiscal 2020. So just if I'm reading this right at the 42.0% midpoint, are you assuming that the core sort of declines 25 to 30 basis points and then you make up that difference with these supplier incentives?

So, Dave, yes, I mean, look, we have a secular, the usual secular mix headwind that comes as we grow more from parts of the business that have lower gross margins. I mean we expect that to continue. So this should help when you look to the numbers. But also remember I mean the 42.0% is going off the fourth quarter, fourth quarter of fiscal 2019.

And, Dave, if you wanted to do some math, I mean I think where you're going is right, which is take a look at the last quarter or two and the Q1 guide. We're looking at something like a 100 basis points year-on-year gross margin change. The midpoint of the framework would imply 60 basis points. So, obviously, what that would mean is towards the end of the year it gets better. And you are correct, it's actually a little bit less than half of the total $20 million would be seen in this fiscal and we would reach the full run rate and the basis point impact you described in 2021.

Got it. Okay. Thank you. And second, as far as your e-commerce disclosure, it seems that you mix in there both traditional direct marketing business along with elements of your high touch model like VMI and vending. Is there any way you can tell us in the quarter what percentage of sales were just MSCdirect.com, so we can kind of parse out the percentage that's resulting from your efforts as a mission critical partner on the shop floor?

Dave, that's a good point. What I would tell you is I know if the numbers handy. We -- of that number, it's a little over 50% has been from MSCdirect com. And that's not radically different than if you look back over the last year or so. And that would be the traditional web business. If where you're going is, you're correct. So that number has that MSCdirect.com. It also has vending and e-procurement type business. I don't have the number handy what I would point, just one data point that we didn't mention in the prepared remarks is vending. So while I don't have the percentage of business flowing through vending, we are seeing good traction on vending. And we've talked about this year signings being up, signings for the quarter year-on-year. So for Q4 we are up, I want to say it was over 80% year-on-year.So in terms of where you're going with movement to the new strategy with some of these changes we made, we are seeing traction with vending inventory management getting closer to the plant floor.

Our next question comes from Robert Berry, with Buckingham Research, please go ahead.

Hey, guys, good morning. Just to connect the dots on the gross margin, I'm not sure if you said how much Mexico is. I think that's maybe 5 or 10. But it sounds like you price cost is say 20 or 30 and sources of growth 50 offset by about 25 benefit from the supplier incentives. I think that adds up to about 55 or 60 those kinds of the main moving pieces?

Rob, are you talking Q1 or the year?

For the year, I'm sorry, the down 60. I'm trying to get to the components of the down 60.

Yes, so I mean --

Do you think they filtered out through the call? I was just kind of lifting the Mexico price cost sources of growth and the supplier incentives.

Right. So you got Mexico is about 20 basis points coming from there, right. You've got over time; you've got the supply incentives, which you talking about which I remember that we talked about the 60 basis points or so. And even if you consider that half-half, okay, it's roughly in that ballpark, and they've got about 30 basis points or so positive coming in that direction. You have a secular sort of headwind as well, that I talked about and that Erik talked about, actually, is this points that come through from that, and the rest is price costs. I mean, it's [Multiple Speakers].

Yes, 25. Great. Okay, perfect. And then just to clarify from an earlier question, I think is the delta between the down four and the up four on the growth all about just with the end markets do? It sounded like you assumed no outgrowth. There could be some but it sounds like you didn't assume any in the framework. Is that correct?

Yes. Rob, look, I mean, really what we did here, what we try to do, you’re right. So from minus 4 to plus 4 is a pretty wide swing, but essentially what we're trying to get at is those are reflective of economic scenarios environments. And we could refer to them as a slightly positive scenario and a slightly negative scenario. Obviously, at the moment given our Q1 guide we would be sitting in a slightly negative scenario for the quarter, who knows what happens for the year.Yes, look, I think, should we -- should we really start to outperform and reestablish a gap? Yes, that would certainly move us up regardless of environment. But what we were reflecting there was more about environment.

Got it. And just based on the historic correlation with the MBI, would you expect that the business would probably continue to decelerate into 2Q?

So tough to tell. It'll depend -- this is going to sound kind of silly, Rob, but it -- a lot of it all depends on what's happened. There's so much uncertainty right now, Rob. Certainly what I'll do we speak to what we have in Q1; you could see that our guide, at the midpoint of our guide was minus 1.5. If you look at September, October, Rustom did the math for you, we are expecting a little more of a step down in November. And that's based on what we're seeing in the business. What we're seeing in the environment. To go beyond that, it's so tricky because look, there's so much swirling now, there's so much uncertainty over trade and tariff.Things change quickly in this business and we tend to be a leading indicator not a trailing indicator. So tough to call beyond that.

Got it. Just lastly for me, I think the growth investment in the first three quarters was tracking at a sum of about $15 million. I didn't hear any in 4Q, so maybe that was like one or zero but would you expect the growth investment in the 2020 P&L to be kind of a decline from that $15 million, $16 million or kind of a level or higher.

So, look, it's a combination of factors and hard to give full guidance this early, right. Because we are going to look at the performance as we say the new business people coming in the performance, the environment, all the rest of that. But part of what we're doing as well is even the efforts the $2.3 million we mentioned in Q1, the efforts required underway right now, as we're taking -- as we are moving away, eliminating positions that aren't required in the business. We are also redeploying the money in to areas where this business development field, sales, service, all the rest of it, areas that we think will generate growth.

And, Rob, just to put some more color. Rustom gave you, said and I think he's right. A lot of this is going to depend on reflects up flex down based on two factors. One, the performance we're seeing out of the investments into the environment. That's what he's saying. Just a little more color, I think in terms of where the investments are going by and large similar to what we've been doing, which is focused on inventory management, i.e. vending and VMI.Business development, we like what we see there; it's going to be expanding. We like what we see from vending. I mentioned that the growth rates in vending are up, signings are way up. And then with one or two new things sprinkled in based upon a fresh look from Eddie I mentioned CCSG is an example of where we're seeing some nice traction and they're going to continue building on it. So similar program with one or two new twists based on a fresh look.

Our next question comes from Michael McGinn with Wells Fargo. Please go ahead.

Thanks for the time today gentlemen. I just want to back to the free cash flow comments. If I look historically, your free cash flow conversion has been over 150 -- average about 150% in the dollar environment. Just you noted vending signs are going to be positive this year. I just want to make sure I'm not missing anything on the CapEx side or, and then what are your priorities for that cash flow going forward?

So CapEx $60 million to $70 million, you're correct. As you go back to math. I mean if you look at '16, if you're going to, it's going back a few years, but that was down environment. Free cash flow was $313 million in that year. I'm not saying that that's the guidance by the way; I'm just providing color behind what we save in there, networking capital and free cash flow in down environments.What we do with the cash, I mean, we continue to invest. I mean priority one is to invest as much as we can in the business. 1B is to enhance dividends. I mean, ordinary dividends, we've had a 19% dividend per share increase this year. So it's steady ordinary by dividend growth. And then after that with the money that's left behind, I mean there's lots of stuff. We can have buybacks, we can have special dividends. We can just keep the cash. I mean it's -- in a tough environment like this today, there's an advantage to having a strong balance sheet with lots of cash and lots of fire power.

Okay. And if I could just touch move to the end markets real quick. Going back ways, you acquired a business called J&L. I believe that business had some auto exposure. Just wanted to check in, see if you have anything on the GM front with that strike going on or any impact to your business that you could kind of breakout?

Yes, Michael, look, what I would say definitely is that the move to J&L move enhanced our Midwest presence considerably. I mean if you look at the end, I mean, the answer is yes. We're feeling it even though, we always talk about the fact our direct exposure to some of these big end markets like automotive is low. What's really big and it's hard to get precision on is the indirect effect meaning a lot of the machine shops, job shops that we service that industry.If you look in the offsets, you'll notice in Q4, while total company revenues were positive, Midwest was actually negative already in Q4. And you got two things going on there that we saw acutely. One being automotive for sure and the second being Ag, which another acquisition, our DECO acquisition, increased our Ag exposure being based in Iowa. Both of those not surprisingly contributed to what we saw in the Midwest.

Right, right. And then if I can just sneak one more in here. For the second half of this year, can you kind of, I'm sorry, if I missed this, can you bucket basically the level of upside you're expecting between the rebate initiative versus the inventory costing initiative. Would it -- which is more impactful for the second half of this year?

Yes, we did not. We sort of are lumping together. And, Michael, as you could imagine, there's some sensitivity around. We're talking about programs with specific suppliers. So what we're doing is we're bucketing them for purposes of what we're conveying here. And the punch line is of the $20 million that is an annualized number full effect in 2021. Under half, slightly less than half in 2020 of that is made up of both some will come through average costing and a good chunk will come in rebate, most of that coming in our Q4.

Our next question comes from Patrick Baumann with J.P. Morgan. Please go ahead.

Good morning, Erik. Good morning, Rustom. Thanks for taking my questions. Just had a maybe first to circle back on operating expenses. I was looking at the first quarter guidance and thinking it would maybe implied 2020 will be down like low single digit percent year-over-year for that $1 billion bucket of operating expenses. But it seems like you're saying flat to up. So just want to clarify kind of from the low to the high end of the framework. How to think about that billion dollar bucket of operating expenses year-over-year versus 2019?

So, yes, in a flattened, yes, you nailed it actually, in a flat environment on the framework, we would be up about 0% to 1% we are saying. So I mean you call it that $0 million to $10 million ballpark, right on the number. And that is quite simply the function of everything we did. We have $6 million of savings coming out of net savings, coming out of the Q4 stuff. We have that amount and roughly a little bit more coming out from the indirect procurement.We've got a whole bunch of other initiatives, pluses and minuses there and investments going on. So the net number with -- it also by the way we have higher wages, this is still a reasonably tight employment economy as well too. So we do have wage and salary inflation as well baked into our numbers. So the net number coming out of all that is exactly where you are up slightly.

Patrick, the only thing, not much to add comprehensive look, and I think that's probably the right way to index, it is the way Rustom did at a flat economy because it takes out variable. The only other thing I'd say is, look, there's some discretion here; depending upon what happens with the economy, Rustom, I think mentioned it in his prepared remarks. The framework was all based on actions we've taken to date. If things were to deteriorate further, look, you'd see us adjust and adjust quickly.So there's some room there and what he's doing is indexing for you saying flat to flat, kind of the easiest way to benchmark up but we would take other actions of things got worse.

Got it. And then maybe along those lines just thinking more medium term, like, how do you guys at this point think about the incremental margin framework. If the macro environment is kind of more normal, maybe assuming you guys grow low to mid single digits organically or whatever you guys think about it. Just curious if you could update on the framework for incremental margins in your mind?

Yes, sure, Patrick. So let me start and I'll sort of walk you down. And we put a little color already on how to think about gross margin that over an economic cycle. Price cost likely to be flat, roughly flat call it. And again that means that early in a cycle, i.e. '18 price cost is going to be positive late in the cycle like we're seeing right now. Price cost is negative, over time roughly flat. And then we are left with the mixed pressures that we've talked about in the business of somewhere 40 to 50 basis points.Looking at the revenue line, we would expect to deliver again over a full economic cycle here at least mid-single digit revenue growth hopefully better, but at least mid-single digit revenue growth. At those levels, we see ourselves generating, we should generate at least 40 to 50 basis points of operating leverage. Potentially more but at least 40 to 50, therefore offsetting gross margin degradation. And then you add on top of that, I think there's two ways where that brings obviously is op margins flat. How do op margins grow and how do we get incremental above current levels really two ways. One is revenue growth back to historic levels of high-single digit, where we would see more leverage.And the second thing is improvements we are making to the business to the operating model and the cost structure which should be gone now, certainly would then create a path to layer on top of that and create op margin expansion.

Got it, okay. So base case, you hold margins in kind of a mid-single digit growth environment. Upside case should be -- maybe 15% to 20% incrementals. Is that --?

In the base as we see it, if I look out over call it the next five years, I would say in the base case or some of the improvements to cost structure and operating model that would enhance that. So look, do we get to 20% plus, to me it's one step at a time, right. Let's get this back on track. But I would say that the things that we're talking about would be part of the base case.

Got it. Helpful color. And then maybe last one for me quickly. Just you said you're assuming a further step down in sales in November. And I guess my question is what's your visibility to that? Or you just are being conservative?

So I'll take it, Patrick. I would say visibility as usual low. And if anything really low right now given all the uncertainty, it is so hard to say. Hard to say whether we're being conservative or not, basically what we're doing is we're looking at the trending in the bit in the business. So, look you've seen a step down from Q4, we were positive. September, we were half a point it was 0.6, October got a little worse. And then you add on top of that what we're seeing from our suppliers, what we're hearing in the channel. Our suppliers not only their numbers, what they're seeing in the channel, what we're seeing in the MBI and discussions that we have, as always, this is sort of our best guess based upon all those factors. And right now that's what we see. Hard to go out past November to be honest.

Our last question comes from Justin Bergner with G Research. Please go ahead.

Good morning and thank you for taking my question. I just want to review the mix headwinds. I realized they sort of just get mentioned pretty quickly are in conversations. But could you just review what are the drivers of those mixes of that 40 to 50 basis point mix headwind and what would cause that to get smaller or larger?

Very quickly, the secular mix headwind is as we do more vending, as we do direct ship, and as we do more national accounts. So all areas that have grown in the last two years. There's a secular sort of headwind quite agnostic from what's happening with price cost demand and that impacts GM.

Okay and net headwind has sort of remained at that level pretty consistently. It hasn't fluctuated too much higher, too much lower in any given year?

One thing I'll say, Justin, it moves around. I mean so we're-- look, we have given you 40 to 50, depending upon, because it's a mixed headwind, it's a lot of function of exactly how fast the different channels, the different customer types and product types grow at. What we're giving you as an estimate, could it be more or less absolutely, but that's kind of the rough range.

This concludes our question-and-answer session. I would like to turn the conference back over to John Chironna for any closing remarks.

Thank you, Brandon. And thank you everyone for joining us today. Our next earnings date is set for January 8, 2020. And we certainly look forward to speaking with you over the coming months.

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