MSC Industrial Direct Co Inc (MSM) 2007 Q2 法說會逐字稿

Good morning.

At this time, I would like to welcome everyone to the MSC Industrial Direct second quarter 2007 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 session.

(OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Eric Boyriven of Financial Dynamics.

Thank you.

You may begin your call.

Thank you and good morning, everyone.

This is Eric Boyriven of Financial Dynamics and I would like to welcome you to the MSC Industrial Direct fiscal 2007 second quarter results conference call.

You should have 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 this call.

It 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.

Though 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 the forward-looking statements will prove to be correct.

Important risk factors that can cause actual statements 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 filing 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 in this call.

I would now like to introduce MSC Industrial Direct's President and Chief Executive Officer, David Sandler.

David, please go ahead.

Thanks, Eric.

Good morning, everyone, and thanks for joining us today.

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

I will be providing some details in the quarter, market conditions and on the status of the integration of J&L.

Chuck will provide details of the financial results and then we'll open up the phones for Q&A.

Second quarter results were solid.

We continued to execute our business strategy, take share and grow.

We exceeded our guidance for earnings as operating margins were slightly better than forecast.

We benefited from solid execution and managing our operating expenses as well as from our continued focus on gross margin.

Our excellent cash generation enabled us to return significant amounts of cash to our shareholders in the form of dividends and share repurchases.

Chuck will provide some details on these items.

Overall, given the more difficult environment, I'm very pleased with MSC's performance in the second quarter.

We have seen some additional softening in market conditions since our last call.

While many customer segments are generally optimistic and telling us that order flows remain steady, we have seen more pockets of business experiencing lower levels of order activity than what was previously seen.

The ISM index of 50.9 reported on Monday suggest continued slow growth in the industrial sector.

We are also hearing that customers continue to closely manage their inventory.

We are confident that we are taking share and enhancing our competitive position every day.

Our model of reducing total MRO procurement costs becomes even more powerful when taking share during times of less than optimal business conditions as we are now experiencing.

The strength of our value proposition was once again demonstrated to me during a recent visit to a customer in the midwest.

This customer is a manufacturing subsidiary of a national account and our business with this national account has grown rapidly since it became a customer about 18 months ago.

This particular subsidiary company has been adversely affected by the economy and they have come under some cost pressures.

We have been talking to them about our cost reduction programs and recently they came back to us with requesting our help in order to achieve their business goals.

To reduce costs, they have targeted ways to reduce their headcount, streamline their ordering process, eliminate a number of their current suppliers, lower their inventory investment and reduce out of stock situations.

Supplier consolidation, inventory reduction, improved in-stock metrics and headcount reductions are the drivers that our VMI CMI solutions can provide.

Utilizing our win-win approach for everything we do, we are currently working with this customer to design and implement the proper solution using VMI at MSCdirect.com with its WorkFlow management tools.

We are confident that we'll help this customer achieve their cost reduction goals and also be able to grow our business with them.

We are very excited about our share gains, but even more excited about the progress we have made in order to ensure sustainable long-term share growth at high operating margins.

The solutions that we have built over the last five years combined with our acquisition of J&L position us as the clear leader in the Metalworking segment of MRO.

Our model is built for success in today's global marketplace and I remain confident in our ability to outperform the rest of our sector.

The combined MSC sales force was 757 at the end of Q2.

We expect that the sales force will grow to about 770 associates by the end of Q3.

We remain very pleased with how our acquisition and our integration of J&L is progressing.

Several weeks ago, we successfully completed the conversion of the UK branch's computer system.

Although it is a relatively small operation compared to the U.S.

business, the transition went very smoothly and provided lots of learning in advance of our larger U.S.

systems migration.

Our successful implementation of this location reinforces our confidence level for the upcoming conversion of J&L's U.S.

computer system.

Based on our solid progress to date, we remain confident in our ability to generate the previously forecasted $20 million in margin improvements and cost savings that we had originally anticipated.

Chuck will provide some details on this.

Overall, J&L continues to meet or exceed the expectations that we had when we bought this business.

Our core execution metrics remain solid.

The MSC team has continued to deliver superior execution and I would like to thank all of our associates and express my appreciation for all their hard work in generating these excellent results.

I would like to provide some guidance for Q3.

At this point, we think that sales will be in the range of $428 million to $434 million, and diluted earnings per share will be in the range of $0.64 to $0.66 including a charge of $0.02 per share for J&L and integration costs.

Thanks, and I'll now turn the mic over to Chuck.

Thank you, David.

Financial results for the second quarter of fiscal 2007 were excellent, even in a slightly slower growth environment than Q1.

We grew sales by 32.3% over the same quarter last year.

J&L contributed approximately 70% of that growth.

J&L's results were not in last years' second quarter.

We estimate that the extreme weather conditions in the midwest and in the Northeast during the quarter probably cost us $1 million to $2 million of lost sales.

Consolidated gross margins came in at 46.4%, in line with our expectations.

We expect consolidated gross margins to be about the same for the balance of the fiscal year plus or minus 20 basis points.

MSC's consolidated operating margin in Q2 was 17.2% of sales including J&L integration costs of $2.2 million and the amortization of intangibles related to J&L of $1.9 million.

Operating margin was somewhat higher than expected as we continued to actively manage our operating expenses.

During the quarter, we realized benefits from improved efficiency in our Customer Fulfillment Centers and from some renegotiated service contracts.

We also realized approximately $2 million of the $20 million in annual savings associated with the acquisition of J&L.

We anticipate realizing approximately $8 million of these savings for all of fiscal year 2007, which will be largely offset by nonrecurring integration costs.

We expect approximately $10 million of incremental savings to be realized in fiscal year 2008 with the remaining $2 million to be realized in fiscal year 2009.

Balance sheet metrics remain solid.

Annualized inventory turns were 2.8 and accounts receivable DSOs were 42 days.

Consolidated free cash flow, which we define as cash provided from operations of capital expenditures was $8.6 million in Q2, an increase of $1.8 million over Q2 of last year.

Q2 was somewhat unusual in that two quarterly payments of income taxes fall in this quarter every year.

Capital expenditures increased to $8.4 million in Q2 in line with our expectations.

Since we began buying back our stock last July, we have purchased approximately 2.25 million shares of the Company stock for approximately $91 million.

$67 million of those purchases have taken place in fiscal year 2007, and approximately $36 million of that has occurred in Q2.

There are approximately 2.75 million shares remaining in our authorization at this time.

Over the past 3.5 years, MSC has returned approximately $400 million to our shareholders, split about evenly between stock buybacks and dividends resulting in a higher return on invested capital and return on equity that would have otherwise been realized.

We intend to continue to return cash to our shareholders in the form of stock buybacks and dividends.

Our confidence in future cash flow has afforded us the opportunity to increase our quarterly dividend to $0.18 per share.

Thank you and now I'd like to open the line up for questions.

(OPERATOR INSTRUCTIONS).

Adam Uhlman, Cleveland Research.

Great quarter.

The first question here for you is on the operating expense line.

The seller expense didn't really move too much from the first quarter level despite headcount being up roughly 25% or so.

So could you give us a little bit more color on what's unfolding with the efficiencies that you're getting in the D.C.'s and some more color on the renegotiated service contracts that you had mentioned?

Yes, a couple things going on there.

I think we've talked in prior calls about our warehouse optimization project in Harrisonburg.

And that, in fact, now every day is running more and more and generating the savings that we thought it was going to generate, so you've got a higher piece of that coming in the prior quarter [and] expect to continue even further as we go through the end of the year.

The only thing you have going on is some of the synergies from the J&L acquisition are starting to be realized now.

The harmonization of deals is essentially complete.

Where we had overlapped suppliers, we've been able to incorporate the better price into our purchasing.

It took awhile to get that turning through inventory after it was purchased, but now that's showing up in the P&L.

That's starting to help the overall performance as well.

Same thing on the OpEx side; although the bulk of the OpEx savings will come post-integration, there are a few things that are happening right now that are leading us to a better position in OpEx.

We had mentioned and you brought up again some of the service contracts.

Primarily where we have many carriers, both on the freight front and then in printing supply, we were successfully able to negotiate a new deal with the combined business volume that actually was a little bit quicker than we thought, and that led to improved operating expense performance.

So you roll that all together, essentially that's what helped account for the $0.02 favorability we had relative to the guidance we provided last call.

That's helpful.

And then could you give us a little bit more color on the J&L integration timeline, when exactly are the computers switched over?

When are the D.C.'s expected to be shut down?

Go ahead, Dave.

Sure.

Thanks, Adam.

Yes, we're really pleased with how things are progressing there, Adam; very successful conversion of the UK branch's systems and as I said, that's really just further heightened our confidence in the U.S.

migration which is coming.

That's actually scheduled for late spring and around that whole time is also going to be the movement of the distribution centers into the MSC network.

So all of that is going to be happening late spring.

And then any updated estimates on what kind of savings you could capture by closing those two D.C.'s?

It's baked into the overall $20 million that we talk about, which as I said, kind of the overall $28 million will actually be in the fiscal year 2007 number, incremental 10 for a total of 18 next year and the last $2 million or so would happen actually and be in our fiscal year 2009 run rate; but that obviously a significant piece of those savings are being derived from the warehouses.

Dan Whang, Lehman Brothers.

Question was around the current end market trends that you're seeing.

I think you said that weather certainly had some impact in the Northeast and the midwest, but were you seeing any discernible pattern, any patterns that emerged during the quarter or into March, I guess March, where you continued to see that low 30% type of growth rate?

Yes, I guess the biggest pattern that we've seen throughout the quarter is more softness in the industrial sector; certainly you're seeing that really affecting all of our regions.

It's coming through the manufacturing sector which has been particular hard-hit.

We're pleased to see our non-manufacturing business growing in double digits.

Pretty much you saw that roll through all the regions, although, as we said, there was a slight increment or detriment to growth based on some of the weather conditions that we saw that slightly affected the Northeast and midwest; but pretty much what you're seeing is related to the downturn in manufacturing and, of course, we're also very pleased to see the effects of our investments really paying off in the west as well and you can see that in the significant growth rates there.

Related to that on the West Coast progress, I mean, obviously the growth rates continue to stay in that high teens area.

Could you provide any additional sort of details on maybe additional sales offices in the West Coast or I'm sure some of the additional salespeople that you added were probably in that area, but any color on that?

I'd rather not for competitive reasons really give you more color other than to say that the west has and continues to be a vibrant growth opportunity for us.

We're really excited about what's been going on with the buildout there and the team that's in place and the extended team that will continue to build there.

So it continues to be one of the focal points of our investment and we think that the west provides just enormous opportunity for us on an ongoing basis.

So we're very pleased with progress to date.

In terms of the J&L integration, you talked about how in the UK, the migration went smoothly and you talked about some of the lessons learned and could you share some of that?

The events that happened over there and how you expect to kind of help [buy] some of the best practices in the U.S.

if that happens over the next couple of months?

I'd rather not share details there, although I will tell you that we have a team that is collectively working, communicating and meeting on a very regular basis.

We stay very close to this initiative given that it's so critical to our future and one that the entire organization is involved with, but just the way that we've communicated the level of training, some of the things that we saw in our systems test plan would have -- has picked up a lot of issues that we learned from that we're now going to be able to apply using your words, as best practices, to the U.S.

systems migration that had we not gone through the UK -- which is exactly the plan and the rationale for why we selected it to be first -- had we not done that, then certainly there would be a lot of issues that would have come up that we're now able to proactively anticipate and kind of head off at the pass.

Just one final related question.

I think you're expecting another couple of pennies in the third quarter related to the integration cost.

How should we expect that to profile in the fourth quarter and beyond?

I think you should expect similar roughly $2 million plus or minus in the third quarter and the fourth quarter as well, bringing the full year total to $7.5 million to $8 million is what we're currently estimating for integration charges related to the systems migration.

That kind of goes away going into 2008?

Yes, once the systems are converted over, all these integration expenses which had been associated with the systems conversion in the warehouses, correct, are not in the P&L next year.

Jeff Germanotta, William Blair Research.

A couple of just administrative questions.

Can you talk about how many days are in the quarter or each of the quarters in the next fiscal year?

Sure.

We're getting that now, Jeff.

And while you're looking that up, can we talk about how March sales have shaped up?

Jeff, you've got the March growth number there that's been posted.

I guess we're slightly ahead of February and when we put March into the blender with all of our trending, Datapoint and the way that we forecast, we come up with our very best thoughts on guidance that we provided.

Thank you.

Q3 is 65 business days and Q4 is 68.

For '07?

Are you talking about 2008?

Yes, do you have 2008 as well?

No, I don't.

Because of where the holidays fall, I know there's some anomalies in the 2008 calendar.

We would have, as we've talked in the past, there is one extra week in 2007 that wouldn't be in 2008, but we'll get back to you.

Sounds good.

And can you talk a little bit about price inflation and how that's influencing margins in this environment today?

Yes, I mean, pretty much what we've seen, there are still some cost increases coming but in general, I would characterize the environment as stable.

We have continued to see a bit of volatility still in the raw materials related area; materials like copper, nickel, brass, stainless still continue to be volatile but in general, I would say that it's a stable environment.

We've got the -- we've had the benefit of being able to generally apply whatever cost increases through on the customer side and all of that has been reflected in our guidance moving forward.

Jeff, I do have the 2008 days.

Q1 is 62, Q2 is 63 and there are 64 days in both Q3 and Q4 for next year.

Thank you and just a last follow-up question to David's comments.

In the 32% sales growth rate you had the second quarter, is their much selling price inflation in that number?

Well, yes, actually, the way that our growth breaks down, I guess I'll give you the answer two ways, Jeff.

First of all, 12% of our growth basically came from pricing.

Another way to look at that is that as Chuck mentioned, when you look at the quarter, roughly 70% of the growth came from J&L.

The remaining growth of roughly 30%, of that 30%, roughly 40% of that came from pricing and the balance of it came from our large customer strategy and the balance of the business.

Important to note, Jeff, that the pricing is as much a function of what happened last year and big book increases that were taken this year, obviously that wasn't pricing during the quarter.

I just want to make sure I got that right.

So we've got a 32% total increase, 70% came from J&L, so that round number is 21%.

So that would mean about 9% growth from the core business which includes inflation.

I guess I really didn't quite understand how the numbers that David just explained added up.

Okay, well, let's try again.

So 7 -- of the total growth, 70%, let's put that aside as J&L; that leaves us a balance of roughly 30% of the growth.

Now let's kind of slice and dice that 30% of the remainder.

So of that 30% remainder, roughly 40% of it was the cumulative effect of pricing action.

Roughly 40% of it was the effect of our large customer strategy growth.

So now we're up to 40 -- there was the 40, roughly the 40 and the balance of 20% came from all other parts of the business.

Thank you very much.

That's very helpful.

Bob Littell, M.D.

Sass Investors Services, Inc.

A couple questions.

If I remember correctly, your guidance in the past was that the J&L acquisition would be earnings neutral in their first and second fiscal quarter and contribute in the third and fourth.

Do I recall correctly?

Actually, Bob, more towards the end of the fourth quarter.

We had said it would be plus or minus neutral -- at least until the integration was done and the integration now being inflated for late spring means that it will be mildly accretive in the fourth quarter and neutral through the first nine months or so.

And when you say mildly accretive, can you put any cents per share on that?

It rounds to just slightly -- I mean, a penny or two, not much more than that.

And just for understanding purposes, it's not just the integration expense that's offsetting some of the earnings and savings we would realize.

Don't forget, when we talk about accretion and dilution, we have things like the interest expense that we've incurred and the foregone interest of the cash we used to do the deal.

There's intangible asset amortization of $7 million or $8 million that's in the J&L numbers now that wouldn't have been in J&L as a stand-alone business on its own, so all of that's in the blender.

Not so obvious in the financial statements, but we run the accretion dilution inclusive of everything I just mentioned and that's how you come up with the roughly penny or two that would be in the numbers for the full-year 2007.

Two questions on your cash flow statement.

The capital expenditures, $14.7 million, that's up quite a bit from last year.

What's in that?

Well, the $14.7 million is consistent with some guidance we gave a while back of a plus or minus in the $25 million range.

A significant piece of that was carried forward and spending associated with the Harrisonburg optimization project that actually was approved and worked on last year, but the cash flow actually flowed into this year.

Additionally, what's unusual is there's obviously some CapEx associated with bringing J&L over and having them run both on our systems, and having our entire business in our warehouse, we have to spend some CapEx to prepare for the D.C.'s and the volume associated with it coming into our area.

The rest of it is our normal $12 million to $13 million worth of CapEx we spend in any given year.

And final question, business acquisition of about $13 million, what's in there?

That's the remainder of the costs and some of the expenses and settlement on the transaction with Kennametal for the J&L acquisition.

I thought probably so.

Good.

Thanks, Shelley.

Holden Lewis, BB&T Capital Markets.

On the -- digging into the metrics a little bit, and looking at your average order size, historically in the second half of fiscal years, you've managed to see increases in the average order size relative to where you were in sort of the first half.

Can you sort of go through what those increases in fiscal Q3 and Q4 are generally a function of and if we can expect to see similar type behavior from your average order size in the second half of this year?

I'm not sure that I can help you on what's coming around the pike on our average order size.

The average order size driver certainly is our mix of business.

What segments that's coming from, as you know, our large customers tend to drive a larger than average order size for us and factored into all that is also the effects of economy.

So it's very hard for us given that we're not able to predict what's coming around the corner economically, what the second half average order size might bring.

Question on sort of the balance sheet.

Obviously you bought back a lot of stock this quarter -- the last three quarters, and when the stock has been sort of in the low '40s, this quarter you actually increased the amount of debt on the balance sheet, net debt to balance sheet to do so.

Now the stock is kind of in the mid to high '40s or maybe just give a little sense of when do you sort of shift the emphasis from buying back the stock, at least in the large quantities that you have been, and shift the emphasis over to maybe reducing the leverage on the P&L?

How do you guys sort of think about that in terms of the capital structure?

We really don't advertise the price points and how we go about buying the stock back.

As you know, there's still in excess of $2 million, $2.75 action on the authorization.

You can see we've been active in it.

There's no magic bullet or formula that says at this price we do this or that.

You've seen in the quarter we're willing to take on some debt to buy back stock when we thought that was the right thing to do.

I will tell you now you mentioned net debt as we speak today, our net debt is down from where it was when we reported it at the end of the quarter with a very strong cash flow month for us in the month of March, but there's no prescribed formula for how we go about buying stock back and at what price and so on and so forth.

Okay, but you would expect that the sort of the pop in your debt is more of a seasonal issue with cash flows and going forward; [with] regards to what you're doing with the share buyback, you would expect that your leverage would decline for the rest of the year?

Not necessarily.

Again, we don't telegraph the strategy because we don't have a prescribed methodology here.

It could go either way.

I will just tell you since the call, the net debt even after we pay the dividend will be closer to 200 million than the 220 or so you see on the balance sheet at the end of the quarter.

We had a strong cash flow month and we've reduced some outstanding debt during the month, but that doesn't mean plus or minus we will or won't buy stock back in the quarter.

It's unrelated to that.

And just [until the softness lead] do you have a level of leverage that you're comfortable or uncomfortable with?

How do you -- that's a philosophical question.

I guess philosophically, we think that where we've got a lot of room if we wanted to use it that we're really underleveraged in that respect and we're very comfortable with our debt levels today and frankly, we would be comfortable with higher debt levels moving forward as well if we chose to go there.

And then lastly, it looks like you sort of reined in your advertising expectations in terms of pieces mailed for the year.

Is that just sort of a reaction to what you're seeing in the market or are you seeing sort of the hit rates on your existing mailings doing better than expected?

What's sort of the catalyst for that?

I think more the catalyst is that we always talk about kind of adjusting the dials where we might spend $100 on one investment, might adjust that down to 95 so that we can spend 105 elsewhere.

That is more the case rather than something really underlying the metrics that causes us to move away.

So our direct-mail marketing team in frankly both MSC and J&L are constantly trying to do more with less, find how we can reach our customers more cost effectively, be able to grow sales and do it with being -- driving more productive levels.

And we continue to do that in our program.

So if the advertising isn't getting it, where were those funds sort of rerouted to?

What's getting a bigger proportion now?

Holden, we don't -- as you know, we've got many different growth drivers that we kind of invest in.

Certainly one that we've continued to talk about that we continue to ramp is our field sales force, but beyond that, I wouldn't want to characterize all the different programs in terms of level of investment of each.

(OPERATOR INSTRUCTIONS).

Adam Uhlman, Cleveland Research.

I was wondering if you could talk about the acquisition environment a little bit; your appetite for doing acquisitions and also what you're seeing out there in terms of availability of potential properties and pricing.

I think that I can't comment on specific pricing and all.

I can tell you that if we were open to opportunities right now, I think we would have our fair share.

As you know, I think we've been pretty clear about the fact that we're very focused on the J&L integration that's taking up significant organizational mind share and bandwidth and we're going to stay very focused on that until we're completely through it until we're comfortable that we've completely absorbed it because we want to make sure that we don't bite off more than we can chew.

Long-term, certainly, we'll continue to put acquisitions in the midst of our strategic thinking using the standard that we've always used, which is to the extent that we think that an acquisition is out there that will put us in a better place five years out, than just focused on growing organically, certainly we would go there as we did with J&L.

But in the near-term, frankly, even if we had appetite to do it, we would stay very focused because we're not able to even look in that area right now.

Thanks, that's helpful.

And then, Chuck, just a clarification here.

On the seasonality of earnings this year, because usually your fourth quarter is a lower earnings quarter compared to the third quarter, but you have more selling days this year in the fourth quarter and you're also going to have more help from the J&L business in the fourth quarter.

I know you're not giving guidance on the fourth quarter, but how should we think about the level of earnings in the fourth quarter compared to the third quarter?

Do you think it will be higher or lower?

Wow.

You hit on all of the things that I can tell you about, David.

There's an extra week in the quarter.

Just to be mindful, the J&L comps are in the fourth quarter from our public reported numbers for the first time.

They obviously weren't and aren't for the first three quarters of this year, and then you've got the overall business environment that we've tried to characterize for you, at least for the third quarter without making any calls for what we believe may or may not happen in Q4.

But you hit on the items that we can talk about and those are the ones you need to bake into the equation.

So it sounds like it should be higher.

Good try.

Last question for you.

On the incremental margin, excluding the charges that you're absorbing with J&L, where do you think that that's falling in on a comparable basis at this point?

Are you still above 30%?

Adam, it's -- with what's going on with J&L including things like the intangible asset amortization which isn't a onetime thing that goes away, it will be with us for the next nine to ten years, it's not apples to apples, but the core business for MSC, we're very comfortable with the [read through] and it's comparable to what we've put up in the last few years, but to aggregate the businesses now without J&L being in the comps from prior periods then even if you exclude the integration charge, you still have things like the intangible asset amortization, makes it pretty tough to draw any conclusions on a consolidated basis right now.

Jeff Germanotta, William Blair Research.

One last question, fellows.

Inventories, as you continue to integrate J&L, do you see inventory turns improving or inventory levels generally remaining higher?

Perhaps you could just give some color on how that integration (technical difficulty)[affected it].

I think in the short to intermediate term, as you think through what an integration means and in closing the warehouses there, obviously the priority is maintaining the service level, so there's an inventory build that's taking place as we speak and we'll take some time to burn off post-integration because obviously the day we flip the switch we need to maintain the service levels to the J&L and MSC customers they've become accustomed to in both businesses.

So I think you'll see, and it's starting already, a little bit of an inventory prebuild that will take some time to burn off.

I think long-term we have lots of opportunities to actually improve the inventory turns.

We'd be disappointed if they stayed at the same pre-integration levels that MSC had.

I think we're going to have to be patient and not jeopardize, of course, any service level commitments to customers.

I think you won't see any improvement of a significant nature until sometime and down the road after this integration is well behind us.

Duncan Thomas, Bear, Stearns & Co.

Could you talk about your timeline for rolling out your customer fulfillment efficiencies in your other D.C.'s?

We're actually not going to be broadcasting what our long-range planning is on our optimization initiatives.

Frankly, we're just now getting the system fully implemented.

We want to make sure that it continues to deliver to our expectations.

Certainly to date it's going to meet and in fact, we think exceed our expectations, but we want to make sure that that's kind of tried and true, that the system is absolutely stable and predictable and that in fact, we're exceeding [the] our [live] thresholds that we had originally put in place and targeted for that, and then, we've got to put it into the context of our longer range CapEx planning, which is certainly something that we're constantly doing and how that rolls through our other fulfillment centers.

And just secondly, could you talk about the training I guess of the J&L salespeople and once the IT systems are converted, will they be up to speed on sort of the MSC way of life and product catalog and ready to sell all of your product lines?

Duncan, you're hitting on a very important area.

Training is, as you can well imagine, is absolutely extensive.

We've invested in training on things like MSC culture.

There's the product offering.

There's an enormous amount of systems training depending on what functional position our associates are in and there's also training opportunities that not only go from MSC and extended to J&L, but there's also training opportunities for some of the terrific things that J&L does that will come back the other way to MSC, so it's a critical area.

It's one that we've invested heavily in.

It's one that has been taking a lot of time over the past several months and what we would continue throughout the balance of this fiscal year, especially through systems migration as it relates to systems and all.

So you can expect to see that continued emphasis and focus on training well into -- throughout the balance of this year and continuing into 2008.

At this time, there are no further questions.

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

Okay.

Well, thank you all.

Appreciate your time and all the questions and your attention today and we look forward to speaking to you all again next quarter.

This concludes today's conference.

You may now disconnect.