MSC Industrial Direct Co Inc (MSM) 2003 Q4 法說會逐字稿

Good morning.

My name is Jeanette and I will be your conference facilitator.

At this time, I would like to welcome everyone to the MSC Industrial Direct 4th quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star then the number 2 on your telephone key pad.

I will now turn the call over to Mr. Eric Forribon of Financial Dynamics.

Sir, you may begin your conference.

Thank you and good morning everyone.

Thank you for joining us today to discuss MSC Indistrial Direct's fiscal 2003 4th quarter and full year results.

You should have received a copy of this morning's earnings announcement.

If you have not yet received a release, just call our offices at 212/850- 5752.

Also, an online archive of this broadcast will be available within one hour at the conclusion of the call and be available for one week at www.mscdirect.com.

Certain information pertaining to non-GAAP financial measures that may arise during this broadcast can also be found at the same website in the Investor Relations section.

Let me take a minute to reference the Safe Harbor statement under the Private Security Reform Act of 1995.

This conference call may contain forward-looking statements that are subject to the 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 can cause actual results to differ materially from those reflected in the company's forward-looking statements are included in today's earnings release and the company's filings with the Securities and Exchange Commission.

In addition, the information contained in this conference call is accurate only on the day discussed.

Investors should not assume that the statements made in this conference call remain operative at a later time.

The company undertakes no obligation to update any information discussed on this call.

With that said, I would like to introduce MSC Industrial Direct's Chairman and Chief Executive Officer, Mitchell Jacobson.

Thanks, Eric.

Good morning everyone and thank you for joining us today.

With me are David Sandler, our newly appointed President and Chief Operating Officer, Chuck Boehlke, Executive Vice President and Chief Financial Officer, and Shelley Boxer, Vice President of Finance.

I'll begin with an overview of the 4th quarter of '03 and our expectations for the 1st quarter of '04.

David will cover our fulfillment model and Chuck will provide details on the 4th quarter's financials.

Following Chuck, I'll wrap-up and open the line for questions.

I want to begin today's call by congratulating David Sandler on his most deserved promotion.

David and I have worked together in various roles since we acquired this company in 1989.

He's an outstanding businessman.

David combines intelligence with an uncommon blend of common sense and a killer work ethic.

However, as, or more importantly, David and I share common vision, values, ethics and sense of the special community that MSC has become.

I'm 100% confident that MSC will be a better performing company as David grows into his new position.

I'm energized by our future and excited to continue to work with David in his new capacity.

We're also taking several steps to upgrade our corporate governments to the highest levels.

These changes, which will be ratified at our upcoming annual shareholder's meeting, including changing the composition of the Board of Directors to a majority of independent directors and instituting two new board committees.

A nominating committee and a corporate governments committee.

MSC has always embraced the highest levels of corporate ethics and accountability and these changes reflect that commitment.

MSC continued to grow at a challenging environment in the 4th quarter.

We did see some extended summer shutdowns and abbreviated work weeks.

Our growth was once again driven by the success of our diversification efforts as the industrial sector of the economy continues to lag.

We're executing our plans with outstanding results as we maintain our service model, leverage our position as a market leader, take share and grow.

We achieved our gross margin target for the 4th quarter and exceeded our expense control objectives.

Operating expenses in Q4 benefited in an adjustment, reflecting better than expected experience throughout fiscal '03 and medical benefits and workers' comp.

Outstanding expense control drove 67% read through this quarter, excluding the Q4 benefits adjustment, and 45% for the entire fiscal year.

Operating income grew to 10.3% of sales, as we continue to capitalize on the excellent leverage inherent in the business.

We are very proud to see the business return to double-digit operating margins and are confident that well see further operating margin expansion as we take advantage of an infrastructure with enormous leverage.

In Q4, net income grew 53%, and earnings per share increased by 54% over the 4th quarter of '02. (Inaudible) generation at $26 million exceeded our internal expectations in Q4 due to the success of our asset management program.

Overall, MSC generated $74 million in pre-cash flow fiscal year '03.

We'd like to provide some guidance for the 1st quarter of '04.

Although the industrial sector continues to struggle, our success in the nonindustrial areas is reflected in our expectations for the first quarter.

Consequently, we expect revenues to be in the range of $218 to $222 million with earnings per diluted share in the range of 21 to 23 cents.

Thank you and I'll now turn the microphone over to our new President, David Sandler.

David?

Thanks, Mitch.

First, I want to express my deep appreciation for the opportunity that you and your dad have provided me over the last 14 years.

MSC is a very special place, and I consider it a privilege to lead our team of dedicated associates.

I've never been more excited about our future and firmly believe we are in the early days of realizing our fullest potential.

I know that I speak for our entire senior management team when I say that I am committed to achieving superior performance for our shareholders and all of our stakeholders in the future.

I'll begin my update by sharing what we're hearing and seeing in the field, and sharing some observations from my customer visits in the south region just last week.

While there are some pockets of increased activity, there's been very little in the way of overall positive developments in the industrial sector.

Employment and inventories continue to shrink, and activities still well below the levels of three years ago.

Although the ISM is on the upswing, which is encouraging, the effects are not really noticeable as yet.

We think that we need to see a few more months of positive indicators before there's a measurable effect in the core manufacturing sector.

MSC, however, it continues to execute our model, take share and grow, and I witnessed that firsthand during last week's road trip, that encompassed visits to a distribution center, some branches and many customers.

One of those visits was to a facility where we had installed the BMI program about two years ago.

Due to cost pressures, the Maintenance Supervisor had to do the work of three people, and it was his job to figure out how to get that done.

He shared with me that the way he solved the problem was to utilize MSC and the latest version of our BMI program.

He explained to me that by going paperless and moving to automatic replenishment, the time necessary to source MRO supplies had literally been reduced to minutes per week from hours per day.

A volume with this customer has increased 40% this year, to more than $70,000 annually, and continuing to grow as more products are added to the BMI program.

It was very clear to me that the MSC value-added model is very attractive to all sectors of the potential customer universe and is only one example of why MSC is gaining share.

We talked about the success of our diversification program during the last several calls.

In Q4, our entire growth came from the nonindustrial sector, while the industrial sector was essentially flat.

We expect that the nonindustrial business will continue to outgrow the industrial sector by a significant amount for the foreseeable future.

I'm sure you're all aware of the movement of U.S. manufacturing business to other parts of the world.

Even so, the remaining business is still a huge market and MSC has a very small, but continually growing, portion of it.

When you combine the diversification effort with the share growth in the industrial sector as well, MSC has a very long runway for growth.

Last quarter we noted our success in starting to penetrate the government sector and the postal service in particular.

We're pleased to report that our efforts to convert that business to MSC are starting to bear fruit.

And we're seeing growth from both of those areas.

As planned, we have to work hard to build our brand and convert that business.

Although the total dollars are growing as we expected, the business is not yet significant.

Turning to details for the quarter, once again, 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.

Our customers tell us that our service is the best in the business, and that is one of the reasons we gain share and ensure future growth.

Overall rates continue at about 99%, and the BC's hit their first (inaudible) goals.

Accuracy levels continue to be excellent with run rates at about 1.3 errors per thousand.

Calls center staff continued at high levels as well.

The call abandonment rate was less than 1%, and we averaged 60 calls per associate, per day.

We ended the 4th quarter with 428 field sales associates and plan to increase our sales force to a range of about 440 to 450 associates by the end of Q3, based on the timing of opportunities to hire outstanding associates.

Starting this past September, we've changed the condensation model for field sales associates to relate more of their comp to their success in growing their sales profitably.

We think that this change will benefit all stakeholders.

The associates can make more money, the company will see more sales and income growth and, therefore, shareholders will benefit as well.

In the 4th quarter, we mailed 7.2 million pieces of mail, about what was initially planned.

By concentrating our efforts in more productive sectors, we continue to generate excellent overall response rates.

Total active customer count was 343,000 at the end of the 4th quarter, compared to 340,000 last quarter, and 329,000 in the last year's 4th quarter, an increase of 4%.

We expect that we will mail approximately 7.8 million pieces in the 1st quarter, versus 9 million pieces in the 1st quarter last year.

As a result of the improvements, we've made over the last two years, we're now positioned to reduce our regular circulation and prospective mailings in FY '04.

We'll reduce regular mailings to customer who is generate marginal sales and plan to reduce prospecting to levels below those in '03, but that are still above historical levels.

Our total mailings in FY '04 are planned to be roughly 30 million pieces, or about 90% of FY '03's total.

We'll be redirecting some of those savings into other growth programs, and believe that these changes will have a positive effect on the bottom line in FY '04 and into the future.

All of our regions continue to grow in the 4th quarter.

The midwest continues to lead the way and all regions grew in low single digits.

Sales to the manufacturing sector were down about 1% in the 4th quarter and sales in the nonmanufacturing sector grew by 17%.

The sales split was 72% manufacturing, versus 28% nonmanufacturing.

And our average order size improved slightly to $224 in Q4, primarily driven by larger accounts.

MSCdirect.com's outstanding growth continued in the 4th quarter. (Inaudible) to the site grew to 24.7 million, now representing 12% of consolidated sales with an annualized run rate of $98 million.

This represents growth of approximately 40% over the 4th quarter of FY '02.

In conclusion, I'm extremely pleased with our performance in the 4th quarter.

We executed our plan and grew in a very difficult environment.

Although the macro situation has not changed meaningfully, we are confident that we can significantly outperform the sector for the foreseeable future.

We know how stressed the small distributors are to comprise the bulk of the market and we're taking significant shares from them.

Our diversification program is very successful and our model, taken as a whole, will drive outstanding performance on the top and bottom lines.

Finally, I'll take this opportunity to express my thanks and deep appreciation to all of our MSC associates who continue to stay focused and execute at such high levels.

Thank you.

And I'll now turn the mike over to Chuck.

Thank you, David.

Once again, we've completed an excellent quarter financially, and exceeded our financial goals.

In the 4th quarter, we beat the 25% reap through yardstick, generating 89% incremental operating margins on our sales increase.

The 4th quarter was aided by a reduction in our accruals for medical expense and workmen's comp costs, totaling about $1.6 million.

That was the result of better than expected experience and that benefited the quarter by about 1 cent per share.

Excluding that benefit, the reap through for the 4th quarter would have still been almost 70%.

For the year, the reap through was 45%, and operating margins increased to 9.8% of sales, from 7.6% in fiscal '02.

As a reminder, we are committed to a reap through of no less than 20% in fiscal '04, and we will deliver the reap through based on leveraging our fixed costs.

In Q4, gross margin came in at 44.7%, within the expected range and should be between 44.5% and 44.9% in the first quarter.

Turning to our balance sheet, we continue to produce excellent results.

Cash flow for the quarter exceeded internal expectations as we generated $29 million in operating cash flow, and free cash flow after capital expenditures of $3 million with $26 million.

Depreciation and amortization once again exceeded capital expenditures as net fixed assets declined in the quarter.

We expect cash flow to be positive in fiscal '04 as well.

Our free cash balance grew to $114 million at the end of the 4th quarter and is currently at approximately $120 million.

Since our last conference call, we have repurchased more company stocks, buying $1 million shares at a cost of approximately $119 million.

Working capital, excluding cash, declined by approximately $15 million in the 4th quarter, reflecting a decrease in inventory and receivables.

DSO's decreased to 40 days in the 4th quarter, from 42 days at the end of last quarter, inventory turns were an annualized 2.25 turns in Q4 and 2.28 for the year.

In summary, we had an excellent quarter financially.

We exceeded our expectations on improved operating margin, delivered excellent cash flow, and continued to manage our balance sheet.

Thank you, and now I'll turn it back to Mitch for the wrap up.

Thank you, Chuck.

MSC went public in December of 1995.

We proceeded to grow revenues and earnings in excess of 25% for our first 13 quarters as a public company.

Based upon this growth, we built three new distribution centers, new corporate offices, and new information systems to support a business running at or in excess of $1.5 billion in sales.

At that time, sales for the industrial sector were about 80% of our business.

We could not have foreseen at that period the longest post war industrial downturn.

Over the last few years, we have not removed bricks and infrastructure.

In fact, we've upgraded and improved our capability.

Our management team has grown and its matured.

We've shifted our business to 28% nonmanufacturing, and will continue our focus on diversification.

For the last 12 quarters we have improved asset management and in fiscal '03, we have proven that there's significant operating leverage in the business.

We believe that the value of our investments over the last few years are just beginning to be realized.

We cannot control the economy, however, we can and we will control the direction of our company.

We're confident in our vision and confident in our future, and Jeanette, if you would, please open up the phones for questions and answers.

At this time I would like to remind everyone in order to ask a question, press star then the number 1 on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Holden Lewis with BBT.

Good morning.

Thank you very much.

Can you give some greater detail here, sort of post-4th quarter, you've heard a lot of companies talk about, you know, meaningful, more than seasonality inspired improvement and end market demand in September with some follow through in October.

You know, you have a couple months under your belt.

Can you comment whether or not, you know, in these last couple months you've seen some, you know, tangible evidence that the recovery may be starting?

Or are you not really experiencing as much?

Holden, it's David.

I guess first of all, let me give you the monthly sales numbers for Q4 and what we're seeing with revenue growth in September and October and I'll add a little color to it.

So in June, through the 4th quarter, June was plus 5.

July was plus 3 -- sorry.

Right, July was plus 3.

August was plus 2.

And then in September and October, our growth rate in both months was 5%.

And now, I guess, to give you a little bit of color of, you know, what we're seeing and hearing out there, I mean, the core industrial market largely remains unchanged from six months ago.

Certainly while we do see some positive pockets overall in our -- I have to tell you, and it was just reinforced for me last week, it's tough out there, the environment is still difficult.

The macro indicators that we're all seeing are absolutely encouraging and we are cautiously optimistic.

Seeing the ISM and positive territory is encouraging, and as you know, our business has historically lagged indicators like the ISM by several months.

If that trend continues and the experience that we have, that we've historically seen during these times, you know, we eventually believe that that effect is going to translate in the form of increasing growth rates.

But frankly, I want to express caution, only because while the macro indicators are very encouraging, we want to be able to see it in our core customer base, and right now, other than in pockets.

We don't see it there yet.

Okay.

Well, in the September/October numbers of plus 5.

I mean, those presumably come against tougher costs.

That's a nice stepup.

I mean, have you seen further acceleration in the nonindustrial, or have you also seen, has that -- you know, that -- the plus five numbers been fueled in equal part by better industrial numbes too?

Yeah, I mean, right now our sense, Holden, is that we're seeing the effects of the positive effects of our diversification program, and the fact that we've, you know, got a team that's out there gaining share every day.

We think that's what we're seeing translating to in our growth rates.

Okay.

With regards to the government and post office business, I know you don't want to talk about what the total size of that business is, I don't think you can give a percentage change, but can you give us a sense in terms of, you know, dollars?

I mean, how much incrementally can the government and the post office together provide you in fiscal '04 at the top line?

Just in terms of incremental dollars?

Any guidance or -- ?

Yeah, Holden, I want to be really careful here.

I mean, you know, we've talked about the fact that it's early in the game with these exciting new segments for us, and, you know, so far, we are getting the results that we've expected, but "want to remind that you we're still in the start-up of the learning mode, and I guess the only additional color I'd like to say, frankly for competitive reasons, I really don't want to say more on this call, other than we're confident for the long term going to be important components in our growth in our future.

Okay.

Then the last thing before I jump into queue.

When did you buy back stock in the quarter?

And what's your shares outstanding, sort of at quarter's end, because they didn't really seem to budge much in the quarter, despite the buy back.

Right.

Holden, it's Chuck.

The actual shares outstanding are at 66.5 million.

The actual shares , you might not have seen a change, but, obviously, the movement in the stock, the price with the -- with options and dilution impacted that -- the shares outstanding are 66.5 at the end of the quarter.

Is that diluted with the options or that your primary?

That's the primary.

And the diluted is 68.3.

All right.

So you finished up kind of where you were.

Okay.

All right.

Thank you.

Thanks, Holden.

Again, I would like to remind everyone, if you would like to ask a question, press star then the number 1 on your telephone key pad.

Your next question comes from David Clancy with Robert W. Baird.

Hi.

Good morning.

I was wondering if you could talk about the ISM, given you would historically lag that number by -- I think we talked in the past about 3 months or so.

Shouldn't you start to see some building strength very soon, and -- I guess you talked about the confidence that gives you, but a 57 number sure has to give you some pretty good confidence based on what you've seen in the past relative to the ISM.

Does it not?

David, it's David.

Yeah, I mean we were pleased to see a 57 ISM, you know, come out yesterday, and if, you know, the fact that we've had now a few good months of a building ISM, you know, to the extent that it continues and doesn't come off that track, and to the extent that it continues to follow what we've seen historically in our business, based in the lag, yeah, that's what certainly, that's what gives us cautious optimism for the future.

Okay.

And then on the gross margin side, could you talk about your expectations for 2004 overall?

I'm just wondering there's any possibility that we actually would see gross margin declines next year due to negative mix, maybe, if industrial customers if they come back, or anything else that may be positively or negatively impacting the gross margin.

Because when I look at fiscal '03, excluding the gross margin improvement, your contribution margin was about 25%.

So I'm just wondering if the 20% that you expect for next year will actually end up being 20% or potentially something less than that, even.

Dave, it's Chuck.

You're absolutely right on the read through for this year.

Certainly the difference between 25 and 45 for this year, '03, with the 140 basis point improvement in gross margin that went on top, of course, of the entire $844 million in sales .

That opportunity doesn't exist as we see it now for next year, in terms of adding additional 140 points of gross margin.

In fact, we'd expect gross margins to be at or slightly below where they'd finish this year, for the reasons you cited.

As we continue to grow the nonindustrial market. there's mixed issues that come about, we have active programs in place to improve gross margin, unrelated to debt that we hope mitigates anything that will come about because of mixed changes, to keep it plus or minus 30 or 40 basis points for what you saw for this year.

The 20% read through number we've committed to for next year is more a function of what David talked about earlier.

It's too early in the game with some of the new sectors of business we're in right now, to predict exactly how that's going to shake out, what kind of expenses we may have to incur and invest in to make that come about.

So, again, we're going to be cautious and say we're certainly committed to the 20%, and as we get our arms around this a little more, as we start to get a little further down the curve, we'll update you on that.

Okay.

And, then, I think this refers back to David's comments on the environment overall.

When you say that your industrial customers are flat right now, how much of that, if you look at the customers you have today, that you had a year ago, are those customers actually up?

And then that's offset to some extent by some big customers that are moving to China?

And if that is the case, could you talk about that trend?

Is that an accelerating trend or is it about the same as you've seen over the past year or so?

Sorry, David.

Sorry about that.

Did you want to say something?

David, would you mind repeating?

Sorry, we got distracted in the room.

If you could just come back a bit and frame the question.

Okay.

My question was, that, when you're talking about industrial customers being flat, if you looked at the customers that you have today, that you had a year ago, I would imagine there's some amount of those customers that have defected and gone to China, or wherever, that you don't have as customers anymore.

So I'm wondering of the customers you have year-over-year,I would imagine those are actually up slightly, offset to some extent by the customers you have lost that have moved overseas, and I was wondering about that trend.

You know, we're hearing more about it, of course.

But I'm wondering is, in your business, are you seeing it more, the big OEMs are leaving the U.S.?

David, thanks for being patient with us, there.

Yeah, certainly, we are seeing some of that trend in our core customer base.

And overall, you know, we -- the -- our customers growth in the industrial sector, you know, as you saw in Q4, you know, is relatively flat.

But what I will tell you is, even with that trend, two things, one it's still an enormous market.

But I think beyond that, remember that we're gaining share within our existing base.

So that while some of the business may be eroding, may be shifting away, we are successfully gaining share and that's what gives us so much encouragement, both in terms of what our current results are, and what we can expect as the overall segment begins to enjoy a bit of economic pickup which we still, even with some of the movement overseas, we still fully expect that historical trend to continue.

Okay.

And so as you look at those three moving parts, you've got sort of your core customer growth rate upset by customers that are leaving, and then the addition would be, customers that you're adding, new customers.

Right.

When you look at those three moving parts, do those that are leaving, are those completely offset by new customers and the core is flat, or is there growth in the core business?

Well, I mean, you have seen -- I don't think that we've shared, you know, the way that we slice and dice and break it out.

We have seen our overall customer base growing.

You know, we do gain lots of customers on a monthly basis, new or industrial customers, some of those additions certainly offset those businesses that are, you know, frankly, drying up or going away all together.

What we're encouraged about is a combination of being -- having the opportunity to see that as the industrial economy begins to strengthen and come back, we'd like to see that core segment grow in addition to what we're seeing right now as the growth coming primarily from our nonmanufacturing segment as a result of our diversification program.

We're king of, you know, we're gaining share and holding our own.

In terms of growth in the core segment, we've got the nonindustrial segment that's really been producing some very solid growth.

It's, you know, it's very encouraging to think we'll get both pieces working for us through '04 and beyond, assuming the trend and the strength continues, and, you know, we get the historical experience that we've seen for certainly as long as I've been around.

Okay.

Thank you.

David, this is Chuck once again.

I just want to circle back to your earlier comment.

You'd talked a little bit about is there a possibility that the margin would cause us to have concern and miss the 20% read through.

I just want to reinforce that we've said all along the 20% commitment is a minimal amount of read through that we anticipate moving forward, and obviously we're going to push ourselves hard to get to an even higher number if at all possible.

I just want to reiterate that we don't see any circumstance in margin mix and so forth -- that the drive is below 20.

That's the minimal commitment we've made.

Your next question comings from Jeff Serminata from William Blair.

Hi.

Congratulations on a fabulous quarter, fellas.

Thanks, Jeff.

My question relates to the change in compensation for the sales force to a more variable structure.

What have you seen there in terms of productivety, measured in sales per person and/or turnover and other effects of that.

Hi, Jeff.

It's David.

It's still as -- as you know, we went on to the plan in September, so we've only had a couple months in, where, you know, we're certainly on plan with anything that we've anticipated, I'm going to be careful to not share much on this call, but you asked specifically about turnover.

We have seen a bit of increased turnover over the last couple of months.

Frankly, that was planned, but I'll also tell you that the majority of that turnover was completely unrelated to the comp plan, and was primarily driven based on performance.

So we're not concerned either with that or not seeing anything that wasn't anticipated.

So far, we're pleased with the direction.

Directionally, are you seeing an increase in sales per person as a result of it?

Yeah.

I mean, overall, sure, we are seeing an increase there, both in productivity, you know, and growth in the business.

Thank you.

Thanks, Jeff.

The next question comes from Yvonne Loranofrom CIBC.

Thanks.

Your deappreciation in 4Q, what when I calculate it out, seems to be about $4.1 million and that seems to be an increase from prior quarters.

Can you tell me what's going on in that number?

Yeah, (inaudible) it's showing (inaudible).

We went back and looked.

We had a slight catchup in depreciation in the 4th quarter.

We were a little bit underaccrued in previous quarters.

So we picked up about 250,000, 300,000 in the 4th quarter.

Okay.

And in the past you have broken out some of the growth that you've seen by region.

Is that something you could do for me?

Ah, sure, Yvonne.

It's David.

All of the regions were in low single digits.

As I said, the northeast was about 3%, the midwest was about 5, and the southeastern and the west were about 4.

Okay.

And then lastly as you add sales people and change your compensation going into next year, what kind of impact do you think that that's going to have on your SG&A?

In terms of a percentage increase?

Yvonne, as, you know, we've talked about our expectations for Q1 and certainly our game plan for the year, has not changed.

I mean, any adds that we've made in the sales force and with all of the investments that we've either been adding or shifting, will all contribute to improved productivity.

All mindful of delivering on the read through, continuing to expand our operating margins, you know, with a push towards historical levels, and that's -- and delivering, you know, consistent earnings growth.

I mean, that's the game plan we've been on, and we're not waivering from it.

Okay.

Thank you.

Thanks Yvonne.

Again, if you would like to ask a question, please press star then the number 1 on your telephone key pad.

Your next question comes from Holden Lewis with BBT.

Thanks.

Down to the last question, (inaudible) a little bit differently.

Can you give some sense of the extent to which your SG&A benefited in the 4th quarter from the departure of some of these sales people?

You know, perhaps the amount which, you know, also in your back at your targeted run rate and fiscal Q4, sort of the amount that is not in the numbers that, that seems to be more of a temporary item?

Hi, Holden.

I mean, the expense numbers are from the sales associates weren't overwhelmingly significant in the 4th quarter.

The 4th quarter, (inaudible), as we talked about earlier, had a big adjustment for our fringe costs if you will, along with some of the advertising David's talked about in Q4.

So they were the drivers of expense change in just about any period you'd want to be comparing this to in Q4.

There wasn't a significant dollar amount associated with the sales attrition in Q4 that affected the numbers.

Okay.

And do you feel there were any revenues lost at all from the departure of any of thoes sales people, or was that equally insignificant?

You know, Holden, certainly, you know, to say that there's no piece of revenue that's ever lost by, you know, a sales rep that may have departed, you know, I wouldn't be able to say that.

I will tell you that, you know, we're comfortable with how we're positioned, certainly comfortable that most of the turnover was driven based on performance, and, you know, and therefore, we're not concerned that revenues were impacted.

Okay.

And then last, can you comment just on pricing?

Is pricing still nominally positive, or has that kind of been anniversarying away?

And then, any sense of whether you're going to step up again the pricing in Q1?

Yeah.

Holden, the pricing, as you know, with the big book goes out --- any pricing that we would have taken with the big book in the beginning of the year.

And other than any unforeseen significant changes in the commodity prices and so forth, there's no plans right now to adjust pricing in the first quarter.

But, can you give a sense, with the big book going out, I mean, what do you expect the net pricing change to be at the outset.

Any idea?

Holden, we certainly modeled it internally for how we see it layering through the years, through the quarters, you know, throughout the year.

I think we're more comfortable staying with the overall annual guidance that we've given.

There's just so many factors that play into margin, we've got, you know, programs across the board to address many of those factors, but we're more comfortable just kind of giving you the overall guidance for the year.

Okay.

Thank you.

Thanks, Holden.

Your next question comes from Mark Kazmarek with Midwest Research.

Hi.

Good morning.

Good morning.

A couple questions here.

One on inventory trends.

You know, even though sales were up, inventories were down, here in the quarter and, you know, seasonly it looks like they sort of swell up in the first part of the year, and then trend down again in the second half when you generate cash.

First of all, is inventory unusually low at the end of the fiscal year here, and can we expect the same kind of seasonal behavior next year?

Mark, this is Chuck.

The first thing you should know in the beginning of any new fiscal year, we add, obviously, the new skews.

They start to, obviously, come in in inventory towards the end of the previous fiscal year, but if you take a look at our inventory numbers, you see some pretty substantial improvement in our inventory turns over the course of a year.

If you took a full, just a two-point average beginning and ending inventory and compared that note to versus '03, our turns actually improved a full quarter from about 2.04 to about 2.09, to about a 3.

So what you're seeing in inventory is a little bit cloudy in terms of adding new skews, but we've had a very aggressive program to improving our inventory turns and we achieved that in '03.

And we have an agressive plan to continue improving in '04, although I think it's fair to say, with the growth we're experiencing and hopefully that continues, the absolute dollars more likely than not will be going up, although we'll be improving the turns from here on out.

Okay.

And then actually you touched on the next one I had, was the skews.

What kind of numbers or percent increase did we have and in what kind of broad general areas are they?

Mark, it's David.

We are currently coming off of September with roughly 540,000 in our offering.

You know, we added about 35,000 in September, gross skews in the big book, and we're not actually talking about what our plans are yet for what we're going to be adding for '04.

Okay.

And then finally, what was, on an overall annual basis, what was price realization this past year, and just, you know, with regard to Holden's question a minute ago, is there guidance so far on what you expect for '04?

Mark, we'd rather stay away from splitting out any one component of our gross margin and we'd rather be, we'd rather just leave it with overall guidance for the year.

The overall margin guidance?

Correct.

Okay.

Thank you.

Thank you.

At this time there are no further questions, I will now turn the call over to management for closing remarks.

Thank you, Jeanette.

Thank you all, and once again, I want to congratulate David on the new promotion, and express my confidence and my excitement of working with him well into the future.

Thank you all.

This concludes today's MSC Industrial 4th quarter earnings conference call.

You may now disconnect.