Essendant's (ESND) CEO Bob Aiken on Q2 2016 Results - Earnings Call Transcript

| About: Essendant (ESND)

Essendant Inc. (NASDAQ:ESND)

Q2 2016 Results Earnings Conference Call

July 21, 2016 08:30 AM ET

Executives

Kaveh Bakhtiari - Director, IR

Bob Aiken - President and CEO

Earl Shanks - SVP and CFO

Analysts

Brad Thomas - KeyBanc Capital Markets

Dan Binder - Jeffries

Oliver Wintermantel - Evercore ISI

Chris McGinnis - Sidoti & Company

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Essendant’s Second Quarter 2016 Earnings Conference Call. My name is Kerry, and I’ll be your conference coordinator for today. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Essendant’s Director of Investor Relations, Mr. Kaveh Bakhtiari. Please go ahead.

Kaveh Bakhtiari

Thank you, Kerry, and good morning everyone. With me are Bob Aiken, Essendant’s President and Chief Executive Officer; and Earl Shanks, Senior Vice President and Chief Financial Officer. Yesterday after market closed, we issued our earnings release and presentation. Both are available on our website at investors.essendant.com. Following the remarks made by management, we will open the call for Q&A. This conference call is being recorded and webcast live on our website, and a replay will be made available after the call.

Before I turn the call over to Bob, let me remind you that today’s call may contain forward-looking statements, and the cautionary language regarding forward-looking statements in our SEC filings applies to the remarks we make today. All forward-looking statements are based upon information currently available to the Company, and a number of factors could cause actual results to differ materially from our current expectations. The SEC filings are available on our website, as are reconciliations to any non-GAAP measures discussed on today’s call.

With that, I will turn it over to Bob.

Bob Aiken

Thank you, Kaveh, and good morning everyone. Thanks for joining us today. As you know, over the past year, we have been working to drive profitable growth in our office products and JanSan businesses, while managing our cost structure. We transitioned these core businesses on to a common operating and IT platform, won new customer contracts, and implemented two separate cost reduction actions at the beginning and end of last year. Despite these and other efforts, we have not made the progress we were expecting and yesterday, we reported second quarter adjusted EPS of $0.55, $0.26 lower than the prior year.

During the quarter, we experienced several significant headwinds to gross margin in our office products and JanSan businesses. These headwinds were driven by general market pressures, a shift in mix to larger and lower margin customers and a shift in mix to lower margin categories such as paper and ink & toner. As a result of these pressures, our gross margin dollars in office products and JanSan, declined by $15.5 million on a year-over-year basis in the second quarter. We expect these market trends and pressures to persist into the second half of 2016. As a result, we are revising our 2016 full year earnings guidance down from a range of $3.20 to $3.40 per share to a range of $2.15 to $2.30 per share. This revised range reflects the trends in volume, selling margin, and supplier allowances that we are now forecasting for the balance of the year, as well as the cost actions that we will implement.

We also plan to deliver a $150 million of free cash flow in the remainder of the year through reductions in inventory purchases. This will drive our efforts to right size our inventories and generate free cash flow. While this inventory reduction will reduce 2016 supplier allowances and earnings, it is the right thing to do from a return on capital standpoint and will right size our inventories and improve our operating efficiencies.

In just a few minutes, Earl will go into more detail on the sales channel and category mix challenges we faced in Q2. With that backdrop on the quarter and the year, I’d like to point out that despite the setback we experienced in the second quarter, our long-term objectives and strategy remain intact. We are continuing to invest in our common platform project, which we believe is critical in helping to get our sales trends and margins higher while enabling us to unlock the potential in cross-selling across categories.

The common platform has already been instrumental and helping us to attract new customers and that’s because it allows us to sell multiple categories, office products; breakroom; food service; JanSan; and furniture with one order, one shipment, and one invoice. It expands our next day fulfillment capability and broadens our product offerings to customers, many of whom have prioritized category expansion and fast delivery as the way to grow their sales in the marketplace. The customer and category mix challenges we faced in Q2 are not new to us, although their impact in the quarter was far greater. In fact, our strategies are intended to compensate for these market challenges. And we have the opportunity to accelerate and improve our execution and focus against these strategies. For example, we moved to better align pricing with our cost to serve at the beginning of July and are accelerating our merchandising efforts to focus our stocking positions more on key suppliers. To this end, we will focus the business on three key areas to recover the ground that has been lost in 2016.

First, we will apply our resources to those customer channels with the best prospects for long-term profitable growth. These include our e-tail segment, which grew 10.8% year-over-year in the second quarter; our vertical market effort to capture share and enterprise accounts where we grew 18.6% in second quarter; and our strategic JanSan customers, where we grew 4.6% in the quarter, even in the face of service disruptions from our common platform facility conversions. These results are consistent with our long-term strategy to align with those customers who are gaining share in the office products and JanSan end user markets.

Second, we will drive gross margin dollars in the business through more effective pricing and merchandising excellence. From a pricing standpoint, we will work to better align our pricing methods with our cost to serve to make certain we are getting paid for the value we bring. From a merchandising excellence perspective, we will more closely align ourselves with the best suppliers in the office products and JanSan categories where we can capture additional value by focusing our volume in the marketplace with those key suppliers. We must continue to evolve beyond the traditional wholesale mindset of being all things to all partners. That approach simply fails to add enough value to earn our share of the industry profit pool in return for our efforts.

Third, we will continue to reduce our cost structure to deal with the realities of our marketplace, particularly around simplification of our business and rationalization of our distribution footprint. In low growth environments, all good businesses must bring this sort of [ph] continuous focus on cost through simplification. We believe that these focus areas will position our office products, JanSan businesses for success in 2017 and beyond.

Importantly, we also continue to believe in the long-term value creation potential of our industrial and automotive aftermarket businesses. Performance in our ORS industrial business was one of the few areas that exceeded our expectation in the second quarter. The recovery and diversification effort in our ORS industrial business is beginning to take hold. We have more work to do to bring year-over-year revenue back to a positive trend, and we are driving very focused and disciplined efforts to do so.

Our MEDCO automotive business is continuing to work through the integration of Nestor Sales, which we acquired last year. We continue to see positive growth in the automotive aftermarket category and like both our business and the position we are building there. We anticipate that we can continue to increase the value of our industrial and automotive businesses by brining the same focus on those customer and supplier relationships that offer the greatest long-term potential to capture value. We will also work to continue to leverage shared services where appropriate to drive down cost to serve.

Despite the setback in the second quarter, I’m encouraged by the opportunity I see in building on our core capabilities while increasing the Company’s efficiency. We continue to poses many of the key value drivers that define best-in-class distributors including category of leadership positions, meaningful digital content, multichannel capabilities, and the ability to generate strong free cash flow even during challenging market conditions. These are some of the key attributes that we intend to maintain and build upon through our overall strategy to create value.

To wrap up, we are disappointed in our results and we are acutely focused on the actions we need to take to deliver improved performance. In the remainder of the year, you can expect from us one, for us to apply our resources to those customer channels with the best prospects for long-term growth; two, to capture gross margin dollars in our businesses through more effective pricing and merchandising excellence; and three, to continue to reduce our cost structure.

At this time, I am going to turn the call over to Earl to provide more details on our financials. Earl?

Earl Shanks

Thank you, Bob and good morning. My comments this morning will include a discussion of second quarter results and our updated guidance for the rest of the year. Beginning with the overview on slide seven, we reported first quarter adjusted EPS of $0.55, a decline of $0.26 year-over-year. As Bob noted in his remarks, our performance was very disappointing and well below our expectation. As a result of our second quarter performance, we have reassessed our expectations for the remainder of 2016. Based on that reassessment, we are lowering our prior full year adjusted EPS guidance range of $3.20 to $3.40 to a revised range of $2.15 to $2.30.

Our results were driven by a significant drop in our gross margin, which lowered earnings versus the prior year, despite some growth in sales. This drop in gross margin is primarily driven by a shift in our product category revenue mix and by a shift in revenue to larger, lower margin customers. I will have more to say on gross margin shortly, but I’ll begin with revenue performance on slide eight.

Increased sales of technology and office products were responsible for our sales growth while acquisitions were neutral as the sales attributed to the Mexico business we sold last year offset the additional revenue from Nestor, the bolt-on automotive acquisition we bought last July.

Slide nine shows our category sales performance and mix. While the overall sales mix was little changed year-over-year, you’ll note that sales of relatively lower margin items increased such as cut-sheet paper, which was up 16.6%. Technology was down 2.2%, but up 3.3% after excluding the impact of the sale of the Mexico business. And sales in relatively higher margin categories such as furniture and industrial were down. These changes in revenue result in a shift in our overall product mix, which is having a significant negative impact on our 2016 product gross margin rates. For the quarter and the full year, we are seeing a significant shift in category mix.

Industrial revenues were down by $6 million or 4.1% year-over-year as the energy and welding channels continued to be weak compared to last year. However, the business again showed sequential improvement by about 200 basis points from the 6.2% year-over-year decline in the prior quarter. Our base case is for a slow and gradual recovery in industrial. And we believe the steps we are taking to stabilize the business and diversify the customer base will continue to have positive impact on results. From an earnings perspective, this business is performing better than prior year through the second quarter.

Sales in the automotive category were up $16.2 million or 25.9%, as Nestor contributed $18.6 million in sales in the quarter. While we are working through some integration challenges, we continue to be pleased with this category and are taking the steps to finalize the Nestor integration and add long-term value to the business. With the increase in miles driven, the increasing average age of cars and continued technological innovation in automobile, we like the position of the business and the secular trends.

Now, I’d like to discuss the drop in gross margin. Increased sales of lower margin products that I mentioned earlier, was a significant factor contributing to the decline. Also, in the OPIDC or independent dealer channel, we are seeing an accelerated trend of consolidation of purchases by the small and medium dealers to the larger resellers. As a result, we are experiencing accelerated margin pressure within this channel. Our sales to the larger resellers are generally at lower margins than sales to our smaller resellers. While the trend is a negative impact on margin, it does help Essendant increase market share over the long-term since we remain well-aligned with large resellers. We have formed deep and lasting relationships with them. And it continues to make logistical and cost sense for them to partner with us based on the capabilities we provide. We have won new businesses here with these larger customers, which is contributing to earnings, but we are experiencing a decline in revenues from smaller customers, which is creating a negative mix shift in our profitability. Our challenge in this space is to improve margins in the face of these shifting customer trends.

For example, during the second quarter, we had incremental revenue from the four large customers that we won in the first quarter of approximately $52 million. While the sales growth of these large customers more than offset the declines in other customers, the impact on gross margin was significant. In our prior guidance, we expected that revenue from these new customers would be additive to our base business. Instead, for the most part, these new revenues are closing gaps in our base revenues.

As Bob mentioned earlier, we saw 10.8% growth in our e-tail business in the second quarter. We continue to view the trend online ordering as beneficial to Essendant over the long-term since our capability to drop ship and process orders ranging from full truckload to single items is a competitive advantage for us. We remain positioned well for the accelerated transition to online sales. At the same time, the transparency of pricing online does cause margin pressure across all of our channels.

With regard to operating expense, we executed on significant cost reduction activities in 2015 and early 2016 that reduced our exempts or salary headcounts by over 11%, about 220 positions since the beginning of 2015, excluding the impact of the Nestor acquisition. In recognition of the challenges that we faced this year, we will further simplify our organization, reduce discretionary spending, and reduce our distribution center footprint. We have included some of the actions in our guidance. However, for some of the changes such as distribution center footprint, we will provide future updates as to impact and progress as the detail plans are established and actions are taken.

Turning to the balance sheet, accounts receivable days sales outstanding are up at the end of the quarter, because of the year-over-year timing of revenue within the quarter. The improvement on our bad debt allowance reflects the success of our credit management efforts. As we have indicted regarding inventory, we are executing on a plan to reduce inventory by $100 million between now and year-end. With respect to leverage, we ended the quarter with debt of $761 million and have a leverage ratio per bank covenants of 3.5 times EBITDA as defined in the agreement. Based on expected cash flows and the inventory reduction that I described, we will see reductions in our leverage level in Q3 and Q4.

Let me wrap up my comments by turning your attention to slide 10, which covers our revised 2016 guidance. Regarding revenue, we are narrowing our expectations for revenue growth to reflect the current market environment and our year-to-date performance. We now expect revenue to be between $5.4 billion and $5.475 billion in 2016. As indicated earlier, we are reducing our earnings guidance for the year to reflect the gross margin pressures that we have experienced during the quarter. We expect the decline in gross margin result in a reduction of our expected adjusted earnings per share to a range of $2.15 to $2.30.

As I indicated when discussing gross margins, the two primary drivers of the earnings change on a category mix shift that we are seeing among the products that we sell and the mix shift for smaller customers to larger lower margin customers. We anticipate that the impacts that we have seen in Q2, will continue for the remainder of the year. On the plus side, we expect to achieve free cash flow in the second half of 2016 of approximately $150 million. To achieve this free cash flow guidance, we will aggressively reduce our product purchases from selected suppliers for the balance of the year and thereby reduce year-end inventory by approximately $100 million from present level.

We believe that we can accomplish this objective without negatively impacting customer service levels.

As part of our earnings guidance, we have taken actions to better align our pricing methods with our cost to serve, modify merchandising strategies, reduce discretionary spending across the organization and to reduce our ongoing freight costs. We are also developing plans to reduce our distribution footprint more aggressively and to further streamline and simplify the business. We will provide an update on the resulting actions in the coming quarters.

As Bob and I have indicted during this call, we are not satisfied with these results or the outlook for the remainder of the year. We are focused on expanding the business where we have the best future opportunities, while controlling and reducing our cost structure and increasing cash flow with aggressive working capital management. I believe we have a plan and the capability to deliver on the expectations that we have described.

At this time, Kerry, please open the lines for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Brad Thomas

Couple of questions if I could. First, and thank you for all the color you provide here this morning, just with respect to this significant change in mix, maybe could you just give us any more color that you could around maybe why the pressure was so significant this quarter and in particular from a timing perspective; and then, maybe why the magnitude seems to have been so great? Thank you.

Earl Shanks

Brad, thanks for the question. I think when we think about this quarter, one of the things that I highlighted on the call was the growth in revenue we had with the new customer wins from the first quarter. And as we indicated, we’d expected those new customer wins to be incremental revenue when we look at the business. And instead, effectively, they were substituting for other revenue as we saw declines and consolidation from a mix standpoint in the customer set, as we had the smaller customers and seeing declines there, which was a challenge. So that was a particular change in the quarter, which came out a bit differently or quite a bit differently than we expected. We also, as we are looking back at the quarter now, clearly are seeing some category mix shifts in terms of product line that we had not also expected. So, those were two pretty significant differences that came on us in terms of what’s happened. As we -- and they were both pretty large on a combined basis.

As we look at the full year, our assessment is we will continue to see the category mix shift and then impact from that through the balance of the year. And we think the trend that we described in the call, generally as smaller, larger, less profitable customers getting bigger and smaller more profitable customers getting smaller is a trend that we would expect to continue. So, these were really pretty big shifts when you look overall. And there were some other moving pieces around the edges, but those were the big ones that we were seeing.

Bob Aiken

Brad, this is Bob. I would just add to that. So, as we look at that, it obviously causes us to say we need to look across our customer base by channel and by category and understand where are we earning adequate returns for our efforts? And the hard work of distribution is to understand where you are earning those returns to apply your resources into the channels where you see the best prospects for profitable growth to drive your gross margin dollars through more effective pricing and merchandising excellence and then to focus on cost. And so, we think the shifts that were seeing in customer mix are reflective of underlying trends in our industry. And it becomes incumbent upon us to continue to modify our business model to respond to that.

Brad Thomas

And so, as we think about modeling the balance of the year here, you mentioned the mix pressure will continue, as you reduce inventory there could be the pressure from vendor allowances, how big could that drag be on the vendor allowance side?

Bob Aiken

So, we baked that into our guidance expectation and it’s actually part of what we think of as the mix shift because it’s very much on the product side. So, when we kind of break this out and think about the customer and the category mix as being roughly equal for the full year in terms of the overall impact, that’s part of what we baked in. Specifically related to the inventory reduction, that’s probably a few million dollars in allowances in the balance of the year. But that’s kind of the magnitude.

Earl Shanks

And then, I would add to that Brad to say, I talked earlier about better aligning with suppliers who drive value in the marketplace and recognize the value that we bring; and when you look at the $100 million inventory reduction, that is not going to affect all suppliers equally or similarly. Purchases from some of our suppliers will be much more impacted than others. And a big part of what we need to do here in driving our merchandising strategies is to create the right level of alignment with the supply base to make certain that we’re getting paid for the effort and value that we bring.

Brad Thomas

So, just one more question from me and I’ll turn it over to others here. But, the Company has a long history of having an operating margin in the 4% range; I think by math, you go back 14 years and it averages about 4%. This year, I think your guidance implies it will be down in the high tows, maybe about 2.8 [ph] at the midpoint. I guess just as you look at the business structurally, I mean how much of this is temporary, what do you think the right operating margin for the business could be in a year or two as you adjust to this new environment that we seem to be in?

Earl Shanks

Brad, at this point, we are very focused on executing on the expectation that we laid out on the call that there is -- we need to focus on that before we get to giving future guidance, at this point. There are certainly opportunities to improve the business that we are spending a lot of time on. But, it’s early yet to say, where we’re going to be next year or beyond.

Brad Thomas

I understand, but appreciate it. Thank you.

Bob Aiken

I would add to that, Brad. If you just think about the businesses that we’re in, we’ve got this work to do in office products to really make certain that we’re aligned with the right customers that can grow profitably with us over time with the right suppliers where we can drive value. And that’s predominantly where we see these mix shifts taking place. In the JanSan sector, we like our position in JanSan. We are growing with the most strategic JanSan resellers, the share takers in our view over time. We disrupted a portion of our JanSan business with the project best implementation; we’re working hard to get that business back, to get JanSan back to a GDP growth type business.

And we believe in both our automotive aftermarket business as we get Nestor and MEDCO integrated; that’s a great category and we have a very nice position there. In our ORS business, the efforts that we’ve undertaken over the last year to start to reposition that business, to diversify the revenue base, to grow in the e-tail segment in the government segment, we’re making investments there. And as Earl pointed out earlier, revenue trends are starting to reverse; we’re still not back to positive there. But, we think, we have a lot to offer in that space as well. And, while that is -- I just want to give you a color as we think about the four businesses today where each is.

Operator

Our next question comes from Dan Binder of Jeffries. Please go ahead.

Dan Binder

Thank you. With regard to the things that are happening, the pressures in the market, I mean, these are things that have been probably building for a while, since you have seen an inflection point here. And frankly, I don’t think they’re going away, and I don’t think you do either. But, it would suggest that if you’re seeing smaller, better margin business with smaller dealers that is, transitioning to business dealers that have larger margin at this gross margin reset is probably fairly permanent. Am I wrong in that assessment?

Earl Shanks

Dan, I understand the point. And certainly, as we look at the balance of the year, we didn’t give you a forecast for much of a change from the second quarter expectations as what we embedded into it. So, in this timeframe, I think that’s right. As we alluded to on the call and as Bob just alluded to, there are a number of actions that we think we can take; there are a number of parts of the business that over time we think we can improve. We are on the distribution center side as an example, on our cost structure side, going to the kind of sense rebuilding the business over time to say how do we change the cost structure, how do we change the model. So, as I said, a few minutes ago in response to the Brad’s question, I think it’s early for me to provide you with guidance. I’m not going to tell you that we have no hope for improving in the future.

Bob Aiken

And I would say this, Dan, we have thousands of customers and millions of transactions that comprise our business. And when we look across the customer base, whether you’re talking about pricing optimization or merchandising excellence or cost, there are opportunities. I’ll take just a minute and talk about pricing optimization as an example and go into some detail, as I think it gives you a sense for it.

It is true, we see the shift from smaller to larger and also from categories that are higher margin to categories that are lower margin, but there is a lot you can do in that context. And when I look at pricing, things like focusing on order size minimums, small order charges as we see a shift to more small orders to make certain we’re better aligning the cost to serve; that’s quite critical to us. As we look at slow moving items that we stock today eliminating or reducing discounts on those slow moving items so that we’re better aligned at cost to serve there; when we look at a category like ink & toner where large tech orders are very low margin. As we look at our cost to serve there, we see the need to better align the cost to service. So, this will play itself out over thousands of customer relationships. But, there are opportunities for us to do a better job of driving gross margin and we are doing today, even in the face of those trends that you talk about.

Dan Binder

So, where do you think the DC footprint goes to over the next year or two as we try and take supply chain cost out? And also, as you -- this Company, both your management and prior has had I want to say several years of cost reduction, sometimes the results in risk, sometimes it’s operational but doesn’t strike me as a company that has a lot of fat. So, I am curious where you see the cost reduction opportunities. And then how you execute that, particularly it pretends to people without losing sort of the brain trust that’s embedded in the organization.?

Earl Shanks

Yes, I think you raised that really critical point. When I look at cost, there are opportunities, both in the short-term and over the longer term. During the short-term, obviously there are discretionary costs; and like every good company, we’ll manage those. We’ve had some inefficiencies in our distributions centers form the project best implementation. That requires training thousands of our associates on the job that they do and how they do their job, and that’s driven some operating expense for us that’s reflected in the numbers. And we have a good plan in the second half of the year to normalize and operationalize project best to get those prospects.

Over the longer term, I think it’s a question of just really focusing on the distribution footprint and saying to deliver on our service model and focusing on customers that can drive profitable growth, what does that distribution footprint look like. We think there is an opportunity; we’re at 71 distributions centers today; we think there is an opportunity to bring that number down closer to I would say in a range of perhaps 61 to 63 or 64 over time. And that’s work that we would have done over time, we may look to accelerate some of that work now.

On the question on the brain trust, we are very focused on this issue. We have a lot of work to do to both assure our shareholders that we can stabilize this business and driving forward. We’ve got the same work to do with our associates with the great people that we have at this Company; we really need them to help us execute these efforts. And as soon as we’re going with these investor calls, say, you can believe, we’ll turn our attention to those issues.

Dan Binder

One last question if I could on the -- I understand the customer shift issues and the pressures in the market impacting gross margin. I was less certain why the product category shifts occur; and I understand industrial and the oil well issues are continued. But you’ve mentioned -- you called out paper and technology moving up, furniture moving down. Was there something notable to point out that’s happening in the industry that would cause these category shifts to occur and also to continue, which sounds like you’re expecting?

Bob Aiken

Dan, as you know, we’ve been driving this year to grow the business in total and therefore, you have to grow the business in terms of what customers want to buy. So, at some level, the paper trend is probably vast. With respect to some of the other pieces that are out there and while we’ve had some growth in more traditional office products, it’s had a lesser rate than what we saw in tech and paper. So, there is some negative impact there, there was also some negative impact in -- effectively as we moved the purchases along to where the business seems to be going, so that had some impact as well, when we think about this. I do think it’s the broader trends in terms of where the demand is for the different products what we’re seeing.

Earl Shanks

I would just add to that. There is a level of end user demand, particularly as it relates to office products. And we’ve talked historically about 3% to 5% decline in end user demand. And we don’t see any reason to think that that trend has accelerated. What we do see is a consolidation taking place among resellers, the larger resellers to respond to the pressures in the marketplace. But, as I look at office products, I think we have been growing our share; and at 1.1% growth for the quarter that continues to be true.

Cut-sheet paper, it can be ROC [ph] accretive to us, that’s a business that our customers are in and we’ll be in that business, if it generates a return for us; the same is true for technology. Furniture, at a 5.4% decline, I think we’re underperforming the market here a little bit now; we’ve got some work to do to get our furniture business back on track. JanSan and breakroom, we’ve talked about, this being a GDP growth business, we think our decline too are driven primarily by the project best implementation. So, there is an opportunity to get back to market growth there. Industrial, this requires a repositioning away from energy to these other sectors. And over time, there’s going to be more cyclicality there but over time, we think there is opportunity for growth as we diversify. In automotive, we like the trends in automotive.

Operator

Our next question comes from Oliver Wintermantel of Evercore ISI. Please go ahead.

Oliver Wintermantel

Have you seen any reaction in the end-market or from your resellers in reaction to Office Depot and Staples not being allowed to merge? Does have anything to do with that consolidation of the resellers to react to the market or anything of the mix shift of products?

Bob Aiken

I would say, as you know, we were proponents of the Office Depot, Staples merger; and obviously, there would have been a direct benefit to us with the acquisition that we would have been able to complete. But more importantly, it would have allowed a consolidation of this industry. There is too much capacity in the office products industry today. And that would have been a key point of consolidation and that would have been good for the industry. I think as our retailers look out now, they are looking at the industry, and the largest players that are most capable with the largest scale are going to consolidate the space. I think Staples just talked about their desire to consolidate the space, a number of our independent resellers desire to consolidate the space. So, you are going to see a trend the larger customers. And on balance, I think that’s good for the industry because it allows the capacity to come out. I do think however, we’ve got to adjust our model to make certain that we’ve got the right value preposition and pricing structures and supplier relationships to be able to create value in that environment. But, I think there is going to be more consolidation among our customers.

Oliver Wintermantel

And then, in reaction to that, if you look a little bit longer term on the strategy, so you got into automotive, industrial was a big growth the last few years with acquisitions. If there is not more consolidation in the office products space, does that change your strategy; are you looking at different verticals or add to some other verticals that you already have in the acquisitions, in regards to acquisitions over the near or longer term, just about thinking about strategy longer term? That would be helpful.

Earl Shanks

The perspective that we’ve had in this for a while is that we need to focus on the businesses that we’re in, so that would be all the businesses that we are in. I think there are opportunities in those businesses and there will be opportunities in those businesses to do some acquisitions that create value and expand our capabilities or expand our footprint whether that would be in the JanSan space or the office products space or automotive or industrial. So, I think there is opportunities there. I think we’ve got some work to do to make sure that we are driving the core business and the businesses that we have as well as we can to make sure we are executing well. But I think there are opportunities to expand the business inorganically as well. And I expect you will see us take some of those opportunities.

Operator

Our next question comes from Chris McGinnis of Sidoti & Company. Please go ahead.

Chris McGinnis

Just quickly on your initiatives to go out and for the cost to reserve, in the face of a more competitive environment, how do you go about improving your pricing in today’s environment anyway?

Bob Aiken

Because I see this the way that pricing has worked historically is that there have been a number of items that are highly impressionable and margins are at all levels are quite thin. What’s happening today is e-commerce growth, there is greater pricing transparency across all the items sold in our industry. So, the traditional pricing methods, whether you are talking about one of resellers or our Company, the traditional pricing methods aren’t as effective. And what that requires you to do is really understand what is your cost to serve for all of the items you are selling and then to make certain that you are getting a fair return, the notion of building a margin basket off a few items, which is a lot of distributors and wholesalers over the years have managed margins in that way. I think that’s becoming much relevant. And those companies that best understand the cost and price their products based on their costs are the ones that are going to be successful over time. And so that’s the transition that we’re talking about there.

Chris McGinnis

And then, I guess just on the cost actions, is it too early to think that maybe you’ll bring a common operating platform to your other two segments or maybe that’s announced by year-end?

Earl Shanks

I think our perspective that, Chris, is that we want to make sure that whatever we’re putting into any investments across the Company, common platform is one of the examples. Deals that we’re getting a very effective return on that investment, we’ve stepped back and actually we stepped back at the end of last quarter to really reassess to make sure we had an effective plan against that for the industrial and automotive space. And we continue to test that plan in terms of return on investment in the way optimize it. I think we are likely to leverage some specific points when we get a really good return and we might modify a little bit some of the other points we’re making, when we look at what we’re doing from the investment. So, we’re not quite to the point of making an announcement around exactly where we’re going there, because we’re really trying to optimize and get the best return on investment we can for the dollars that we’re going to spend in that space.

Bob Aiken

And I would just add this, in office products and JanSan, there is clearly a real blurring of the channels, and resellers are moving across these categories to a broader offering. When we look at our industrial customers or our automotive customers, there is overlap between the products that we’re selling in the office products, JanSan business and what those customers want to bring to end market to, but the level of overlap is not as great. And so for as an example in industrial, you might say well, we need the common platform to sell into the e-tail space. We are finding ways on our current industrial platform to sell into e-tail space and that will generate a higher return, allow us to move faster at a lower investment. So, we’re going to be pragmatic about these things and where it makes sense, we’ll do it. But the kind of blurring of the channels between OP and JanSan was clearly the most obvious and the work we’ve done to-date most responsive to how reseller, the number of categories that resellers are handling is changing.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Bob Aiken for any closing remarks.

Bob Aiken

Okay. Well, thank you all for joining us this morning. I hope that you know, while we are disappointed with these results, we are encouraged by our plan to create value in the back half of the year and beyond. I have great confidence in the associates across this Company. And I believe that the actions that we’re talking about will position this Company for success over the long-term and enable us to respond to the sorts of market pressures that are reflected in this quarter’s results and that we’re facing today.

We really appreciate your time and interest during the call today. We look forward to sharing our progress with you in the coming quarters. Thanks very much.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.