MSC Industrial Direct Co Inc (MSM) 2006 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the MSC Industrial Direct first-quarter 2006 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) I will now turn the call over to Mr. Eric Boyriven of Financial Dynamics.

Sir, you may begin your conference.

Thank you and good morning everyone.

This is Eric Boyriven of Financial Dynamics.

I would like to welcome you to the MSC Industrial Direct fiscal 2006 first-quarter results conference call.

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

If you have 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 be 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 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, 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 Exchange Commission.

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

Investors should not assume that 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 President and Chief Executive Officer, David Sandler.

Please go ahead, sir.

Thanks, Eric.

Good morning, everyone, and thank you for joining us today.

With me are Chuck Boehlke, Executive Vice President and CFO and Shelley Walker, Vice President Finance.

I will be providing some details on the quarter and the execution of our business model.

Chuck will give some details on the financials, and then we will open up the phones for Q&A.

I am very pleased with our first-quarter results.

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

We exceeded our target for incremental margin in the first quarter and that enabled us to exceed the top end of the earnings range we gave as guidance for the first quarter.

Market conditions continue to be good.

Our customers are generally telling us that order flows are steady and that there are no shortages of raw materials.

Many remain concerned about rising costs, especially in energy and in petroleum-based products.

The IFN index continues to be positive, with another number north of 50 just reported on Tuesday.

I can assure you that our team is very focused on driving revenue growth and we continue to step up our investments in future growth, just as we have done for the last several quarters.

We are executing on our investment program for growing our business in the West and since we last spoke, we have opened new branches in San Diego and in Oakland, California.

Overall our sales force continues to grow and now stands at 546 associates.

We are raising our target to 560 associates by the end of the second fiscal quarter.

As we have historically explained, our sales force expansion program is dilutive to earnings in the near term as it takes time for these new hires to be fully trained in our solutions based selling model and assimilated into our value system.

While there is a ramp up period to new sales associates production, I can assure you that this program produces excellent results over the long-term.

Our sales management team has a solid process to monitor each sales rep's progress against an individually designed business plan.

We are putting more and more investment into the growth pipeline and we believe that it will pay off in future market share gains and long-term growth.

During my recent customer visits in the Northeast, I asked two long time customers who give us a substantial portion of their MRO spend what it was about MSC that convinced them to give us their business.

They both said the same thing.

MSC provides extraordinary service at fair prices, has the best product selection and delivery standards, and does business with them by e-commerce channels, saving them time and money.

Both were also quick to add that the added value from the personal relationship with the field salesperson is a critical component of our success with them.

They explained that our field sales associates not only bring them new ideas on how they can save money and lower their procurement costs, but are always there to solve problems and assure that their needs are taken care of.

I have heard this time and time again and I believe that our stepped-up investment in new field sales associates will reward us with long-term growth and share gains.

I remind everyone that the updated execution metrics are available on our website in the Investor Relations section.

All of our metrics are solid and the business continues to execute very well.

I would like to give some guidance for the second fiscal quarter.

Historically the second quarter has been the most difficult quarter for us to forecast due to the unusual sales patterns that we see during the prolonged holiday season.

We generally combine the December and January results into one for the purposes of our forecasting model; however, we do not have enough time to see January's results before we report the first quarter and have this conference call.

At this point, we think that sales will be in the range of 299 million to 305 million and diluted earnings per share will be in the range of $0.46 to $0.48, including the charge of approximately $0.02 per share for the effect of expensing stock options.

In inclusion, I want to thank all of our associates for their dedication and hard work in executing our model.

They are the driving force behind the excellent results reported today.

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

Thanks, David.

MSC had an excellent quarter financially.

It grew sales by 12.4% over the same quarter last year and generated a contribution margin which we call read-through of 30%.

This includes a charge to operating expenses of $2.1 million to reflect the compensation costs of stock options, as required by SFAS 123 R. There was no similar charge in last year's financials.

Computed on a comparable basis to last year, the read-through would have been 36%.

Since there is a minimal tax benefit of $400,000 associated with this quarter's charge, earnings per share were reduced by roughly $0.03.

The charge for each of the next three quarters will be approximately $0.02 per share.

Gross margin increased to 46.9% and we expect to maintain approximately 47%, give or take 20 basis points for all of fiscal '06.

The [excess] read-through in Q1 will likely normalize in the low 30s in Q2, excluding the charge for options accounting.

Operating margin increased to 17.4% from 15.9% in the same quarter last year and we would have reached 18% excluding the option effect.

We have seen some moderation in the rate of growth in the cost of our medical benefits realized from savings on our variable costs due to process improvements and continue to take advantage of the leverage inherent in our model.

Balance sheet metrics were very good as well.

We had 42 days in DSOs and we increased our inventory turns to an annualized 2.7 turns in Q1.

Free cash flow, which we define as cash provided by operating activities less capital expenditures was $33 million in Q1.

Cash, cash equivalents, and investments and marketable securities grew to approximately $118 million at the end of the quarter.

After-tax return on invested capital was an annualized 27% in Q1, reflecting the excellent earnings.

Thank you, and now we would like to open the lines for questions.

(OPERATOR INSTRUCTIONS) David Manthey, Robert W. Baird.

First question is on the outlook for the year.

Just as you look at your budgets and you're thinking about the full year, can you give us an idea approximately of how you think about the economic environment?

Do you expect ISM to remain above 50 for the year?

Then if there was a situation where we had a mid-cycle pause -- not that we are seeing one -- but if that would happen and ISM would like in the mid-90s dip below 50 for a short period of time, what actions would you take and what do you think the impact would be on the P&L?

David, it's David.

Good morning.

Outlook for the year, we have given you guidance in a couple of areas certainly on our expectations for gross margin as well as on read-through.

Sales, as I said in my script, really tough projecting December given the long holiday season.

Certainly if we had our druthers we would love to have seen January and of course will -- all that was factored into our guidance for the quarter.

So as you know, give our visibility, we don't project out more than the one quarter we provided the Q2 guidance accordingly.

For the balance of the year, we hope that the ISM remains strong.

That is anyone's guess and remains to be seen, but as you know, we will always continue to adjust our business plan based on a combination of balancing short-term profitability with long-term growth investments, and we would make those adjustments if in fact you saw the kind of -- if it were to dip the way that you just explained, David, we'd certainly step back and want to reevaluate as we always have.

David, this is Chuck.

I think we've talked about this a little bit in the past that if for whatever reason we felt threatened that our read-through commitment was in violation, there's a few short-term levers we can pull.

The direct-mail program can be looked at.

The turnover situation can be looked at.

There's a couple short-term things that if again we ever felt that we would be bumping up against a case where we would be violating our read-through commitment that we can -- you can take some actions on those particular areas in the short run to ensure that we make the commitments we've made.

Thank you.

Just one final question on the price increases in the new catalog.

I believe you said the average was 3.5 to 4% for the current year.

Could you talk about just in broad terms is that more, the same, or less than what you are seeing from your suppliers?

Also with what we have seen here in the gross margin side, can we also assume that private-label is increasing as a percentage of the overall mix?

David, certainly the price increases that we're able to take and pass along into the marketplace is not at the same level that we incur from our suppliers, a culmination of many factors that allow us to do that.

Certainly on a going forward basis all of that has been factored into our gross margin guidance for the year.

And from an import standpoint, that continues to be an important part of our margin improvement plan as well.

It is a plan that we're executing on that we don't break out the percentage of the imports.

But that continues to be an important part of our development plan and we are confident that we will execute there and continue to use that as a tool to fuel our margins to offset some of the pressures that would negate some of the favorable portions coming in.

Okay.

Thank you and Happy New Year to you all.

John Inch, Merrill Lynch.

I maybe missed this, the read-through you said was the low 30s.

Does that include options or that's excluding options?

Yes, the 30 -- actually from the last time we were together beginning of the year we said we committed to roughly 32% for the full year, and that was a 32% number that excluded the impact of options expensed.

We did better than that in the first quarter.

Again without option expense we would've been closer to 36.

I think we're saying we're reaffirming our commitment for the full year now that the low 30s, 32% or so excluding option expense, is where we would think our read-through would be.

Okay, so why then does the read-through begin to -- I guess deteriorate from the present levels?

A few things.

As you look forward here, the impact of if you take a look at where we are in terms of outside sales associates this year right now versus where we were last year, the monies that are tied up with associated with funding the salesforce increase and so forth start to play through the P&L.

And I think that's what takes it down a little bit from the 36% non option expense read-through that you saw in the first quarter.

Are their mix issues or customer issues that affect this as well?

No, I don't believe that is the case at all.

I think it is more a case of as we said we have tried to balance our growth with our investment spending and we have got the investment spending we have been doing is starting to kick into our numbers as well.

Okay, just going back to the prior questioner -- just pricing.

Is pricing rolling through on a gross basis that you're going to have to (inaudible)?

I'm sorry, what was the question on pricing?

I want to make sure I understand what's going on in the pricing.

I understand the new catalog had price increases but the prior questioner referenced 3.5 to 4.

Is that the average gross price that's being realized today?

It's an average.

I guess another way to look at it is that certainly that 3 to 4% range is being reflected in what you are seeing in our sales and the way that it rolls through our gross margin, certainly that is all incorporated into our guidance.

Because obviously on the other hand, John, not only are we taking some pricing where we see opportunity and where it makes sense for the market given some of the supplier increases and what traditional distributors have to pay, but we are also faced with cost pressures going the other way, meaning while we don't take them all, certainly there are price increases that do factor into our costs and our cost of goods.

Right.

And can you remind me your guidance this year on a net basis for pricing?

Does it presume improvement based on the gross increases that you have taken or is it kind of flat with last year?

Well, I think at 46.9 for this quarter, given that we said that the full year should be in the 47 range plus or minus 20 basis points or so, that would imply that the curve through the year certainly there has got to be some improvement to end up at the 47 or 47 slightly higher.

Then just lastly it doesn't look like you bought any stock this quarter.

What is the plan -- you raised the dividend.

What is the plan for share repurchase over the coming quarters?

John, the Board has authorized 5 million shares.

We have the full 5 million share authorization outstanding.

There is no specific plan in place to say at such and such a price we promise we're going to do X or Y. It is that that authorization is out there and we will kind of selectively go after it as we see fit.

Okay, but would you -- without getting too technical on a quarter-by-quarter basis, how would you want us to think about the likelihood that over the coming year you're going to use more of this share authorization to repurchase stock?

I don't think it would be appropriate for us to say -- give you direction on how you think about it.

The authorization is there.

As you see, we increased the regular quarterly dividend.

Last year we did a special onetime dividend.

I think all those things are on the table as opportunities for how we use our cash and to pinpoint what piece of that would be going towards share repurchase would not be appropriate.

Thank you.

[Adam Ullman], [Midwest Research].

A follow-up on this -- the pricing question here.

Have you seen any new price increases from your suppliers lately or are there any upcoming price increases from your suppliers here in the pipeline that you have visibility into?

Adam, sure.

We are seeing ongoing pricing pressures in the marketplace from a supplier side.

We still see that as opportunity with our customer base.

Fortunately it really speaks to the strength of our value proposition, because we are able to pass along those increases that we have had to take from our suppliers.

So that is what we continue to do and that has been factored into our guidance.

I will tell you also that since our first quarter increase we did take a moderate increase again in December that was very modest and that has also been factored into our guidance, because remember not only are the same price is going to our customer base, but there is also costs that we have got to absorb that impacts our margins as well.

Okay.

Is there any specific product categories that really stand out that suppliers have raised price more than average?

I think, Adam, generally speaking the areas of raw materials and petroleum-based products continue to have pressure.

Having said that, the pressure has abated a bit.

It was much frothier.

It continues to be an inflationary environment, though it wasn't quite -- it's not quite as inflationary as it was.

But things are kind of steadying out, albeit at a higher level than it was previously.

Okay, and then have you seen any follow through from Hurricane rebuilding inactivity?

Is there any activity taking off down there yet or what are you seeing in regards to that?

In the last quarter I think we said that we saw activity related to the hurricanes both that produced closings of customers, etc.

On the other hand also some opportunities.

I think that was a relative neutral for us, and that is what we have seen.

Certainly that is an area of ongoing opportunity in the future as those events occur.

Okay, great.

Thanks.

(OPERATOR INSTRUCTIONS) Brent Rakers, Morgan Keegan.

I just wanted to follow up with some comments you made earlier about the stock option expense.

I wanted to make sure I understood this correctly.

Could you give specifically how much was actually in SG&A and then what the related tax implications were of that?

Sure.

The bottom line, we will start there first, was roughly $0.03 a share for the first quarter and what we would expect for each of the next three quarters is $0.02 a share.

So from an EPS point it totals 9 for the full year.

There is a mix in the stock compensation expense, Brent.

From the past we have had both incentive stock options and nonqualified stock options and the two of them are treated different for tax purposes.

So what is difficult about this is you just can't take an SG&A expense, which was roughly $2.1 million, and use the normal tax rate to take it through the bottom line because one has tax benefit, the other doesn't.

It's a combination of those two events.

So it was really $2.16 million worth of stock compensation expense that rounded at roughly $0.03 in EPS.

Obviously on a normal basis 2 million plus in expense would not be worth $0.03 a share in EPS.

Because of the tax ramifications here, that is exactly how it shook out.

Related to that, then, do you have thought on what the tax rate guidance would be then for the rest of the year?

Are we looking at this kind of 39 plus kind of category?

Around 39.1 would be right about right, yes.

As the business unfolds again because the stock compensation expense for all practical purposes is fixed and we know the tax ramifications of that, you blend that with the ongoing activity and what the tax rate would be for that.

It would move quarter-to-quarter if we had large swings in mix of how the business performed.

But I think for planning purposes now you can use that 39.1 and you'll be fairly safe.

Perfect.

And then again, back to the hurricane question.

I know essentially all in all it washes out to be pretty much neutral for you guys.

Is it safe to assume though that when you look at the growth rates for the manufacturing versus the nonmanufacturing segments in the quarter, would the manufacturing segment be under pressure as a result of Katrina and nonmanufacturing meaning like government customers be beneficiaries of that?

Brent, I am not sure that I could characterize or that I would want to frankly break out between the two, because that would begin to point to opportunities that we see within our customer base.

Fair enough.

Then I guess another question, on the read-through comments that were made earlier and I guess your salesforce numbers are up 25, 30% over the last couple years.

You talked about how the costs from those will continue to be a drain on read-through.

I just wondered at what point do we reach the inflection point on these salesforce adds?

Because I would assume that all the people you added a year ago, two years ago there is a lot of initial cost and a lot of initial salary that is not recovered in (technical difficulty) I assume we would be hitting those inflection points on some of those earlier salesforce adds now.

Could you comment on that a little bit?

Sure.

The way that our salesforce works is that we have always explained that the investment is dilutive in the near term and it builds over time into a really great long-term investment for us.

It is exactly that.

It is an investment.

So sales reps that were hired some time ago begin after a period of time to ramp up assimilation into the business, customer base, training into our solutions based value model, etc.

They begin to contribute and that contribution gets stronger over time.

But initially certainly dilutive.

You certainly see that as dilutive to our results and it brings -- it's a component of bringing down our read-through.

Long-term it is an investment that produces great market share gains and long-term growth, and that is exactly why we're investing and frankly we see the runway and the opportunity for us to continue to do that far into the future.

Last question on the West Coast region.

I believe you said you opened up a couple new branches in California in the quarter.

Could you maybe elaborate when those opened and is this going to be a continued further commitment?

And then again, is tracking the West Coast region a good way for us as analysts to track the success of your salesforce additions in the future?

Let's see.

First of all, the branches San Diego and Oakland have only been very recently opened.

I think San Diego was in the last three months and Oakland was in the last month or so, so very much new.

In terms of commitment, certainly it is an area that we're going to continue to invest in.

We see just an enormous opportunity out West, one that we are very excited about, so you will continue to see us investing there.

I would not want to share more specifics than that, but it is an area that you'll continue to see us committing some of our investment dollars in.

Then I guess the final point that you asked was on the West and is one of our metrics a way to track it?

Well, the West region is a really broad region, so I think directionally certainly there is value in looking at that to see the results.

But I have to tell you that because it is so broad, these branches -- there's a circumference around the branch and that circumference around the branch, which is something that we measure for growth, we are very pleased with.

The more critical mass that we get in the broader West, I think the more meaningful the metric will be to be able to see the growth.

Just one real quick follow up to that.

Is it safe to assume though that in that Western region the increase in MSC's salesforce is greatest in that region than the other regions?

Or would that not be a correct statement?

I would not want to assume it either way.

We don't like to talk specifically about where we place our investments.

I will tell you that we are investing and have opportunities to invest not only out west but across the entire country.

We are continuing to do that.

However, we don't specifically say X% was in the West, Y% was in the Midwest and so forth.

Thanks a lot.

[Adam Fleece], [Shelton Investment Corporation].

Great quarter.

Terrific.

A few questions.

The salesforce number is up about 15% and your active customer list is flat, so how should we think about those metrics and the direction of both?

I would think if you're bringing on more sales people you should be getting some new accounts.

Adam -- David.

We certainly are getting new accounts, but remember our strategy to our customer base is that we have been doing a few different things.

One is that we are not focusing on in fact culling those small, unprofitable customers.

So you see those actually coming out of the number, but we are also really focused on customers, larger customers like the national accounts in government.

It is interesting because government for example, those types of accounts have multiple locations -- actually that's true of national accounts and government -- many, many locations but often those many ship-to locations, plant locations where we're actually calling and penetrating business would only account in our customer base sometimes even just as one.

USPS is an example that we have given within the government where there is a potential of up to 40,000 customer ship-to locations and yet as we penetrate those, it is only counted as one within our customer base.

So there is a dynamic there that you really wouldn't see from the number and therefore that metric is a tricky one for you to follow in that regard.

Okay, so we should not really be -- I guess what I am trying to get is how do we measure the productivity of the sales people and what are your expectations?

What should our expectations be?

Certainly our expectation is that we continue to enhance and make a more and more productive salesforce.

That is the underlying rallying cry of our sales team.

And I can tell you that those associates both short- and long-term that we have were really pleased with what we are seeing.

But I guess when you look at the absolute measure, tough to measure because the more and more that we are investing, the more that it would certainly appear that we are less and less productive.

Perhaps the way to think about it is to separate from the public reporting that we give, separate them into classes as we have said that the current investment does not actually contribute to current sales dollars.

You really have to look at it and you could pick whatever point you would choose to say okay, I see that the last investment of X a year ago given that it takes time to ramp up perhaps you would want to layer them differently than just putting them altogether.

I don't know if you follow my logic there.

I don't want to pin down obviously and I am not looking for forward-looking statements, but at some point in time your revenue growth should start to exceed the growth in your salesforce, correct?

I can't -- I am not sure that that is the right way to characterize it.

I can tell you that the salesforce on the salesforce investments are made for two purposes.

One is to gain share and the other is to fuel long-term growth, and that is exactly what we see happening.

Your mailings -- given that you're doing a lot more business online and your customer base seems more prone to communicating online, I would think your mailings would maybe trend downward over time.

Well, it's interesting.

First of all while online transacting is something that has been growing wonderfully, it is a significant part of our business, just under 19%.

It continues to grow at roughly a 40% clip and we are very excited about it.

But at the same time we still see -- you might look at that and say well, I guess paper is going away.

That is not what we see from our customers at all.

Customers continue to want to use many different means and channels to transact with us and paper often augments their transaction electronically.

So they may use our Big Book, they may use one of our brochures and that would be in concert with perhaps then using the MSCDirect.com to transact.

So certainly our paper brochures and catalogs continue to be an important factor.

Frankly we don't see that changing any time soon, although you are right, certainly there is an element of customer that want to be completely paperless and that is also a factor as well.

Maybe just one more comment on -- you'll see that right now we are estimating our direct-mail program to be actually slightly higher than it was over the last couple of years.

Part of the reason for that is that remember the underlying customer base we are expanding our ship-tos -- meaning the number of plant locations and in particular, the number of contacts that we are penetrating within those plants.

That means that more and more circulation from our direct-mail is being mailed into those folks and that is kind of what is going on in the underlying program.

Did the average calls by per call center associate go down because you are just seeing a lot of more online ordering?

Not really.

Good question.

Actually it is really a function of us beginning to and having done some work on our staffing model.

We think this is a productivity improvement there that we are in the process of mining.

Customer service levels are at all-time high levels.

What our plan is to keep them at all-time highs while at the same time mining the productivity that we believe is inherent within our call centers.

But we want to do that very, very carefully as we tweak our model, because the one thing that we would not want to do is sacrifice customer service for enhanced productivity.

We want both.

One last question about the cash flow -- the non-cash charge for stock based comp of 2.380 million but then the reclassification of the tax benefit of 1.980 -- did that reclassification flow through the P&L also?

Adam, it's Shelly.

No, it doesn’t.

It is strictly in the equity to the liabilities or back again.

It reflects the change from APB-25 accounting to SFAS whatever the hell the number is R accounting.

That's what you have to do.

Thank you very much.

Terrific.

Holden Lewis, BB&T.

Can you comment a bit?

I noticed that the error rate was up a tick, not your traditional less than 1% and I am sort of curious if that was a function of the WMS system being rolled out and if you can give us some update on where we are in that WMS rollout process?

First of all, Holden, the error rate -- when you talk about the levels that we are, our team is incredibly accurate.

It produces just an enormously terrific service experience for the customer.

At the levels that we are now, whether it is off by just tiny fractions that you are looking at really has no impact at all.

The numbers are so small and the number of errors are so small one slight tick in one package out of 100,000 might produce it, but frankly no concern there.

Our accuracy rate are rock solid and any movement that you see there, again, it is so minuscule it is insignificant.

Having said that, it is also completely unrelated to anything going on with our warehouse management system project, which is progressing along.

It is in its infancy stage.

We are pleased with the progress that we are making there, but it is going to take us some time as we recognize there is -- we are very mindful, the team is very mindful of making sure that we don't blip while we're installing new systems and ensuring solid customer service levels.

Okay, and in terms of -- if there is a threat of disruption related to the WMS rollout, where would we see the greatest risk of that?

Was Q1 an area where if there was going to be an area you would have seen it, or is Q2 kind of the critical point?

Where do we hit the critical point on that?

I think that later in the project as we begin to cut over, certainly that's where the greatest risk is.

I would not want to specifically say in what quarter that's going to happen, because we have said that it is a project that is going to take shape over the next year or so.

Certainly the cutoff point of converting from old to new is where there is risk.

But frankly our team has factored all of that in and I will tell you that our BP team and our DC teams’ management is very risk averse when it comes to anything that mettles with the customer service experience.

We're going to be very cautious in the way that we implement.

Still there is no do or die scenarios here until probably Q3, Q4?

Q2 is not a problem?

Holden, it's Shelley.

There really is no do or die here because these systems are going to run in parallel for quite some time and literally you can switch between the two the way they are designed in a couple of minutes.

So once we are in the testing phase, we will be running the new system in longer and longer swaths of time.

Then when we are really happy is when we will finally switch over 100%.

But still have the backup for quite some time to going back to the old way.

Okay, then were the costs meaningful related to the program?

Do those escalate or ramp going forward?

How should we view that?

The costs associate with the investment, Holden?

Yes.

I'm just curious where the quarterly cost component is going to peak out or what have you on this year-long investment.

From a cost point of view you'll see very little this year because right now it's CapEx spending that is not being obviously turned into a project that is generating cost savings and becoming a part of our business.

So you'll see it more in the CapEx line this year and you'll see obviously a piece of that hitting the depreciation line going forward, but not much depreciation associated with this year at all.

And then following up on Brent's call, can you -- I know you don't want to speak specifically about specific classes of people that you hired but can you just give us a sense or an impression of what the usual model is for adding salespeople?

When they tend to get to full productivity or begin to contribute to the earnings as opposed to dragging?

Just sort of the ideal boilerplate model that you skew to?

We can't give you specifics on the boilerplate.

Certainly internally that is something that we monitor very carefully on time to profitability as well as breakeven, those are all metrics that we focus on and we are very pleased with what we see.

But what we have said and as you know, Holden, it takes time to bring the individuals on board, to train them, to train them in our model, to get them comfortable with their portfolio of accounts, and to begin to develop those relationships.

All of that takes time to ramp up.

Once they have ramped up though at some point they do contribute to profitability and that profitability increases over time.

So while we understand what the ramp up time to profitability as well as the breakeven is for our outside team and it is something that we measure very carefully, it is not something that we like to publicly disclose.

Okay.

Lastly onto the December growth rate, it looks like the guidance that you're providing certainly on the top line and how that flows to the bottom line really kind of assumes that December's growth rate is sort of sustained going into January/February.

But if memory serves didn't December last year have like a 25% growth rate, some very, very difficult comp that may be artificially depressing this December's number?

While Chuck is looking at whatever that December comp was, I can tell you that what we used for December which produces our guidance is the same standard forecasting methodology that we use every quarter.

That is what we rely on.

It is not a perfect science by any means.

It's gets much further complicated by the difficulties of having a couple of holiday weeks in December.

But we do the best that we can and we use that same forecasting methodology to produce the range of the answer.

I believe last year, Holden, to also in the quarter, in the second quarter, there was a sizable price increase that went in last year in the second quarter that would have some impact on the comps if you're talking about year-over-year comps.

I wonder if that comp included last December -- if the number that you are alluding to was actually adjusted on an ADS bases for holidays?

It doesn't really ring true, Holden. (multiple speakers)

For example, our current December growth rate when it is not adjusted for the holiday ADS would've been higher, but that adjustment is to try and normalize it for what we see as the average daily sales in the business.

Obviously that's true but if memory serves, I thought you had about a 25% growth rate last year which may have been holiday timing because of the holiday last year falling on a weekend.

But it fell on a weekend this time as well, so you don't have that switching the other way and that's why I was curious about whether you factored in the comp.

It looks like 11.6 growth in December and you're looking for 10 to 12% growth for the quarter.

It looks you're expecting a little bit of -- potentially some deceleration in --?

Listen, typically because it is so difficult in Q2 what we would like to do is get the benefit of a month and then either the following month or two or three weeks in the following month.

That is generally what we're able to do coming into this call.

Unfortunately we do not have the benefit of that, so we have got to go with plugging the numbers into our forecasting model that we have and in this case it produces the range that you see.

Fair enough.

I think that is it.

Thank you.

I would love to have -- love to come out on the higher end of the guidance range, but it is really going to depend on what we see in the business and ultimately we have to go with the numbers that we see today.

Just the number of days in the quarter, I know there's one extra I guess this time in December.

Do you lose that again in January or February or is there more days this quarter?

We lose it in January and also the holidays fall on different days of the week.

You have different buying patterns.

It just gets really difficult, so it will be accelerated reporting schedule and the natural progression of our fiscal year backwards a day or two every year means that we have a really short time.

We saw two days in January.

Yes, thank you.

Adam Ullman, Midwest Research.

I had a follow-up on the field sales associates numbers.

Is there a physical limit on how many sales associates that you can add over one year?

Because you have [polled] to have your target now.

Are we going to see kind of the second half of the year somewhat flattish or could we see an acceleration from the number of associates that you added last year?

We have not wanted to go out for the second half of the year.

We're comfortable with our guidance through Q2.

We want to be able to see -- certainly we have a plan for the full year, but especially given the short forecasting period we really want to be able to see January before we cement our plan for Q3.

We have got a huge runway for opportunity with our field sales force.

And frankly the only limitation that we have to expanding it is our balanced approach between investing for the long-term and ensuring that we meet our commitment for short-term profitability.

We are constantly looking at that balance, and that is how we make our decision.

Okay, there would seem to be a training limit or even just office space capacity limits on how much (multiple speakers)

Certainly -- I guess my point is that from a recruiting standpoint, training, if we chose to ramp it up to very significant rates, then that kind of support staff is something that we would also want to add to bolster.

Having said all that, I guess the other limiter for us is we will only move it as fast as we feel comfortable from a quality standpoint because that is not something that we compromise on for the sake of a number.

We make sure that the associates that we add to our team are going to be -- are going to fit well and fit well into an already terrific base of associates.

Fortunately there is an awful lot of talent out there and frankly an awful lot of talent out there that would love to join MSC.

So we are fortunate in how we are positioned today.

Okay.

Great, thanks.

There are no further questions at this time.

Management, do you have any closing remarks?

Only that I appreciate all the participation today and we look forward to speaking to all of you again in the next few months.

Thank you all.

This concludes today's conference.

You may now disconnect.