MSC Industrial Direct Co Inc (MSM) 2007 Q3 法說會逐字稿

Good morning.

My name is Crystal, and I will be your conference operator today.

At this time I would like to welcome everyone to the MSC Industrial Direct fiscal 2007 third-quarter investor call.

(OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the call over to Bob Joyce from Financial Dynamics.

Sir, you may begin.

Thank you and good morning, everyone.

This is Bob Joyce as mentioned from Financial Dynamics, and I would like to welcome you to the MSC Industrial Direct fiscal 2007 third-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 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 now take a minute to reference the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

This 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, 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 President and Chief Executive Officer, David Sandler.

Please go ahead, sir.

Thanks, Bob.

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

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

I will be providing some details on 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 will open up the phones for questions.

Third-quarter results were solid given the softness of the industrial economy.

We are pleased to have met or exceeded guidance on all key metrics in our business.

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

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

Expense control, as well as gross margin execution, was outstanding.

We also realized some tax benefits which will continue to lower our effective tax rate for the foreseeable future.

Chuck will provide some details on these items.

Overall I am very pleased with MSC's performance in the third quarter.

In general market conditions have not changed since our last call.

Those conditions were reflected in seven months of weak ISM index reports; however, the two most recent ISM indexes that were reported show that there is more optimism out there than in the previous several months.

If this trend continues and history remains an indicator for the future, then we should see business conditions start to improve in a few months time.

The optimism in the index has not yet reflected -- has not yet been reflected in ordering rates from our customers, which is consistent with historic pattern.

I recently visited with a manufacturer of electrical devices and equipment in the Southwest.

This is a fast-growing national account customer that we are looking to penetrate further.

I met with the plant manager, divisional logistics manager and the purchasing director.

They were ready for me, and as soon as the meeting began, they proceeded to take me through their strategy to reduce their cost of procuring MRO supplies.

In their presentation, they said they wanted to reduce the number of orders placed, reduce transit time for those orders, reduce inventory levels and consolidate many suppliers down to a small number.

I was thrilled to learn that they had chosen MSC to be their partner in this project.

In probing the reasons behind their decision, they explained how impressed they were by MSC's outstanding service and specifically noted how well they were supported by the local branch team and the sales rep assigned to them.

They have concluded that the MSC inventory management model fits them perfectly and is the best one out there for them.

We expect to be able to accomplish everything that this customer had outlined in their presentation to me, which should result in significant growth in our business with this customer.

This is yet another example of the strength of our value proposition and again demonstrated to me that our model is built for success in today's global marketplace.

I remain confident in our ability to outperform the rest of our sector over the long-term.

The MSC sales force was [780] at the end of Q3.

We expect that the sales force will grow to about 800 associates by the end of Q4.

We remained extremely pleased with how our integration of J&L is progressing.

We have said all along that the most critical portion of this project would be the migration of J&L to MSC's computer system.

I'm thrilled to tell you that we completed that transition over the Memorial Day weekend, and it was a great success.

Naturally with an integration of this size and complexity, there were literally thousands of project tasks to complete and issues to resolve.

While we expect to continue to make small adjustments throughout the summer, J&L orders are now being successfully processed on MSC's computer system and orders are being seamlessly shipped from MSC's fulfillment centers.

Over the summer we will finalize the integration of the J&L distribution centers and certain other functions as well into MSC.

We would like to take this opportunity to publicly thank our new MSC associates that joined us with the J&L acquisition.

We said right from the start that one of the most important assets of J&L was their team.

They have shown their professionalism, passion and capacity by continuing to sell and operate through a complex and challenging integration.

In addition, I'm extremely proud of not only how our integration team has performed in leading us through this process but how our entire organization stepped up to ensure a seamless service experience for our customers.

I want to take this opportunity to personally congratulate the entire team who made that happen at all of our locations during the integration.

I would like to provide some guidance for Q4.

At this point we think that the sales will be in the range of $442 million to $448 million, and diluted earnings per share will be in the range of $0.67 to $0.69, including a charge of $0.02 per share for J&L integration costs.

Please remember that Q4 guidance includes an extra five business days in August for MSC and J&L, as well as two additional business days in June for J&L only.

June's growth rate through Tuesday, including those two extra days, was approximately 9.3%.

Thanks and I will now turn the mike over to Chuck.

Thank you, David.

Financial results for the third quarter of fiscal 2007 were excellent.

We grew sales by 30.7% over the same quarter last year.

J&L contributed approximately 74% of that growth.

J&L's results were not in last year's third quarter.

Consolidated gross margins came in at 46.2%, in line with our expectations.

We expect consolidated gross margins to be about the same for Q4 plus or minus 20 basis points.

MSC's consolidated operating margin in Q3 was 17.5% of sales, including J&L integration costs of $1.5 million and amortization of intangibles related to J&L of $1.9 million.

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

We continued to be right on track to realize our goal of $20 million in annual savings associated with the acquisition of J&L, and I'm happy to report that J&L contributed approximately $0.01 per diluted share to earnings this quarter.

Earnings per diluted share exceeded the midpoint of our guidance range by $0.04.

Our improved operating margins and lower than anticipated interest expense accounted for approximately half the improvement, while the balance is achieved through the successful implementation of efficient tax planning strategies.

These strategies help reduced our Q3 tax rate to 37.1% and offer ongoing savings for the Company.

We also have realized some benefits from the conclusion of certain tax audits, which combined with the strategies just mentioned we have an effective tax rate for Q4 of about 36.5%.

For planning purposes a 38% tax rate can be used for fiscal '08.

Balance sheet metrics remain solid.

Annualized inventory turns were 2.9, and accounts receivable DSO's were 42 days.

Consolidated free cash flow, which we define as cash provided from operations less capital expenditures, was $44.9 million in Q3, an increase of $9.9 million over Q3 of last year.

Free cash flow has continued at its high levels, and in Q3 we paid down $30 million of borrowings on our revolving credit agreement, and in June we repaid $25 million of our term loan.

Capital expenditures were $6.7 million in Q3, in line with our expectation.

We bought back about $3 million of our stock in Q3, and approximately 2.75 million shares remain under authorization at this time.

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

(OPERATOR INSTRUCTIONS).

Dan Whang, Lehman Brothers.

The first question was regarding the revenue trends that you saw in the quarter.

I think in the operational stats you broke that down by region.

But I was wondering if you could just provide a little bit more color as to what your -- the trends that you're seeing by the different regions and any additional details around in particular end markets that you're seeing out there?

Sure, Dan.

It is David.

In general, what you saw throughout the region is that the manufacturing base is continuing to have a drag based on a slower manufacturing economy.

We continue to see conditions pretty much the same as what we saw last quarter and we have been experiencing throughout the year, which is causing that -- those growth rate declines.

You will notice in the Northeast that flow of growth is really because the greatest concentration that we have in the durables portion of manufacturing, which is the one that has been hardest hit, the greatest concentration there is what is yielding the Northeast.

And that is while you're seeing that at a rate slower than the other regions.

In the West I think you will see that the benefit of our investments continue to pay off, and we are doing quite well there.

I'm very excited about how our program continues to take shape out West.

I think the other thing that is threaded in general throughout our growth is not only the manufacturing, the drag from the manufacturing sector, but also the fact that we have been so focused on the J&L integration that certainly that distraction factor has certainly had some impact on our overall growth rate at both companies.

It is difficult to quantify, but certainly it is threaded in there and one that we're very pleased to now have the systems migration integration behind us.

Right.

So actually along those lines, it seems like much of the heavy lifting on the J&L effort is coming to a close.

Would you say that that effort is 80% done at this point?

As you mentioned, I think you probably need to shift over some of the warehouse processes over completely and shut down the DC at J&L.

But I guess you would have some of the resources becoming reallocated to focus on the growth avenue?

Yes, I would certainly characterize the systems migration portion of the integration, the heavy lifting as you call it, is absolutely behind us.

The team, I could not be more proud of the just tremendous job that everyone throughout the organization did.

They did a terrific job on integrating the system.

So while we are continuing to focus on items from the integration that we were not able to get to in the first-round, we do expect that to wind down throughout the summer, and we're able to now focus on the summer and into the fall on really ramping up our focus on growing the business.

Now that we're able to turn that focus, although we will continue to do that through the summer, we will begin to really now focus on selling MRO products to those customers that we acquired from J&L, and we're very excited about how that will bode.

But there's still -- although the heavy lifting is behind us, we've certainly still got work to do through the summer and into the fall on training and cleaning up what I will call the balance of the details on the final phases of the systems migration.

Okay.

And along those lines, I mean with these activities kind of slowing down, at what point do you think operationally you would be ready to perhaps work on another acquisition?

And also related to that, I think J&L has about 10% of their revenue base over in the UK.

Obviously their economy, the European economy is doing quite well.

What are some of the opportunities in that part of the world?

I mean could you expand on that organically or through acquisitions?

I guess a two-part question.

First of all, on the acquisition, as I said, we're going to continue to stay focused certainly through the summer on the final details of this phase of the integration that we have been focused on and successfully completed over the last month or so, but certainly our strategic planning process continues.

In fact, we have got a lot of time scheduled for the summer to go back examining another year our five-year plan where we get very granular over the next year and, frankly, examine where we think our best opportunities are.

Certainly acquisitions is now back on the radar as one of those opportunities, although I will tell you as with the case with J&L, we've got a high bar for an acquisition and want to ensure that anything that we would do, we think is going to position us to be a better Company years out than we were today, which is exactly the standard we use for J&L.

So that process continues and is part of our strategic planning and gets baked in.

And I guess part two of the question was on Europe.

We have got a terrific team out there, and you are right, while it is a small part of our business today, we learn more and more everyday.

Part of what we learn is that the opportunity in the UK and in Europe is terrific for us.

It is not something that we're currently focused on taking advantage of today, but again as I say, between learning about the opportunity and being able to leverage the capability of a great team in the UK, we're really excited about what that will mean in our future plans.

Jeff Germanotta, William Blair.

Can you shed a little light on some of the costs that are going to to go away associated with the integration of systems?

Is there an incremental expenditure reduction, not having to rent those systems from Kennametal?

And what that might translate to in terms of incremental operating margins going forward now that we have lapped or are about to lap the anniversary date of the J&L acquisition?

Clearly part of the $20 million worth of synergies that we anticipated achieving would come about post-integration from systems migration.

Specifically related to systems themselves, I think as some of you may know we have been running J&L on the Kennametal platform up until the Memorial Day conversion, and obviously there was a significant cost associated with that that is now being eliminated with some minimal investments on our part from a CapEx point of view to sustain and care that volume over to our systems.

But clearly net net a pretty sizable savings from that as well.

In addition to the integration, someone spoke earlier about the DCs and so forth.

There's obviously some savings associated both with facilities and freight.

Given that the business now is being run on the MSC system and served that of CFC's here at MSC, and I think as that annualizes and the total impact of that as cost savings become apparent next year without the significant integration expenses associated with it, yes, they will be accretive and certainly add to our operating performance moving forward.

And to follow up, do you expect incremental margins to start to rise now that we're passed the anniversary date for J&L?

I think, Jeff, clearly if there was no incremental investing going on, that would absolutely be the case.

But, as you know, we kind of balance the short-term with the long-term here.

I think our goal is to certainly continue to tweak the operating margin up, and realizing the J&L synergies will certainly help that.

But we would also consider redeploying a fair amount of that back into additional growth drivers, which would keep our margins, you know, improving slightly but certainly not at the rate they have improved over the last two years.

You have also had some non-recurring costs to the tune of maybe a penny or two a share for a couple of quarters with respect to integration.

Will we still see some of that going forward as you collapse the distribution center structure?

Just in Q4, Jeff.

There is $0.02 planned in Q4, which is really the cleanup, the pick, pack, ship of the J&L inventory to the MSC facilities.

It was prudent obviously to extend the agreement for an extra month or so with Kennametal just in case the Memorial Day weekend did not go as well as planned.

Obviously it did.

Those are the types of expenses that make up the $0.02 worth of integration costs in Q4.

They should be done and over with, and we do not anticipate onetime integration costs moving forward as we begin fiscal year '08.

And then the last question and I will let somebody else have a turn.

Assuming there's not another immediate acquisition, cash flow should continue to be very, very strong.

Will debt reduction be the priority or might we see share repurchases and/or a dividend?

Jeff, a combination of all three actually.

You have seen last quarter we increased the dividend in large part based on our confidence and our strong cash flow.

This quarter you happen to see us buy a little bit of stock back and pay down debt.

So return on capital to shareholders has been important for us.

I think you have seen in the last two years we have returned about $400 million or so between dividends and repurchases.

We would expect that to continue moving forward as well as obviously paying off the debt, which we have been able to accelerate a little bit given our strong cash flow.

Holden Lewis, BB&T.

Obviously when you made the acquisition back in Q4 of '06, I think you had sort of a blended operating margin of 16.3%.

Based on your guidance, you are sort of looking for something I assume in Q4 of '07 between 17.5% and 18%.

Can you give a sense of how much of that increase, that 150 basis points or so increase is due specifically to the J&L benefit and how much of it is due to sort of organic and internal operational improvement?

The J&L plan and its contribution is almost exactly where we said it was going to be.

We forecasted $20 million in savings and had that basically broken out by year.

And what we are realizing currently in the current operating margin, which is roughly $8 million of the $20 million worth of synergies to actually occur this year in fiscal year '07 is actually materializing.

So that is on schedule.

For us in total to be ahead of schedule is really driven by the core based business of MSC actually having improved margins a little bit quicker than we realized when we had talked about getting back to kind of the combined operating margin being at the old MSC margins by the end of '08.

We're actually a year ahead of schedule, but not to be misinterpreted that the J&L acquisition is way ahead.

It is primarily the J&L acquisition, and its savings are on schedule, and the core underlying MSC business has actually improved.

So to answer your question, the improvement is really organically as opposed to being ahead of the curve on the J&L side.

Okay.

And I think that when you acquired J&L, you were sort of viewed as being at a 17.5%, 18% type organic margin level.

Do you have a sense at what you're running at organically at this point?

Have you become a 19 or 20 type of margin company?

No, it is tough to tell because the overlap throughout the quarter course of the year has blurred.

There are sales occurring from the field sales associates in J&L that are MSC type products that are starting to take place to segregate and split this out down to an operating margin by J&L separate from MSC.

In aggregate, we're confident in kind of the answer I gave you to the last question.

But there's clearly improvement from where we were running organically before the acquisition on the MSC side, and the J&L business is exactly where we thought it would be give the savings are right on schedule.

And what has driven the core improvement?

Is it a handful of little things, or are there some things that you can point to that in the last year have been meaningful, whether it be source or any other sort of major initiatives that we can sort of reference and look at?

Sure.

I think up until recently the gross margin improvement we have seen has been obviously a reasonably fertile pricing environment.

There has been inflation that allows us to take advantage on the margin side and pass those costs along.

We have done some hard what we call buy better work in terms of actually squeezing costs out both on the gross margin and the OpEx side.

We talked in prior calls about starting to realize the benefits of our CFC optimization project that is actually now starting to show up in our results.

It is a combination of lots of those things that have continued to take that MSC margin to higher levels.

Okay.

And then sort of the other thing that is hanging out there from J&L is you had commented on cross-selling opportunities that you really had not built into that 20 million.

Now that you've got this system behind us, are we going to start to see those starting to bear fruit, and what evidence do we have that would suggest that we can start to farm some of those cross-selling synergies?

Where the systems migration gives us the ability, as you said, to really provide the platform for us to begin to really harvest and mine those cross-selling opportunities, we're going to be focused on continuing training in the summer and in the fall, and we're really excited about MRO product really beginning to sell.

And as they -- not only as we complete training but as we begin to assimilate the businesses and assimilate associates really being comfortable selling those products, which I suspect will be a process that actually builds throughout '08.

It will certainly begin early in '08 and should build throughout the year.

(OPERATOR INSTRUCTIONS).

Brent Rakers, Morgan Keegan.

I was hoping you could maybe give us a little bit more detail on the monthly progression.

By my calculations it kind of shakes out at about 9%, 5% internal growth in May and then back to maybe 8 or so in June.

I was hoping maybe you could spend some more talking about what happened with May, how that possibly ties into the integration.

Because it looks like it probably happened more on the MSC side than the J&L side.

It is very hard to be able to pinpoint by month given the accumulated effects of all of the work and I will call it the distraction factor really both at J&L as well as MSC.

So there is one thing that has been going on that has affected us throughout the year, certainly throughout the quarter.

And if you take a look at June, you probably are looking at a similar slightly better June to date than what you saw in May but pretty similar to the rest of the quarter.

And not far off from the same range that our guidance is for Q4, which I think all-in-all says that pretty much the business and the growth rate given the customer conditions that we see is kind of holding steady at the point that it is right now.

David, to maybe take that a little bit different way, is there anything in terms of end customer demand whether it is manufacturing, nonmanufacturing, that might help explain some of the variability in the monthly numbers in the quarter?

Actually there is -- nonmanufacturing has been growing, as you see from the numbers that we report, quite solidly.

Within manufacturing, although we report the aggregate number as total manufacturing, we break it down internally into heavy and light.

Heavy being described as durables, and where we see durables, I mean it is quite a significant change in the difference between what we see even within manufacturing, the drag from durable goods manufacturing is very apparent, and you see that in our growth rate as well.

Great.

And then I guess back to the synergy targets and you guys talked about the $8 million this year and the $20 million target I think you are really talking now about next year.

I guess first, is that correct?

Because I don't know if you had given -- you usually had focused on 2009 as hitting the full $20 million?

Right.

It should be $8 million recognized this year, an incremental 10 for a total of 18 of the 20 for next year.

And then the back end, that will be probably a couple of million bucks that probably coincides with the release of our Big Book for '09 that would probably put another $2 million or so on the margin side into the numbers.

Is there any more specifics you could provide in terms of the timing of the DC, official DC closings, and also maybe when there would be a small reduction in the staffing levels as a result of that?

Actually we are servicing as we speak today and it was the case since we flipped the switch Memorial Day that following Tuesday, we were shipping and servicing J&L customers from MSC locations.

So there's no active ongoing customer shipments from the DCs supporting the bulk of the J&L volume that is out there.

So the bulk of the efforts to finish up here, of course, there is still inventory that is in the DCs that needs to be picked, packed and shipped to the MSC warehouses.

The DC's need to be put back in the condition they were when the original lease was taking place and so forth.

Those are the type of expenses that would be around and are actually part of the integration expenses that we talk about when we reference $0.02 a share or so in Q4.

That should be perfectly clean and cut off and would anticipate again right out the gate with the first day of '08 that there would be no more the onetime unusual type expenses.

Okay.

Any comments at all on the inflation contribution year-over-year in the quarter and maybe in terms of what you're seeing with product costs where the new catalog might come out in terms of price increase?

Sure.

I guess I will break down -- probably the best way to do that is to break down our growth.

As we said in the script, that 74% of our total growth was attributable to J&L, leaving a remainder of the growth at 26%.

And now let me break down the remainder, which speaks of the pricing question.

So of the remainder of growth at J&L, 34% came from pricing, which was the cumulative effect of all pricing actions that we have taken.

46% came from our large customer segment, and the balance roughly 20%, came from all other components of the business.

So I guess that answers the pricing question.

And then just to give you a little bit of flavor on the environment, I would say that I would characterize it is generally stable, pretty much stable as we have seen for the last several months.

I will tell you that we continue to see some pockets of volatility.

Any (inaudible) continues to raise it, frankly, raise the (inaudible) we had in terms of pricing products, things like plastics, and we also continue to see some raw materials-related products also continuing to have volatility.

Things like molybdenum, nickel, copper continue to be volatile.

Fortunately we have been able to maintain our ability to pass through pricing to the marketplace given the strength of our model.

We are also getting the benefit of those increases that don't get passed along through by our preferred suppliers, which is generally the way that -- one of the ways that they maintain a preferred position is holding their cost increases, frankly, to zero or close to zero.

Thank you very much.

That is very helpful.

Dan Leben, Robert W.

Baird.

I just wanted to follow-up little bit on the Harrisburg DC optimization.

Could you talk about where we are at in that process and some of the savings that you have seen from that so far and then in looking forward to any plans after all the J&L integration is completed to roll that out to some of the other locations?

The project has substantially been completed and implemented, and we started to realize somewhat in the third quarter with continued acceleration of savings through Q4 and ongoing pretty sizable savings in terms of optimizing the whole process of the merchandise selection and the shipment out the back door.

Clearly the plan would be over the course of the next couple of years to roll that same type project out to other facilities.

There are some warehouse expansions and some other things planned, and we will have to coordinate the timing of that.

But it will not be a one fell swoop where we knock off the remaining three large facilities in one year.

It will be time phased, if you will, over the next couple of years, and we would anticipate similar type savings in those areas as well.

Okay, great.

And then looking at with the system being changed over on the J&L site, do you have any metrics in place to measure the selling of MRO products to J&L customers, or are there any sales incentives that you have built in there to try and ramp those synergies up quicker?

No sales incentives because we would not want to drive bad behavior either through our sales force or through the customers.

Certainly we've got a lot of internal metrics that let us track our progress, and we're training as we speak.

We will be training through the summer.

Turning on different aspects of our growth drivers, different parts of our growth driving community at J&L, we will be staffing up and selling more and more products.

And that process will really be concentrated from a training perspective through the balance of the summer and early into the fall, and then we will begin to see the fruits of our labor really progressing throughout '08 as associates get more and more comfortable, and their customers get more and more comfortable calling on J&L for those types of products.

Adam Uhlman, Cleveland Research.

Adam, we do not hear you.

Crystal, we cannot hear Adam.

Just one moment, sir.

Can you hear me now?

On the systems changeover, I guess the first question I had for you here was on the SG&A line for the quarter.

It sounds like (inaudible) came in a little bit better as expected.

This is puzzling given the (inaudible) that was due on the J&L business, along with the fact that your sales force position has been coming in higher-than-expected over the last couple of quarters.

So could you walk me through some of the drivers on the SG&A line?

What are you seeing in freight expense, medical expense, etc.?

You hit on two big ones right out the gate.

Medical expense is actually I will categorize it as it has behaved fairly well.

It is very expensive for us, but we're self-insured to the extent that you're fortunate and have less large claims at any given period versus another period.

The medical expenses are cheaper.

You never want to get in the position to try to forecast very little to no claims, but clearly medical was a piece of the driver in the quarter relative to what we had said that guidance that helped us with that.

The other piece that is significant too, by the way, is again this Harrisburg optimization project.

We have talked about that a little bit, but we had a fair amount of associate buildup, if you will, to handle the J&L volume.

That was over the course of the quarter we had anticipated building up fairly significantly in our CFCs to handle the J&L volume the day after we flipped the switch.

And, frankly, some of the productivity from our optimization project put us in a position to recognize and have to add fewer associates and fewer direct labor expenses, if you will, to support that volume.

So clearly a piece of the improvement was a reduction in integration charges.

They were only $0.01 versus the $0.02 we had projected for the quarter, largely driven by our productivity gains in other areas afford us the opportunity to not have to add it to the extent we originally anticipated to support that volume.

And then freight, to your point you have got to be careful with freight given that the volatility with oil and surcharges and so on and so forth, but our freight team and our logistics team have done a nice job given the environment we have to actually manage that through a very reasonable situation that actually put us in a position to save a little bit more money on freight than we anticipated when we set the guidance.

So it is kind of those three areas in conjunction with a significantly less debt.

We talked about the paydowns and the savings on the interest expense, probably kicked in a $0.05, and the other $0.02 came from the tax rate.

Okay.

Thanks, Chuck.

That is helpful.

And I guess just a clarification.

A moment ago you were discussing the sales by manufacturing industries.

I guess within the durables sector, are you to actually seeing sales decline to that sector of your business of the manufacturing business?

When you say sales decline, what we're seeing is a slower growth rate than in other customer segments.

In fact, that is the durables manufacturing has absolutely been the hardest hit.

Certainly we are seeing growth there, but much slower growth.

Duncan Thomas, Bear Stearns.

Actually to piggyback on Adam's question, durable goods clearly moderated in the quarter.

Is that built in to your fourth-quarter sales guidance further moderation?

Yes, it is built in.

We have taken all of the trends that we see and have gone through our normal forecasting process to produce the very best guidance that we can.

Certainly the continued slowness in that sector is factored into our guidance.

Okay.

You are not factoring in any hiccup that you're seeing in the ISM just to clarify?

Yes, and just to clarify you're absolutely right.

We are not factoring it in.

I will tell you that given historic patterns, we have had two very positive ISM data points.

The last two we're pleased to see have been very positive considering the seven previous (inaudible) on what I will call baseline of growth to contraction.

We are hopeful, although we won't predict what the next couple will bring, but historically as a leading indicator, once we get several months of solid ISM, it gives us real room for encouragement in terms of business conditions actually changing.

So it really starts with an air of optimism, which I would say is the way to characterize what we're hearing from our customer base now.

Optimism but not having order flows actually changing.

And if the ISM continues, then that optimism is actually followed by customer order flows, which, therefore, translates into our business for business conditions picking up.

And if it continues, we would hope if the ISM continues to remain at the positive level that it has over the last couple through the summer, we would certainly expect business conditions to improve in Q1 of next year.

Holden Lewis, BB&T.

We cannot hear you.

That question has been withdrawn.

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

Okay.

Thanks, Crystal.

Thank you all for joining us today, and we look forward to speaking to you again next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.