MSC Industrial Direct Co., Inc. (NYSE:MSM) Q4 2023 Earnings Call Transcript

MSC Industrial Direct Co., Inc. (NYSE:MSM) Q4 2023 Earnings Call Transcript October 25, 2023

MSC Industrial Direct Co., Inc. beats earnings expectations. Reported EPS is $1.64, expectations were $1.62.

Operator: Good day, and welcome to the MSC Industrial Supply Fiscal 2023 Fourth Quarter and Full Year Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Ryan Mills, Head of Investor Relations. Please go ahead.

Ryan Mills: Thank you, and good morning, everyone. Welcome to our fourth quarter fiscal 2023 and full year earnings call. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me today. 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 our Investor Relations web page. Let me reference our safe harbor statement, a summary of which is on Slide 2 of the accompanying presentation. 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.

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 our other SEC filings. 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 or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. I now turn the call over to Erik.

Erik Gershwind: Thank you, Ryan. Good morning, everyone, and thanks for joining us today. On today’s call, I’ll reflect on where we are by recapping our fiscal 2023 performance and our 3-year mission-critical achievements. I’ll then pivot to where we’re going by outlining the next chapter of MSC’s mission-critical playbook. Finally, I’ll provide color on the current environment and outlook. Kristen will then provide more specifics on our fiscal fourth quarter financial performance and our initial expectations for fiscal 2024. I’ll wrap things up, and we’ll open up the line for questions. Before I dig into our annual performance, I’d like to thank our shareholders for their continued support. Earlier this month, we announced the completion of our share reclassification agreement and elimination of our dual-class share structure.

This was voted heavily in favor by our shareholders and makes MSC shares a more attractive investment as it broadens our scope of potential investors, enhances our corporate governance practices by limiting the Jacobson and Gershwind family’s voting power, to 15% of shares outstanding, transitions us to a majority standard for any election of directors that is not a contested election and replaces the 2/3 voting rule for certain significant transactions with a simple majority voting standard. Additionally, we’ll add another independent board member with the selection process getting underway in short order. Lastly, it remains our intention to offset dilution from the transaction and Kristen will discuss that later on in more detail. I’ll now move on to our recent results.

As you can see on Slide 4, we continued the trend of meaningfully outpacing the IP index in our fiscal fourth quarter. Average daily sales improved 9.3% year-over-year compared to flat growth for the IP index. Zooming out from the quarter and looking at our fiscal year 2023 on Slide 5, we achieved average daily sales growth of 11.2%, which was over 1,000 basis points above the IP index. As a result, we achieved a nice milestone with annual sales exceeding $4 billion for the first time in company history. Moving to profitability for the fiscal year. Our gross margin of 41% was down 120 basis points year-over-year, largely driven by headwinds related to customer mix and acquisitions, in particular, the outsized effect of the large public sector purchases.

However, due to strong operating expense leverage, our operating margin was 12.1% and 12.6% on an adjusted basis, which was only a decline of 60 basis points and 30 basis points, respectively, year-over-year. I’ll now spend a few minutes on Slide 6 by illustrating our successful execution of the mission-critical priorities. As many of you recall, our mission-critical program was based on five growth initiatives. And here, we showcased our performance across each on a 3-year compound annual growth rate or CAGR basis. One, Solidify Metalworking. Metalworking related sales produced a 3-year CAGR of roughly 9%. And beyond the numbers, we strengthened our metalworking position, by adding new technologies and capabilities such as MSC MillMax and tool regrinding services; two, leverage portfolio strengths or what I commonly refer to as selling the portfolio, which focused on increasing share of wallet through adjacent product categories.

This includes Class C consumable product sales, which improved roughly 9% on a 3-year CAGR. Of note, Class C consumable product momentum continued in our fiscal Q4 as we sustained our recent double-digit growth trend; three, expand solutions, which was primarily geared towards vending and implants. Our vending installed base has grown 10% over a 3-year CAGR, while implant sales produced a strong 3-year CAGR of roughly 35%. As a reminder, we achieved record quarterly implant signings during our fiscal third quarter and maintained a strong signing rate in the fourth quarter. Looking forward, we expect strong signings to remain a trend across both solutions; four, digital with a particular focus on e-commerce. E-commerce sales improved roughly 9% on a 3-year CAGR, and we see plenty of room for continued improvement.

This is especially the case for our core customers, which I’ll touch on in a moment. Five, diversified customers and end markets with a particular focus on the public sector. Public sector sales grew at roughly 7% CAGR and despite a high starting point in fiscal ’20 due to COVID-19-driven demand. Recent performance in the public sector was particularly strong with fiscal ’23 growth of over 45% and over 20% even without the public sector large orders that occurred in the prior two quarters. Execution of our growth initiatives enabled us to meet or exceed all of our long-term targets associated with the program, which can be found on Slide 7. This includes compound average daily sales growth of 7.7% over the 3-year period, which was over 500 basis points above the IP index and ahead of our 400 basis point target.

And this growth drove strong returns, allowing us to meet our goal of a high-teens return on invested capital. Fiscal ’23 ROIC came in at 18.6%. Progress was driven by greater than $100 million in cost savings, also exceeding our target and helped to produce a 220 basis point reduction in adjusted operating expense as a percentage of sales over the 3-year period. I’m pleased with the execution of our mission-critical program. And I’d like to thank all of our 7,000-plus associates for their efforts. However, we’re not stopping here, and we’re not satisfied. We aspire to continually improve and to take MSC to new heights. So with that, let’s move on to Slide 8 for a look at the direction we’re heading. The next chapter in our mission-critical journey is anchored in three pillars, which I’ll now describe in more detail.

Our first pillar will be to maintain momentum on the five existing growth drivers that I just described. And this includes maximizing the impact of our large account program. Over the past three years, we’ve built up a significant backlog of large account signings including meaningful implant agreements in fiscal ’23, scaling these new wins to their full potential run rate represents significant latent revenue growth. Our second pillar will be to add a couple of significant and new elements to our growth equation to further our performance. First, we will reenergize core customer growth. Over the past three years, most of our growth initiatives were focused on larger customers through penetration of high-touch services. In other words, we outperformed our growth over IP target without generating outperformance from the largest part of our customer base, the core customer.

Our next mission-critical chapter calls for an acceleration in growth of the core customer, and we’re making several critical investments in order to make this happen. We’re improving pricing effectiveness, upgrading our e-commerce platform and product discovery functions, and we’re investing in AI-based digital capabilities to improve our marketing effectiveness. Not only do we think this effort will improve our growth formula, but that it will also serve as a margin tailwind because our core customers are associated with gross margins that are higher than company average. Second, we’ll increase our focus on OEM Fasteners. We have two strong businesses now in AIS and tower fasteners that form a solid foundation to build from. We have a cross-selling blueprint that was developed and proven out with CCSG.

And so we will take that blueprint and apply it to the OEM Fastener space. And though OEM sales are currently well under 5% of company revenues, we see significant potential to scale the business. We will begin implementing our proven process throughout fiscal ’24 and expect to see the benefits accrue in fiscal ’25 and beyond. Our third pillar will be to drive productivity improvements that continue reducing operating expenses as a percentage of sales and increasing ROIC. During the past three years, we built momentum by developing a productivity mindset across the company. We reduced adjusted operating expense to sales ratio by over 200 basis points by capitalizing on low-hanging fruit, and making some bold moves, such as reshaping our branch footprint.

We see plenty of room for further improvement. And so our third pillar of the next chapter of mission-critical incorporates several new initiatives to accomplish these improvements. We will leverage investments in advanced analytics to improve supply chain performance. in areas such as freight efficiency, network performance and more. We’ll build on recent momentum with category line reviews and continuously optimized product and supplier portfolios, and manage mix to improve profitability, and we will attack our order-to-cash and procure-to-pay processes in a way that we’ve not done before. We will upgrade our digital core systems and reengineer our order-to-cash and procure-to-pay value streams in order to unlock productivity in both operating expenses and in working capital, such as inventory and accounts receivable.

Looking beyond fiscal ’24, we see an exciting setup unfolding. As we leverage these new initiatives, we target 400 basis points or more of growth above the IP index and 20% incremental margins over the cycle. This yields a clear path to achieve adjusted operating margins in the mid-teens and ROIC in the 20% range over the longer term. I’ll now turn to the more immediate and discuss the current macro environment and near-term trends. On our last earnings call, I described the tone on the ground as one of leveling, which was largely the case through our fiscal fourth quarter. However, we experienced a deceleration in our average daily sales in September. A portion of this was expected as the public sector capital purchases wound down at the end of our Q4 so no surprise there.

However, the sequential step-down went beyond this and was indicative of further softening. The softening trend is also not surprising given IP readings, sentiment survey results and macro news as companies and consumers deal with the effects of sustained higher interest rates and recessionary fears. However, Conversations with our sales team suggests that we were more acutely impacted in September and October by the extended reach of the UAW strikes. While we have some direct exposure, this headwind is magnified when accounting for our indirect exposure, including job shops and machine shops, many of whom service the auto industry. We’ve since received a steady flow of reports of customers clamping down on spend and taking temporary breaks from production.

We see this evidence in a sequential step down of our sales into auto-related end markets in early Q1 that is considerably larger than what happened in the rest of our business. This led to September average daily sales growing 1.3% over prior year or down 8% on a sequential basis. Looking to October, the reach of the automotive strikes has widened, and as a result, with roughly halfway through our fiscal month, we’re estimating October net sales to be up 1% to 2% over prior year, which implies flat sequential performance from September levels. We estimate the impact of the UAW strike on September and October average daily sales to be in the low single-digit range. And while we expect these challenges to continue throughout our fiscal first quarter, these headwinds are temporary.

In fact, history tells us that during times of extended softness with customers, there’s often a bounce back to some degree when normal conditions restore. In the meantime, it presents an opportunity for us to take market share from the local distributors who make up the majority of our market. Before I turn things to Kristen, I’d like to acknowledge the efforts of our entire team. During our first mission-critical chapter, we sharpened our focus, increased the intensity inside of the company and improved our agility. All of those are on display right now. We came out of the gates in fiscal ’24 with lower revenue growth than we would like, but I’ve been pleased with how the team has rallied in response. We are moving aggressively to capture market share that we believe will allow us to power through a softer environment.

For instance, in the month of September, Vending signings were up 57% over prior year and VMI signings, which are largely attributable to our Class C business were up 25%. Implant signings also maintained recent momentum. All of this bodes well for future growth prospects as these signings get stood up. With respect to profitability, we’ve taken several gross margin initiatives that were already in flight and look to accelerate near-term returns. These include discounting disciplines and a focus on moving product mix to our most profitable supplier partners. On the expense front, we’ve moved swiftly to reduce discretionary spending and moderate headcount. We’re also embedding a continual improvement mindset across the company, such that all 7,000 plus of our associates are empowered to identify and act on productivity improvements.

All of these actions will strengthen our ability to navigate through the previously discussed environment and drive profitable growth. I’ll now turn things over to Kristen.

Kristen Actis-Grande: Thank you, Erik, and good morning, everyone. Please turn to Slide 9, where you can see key metrics for the fiscal fourth quarter on both a reported and adjusted basis. Before I dive into our results for the quarter, public sector growth was again particularly strong this quarter. This was partially due to greater-than-expected small capital purchase orders from the contract win discussed during our third quarter call, that fall below normal public sector margins. Digging into the details of our fourth quarter performance, momentum across growth initiatives resulted in continued share gains and strong cash generation. Fiscal fourth quarter sales of $1.035 billion improved 1.3% year-over-year. Our year-over-year improvement was driven by continued volume growth, more modest pricing benefits as we lap prior year actions and a 150 basis point benefit from acquisitions, partially offset by five fewer selling days.

On an average daily basis, we experienced year-over-year growth of 9.3% and outpace to the Industrial Production Index by approximately 900 basis points, continuing the trend of significant above-market growth. By customer type, on a year-over-year average daily sales basis, public sector sales increased over 60% while national accounts and core customers improved mid-single digits and low single digits, respectively. Looking at our sales through the lens of our mission-critical growth drivers, we continued making strong progress. In metalworking, we continued seeing growth driven by our ability to provide customers outsized savings and value through our best-in-class technical expertise, product breadth and service levels. These competitive differentiators, combined with our 150-plus metalworking experts, places at the spindle with customers and has us well positioned to further penetrate high-growth end markets and address customer needs associated with the skilled labor shortage in North American manufacturing.

Within our vending and implant offerings, we continue capturing share and experiencing favorable levels of growth. In vending, Q4 average daily sales improved slightly more than 9% year-over-year and represented roughly 16% of total company net sales, in line with the prior year. Implant signings remained strong at a rate modestly below last quarter’s high watermark and sales improved approximately 13% year-over-year. As a percentage of total company net sales, implant revenue represented 13%, an improvement of roughly 110 basis points year-over-year. It’s worth noting that both of these solutions would have accounted for a higher portion of total company net sales excluding the outsized public sector growth. In e-commerce, we experienced mid-single-digit growth year-over-year.

Sequentially, related sales improved slightly to 61% of total company revenue, but was down year-over-year largely due to the outsized public sector growth that transacts through different channels. Looking forward, we expect improvement in our e-commerce sales particularly through mscdirect.com as we start rolling out enhanced capabilities, including improved search and navigation functions. Across our other two initiatives, we continued making strong progress in selling the portfolio to increase share of wallet, which is primarily our Class C consumables, ADS growth was in the low teens. Progress on our diversification initiative also continued with public sector growth in excess of 60%, representing 13% of sales, which is an improvement of 500 basis points year-over-year.

It’s worth mentioning that even excluding the small capital purchases, public sector growth was north of 20%. Lastly, and as Erik mentioned, we successfully completed the first chapter of our mission-critical programs. However, we expect to maintain this momentum in fiscal 2024 and beyond. Looking ahead, this will help us mitigate impacts from the temporary market challenges we currently face that I’ll speak to you later on. Moving on to profitability for the quarter. Our gross margin of 40.5% was down 140 basis points year-over-year. The year-over-year decline was largely driven by a 130 basis point mix headwind primarily due to the specific products sold in association with the previously discussed public sector contract win, which was below typical public sector margins.

Looking forward, we don’t expect these lower margin sales to have a meaningful impact in fiscal ’24. As expected, price/cost was a larger drag on margins this quarter driven by the combination of more modest pricing benefits and higher cost inventories working through the P&L. However, this was completely offset by combined benefits of other items such as rebates and other cost of goods sold adjustments. Reported operating expenses in the quarter were approximately $299 million and up $9 million year-over-year. On an adjusted basis, operating expenses were approximately $289 million, a slight decrease of $0.5 million. This represents a decline in adjusted operating expense as a percentage of revenue of 40 basis points year-over-year to 27.9% of sales.

The reduction in adjusted operating expense was primarily due to one less selling week year-over-year. Excluding the difference in business days, adjusted operating expenses would have increased year-over-year. This increase was primarily driven by variable selling expenses tied to higher volume, labor costs, digital investment and increased health care costs, which remain at the elevated level we experienced in fiscal Q3. This was partially offset by lower freight expense as well as mission-critical savings of approximately $3 million bringing total programming savings to $102 million, slightly above our stated 3-year target. Reported operating margin was 11.4% compared to 14.1% in the prior year period. On an adjusted basis, operating margin of 12.6% was in line with expectations and declined 100 basis points compared to the prior year.

The year-over-year decline was primarily driven by the 140 basis point reduction in gross margins with a partial offset from the 40 basis point improvement in adjusted operating expenses as a percent of sales. We reported GAAP earnings per share of $1.56 compared to $1.86 in the prior year period. On an adjusted basis, EPS was $1.64 versus $1.79 in the prior year. Turning to Slide 10 to review our balance sheet and cash flow performance. We continue to maintain a healthy balance sheet with net debt of approximately $404 million, representing 0.72x EBITDA. We have a strong liquidity position with $50 million of cash on hand and approximately $550 million currently available on our revolving credit facility. Looking forward, our balance sheet strength and cash flow generation strongly support both our capital allocation strategy and near-term intentions to offset dilution from the share reclassification, which I will speak to you momentarily.

Additionally, we had strong operating cash flow generation during the quarter of 152% and 204% for the full year, well above our greater than 100% target. Capital expenditures totaled $28 million during the quarter and approximately $92 million for the full year. Together, this resulted in strong free cash flow generation of approximately $607 million for the full year, an increase of over $420 million year-over-year. Moving to our capital allocation priorities on Slide 11. Our decision to deprioritize special dividends creates significant room for strategic optionality. Looking forward, this will likely be geared towards organic investment both on M&A opportunities and further deployment to shareholders. As it relates to the ordinary dividend, we will target modest and consistent increases as seen by the recent 5% increase.

As I previously mentioned, share repurchases will remain in the pecking order of our capital allocation strategy. Given our intentions to offset dilution from the share reclassification. We detailed our expectations for buybacks in fiscal ’24 for modeling purposes on Slide 12. The dilution of shares from the reclassification was approximately $1.9 million. We repurchased approximately 645,000 shares during the fourth quarter and an additional 205,000 in the current quarter as of October 13, leaving approximately 1.1 million shares remaining to fully offset dilution. As a reminder, we expect to repurchase the remaining shares by fiscal ’24 year-end. Looking forward, after completing this buyback initiative, we will have approximately 2.4 million shares remaining on our current authorization.

And at a minimum, we will look to offset annual stock-based compensation dilution. Now moving to our initial fiscal 2024 outlook on Slide 13, we expect average daily sales to improve approximately 2.5% at the midpoint with a range of flat to up 5%. This includes an approximately 160 basis point year-over-year headwind from nonrepeating public sector sales. Underlying assumptions within our sales outlook include more normalized pricing benefits year-over-year. As it relates to the current market challenges, our outlook assumes the IP index remains roughly flat, consistent with recent readings and that headwinds related to the UAW strike will begin to alleviate in early fiscal 2Q or before calendar year-end. Lastly, as a reminder, we have the same amount of business days year-over-year throughout the fiscal year.

Within the sales outlook, we expect adjusted operating margins to be in the range of 12% to 12.8% or down 60 to up 20 basis points year-over-year. This reflects lower volume and more challenging price cost expectations in the first half of the fiscal year. However, for the full year, we expect to offset a good portion of these negative factors through category line review savings, other gross margin countermeasures and a roughly 50 basis point gross margin mix benefit from non-repeating public sector sales. The combined effect of these items are expected to result in gross margin for the full year being flat to slightly down year-over-year. Depreciation and amortization costs are expected to fall in the range of $85 million to $95 million, with the increase representing a margin headwind of 30 to 50 basis points year-over-year.

This largely reflects the investments made in technologies and digital capabilities as well as continued growth in vending. Other underlying assumptions include an interest and other expense of $40 million to $50 million CapEx, including implementation cost for cloud computing arrangements of $120 million to $130 million, and a tax rate between 25% and 25.5%. Additionally, we expect strong operating cash flow generation to continue in fiscal 2024 and to be greater than 125% of net income. I will now provide some additional detail on our expectations for the first quarter and quarterly cadence throughout the fiscal year. With respect to revenues on a sequential basis, we historically experienced low single-digit improvements in our 1Q ADS rate compared to 4Q, which isn’t expected to be the case in fiscal ’24.

This is primarily due to the previously discussed market challenges as well as an approximately $30 million headwind related to non-repeating public sector small capital purchases. As a result of these factors, we expect average daily sales in the first quarter to be down sequentially in the low single-digit range and up slightly year-over-year. Looking beyond the first quarter, we expect to slightly outpace historical sequential patterns in 2Q with stronger sequential performance in the second half. Under this scenario, we assume the previously discussed market challenges begin alleviating in early 2Q. With respect to gross margin, we expect the first quarter to tick up sequentially because of the removal of the public sector large order noise.

That said, the first and second fiscal quarters are likely our most challenging due to negative price cost. As we move through the year, that gap should ease due to the cycling of our inventory and the benefits of category line reviews and other gross margin countermeasures. Finally, with respect to operating expenses, Q1 will see a sequential step-up in D&A and incentive compensation expense. That sequential step-up will not repeat itself to nearly the same degree in the following quarters of fiscal ’24. Additionally, our profitability as the year progresses, will be supported by the swift actions Erik previously outlined in response to the soft start to the fiscal year. This will come in the form of clamping down on discretionary spending, taking a hard look at key expense areas like freight and other productivity initiatives and executing on several gross margin actions, including the category line reviews.

With that, I will turn the call back over to Erik for closing remarks before we open the line for Q&A.

Erik Gershwind: Thank you, Kristen. Fiscal ’23 was a monumental year for MSC as we strengthened our corporate governance, successfully closed the first chapter of our mission-critical journey and surpassed $4 billion in annual sales for the first time in company history. I’d like to thank our entire team for their hard work in making this possible. Looking ahead, we will leverage the muscle memory gain from the past three years to further strengthen MSC’s performance. Regardless of the macro environment as we enter fiscal ’24, we will remain focused on harnessing our momentum, adding new levers of growth and productivity initiatives and executing what is in our control. Thank you again to our entire team, and we’ll now open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] First question comes from David Manthey with Baird. Please go ahead.

David Manthey: Good morning, everyone.

Kristen Actis-Grande: Good morning, Dave.

David Manthey: Yes. Thanks for the color on margin progression as we look year-to-year. But I’m hoping you can bridge us a little more clearly from fiscal ’23 to ’24 gross margin. We’re starting at 41 even. You said 50 basis points due to the non-repeating public sector contract win. I think the last time we did a line review of something like 50 basis points. So, I’m thinking you probably, are getting 100 basis points of good guys there on the gross margin. What are the 100 or more basis points, of offset that leads you to believe gross margin will be flat, to down next year?

Kristen Actis-Grande: Yes. So you’ve got the tailwind on the purifiers right, Dave. That’s definitely one piece of it. And then the second thing I’d point out is on the category line reviews, I’m not sure I’d go quite as high as the range that you gave. But there is a reasonable expectation, of course, that’s helping to offset some of the price cost headwind, that we’ve been experiencing and we’ll continue to experience. So if you’re starting at 40.5, let’s just say you build that up to 41 as a kind of revised starting point for simplicity. I think then you could expect let’s just say, somewhere between maybe 50 to 70 on the category line review benefit, and then your headwind would be in your price cost spread, and that would get you back down to roughly flattish.

Now we alluded to kind of the countermeasures in the script that Erik was talking to. So obviously, there’s a lot of things we’re doing within gross margin, both in terms of transactional price cost, but also trying to affect other things in the kind of the other cost of goods sold accounts via countermeasures, but that that’s kind of the color I’d give you, on kind of simple building blocks, to get back to the roughly flattish guidance on the GM rate.

David Manthey: Shouldn’t the – you’re starting from 40.5, but shouldn’t we start from 41.0 if we’re adding back the 50 basis points for the government business?

Kristen Actis-Grande: Yes. Yes, that’s what I did. So go from 40.5 million then put back on 50 bps for the government business, so that would take you to 41.0. And then depending on how you want to assume category line reviews go, I think we’ve communicated that we hope to do at least as good as in prior reviews. So that would be about $20 million I’d say, obviously, we’re hoping to do better than that. So, depending on how you want to layer that in, I would put in 50 to 70 on category line reviews, if I’m kind of being conservative, that would get you up to 41.5 to 41.7 million. And then to drop you back down to 41 flat, that’s where your price cost headwind comes in.

David Manthey: Okay. All right. We can follow-up on that. And then on the overall sales growth outlook here, including the 400 basis points of share gain, if you take out the unusual government sales and acquisitions, it still seems like you’re assuming industrial recession in most cases here. So first question is, is that the case? Are you looking at flatness to down in terms of IP for ’24 as a base case? And then second, Erik, you mentioned a bounce back in auto-related sales following a period of slowness. Is your assumption in the second quarter of fiscal ’24?

Erik Gershwind: Yes, Dave. So on the revenue front, what I’d say is – basically what we’re assuming, and I think Kristen alluded to this in going through the framework, is a roughly flat IP through the year. The reason revenues are where there are is you have two things. One is, as you mentioned, it’s about a 150 basis point headwind for non-recurring public sector orders. So if you take the midpoint of our guidance at 250. There’s another 150 basis points or so for non-recurring orders. The other thing I’d say is it’s also in recognition, Dave, we’re coming out of the gate slow – slower than we otherwise would have, because of the UAW situation. And in the prepared remarks, we talked about low single-digits in terms of points to growth impact.

So September and October, we’re a little more than halfway through here. But September, we have under our belt at half of October are going to be lower than the midpoint. So that is factoring into our equation. In terms of bounce back, that is not factored in. So what we are assuming is that the UAW situation releases itself, before the end of the calendar year. And that things restore to more of a neutral, or flat IP situation, it does not account, for any big bounce back that certainly could happen.

David Manthey: Got it. Thank you very much.

Erik Gershwind: Thanks, Dave.

Operator: And our next question today comes from Steve Volkmann with Jefferies. Please go ahead.

Stephen Volkmann: Hi. Good morning, everybody. Erik, you talked about the deceleration in September and October. It sounded to me like maybe half of that was due to UAW issues and the other half was sort of more general. Any more color you can give us on sort of the non-UAW drivers?

Erik Gershwind: Yes, Steve, certainly, I’ll take a shot here and then Kristen can chime in to fill in any dots here. But certainly, if you look and you go Q4 to September, the Q4 and even August, growth number, it’s certainly a big drop. I think one thing just to sort of walk you growth rate from where we were tracking Q4 to Q1, you have a couple of things going on. So one, certainly, the non-repeating public sector orders were about three points of that. So that brings you down to about 6%. There is a bit of a timing on the lapping of an acquisition, it’s 0.5 point or so. But basically, you’re looking at somewhere in the 5%, 5.5% range without those factors down to what’s in the 13% range for September and something similar, to what we’re projecting for October.

Of that, what we were saying is in the low single-digit range, you could add back for UAW. So yes, I think you’re back of the envelope on saying, about the sequential step down about half and half, is a reasonable ballpark, meaning half related to UAW and then certainly a little bit of softening, which isn’t surprising to us, given what’s going on at all of the macro indices.

Stephen Volkmann: Right. And just any sort of end markets or themes to call out in terms of that slowing non-UAW slowing? Is that what….