MSC Industrial Direct Co Inc (MSM) 2002 Q4 法說會逐字稿

Please stand by. The conference is about to begin. Good day. Welcome to the MSC Industrial Direct fourth quarter 2002 conference. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. At that time, if you have a question, you will press the 1 on your touchtone phone to register for a question. As a reminder this call is being recorded on November 19, 2002. I would like to turn the program over to Lindsey Hatton of Morgan-Walke.

Thank you for joining us to discuss MSC Industrial Direct fourth quarter and fiscal 2000 financial results. You should all have received a copy of this morning's earnings announcement. If you have not yet received a release, call our offices at 212-850-5752 also an online archive of this broadcast will be available within one hour of the conclusion of this call and will be available for three business days at www.mscdirect.com.

Let me take at a minute to reference the safe harbor statement under the Private Securities Litigation Reform Act of 1995. This call may contain forward-looking statements subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the company's forward-looking statements are included in today's earnings release and in the company's filings with the Securities and Exchange Commission. The information contained to this conference call is accurate only as of the date discussed. Investors should not assume the information will remain operative at a later time. The company undertakes no option to update any information discussed in this conference call. With that said I would like to introduce you to MSC Industrial Direct’s Chief Executive Officer, Mitchell Jacobson. Please go ahead.

Thank you, Lindsey. Good morning, everyone, and thank you for joining us today. With me are David Sandler, our Chief Operating Officer, and Chuck Wolkey-ph, our Chief Financial Officer, and Shelly Boxer, our VP of Finance. Let me begin with the results of the special committee's report, an overview of the fourth quarter and our expectations for the first quarter of 2003. David will cover our fulfillment model, Chuck will provide details on the re-audits and the fourth quarter financials. Following Chuck, I will wrap up and we will open the line for questions.

I'm especially pleased to report that the special committee of the board of directors found there was no evidence that accounting was done with improper motive or with the intent to misstate the company's financial performance. They also found that the company's management at all times acted with integrity and that management responded properly and professionally when informed of the accounting errors. Integrity and honesty have been one of the cornerstones for MSC since our founding. My father, who started the company, did business by handshake. Those in our industry know our company operates consistent with the highest standard of ethics. Our word is our bond. As such, the findings of the committee come as no surprise to me.

I'm also happy to report that sales growth continue through the fourth quarter and the first quarter to date. Sales of $201.7m in the fourth quarter represented 3% growth in average daily sales dollars versus the fourth quarter of the prior year. This business continues to operate at a high level. Our model is being validated by the marketplace and we're taking share. In the first quarter, average day's sales increased by approximately 10% over last year, and are up approximately 6% over the fourth quarter. September, October, and November growth year to year have been consistent through the quarter at just over 10%. This growth is not the result of an improved economy. Rather, the bulk of the growth is being generated through market share. Hence, the results of lots of hard work, capitalizing on our model, growing our active customer base and taking market share from the competition. It's working and we're seeing it in the numbers. As the revenues gain momentum, so will our earnings. MSC will will be benefit from the significant leverage that is built into the business. We have committed that 25% of every additional revenue dollar in fiscal year 2003 will be passed through as operating income. Based upon our growth rate in the first quarter to date, we expect our revenues for the quarter to be in the range of $207 to $210m and our earnings will be between 16 and 18 cents per share. I will turn it over to David.

Thank you, Mitchell. Before getting into the usual stats, I would like to add some color to what we're seeing and hearing in the marketplace. For the first time in quite a while, all of our regions grew in the quarter. The Midwest continued to be the strongest with high single-digit growth. The other regions were all low single-digit growth. We have not seen a consistent up lift in most customer segments. Growth is spotty and varies considerably, not only geographically but by customer segment as well. We're also concerned about the declining macro-economic indicators. We believe that we're achieving our growth through the execution of our plan as we are taking share by penetrating deeper into customers, even those that are not growing their businesses. The key drivers are our solution-selling approach and the delivery of our value-added services in a flawless manner.

Recently, we had a customer visit us at our monthly town hall-style meeting. This customer is a small defense contractor located right here on Long Island. Not that long ago, they were having trouble meeting their delivery schedule with the U.S. Navy for their product. And they were striving to make a decent return on their sales. They looked to us with this opportunity. The result was that MSC was able to reduce their costs considerably by recommending different tooling to reduce their manufacturing costs and also to deliver this tooling from stock the next day. This customer was thrilled with the solution we provided, which was a big win for them and for us. Not only has their business with the Navy increased substantially in a short period of time, they're also enjoying a reasonable profit margin made possible by the new tooling. They recently received a visit from U.S. Naval offices to commend them for being the Navy's only vendor, making their type of specialty product with 100% on time delivery. This example of partnering with our customers and solving their problems is one of the prime reasons why MSC will outgrow their sector. Our business with this customer has grown from $6,000 annually to $60,000 annually.

Turning to the details for the quarter, I'm pleased to report that the execution of our model continues at very high levels and our metrics are coming in at target levels or better. By continuing to service customers at levels unmatched by the competition, we gain share and ensure our future growth. We are now seeing some of the results of that execution in our sales numbers in the first quarter. Overall fill rates are about 99% and all D.C.'s are hitting their first-pass fill-rate goals. We have seen a mix change in our business with more of our sales dollars generated by C, D, and E type of items. We believe this mix change is consistent with the de-stocking occurring in smaller distributors due to the financial pressure of the extended downturn.

Our four distribution centers provide us with the ability to service these unusual items with industry-leading fill rates, although the item may not be stocked in the center closest to the customer. Accuracy levels are excellent, averaging about one error per thousand and call center staffs continue at high levels as well. The order-to-call ratio continues to run above 70% in the fourth quarter with an abandonment rate of less than 1%. And we average 60 calls per associate per day.

As noted, we are continuing to view the marketplace with some caution so we will continue to manage our fill sales hiring quarter to quarter. We finished the quarter with 450 associates and plan to maintain approximately this level in the first quarter. In the fourth quarter, as expected, we mailed approximately 7.9 million pieces. This compares to 9.8 million pieces in the fourth quarter of the previous year. This year we cut back on prospecting and specialty mailing, anticipating the response rate declines associated with the summer slow down. The summer seasonality shows our normal cycle reflecting summer vacations and planned shutdowns. We planned for an especially difficult summer given market conditions and we're very pleased with our mailing program results. By concentrating our efforts in more productive sectors we were able to maintain excellent overall response rates. Total active customer count was 329,000 at the end of the fourth quarter, up 6,000 from a year ago. Both periods includes approximately 8,000 customers who were erroneously excluded from earlier counts.

Our big book was introduced on schedule and has been received extremely well by our customers. We added over 40,000 new items this year to our industry-leading product offering and also deleted a considerable number of nonproductive items from the book which brings our total to approximately $525,000. In terms of manufacturing versus non-manufacturing, we continue to see improvement. We turn the corner in the fourth quarter, as average daily sales to the manufacturing sector turned positive and grew about 2.5% and sales to the non-manufacturing sector grew to about 6%. The improvement in both sectors is due to our share gain as noted earlier. Average order size was $220 in the quarter, up about $4 from the previous quarter. National accounts and our E-com programs continue to be huge success stories for MSC. National accounts grew to 110 customers in the fourth quarter, up from the third quarter's 102. The program generated $25m in sales in the fourth quarter. That's up 45% versus last year. And that represents 12% of consolidated sales. We will continue our investment in this program and expect its growth will continue to outpace the rest of the business.

Just as exciting is the continuing success of MSC Direct.com. Sales through the site were $17.8m, representing 9% of consolidated sales with an annualized run rate of $71m. This represents growth of 55% from the fourth quarter last year. Customers continue to embrace the site and it's integral to the growth of the national accounts program as well.

In closing, I want to reiterate just how pleased I am with our performance and that I'm extremely optimistic about our future prospects for growth. I will, however, remain cautious in the near term based on the economic conditions that we face. Before turning the Mike over to Chuck, I would like to thank the entire MSC team who have continued to stay very focused on executing our model at consistently high levels throughout a difficult period. Thank you and, Chuck, now over to you.

Thanks, David. MSC has gone through a lot this quarter, and I believe that we have merged stronger for it. We have completed what I can confidently call a thorough, professional audit of fiscal years 2000 through 2002 by Ernst & Young LLP. We will be filing a complete set of audited financials on form 10K before the end of the month. I wanted to take this opportunity to thank all of the associates in the finance organization and the team from E & Y who got this done in a timely and professional manner. The re-audits from the previous years -- in addition to the errors noted in our press release of August 5, 2002.

These additional adjustments increased reported net income by an aggregate amount of $1.3m as follows. Net income in years prior to FY 2000 will be increased by approximately $3.6m. Fiscal 2000 net income will be decreased by approximately $2.6m, and fiscal 2001 net income will be increased by approximately $300.3m. Of the shifts between FY 2000 and prior years is due to a significant time lag between the accrual of corporate bonuses and the final determination of the actual bonuses paid. In the fourth quarter, we met the expectation we set in our last conference call and reiterated on August 5. We earned 14 cents per share before non-operating items. In this quarter, we recorded the effect of three non-operating items into the other income and expense captioned on our income statement.

The details are as follows. First, we wrote off the remaining residual value of our external Internet investment, approximately $700,000 of a small related tax benefit of only about $60,000. Secondly, we have recorded an accrual of $535,000 for estimated out-of-pocket costs in relation to the restatement. And lastly, we reported a gain of $365,000 on sale of property no longer needed. The total for these items was $870,000 reduction to pre-tax income and $740,000 reduction to net income. Reducing EPS by approximately 1 cent per share. We are reiterating our commitment to grow operating income by 25% of the sales increase in fiscal year 2003. As we noted in previous calls, the commitment is based on the entire year. Seasonal factors may result in some quarters being either higher or lower than the 25%. Gross margin came in at 43.6% as we anticipated in our previous conference call. We expect gross margin to continue to rise in the first quarter and be somewhat higher than fiscal year 2002 throughout all of FY 2003. We held the line on operating expenses in Q4 and planned FY 2003 expenses consistent with our 25% read through goal.

Turning to the balance sheet, we once again see an improvement as our asset management programs continue to produce excellent results. Cash flow was excellent as the business generated $17.8 million in free cash flow for this quarter and $77m for the year. The cash reserves were $60m at year end and now stand at approximately $65m. Depreciation and amortization exceeded capital expenditures as the net fixed balance declined $2m in the quarter and $8m for the year. We have no significant capital spending plans for fiscal year 2003. We expect the total Capex will be at or below our depreciation and amortization once again. MSC will continue to generate significant free cash flow in fiscal year 2003, although most of this will be generated by income, as revenue growth result in some working capital investments. Receivables declined in line with sales of the fourth quarter and DSO’s were 41 at the end of the quarter. Inventory management continued to improve and annualized returns were 2.2 in the quarter. This is better than expectations we usually see an increase in inventory when we stock the new skews. This year we absorbed the new skews and still reduced inventory levels modestly. Inventory should rise slightly to meet increased sales demand in FY 2003 but we anticipate a slight improvement in overall turns.

The stock buy back program that we introduced in July continues. During our previous call in July, we said that we had repurchased 1 million shares at a cost of $19m. Since then we repurchased an additional 2,340,000 shares at a cost of $28.2m. In September the board restored the maximum number of shares that MSC could repurchase to 5 million shares and approximately 4.7.million shares remain from that authorization. Our bias is to maintain comfortable cash balances during this time of limited visibility. Of course we will continue to evaluate repurchase of our stock as a good use of our cash.

In summary, I believe we had an excellent quarter financially. We exceeded our expectations on cash flow generation, continuing to show progress and balance sheet management and repurchased a significant amount of stock at what we believe were very advantageous prices. Thank you. I will turn it over to Mitchell for the wrap up.

Thanks, Chuck. The next few months will be a test of whether our momentum will continue in the face of a weakening industrial environment. While we expect solid revenue and earnings growth in 2002, we remain cautious as our visibility is limited. Thanks. I'll now open the line for questions. Jamie, can you open the line, please?.

At this time if you would like to register to ask a question, please press the 1 on your touchtone phone. To withdraw, just press the pound key. Please hold one moment while we wait for people to queue. All right. We will take our first question with David Manthey with Robert B. Baird.

Good morning. I was wondering if you could help me with the tax rate. When I pull out the non-recurring items, I come up with a 38.1% rate were there year end adjustments in that number?

David, this is Chuck. The issue is the non-recurring item, a significant piece of that, as we mentioned, was related to our last remaining piece of our internet write-offs and that line item does not provide the tax benefit a normal operating expense would be. That's a capital loss for us. So I think, you need to factor that into your calculation to arrive at the appropriate tax rate which for us is at the 39.5% tax range

Okay. And looking back to the restatements, on the balance sheet in the fourth quarter of 2000, the inventory number changed. I was just wondering if you could talk about that and then maybe just give us cursory overview of how the changes flowed through the balance sheet, particularly the deferred tax asset, accounts payable, accrued liabilities and the equity account?.

Dave, we've got a bunch of debit and credits going through. I think off line, if you're interested, we could walk you through the excruciating detail here. The original restatement we came out with on August 5th basically said we had an issue with how we accounted for foreign purchases or foreign inventory. And the items really affected -- related to that hit the cost of goods sales on the P & L side and affected the accounts payable on the balance sheet side. Other than those items, most of the entries are plus and minus effect reserve balances and other activity throughout both the balance sheet and concurrently obviously rolling through the P & L and different periods. But there's a tremendous amount of detail of plus and minus and we would be happy to walk you through that off line.

Thanks.

And just for clarity here, the change in that inventory number, was that a part of the original restatement or was that a part of the audit?.

David, do you want to give us your numbers there? You're looking at the 260?.

I'm looking at -- yeah, it originally was, I believe, 264-494 now I believe it's 260-494.

Yeah, that is part of the audit entries.

That's the second part, the second audit?.

Correct. The re-audit.

Final question and I will get off the line here. How many VMI customers do you currently have, if you can give us that number and talk about how profitable that business is. And doesn't that business or growing that business necessitate also growing your branch base?

David, it’s David. For competitive reasons we have not broken out or shared details on our VMI program. I will tell you that the program has been and continues to be successful for us, but I would rather not broadcast more information on how we're doing there.

Okay. That is a branch-based model, though, correct?.

Currently, it's a branch-based model, correct.

Thank you very much.

We will take our next question from David Jeru-ph with T. Rowe Price. Go ahead.

I have two questions. You made a comment about the gross margin in 2003 moving up. Can you talk about that? Also I want more clarification on the share repurchase. How many shares did you repurchase in Q4? How many shares -- I believe the comment in the press release to date is you repurchased 2.34 million, I guess, since that initial 1 million purchase and are you still buying stock today at prices little higher than what you had bought that in the past?.

David, I will jump in first on the gross margin question. We're pleased with the progress we've made on our gross margin line and our expectations for the coming year, fiscal year 2003 is that the overall margin will be somewhat higher this year than it was in 2002. But it will follow our normal seasonal pattern where it's higher in Q1 and slightly declines throughout the year. But overall, somewhat higher than it was in 2002.

What is driving that? I apologize. What is driving that higher growth margin?.

David, there's many, many factors involved with driving our margin. You know, we've talked about them on previous calls, in high level detail. You have product mix. You have geographical mix. You have pricing action both increases and decreases. I could probably go on and on with 10 other factors, but you know, that's -- for competitive reasons that's probably as much -- I would want to share over the top.

Okay. Are we talking about a small, are we talking about a point? Can you give a little more clarity in terms of what you're talking about on the growth margin line, in terms of the magnitude of the gross margins that you're looking for?.

Throughout the year, I would say slightly higher. And I guess I'm not going to put more color on how to define specifically what that means.

All righty. Okay.

This is Chuck. On your share repurchase question, the bulk of that was done in the fourth quarter. Some of that flipped into September, a small amount. In terms of whether or not we're in the market right now buying that, as you heard through the call, we really have and will continue to maintain a pretty strong buy as for keeping a healthy amount of cash on the balance sheet. That doesn't mean opportunistically we won't look at the stock and go back in the market, but I’ll leave it at that right now. That's the position we're in.

So you're not in the market right now buying back stock?.

I will leave it to you based on what we've told you.

Thanks.

Once again, if would you like to register to ask a question, please press the 1 on your touchtone phone at this time. We will take our next question from Jeff Germanotta with William Blair and Company.

Can you share with us the sequential monthly improvement sales trends? That looks like it's off to a great start beginning with June through October?.

Sure, Jeff. Through the fourth quarter, June was flat with no growth. July spiked up to approximately 7%. August was up approximately 4%. In each of the months in the first quarter I'm delighted to report are up just north of 10% with, you know, a switch by a few basis points between the months. But all months: September, October, November, slightly north of 10%.

Given that the economy is weak, this reflects better execution. Have you changed something in the way that you go to market or monitor reward or others regarding your sales program?.

Yeah. I mean we -- I guess the short answer is we've been executing our plan for -- since this downturn began, and we think we're doing an excellent job executing our overall plan, and that's really across the organization. Listen, we are -- we're concerned about the macro indicators, the deterioration that we have seen, which is why we raised the caution flags on a going forward basis. Listen, we're going to need to see a few more data points in order to understand if we have broken out of the cyclical pattern, Jeff.

What I'm trying to draw out, are there any specific actions you have taken which you think led to this superior execution in the face of what is yet a weakened industrial economy?.

Right. Jeff, actually, you know, I think we have taken a lot of action that are driving our results today, and, frankly, I wouldn't want to broadcast the many adjustments we have made month over month, year over year. We have a team that is very dug in here in every part of the organization. We're making adjustments, frankly, every month to what we do. I probably wouldn't be wise to talk specifically about where those are occurring or specifics about what is occurring, because frankly what is happening in every part of our organization.

My next question relates to the announcement in August regarding earnings over statement and the inventory issues there. As I originally understood it last August, in fiscal 1999, we overstated earnings by 4 cents a share, in fiscal 2000, 6 cents a share, fiscal 2001, about a penny a share and first part of the 2002, about a penny a share. Now I understand subsequently that as E&Y has gone through this and there are offsets to that. Can you clarify what those offsets were and (inaudible) annually?.

This is Chuck. You had the restatement, as you pointed out earlier and the numbers were close to what you had before. The aggregate restatement here is about a million three -- the aggregate of the re-audit is about a 1.3 million pickup. So, when you net those two out and you're in a 7 million-dollar change for the periods involved here. In many cases, it was a switch between the balance sheet item or cost of sales item, as it turns out in expenses going the other way. But in aggregate this thing was about a million three. It had timing consequences as to what year it hit and in some cases switched between the expense line and the gross margin line. As we said in aggregate, it didn't have a material effect on our results, at least the re-audit and essentially what you're left with is a large dollar amount disclosed on August 5th, with some timing based on what shook out from the re-audit

Jeff, it’s Shelly. I just wanted to add one thing. When you go back and Re-audit, you have the benefit of 20/20 hindsight. Every year when you close the books, you make estimates and assumptions about what is going to happen in the business and the future, and you book items related to that. When you have this benefit of going back through -- almost like a time machine, you know, you have the ability to go back and say, okay, you have your year's open now, I'm the new auditor and I have the ability to move these things around a little bit because we know exactly what happened. That's basically what you're seeing in the results of the audit.

Okay. Next question then, consistent with your program to deliver 25% of every incremental sales dollar to the bottom line, you're going to drive some pretty strong earnings growth in fiscal 2003. And you've talked about a 40% increase in the first quarter. How long do you think that is sustainable and at what point might you step up your investment in other growth drivers, and is there a risk we could see that diminish in late 2003 or fiscal 2004?.

It’s Chuck again. The 25% read through we like to characterize as the incremental profit read through for the sales change from fiscal 2003 over fiscal 2002 as viewed across the entire year. Whether 40% is the right number or not for the whole year based on the first quarter will depend where the revenue number comes out. The 25% read through is how we're running the business for the entire year for fiscal 2003 and there will be potentially some quarters that are up or down but our commitment is to drive that 25% through. In terms of accelerated incremental growth drivers, we think we have some run way and we're starting to see some of this from some improvement in productivity opportunities here across the board in all of our growth drivers. While we built the plan, the 25% read through, we believe we can handle any incremental growth driver spending that we choose to do through productivity gains on the existing growth drivers that are out there. With that in mind, I think it's safe to say the full year 2003, the 25% read through is the commitment inclusive of investments we can make in growth drivers and we think we have ways to fund that.

Do you see any material change in your external sales force or your telemarketing course in the year ahead?

Jeff, we -- you know, for right now, we're planning quarter to quarter, and we're going to do it with that read through in mind. Just to step back a minute on the sales force, you know, this -- the program that we've put in place, our sales team is a really important component of the company's improved operating results. And, you know, we have really started to see that up tick over the last couple of quarters. Remember, we have a larger sales force now than two years ago with lower total sales. And our sales team is really focused on improved productivity. Ultimately to generate a higher return on our investment. Over the last couple of years, we have invested heavily during this downturn and we think we have got just a lot of imbedded investment currently. So net we're going to focus on driving results to the bottom line. And that's -- that's what our take it on it currently.

The same posture would hold true for a branch buildout?.

That's correct.

Thank you very much. And keep up the good work.

Thank you.

We will take the next question from Holden Lewis with BB and T Capital Markets.

Just clarify the buy back for me again. The 2.34, you said some of that is (inaudible) in September -- for the most for the 2.34 million was in the first quarter. Then you mentioned the million. Didn't -- only half of that million was in the quarter and another half was in the ongoing efforts prior to, you know, the disclosure of the accounting issue. Is that correct? What were the total numbers actually purchased in Q4?.

Most was purchased in Q4, Holden, about 300,000 or so flipped over into September and October. But the bulk was purchased starting in June and then running out through the end of August. You had a million purchase before the July conference call and we -- at that time, that third quarter conference call, I think we told everybody that we had purchased a million shares and it was roughly just under $19 a share. Since then, obviously, we have purchased 2.3 million at a significantly lower price, and I think that handles all of your question.

So then the total is about 3 million in the quarter itself?

Yeah.

Okay. And then explain -- I think you might have linked this together. Were you explaining that the mixed shift toward more C, D and E items is the explanation for the decline in your fill rate or should I not draw that link?.

Holden, it's David. Yeah, our fill rate goal had actually slightly decreased for the period. And the reason for that is that we're seeing a different -- the mix in our sales, we're selling more of those C, D, and E items but because of the way the goal builds up based on class, you see this combination which means that the full rate is slightly lower.

Okay. Fair enough. Are there any implications that we should read into, you know, the markets or, you know, your strategy, whether you're going to is accelerate market share from the fact that you had this shift from fast-moving A stuff to slower moving items in. In the past when you seen this, you know, have there been any conclusions that you can draw about strategy or market from that?.

No, I mean -- not -- Holden, not really other than to say that we think that customers, especially through this downturn continue to look at us for the breadth of our offering given some of the difficulties that local distribution faces in being able to stock and pay for inventory. The tougher it gets in that regard, you know, we think that impacts traditional local distribution.

Okay. And then just going back to the advertising mailings, I mean do you sort of couch the fact it's down sequentially on seasonality but I note that in Q4 last year, for instance, you're advertising and your mailings were not down from Q3 and were up from Q2 and Q1 much this quarter looks like a pretty sharp dropoff to me. Can you respond to that and give a sense of what you plan on doing with the mailings in 2003?.

Holden, we are seeing positive results from our direct mail program. In addition, you know, on the prospecting response rate side, the results we're seeing have been improving sequentially throughout the year. Part of what you're seeing in direct mail is a reflection of what you're seeing throughout the company in terms of a focus on really driving improved productivity in order to make sure that we're improving results to the bottom line and expanding our operating margins. So our direct mail team like so many others are focused on how we could get more with less, better results with spending less money or the money we are spending to generate higher rates of return and those are some of the adjustments that we're making as we look at the less productive segments and lists and so on. So that's kind of a theme that you will see throughout the company in all perhaps now.

Okay. So going back to your plans for the growth drivers, you know, Q1 and Q2 you had 9.8 million mailings -- Q1 was 9.8, and Q2 was 9.3, can we expect to see appreciably lower mailings than that as we go into next year and that is a source of your operating growth?.

I will tell you based on the improvements that we have made, I will share what to expect in Q1 in terms of our mail program. Last year 2002 was 9.8 million pieces. We expect to have mailed 9.3 million pieces this year. That's part of the productivity improvement that we have made in the program.

Okay. And does scaling back represent a material portion of the leverage savings that you guys talk about or is it probably not a huge number?.

It's a piece of many things that we're putting in place to drive this 25% read through. I would categorize it as not cutting back as much as it is doing it smatter.

Okay. Fair enough. And then on the sale associates side -- sale associates do look like they dropped off pretty well in Q4 over Q3. Was that deliberate attrition? What is behind that? And does that make you get more aggressive in hiring in the near term?

I wouldn't say that it makes us get high -- more aggressive. I think it's been kind of a logical place that it's run. Our turnover levels are running certainly in line or even below historic levels. We have a great high-quality sales force out there, you know. And any turnover that you're seeing is generally performance based.

Okay. And then I guess it's funny wrapping up together. You saw -- you saw a pretty good increase it looks like, sequentially in your active client base despite the lower mailings, despite the lower associates. Any concern that perhaps the growth in your active client base, given both of these have tapered off a bit, might also taper off a bit, or do you think you can continue to add these at a decent clip?

Hold on. Let me tell you what we're seeing there. We're generating lots of new customers. As I mentioned earlier, we're seeing improved results sequentially quarter over quarter throughout this year. But we are seeing the continued fallout from the recession in the form of increased attrition in our customer base. Definitely reflect a break from our historic patterns of attrition and it makes forecasting and understanding it therefore over the next quarter or two much more difficult to predict. But, remember, that the way that we measure attrition is that it reflects customers who haven't bought from us in over a year. So likely they have already been casualties of the recession. And, you know, we haven't seen, as we have dug into this, any significant reasons, other than economic ones, to account for the increase in attrition that we've seen. To answer, you know, I guess in closing, you have to answer the question long-term. I'm absolutely confident that we're going to continue to see growth in our customer base.

But near term you're not so sure that is going to happen?.

Near term the visibility is much more murky given the fact we've had a lot of customers (inaudible) related to what we're seeing in a tough economic landscape.

I just wanted to add some more color. I think where you were trying to get to is whether or not we're going to make a 25% read through by cutting back on what you had considered growth drivers. That's not how we're going make it. We can make that read through by continuing at the mail levels. The half million reduction in mail represents a quarter million dollars. It's not very significant across the quarter. Of the ability to make 25% read through by continuing to grow this business, it won't be compromised. I mean, it's all at a leverage

I guess the other part of the question is as you look in the second part of the year, market aside, if your sales associates are down and your advertising is down and your client list looks like it will have a difficult time expanding, you know, if you don't take some of the wind out of your own sails, come the second half of the year and maybe you start to see revenues get mired down just because these growth drivers aren't building on themselves any further, any risk on that in the top line?.

I think what you have to -- what we look back on is what David referred to earlier. We have imbedded growth in the business. We have a heck of a lot more customers than we had two years ago. We have more salesmen. There are a number of other programs which we are not talking about for competitive reasons.

More skews.

More skews. There are 80,000 skews. There is an enormous imbedded growth in the business. So answer your question, no, we're not scrambling here. This is purely, as David said, moves to achieve the same results or better results investing pure dollars. This is just good business.

Okay. Thank you.

One last time, if you would like to regime story ask some final questions, please press the 1 on your touchtone phone at this time. And it appears as though we have no further questions. I'll go ahead and turn the call back to management for closing comments.

Thanks Jamie and thanks for all of you for joining us today. Bye-bye.

This concludes today's conference call. We would like to thank you for your participation and have a great day.