MSC Industrial Direct Co Inc (MSM) 2005 Q2 法說會逐字稿

Good morning.

My name is Laketia and I will be your conference facilitator today.

At this time I would like to welcome everyone to the MSC Industrial Direct fiscal second-quarter 2005 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. (OPERATOR INSTRUCTIONS) Mr. Boyriven, you may begin your conference.

This is Eric Boyriven of Financial Dynamics and I would like to welcome you to the MSC Industrial Direct fiscal 2005 second-quarter conference call.

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

If you've not received a release, please call our offices at 212-850-5752 and a copy will be sent to you.

An online archive of this broadcast will be available within one hour of the conclusion of the call and will 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 been found on the same website in the Investor Relations section.

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

This conference call may contain certain forward-looking statements that are subject to these significant risks and uncertainties, including the future operating and financial performance of the Company.

Although the Company believes the expectations reflected in its forward-looking statements are reasonable, they 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 in the Company's filings with the Securities and Exchange Commission.

In addition, the information contained in this conference call is accurate only on the date 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, Mr. Mitchell Jacobson.

Mr. Jacobson please go ahead.

Thank you.

Good morning everyone and thanks for joining us today.

With me are David Sandler, Chuck Boehlke and Shelley Boxer.

We will be adding some color to today's press release of our Q2 financial performance and then we will open up the lines for questions.

I am very pleased with the excellent financial results the Company reported today.

We continue to execute our strategy, grow and take share.

We once again delivered on the commitments that we have made to our shareholders.

I remain very excited and confident that our success will continue well into the future.

I'd like to provide some guidance for Q3.

We expect that sales will be in the range of 285 million to 290 million and earnings per diluted share will be in the $0.42 to $0.44 range.

Thanks everyone, and now I will turn the microphone over to David.

Thanks, Mitch.

I would like to share several things that I heard on my recent trip to visit customers.

In general, market conditions continue to be solid; customers are busy and have good order flows.

However, backlogs remain short, and there is increasing concern about energy costs and raw material cost increases.

The need to keep costs down including supply chain and inventory holding costs makes our model that much more attractive to customers.

Recently I visited a large plant that bakes and packages cookies and all kinds of other snack foods.

This is a plant location for one of our large national accounts that has grown about 20% in total with us this year.

This plant, however, has grown considerably faster, and I wanted to get a firsthand view of our progress, which became immediately evident during my visit.

I could see that we have an active DMI program and our field sales associates have spent considerable time introducing new products and technology to them in order to reduce their supply chain cost.

Our contact at the plant told me that they place a very high value on what our sales associate provides to them.

The personal attention, new ideas, both in technology and product selection, a swift response to their needs as well as ease in ordering and very high fill rates have convinced them to consolidate their MRO spend to MSC because we enhance their profitability and efficiency.

This is another example of what our model, combined with the value provided by a field sales associate, can bring to the table.

I'd like to take a few minutes to give you an overview of our current thinking about growth investments.

For the last few years we said that when we achieve our profitability objectives we will increase our investment in our growth initiatives.

That process is well underway and will continue.

I'll begin my overview with our sales force investment.

Based upon careful consideration of market trends and market opportunities, we exceeded our growth target for our sales force set at last quarter's call.

We had 485 salespeople at quarters end and are increasing our target to approximately 500 for the end of our fiscal year.

That will represent growth of approximately 10% in our sales force this fiscal year.

We are actively executing our West Coast growth plan.

Over the past few years we have concentrated on building awareness of the MSC brand and our business in the West through our direct-mail and our national account programs.

We are now taking the next steps.

We have opened a branch in the Los Angeles area and hired an L.A. region sales force.

We are recruiting a sales force for our next branch opening as we speak.

More branch openings will follow that one.

In addition, we are increasing our investment in new E-com (ph) improvements and other technologies to benefit our customers.

And finally, we are actively researching new customer segments, as well as new product lines that will extend our SKU base even further, leading to the development of future growth initiative.

Turning to the results for the quarter, monthly sales growth rates were 24.5% in December, 14.3 in January and 14.7 in February.

March' growth rate was 10.7%.

March' growth rate is not indicative, however, of what we expect for Q3 as the Easter holiday was in March this year versus April last year.

This should reverse in April, hence the higher revenue growth guidance for Q3.

All of the regions continued their solid growth.

The Southwest grew at 20%; the West at 19%, Midwest at 18% and the Northeast at 16%.

Sales to manufacturing customers grew 16.4% in the quarter and represent 72% of total sales.

Sales to nonmanufacturing customers grew 19.4% and represent 28% of our business.

Average transaction size remains at about the same as Q1 at $251.

MSCDirect.com.com once again delivered outstanding growth in Q2.

Sales through the site increased to $45.2 million, now representing 16.7% of consolidated sales revenue, which is an annualized run rate of $182 million and reflects growth of 48% over Q2 of last year.

One of the keys to growth is our execution, which continued at very high levels in Q2.

The details are as follows: overall fill rates continue at 99%; all of our DC's hit or exceeded their first bat (ph) filler rate goals and accuracy was excellent with an error rate of approximately 1 per a 1000.

Call center stats continued at a high level, as well.

The call abandonment rate was less than 1, and we averaged 61 calls per associate per day.

In Q2 we mailed 7.1 pieces of mail, about as planned.

Direct-mail productivity continued to increase as average sales per piece once again improved.

Response rates remain at excellent levels.

The active customer count was down slightly to 341,000 just as we expected as smaller, nonproductive customers continue to drop off as we have eliminated our mailings to them.

In conclusion, I'm extremely pleased with our performance in Q2.

The results were outstanding, and I want to say thanks to all of our MSC associates whose dedication and focus produced these great results.

Thank you, and I will now turn the mike over to Chuck.

Thanks, David.

I am very pleased with our financial performance in Q2 as we met or exceeded all of our financial goals.

In order to further your understanding of the business dynamics behind the numbers, I am going to try to connect the dots by reviewing each section of the income statement.

We raised some prices during the quarter to reflect increased costs from our vendors, and we also passed through most of the increased freight costs that flowed through to us due to higher energy prices.

This has resulted in an increasing gross margin percentage to 46%.

We expect to maintain this gross margin level give or take 20 basis points for the balance of the year.

Read through for the quarter was 34% leading to a 46% increase in income from operations and an increased operating margin of 16.2% of sales.

Operating expenses increased $6.7 million or 9% in the quarter over last year's Q2 spending.

The Company continued to generate leverage in our fixed costs and achieved excellent results from our cost reduction programs.

We did experience an increase of $4.1 million in our operating expenses over Q1 levels.

We had higher costs due to our higher sales volume and the freight cost increases previously noted are recorded in operating expenses.

Additionally, we incurred the cost of our increased investment in our growth programs and operating expenses, and we needed to increase certain accruals in Q2, most notably our accruals for medical benefits and for incentive compensation.

Given the uncertainty of medical costs we have included the higher cost levels incurred in Q2 and our Q3 guidance.

Similarly, the Company's performance has exceeded our initial internal expectations and we have included the higher levels of incentive compensation in our guidance as well.

Our guidance reflects a read through of about 35% for Q3 as measured by the middle of the sales range.

We produced excellent results on our balance sheet as well.

Free cash flow defined as cash provided by operations with capital expenditures was $1.3 million in Q2 compared to $0.3 million in last year's Q2.

In Q2 we had two estimated tax payments to make compared to none in Q1.

These estimated tax payments were about $27 million in Q2 this year compared to $19 million in Q2 last year.

Invested cash was $201 million at the end of Q2 and is currently at $230 million.

We purchased 480,000 shares of the Company's common stock right near the end of the quarter for $15.3 million, and the Board of Directors increased the regular quarterly dividend to $0.12 per share to reflect the Company's increased profits and cash flow and they are confident in our ability to continue to produce excellent results.

Working capital grew by $27 million in the quarter, reflecting increased inventory and receivables to support higher volumes and the reduction in payables and accruals through the aforementioned tax payments.

Inventory turns were an annualized 2.48 in Q2 and DSOs declined slightly to 40 days.

CapEx in the quarter was slightly greater than depreciation and amortization, although below it for the year-to-date numbers.

Thank you, and now Laketia if you would, please open the lines for Q&A.

(OPERATOR INSTRUCTIONS) John Inch of Merrill Lynch.

Thank you.

Good morning.

I guess can you guys update us on what you think the CapEx is going to be this year and the corollary is simply is with the elevated cash flow that you are generating, should we be looking for some incremental share repurchase beyond kind of the run rate that you described in the quarter?

The CapEx for this year we're looking for is still in that $10 to $12 million range that we've been talking about for some time now.

Your question about stock repurchase, we still have 2.5 million shares open under our existing authorization from the Board of Directors, so we will opportunistically, as we see fit we have a process in place to identify when we want to go into the market and possibility exists we would buy some more.

Was the ending share count, Chuck, just prior to the end of the quarter where did the shares end?

The actual shares outstanding are 69.1 million shares or 69 million, roughly.

Okay, and then your growth initiatives, I wanted to ask you as you kind of expanded to California, is this 10 to 12 million CapEx run rate now, is that a number that we should be using for '06?

Or as we are kind of thinking ahead or is there something about the investment in California now that doesn't necessarily get repeated as we look to kind of further years out?

Most of our investments when we talk about going west and investments for growth are actually in our operating expense number; lease expense for branches, sales associate expenses, etc.

So it is not really CapEx intensive as we buildout the West Coast.

So to answer your question there it is not CapEx related, and we've done some five-year modeling and for the foreseeable future the $12 million, $13 million CapEx number seems to be working out for the future number you can use for planning purposes.

So could you look at this quarter as the extra 2+ million you spent on CapEx versus last year, what would that have been for them?

John, its Shelley.

In this quarter we actually did buy a new computer.

We are going to be switching pretty soon from external backup to a merit (ph) system internally down in Atlanta to backup our data center here.

So that's a onetime thing.

So it really doesn't relate to California at all.

And then just lastly, you raised the dividend.

How should we be thinking about your preference in terms of the cash usage share repo (ph) versus the dividend?

You want to kind of keep the shares outstanding constant or flat or how should we be thinking about that?

John I think from a dividend point of view I think you'll see as the earnings grow our intention would be to presumably look at the dividend relative to the amount of cash flows over time as well as the earnings.

So I think that would be a way to view the dividend, and cash above that is kind of discretionary.

And we would use that as we feel appropriate to buy stock back.

I guess I'm trying to understand you think about other opportunities though and obviously you're not a big, you're not a huge Company versus your geographic opportunities in other areas.

Is your preference to try and accelerate some of the growth, or to do a little bit more of the share repurchase or both or is there no preference at this point?

When you say accelerate the growth, again I would tell you from our perspective the growth are really OpEx expenditures, and we would manage that in accordance with how our financial performance is going.

I think you'll see as we have the last few years a balanced approach between our financial port performance and our investments in growth.

So we'll be keeping our eye on both of them.

Just the overall cash discussion -- and maybe this is where you are going -- use of the cash would be obviously for a dividend, working capital needs as we grow the business.

I've already mentioned what the CapEx looks like moving forward.

I know that it's not part of our plan right now a cash on hand for any kind of acquisition that may come along that may make sense we'd like to be in a position to finance that should there be one that is of interest to us, primarily with cash.

I guess I was just trying to fish for still no reason to build out a new distribution center or anything like that?

There is nothing right now in the plan that says we would be doing that for the foreseeable future.

Great.

Thank you.

Jeff Germanotta of William Blair.

Good morning.

Sales were up about 18% this quarter, and you mentioned price increases and the impact on margin.

Can you estimate what price increases contributed to the total sales growth rate this quarter?

Jeff, its David.

We did, as you can see, take some increases; we were opportunistic in the quarter based on what we saw happening, both in our vendor community with some of our costs changing as well as the external customer environment.

We would estimate, Jeff, on an annualized basis that that's roughly in the range of 1 to 1.25% (inaudible).

Thank you.

And then you mentioned multiple sales growth initiatives.

Can you -- have you set some targets or ranges for things like increased mailings, increased SKUs, branch count, field salespeople, telemarketers, etc.?

Jeff, we've got our, certainly our internal planes and our internal targets that we've set, which we've tried to share, for example on this call to give you a little bit more color on where we're headed with our growth investments.

We wouldn't want to put much more color beyond that.

But as we are able to share we certainly will.

For example, we're very excited about our West Coast build.

We have a long-range plan which we talked about on this call that we started in L.A. and that is going to have some significant runway in California, which is the largest MRO state in the country, which we are excited about long-term, but I don't want to give more color beyond that.

Well, thank you very much, and keep up the good work.

Mark Koznarek of Midwest Research.

Hi, guys, good morning, it is actually Adam Walman (ph) of Midwest.

How should we think about the gross margin mix as the rate of growth shifts from the rapid manufacturing customer sales growth that we've seen to more non-manufacturing type growth over the intermediate-term?

Adam, I guess in the short to intermediate-term we have provided the guidance for Q3 and we've always talked about the fact that our visibility with our customer base and of course the economy is limited.

So we don't like to go further with our guidance for those reasons.

But I will tell you that we are seeing solid demand from our customers and that generally growth out there looks solid.

We continue to have solid ISM readings, which in the range that they are in right now are favorable and should continue to bode well for us.

So we remain optimistic about our future.

In terms of gross margin, which I think was the first part of your question, Adam, we've given specific guidance for Q3 in that 46 range plus or -20 basis points and actually through the balance of the year.

We are also targeting and expect to be in that 46% range.

Longer-term as the marketplace changes and moves we really wouldn't be comfortable going beyond the next half a dozen months or so.

Okay.

And then the other thing is that you have been growing your direct sales force now for over a year by a good amount, and how should we think about these extra people costs as they roll through your P&L.

How long does it take to move them from a drag on earnings to a fiscal benefit?

You're right, Adam.

You will see a significant part of our increase in operating expenses is a result of the investments in our growth drivers, particularly our sales force.

Our sales force has been an important part of our improved operating performance, as well as contributed to our growth rate.

So we're very pleased with our progress there.

We don't talk about specifically breaking out the absolute costs just because we don't want to broadcast headcount and the compensation plans and so forth that they are on.

But we are building it out.

We've given you some guidance, and that is going to be an important continued part of how we move forward.

I think the way to think about the operating expenses associated with that is really through the read through guidance that we have provided and given.

Again we would be at the midpoint of the range at 35%.

That is inclusive of some of the cost things we talked about today, including the growth driver investments that will be incurred as we not only incur the cost of the additional hires we've experienced already, but as we buildout to 500 or so by the end of the year.

Those numbers and the calculations for them are already reflected in the read through guidance we've provided.

Okay.

You know these sales professionals that you are hiring, are these experienced professionals or does it take longer to bring these people up on the learning curve?

Should we be expecting a year of training to bring in new sales hire on the line, or is it kind of -- I mean, how would you characterize that?

Good point Adam, and I guess it dovetails back to your last question as well.

I mean, we hire a broad range of professionals that we bring into the business, some that have deep selling experience and solutions from other industries, others that are traditional and that are already part of our existing business.

I think you hit on it that even the most experienced sales person needs to come in, needs to get assimilated to our culture, which is very different than traditional distribution.

They need to be trained on our business model, our value proposition and all the tools and the solutions that we bring to bear on the marketplace.

So I think you touch on a very important point.

We don't give the absolute breakeven point, but I will tell you that in the short term the investment is dilutive until we are able to get them up to speed, assimilate them, get them comfortable in their new environment calling on their customer base.

But long-term it is a very productive and positive investment for us.

The last thing that I had, last quarter we talked about some weakness in the Midwest due to the automotive exposure there.

And the automotive supplier exposure and I was just wondering if you can give us an update on that given the continuing slowdown that we've seen in the automotive industry.

And if you could just talk a little bit about your exposure there whether or not it is material at all.

Midwest auto is the sector that has been hit and is one that continues to remain under pressure and is declining.

I think, though, that on our last call what we really intended to do was just to share a little bit of Midwest, more a landscape observation.

I guess I want to calm everyone's concerns in that regard that automotive is actually was, has been and continues to be a very small piece of our business.

So that its overall effect while declining is relatively insignificant to our overall business.

Greats.

Thanks a lot.

Dan Leben of Robert W. Baird.

Just a follow-up on that last question, where there any other industries where you were seeing strengths or weaknesses outside of auto?

Just to get a sense of where the market is going not necessarily that were huge impacts on the quarter.

We absolutely do see industries where there is significant strength.

Certainly on the weakness side nothing compared to the small exposure that we have to automotive and what we've seen there, and I guess what we all hear and see every day in the news and so forth.

But we don't, Dan, talk about where those pockets of real strength are.

We are fortunately we've seen broad based strength in our customer base.

Some areas have significant strength where we target our efforts and for that reason it is not something that we want to characterize further.

Okay.

Fair enough.

So based on your experience and past cycles, where do you think we are in this current cycle?

What stages of the industrial cycle, and how exactly is your business going to change as we move through the cycle?

You know, Dan, very hard to call where "we are in the cycle."

We judge it quantitatively by many measures; probably the most important for us is the ISM.

Qualitatively the best rate our systems we have has been constantly plugged into our customer base and what are the issues and opportunities facing them.

So we look at the current environment right now.

We see a solid ISM level historically.

The ISM levels where we are today represent solid, ongoing growth.

And while our customers have voiced some concerns about rising energy costs, petroleum and so forth, generally their experiences has been very favorable right now.

The other thing that we see as kind of a macro is the weak dollar, which should be very good for manufacturing here.

Okay.

And so regardless of the timeframe just when the cycle does start to slow down how does the business change for you guys?

You know, Dan, we have always managed the business first and foremost for our long-term strategy, frankly the change in the business cycle does not divert us at all from our five-year and longer range plans.

But having said that, we are mindful of the progress that we've made and the financial results that we're looking to continue to -- that we have produced and we look to continue to produce.

And that while our long-term strategy doesn't change we are of course always adjusting our short-range plans to adjust to whatever the environment is that we see.

Okay.

One last question.

Can you give us any quick update on U.S. postal service?

Sure.

It's a piece of business that we enjoyed and have been growing for the last year or two.

The whole government sector is relatively new for us.

But we were and continue to remain very excited about the opportunities for us in the future, and U.S.P.S. is one of those government customers and we've been making progress in that area as well.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Tom Lord of Lord Abbott.

You actually answered my question with the first so I'm all set.

Thanks.

Sarah Bayridge (ph) of Artemis.

Thanks for taking the question.

I was wondering if you could just give us more detail on the California market; how much do you currently have sales there, and what is the opportunity relative to -- maybe a different market where you've been more established -- I am just not clear on that.

And just any expectations we should set for how quickly do you think that you can penetrate that market.

Is this something we should be very patient with or do you think you can have pretty good traction pretty quickly?

Sarah, this is David again.

We've actually been penetrating that market now for a period of years.

We have been slowly through our direct-mail program over the last 5 years or more coupled with our national accounts program more recently in the last couple, have been building out that region.

We've been building brand, and so the process today of taking the next logical step for us which is building our branch network and putting a sales force locally in that region is one that we have been kind of leading up to.

And so we've actually enjoyed the benefit of this brand building for some time now.

As you will see, our West growth has been pretty strong.

Certainly we expect that to escalate as we continue to penetrate further and as we continue to keep our buildout moving.

Do you break out how much of your sales is from the West right now?

We don't, Sarah.

The only thing that we do share is what our growth rates have been there.

And is it fair to say the increase in sales people would all be going to the West, or is that not?

No, we certainly -- some of the increase in our sales folks are to the West to fuel this plan, but we've got runway, really runway everywhere across the country.

And we look for the best opportunities that we can find and fortunately there are many.

And that is where many of our folks go as well even beyond the West.

And I think you mentioned California is a really big market.

I just wondered if you compared it to -- is it the largest, or.

It's really big, and you are right I would characterize it as the largest MRO market in the country.

Okay.

Thank you.

Holden Lewis of BB&T.

Thank you.

Just trying to get a little bit better feel for sort of the dynamics impacting the gross margin.

When you were talking about price increases to offset material costs, that one, there is 100 to 125 basis point impact pack to revenue; is that in excess of the material costs?

Is that benefiting the gross margin, or is that just the amount needed to offset material costs?

Holden, it is David.

I think the net effect is that you're seeing a higher gross margin which is what you saw in the quarter.

And is frankly what we are guiding to for the balance of this year.

So net net it was a positive, and it really tracks back to the fact that while we are experiencing some cost increases that we've had to take, even though that we are able to still put off many from our supplier community those that we've been able to -- we've had to take, we have been able to successfully and seamlessly pass-through to our customers.

And all of it translates into our historical pattern, which is inflation, generally is good for MSC.

Right, but so the price increases have been in excess of the material cost increases?

That's how it would actually benefit gross margin, is that correct?

Yes.

Then the excess amount is about 100 to 125 basis points.

Is that right? (multiple speakers)

100 basis points dropped through as you can see from our last 10 quarters of 45 to 46.

Hold on, I think what is going on underneath is of course we're getting some cost increases but we've become, as we've said, very aggressive on the purchase cost reduction side.

So while some areas costs may have increased we are actually reducing costs elsewhere and our buyers are taking a very aggressive posture through OBE (ph) option tool and lots of overseas development to take costs out of our business.

So I think you see a lot of moving parts in gross margin.

So it is fair to infer that certain prices are going up but we think, we would like to also think that a lot of prices are going down.

Okay.

Fair enough.

And in terms -- it also sounds like the freight impact is such that the surcharges you've put into pass-through are going through cost of goods favorably but that the actual increase in cost is actually going through the SG&A.

Is that right?

When you say cost of goods favorably it basically pulls down to their going into revenue on the top line and the costs associated with them are down in OpEx.

That's correct.

Okay.

And so how big was that impact on the gross margin?

The 100 basis point increase, how much of it is just attributable to that?

Are you able to give a sense?

That by far was not the most significant piece.

I can only tell you that the pricing that we took in the quarter and the costs down that Mitchell pointed out were the real drivers of the gross margin improvement.

Yes, we passed some of that along, and yes a piece of that was offset in our OpEx, as I mentioned when we spoke a little bit earlier, but I would say it is relatively insignificant to the 100 basis point improvement.

Okay.

And then can you give a sense of how much of an impact you are having at the gross margin because of your active customer lists coming off a little bit as you try to sort of cull out some of the less profitable or those that don't recognize the value of the model as much?

Is that having a material impact?

Holden we tend to look at those accounts more from the operating margin level.

When you look at the various operating margins across the board there is a mix as you might imagine, between some accounts that have higher gross margins than others.

And others have a much lower cost to serve models than others that's out to the operating margin being relatively close for all of the categories of the business we talk about.

In this case it would be fair to think that the highest gross margin customers are the ones dropping off.

Where years ago you may be referring to the fact that we pulled out some low gross margins.

Right, okay.

Higher gross but less and obviously an operating margin which is the reason they are being culled out.

Actually some of these -- actually this effort may reduce your gross margin a little bit, it might be something of a drag?

All other things being equal that would be the case.

We got a lot of other programs going on, as you can see, to help mitigate that.

Sure, okay.

All right and then on the sales rates that you provided for January and February, January February sales rates looked pretty similar.

On the other hand, February's comp was appreciably tougher than January's was.

Was January particularly weak for any reason or what is sort of the dynamics there?

I just would have expected February would be weaker than January given the comp.

Holden, no real dynamics to speak of through the quarter.

Okay.

Holden, the real uptick comes in March.

If you go back and look it is in the -- started in February but March April May are the real big hockey stick in growth rates last year.

Right, okay.

All right.

Thanks.

Michael Shepherd (ph) of Morgan Keegan.

Just a quick question on the operating expense, the sequential $4 million increase just wondering if we could get a sense as to what the primary driver of that was.

I know you mentioned a few things; just wondering if the primary thing there was maybe increased rate costs or just maybe rising costs in general.

Maybe fuel related as it probably relates to freight or maybe would it be sales force costs or maybe the cost to the incentives?

Just what would be the primary driver of that $4 million sequential increase?

Mike you just identified all of them in aggregate, but the big drivers we try to point out in the text was basically the medical, freight, basically kicked in.

And the incentive compensation.

Those three themselves probably are worth about $0.02 a share to us in additional costs that weren't contemplated when we set the range last time.

Okay, great.

And I guess to touch on the sales force issue again, obviously you guys ramped that up pretty significantly within the past year.

Just wondering when can we expect the sales force of the new hires to start contributing I guess if at all to the level of the existing sales force?

We don't break out specifics, breakeven times or what their ramp up looks like or what their six-month, one-year, two-year contribution is.

Certainly over time they contribute more and more as they get entrenched in their territory and develop those relationships entering our solutions to the customer base.

Okay.

Thanks a lot, guys.

Andrew Casey of Prudential Equity Group.

Good morning.

If I could ask a bigger picture question I think you indicated earlier in the call that customer demands feels very high but backlogs at your customers were shorter and you are seeing some customer concern over rising energy prices.

First, is that a fair characterization comment, and second, if it is fair and I realize you're outpacing the end market, are you seeing any hesitance from any of your customers in adding additional labor, pursuing any type of additional production?

I think the way you have characterized it is fair, and it is a mixed bag out there, meaning that we've got some customers that are staffing, that are looking to increase their employment significantly, and it is actually happening.

And that really depends in part on their industry and also in part on how they position their business over the last few years through this downturn, etc.

But there isn't one answer.

I would tell you that generally things remain solid.

But there is a sense of being cautious out there especially with the backdrop in the environment over what's happening with energy and the Fed on interest rate.

Thank you very much.

At this time there are no further questions.

I would now like to turn the call over to management for closing remarks.

Thank you everyone for joining us today.

We appreciate it.

And we look forward to speaking to you next quarter again.

This concludes today's MSC Industrial Direct fiscal second-quarter 2005 conference call.

You may now disconnect.