MSC Industrial Direct Co Inc (MSM) 2007 Q4 法說會逐字稿

Good morning.

At this time I would like to welcome everyone to the MSC Industrial Direct fourth-quarter fiscal 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 FD.

Thank you.

Sir, you may begin your conference.

Thank you and good morning, everyone.

I would like to welcome you to the MSC Industrial Direct fiscal 2007 fourth-quarter results conference call.

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

If you have not received a copy, 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 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 assurances 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'd 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 Willey, Executive Vice President and CFO; and Shelley Boxer, Vice President of Finance.

I'll be providing some details on the quarter, market conditions along with updates on J&L and our West Coast growth initiative.

Chuck will provide details on the financial results, including our thoughts on gross margin, operating expenses and how we will handle J&L in our website metrics.

After my closing remarks, we will open the lines for questions.

Fourth-quarter results were solid, given the mixed state of the economy.

We continue to be pleased with our progress on J&L and have successfully executed on our fourth-quarter plan to complete the integration and absorption of the J&L back office and distribution centers.

We're also making solid progress on our plan to train and acclimate the J&L sales force in selling MRO products and other MSC brands to our J&L customer base.

We are beginning to see progress on this initiative.

This is a process that will take time, and we expect that the results will continue to build throughout the year.

We're 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 the upper end of our guidance for both sales and earnings, and operating margins were slightly better than forecast.

Expense control as well as gross margin execution continue to be outstanding.

Overall, I'm very pleased with MSC's performance in the fourth quarter.

In general, the market is reasonably solid with pockets of strength and pockets of weakness.

Since our last call, we have generally heard an optimistic tone from our customers, although tempered by their concern over the liquidity crunch, oil prices and the possibility of another slowdown or even a recession.

Customer order flows have remained steady.

The ISM remains in positive territory, although the two most recent readings have moderated versus the preceding four readings.

While the ISM points to growth, there are other conflicting indicators at this point such as [we durables] orders and a weak housing market.

We have factored this market information into our guidance for Q1 along with our plans to continue to invest in future growth.

Chuck will add some more color to this later on in his portion.

We continue to execute on our plans to penetrate the Western region of the United States and are in the process of opening three new sales offices -- Seattle, Portland and Salt Lake City.

We believe that we're just beginning to take advantage of the huge sales opportunity that exists in the Western United States.

Of course, we're continuing to grow our sales force in the balance of the United States as well.

The MSC sales force grew to 814 at the end of Q4, and we expect that the sales force will grow to about 840 associates by the end of Q1.

Last quarter, we reported on the successful migration of J&L to MSC's computer systems.

During the summer months we completed the absorption of J&L support functions into MSC.

The estimated cost savings are now being realized and are included in our guidance for Q1 results.

We are in the process of optimizing the customer experience to bring the best of MSC and J&L to all of our customers.

At this point I am unable to share details, due to competitive reasons.

But we're confident that the result will be a service model that's even better than the industry-leading model that we currently have in place and will help to drive growth well into the future.

I saw some of the results of the combination of MSC and J&L during our recent customer visit in the Midwest.

This customer has been a J&L customer for many years.

They have relied upon J&L for the bulk of their metalworking supplies and have enjoyed ongoing savings from J&L's value-added solutions.

The field sales associate serving this account has continued to bring value to them since our acquisition of J&L.

The customer's plant manager sees the combination of our two companies as a very powerful one.

The addition of MSC's huge SKU base, CMI/VMI tools and access to many more quality private-label and branded products to the J&L package has positioned our Company to further penetrate this account.

The customer trusts us to solve their problems and reduce their costs.

In the last year our business with them has grown about 60%, and our expectation is to see continued strong growth as we install DMI in their [Tool Crib] and begin to introduce the complete range of MRO products into their plant.

Once again, my customer visits have shown me how well-positioned MSC is for the future.

I would like to provide some guidance for Q1.

At this point, we think that sales will be in the range of 435 to $441 million and diluted earnings per share will be in the range of $0.68 to $0.70.

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

Thanks, David.

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

As a reminder, the fourth quarter of this year included an extra week as compared to last year.

This happens every five years as we true up our fiscal year to the last weekend in August.

Gross margin came in at 46.1%, within our guidance range.

I think that it's important to review the components which impact our gross margin, as the environment this year will likely be a bit more challenging.

The drivers of gross margin are the following.

Number one, customer mix.

As we grow our margin account program more quickly than other customer segments, we experience a diluted effect on gross margin.

Number two, the degree of inflation has an impact on gross margin.

We think that this year's inflation effects will be mild, and it will see less impact from pricing that we have seen in the past few years.

Number three, our aggressive buy-better programs, which includes focus on private brand, better structured growth programs with key brands and our e-auction program for commodities have an accretive impact on gross margin.

Number four, product mix.

As you know, some of our product lines carry higher margin than others.

We think we have a solid process for forecasting and managing the major components of gross margin and a solid track record for delivering results.

As we noted, we think that this year will be a bit more challenging, and accordingly we think that gross margin for all of fiscal year 2008 will be 46.2%, plus or minus 20 basis points.

We continue to experience ongoing success in our efforts to manage our operating expenses.

Our headcount remains under control.

We realized some benefits in the health cost area, and J&L integration expenses were somewhat less than expected in Q4.

We expect there would not be any J&L integration expenses in the future.

MSC's consolidated operating margin in Q4 was 17% of sales, including J&L integration costs of $1.4 million and amortization of intangibles related to J&L of $1.9 million.

Earnings per diluted share exceeded the top of our guidance range by $0.02.

Benefits from exceptional operating cost management account for much of this.

Our expectation was for Q4 operating margin expressed as a percentage of sales to decline slightly from Q3, reflecting the higher levels of investment spending that began at the end of Q2 of 2007.

We intend to continue to invest at these higher levels in areas such as our sales force throughout fiscal-year 2008.

Even with this investment, our expectation is that operating margin in Q1 will increase from Q4 levels as we increase productivity, generate leverage in the business and realize the anticipated cost synergies and savings from J&L.

Balance-sheet metrics remain solid.

Annualized inventory turns were 2.95, and Accounts Receivable DSOs were 43 days.

Consolidated free cash flow, which we define as cash provided from operations with capital expenditures, was $34.8 million in Q4 and $138.7 million for fiscal 2007.

Free cash flow has continued at high levels, and in Q4 we paid down $25 million of borrowings under our term loan and purchased $11.1 million of our stock in the open market.

For all of fiscal year 2007 we purchased $75.2 million of our stock.

Capital expenditures were $5 million in Q4, in line with our expectations, and totaled $26.5 million for the year.

Total cap ex for fiscal 2008 is expected to be about the same.

Before turning the microphone back to David, I would like to make mention of our business metrics on mscdirect.com.

As promised, we have included J&L in the metrics for Q4.

We did substantial amounts of work following systems conversion in May to get comfortable with the data and to make certain judgments about what we should be including.

We decided to leave out the effect of the UK operation, as that business is not operated in the same manner as the US business.

Similarly, we have excluded the J&L call centers from the call center metrics, as those metrics are not relevant to the J&L call center experience.

We were also very thorough in illuminating the overlap in customers from the count of active customers.

If one entity did only $1 in business with a customer of the other entity, we only counted that customer once.

With a large increase in the number of active customers, it's clear that there's a huge opportunity in the J&L customer base.

Thank you, and now I'll turn it back over to David.

Thanks, Chuck.

I'd like to thank all of our associates for all their efforts and the outstanding results which they produced in fiscal-year 2007.

We set new records for sales, profits, profitability and cash flow.

During the successful integration of our largest acquisition ever, the service experience to our customers never faltered and in fact reached new heights.

We expanded our foot print in the West, invested substantially in our future and continued to demonstrate the strength of our model in terms of share gain and in leverage.

On behalf of all of our stakeholders, I offer a heart-felt thank you and well done to all of our associates.

Thanks, everyone.

Now I'll open up the line for questions.

(OPERATOR INSTRUCTIONS).

David Manthey, Robert W.

Baird.

A couple questions on the tone of business.

I was wondering if you could talk about what you saw in the pace of business and the trajectory in September and October versus what you saw in August.

It looks like things picked up, and I'm wondering if that's just comps or if there was some underlying strength there.

Very tough to certainly characterize the four weeks of August.

It's one of the two very heavy vacation months.

So I can't say that the tone, frankly, was meaningfully different from our customers during that period versus what we are really seeing right now.

So in general, customers, based on the segment that they are in generally have an optimistic tone.

The environment is reasonably solid.

Again, that's depending on which customer you go into really depends on how they are feeling.

But the other thing going on here, obviously, is what is happening more in the macro, and that's also in customers' minds.

Could you remind us, as far as pricing in the Big Book, I think you had previously said you thought you would achieve 1%, and I don't remember if that was for fiscal 2007 or what you expected for fiscal 2008.

Could you talk about pricing in both years?

Sure.

I'll talk about it, I guess, in the quarter, and I'll also talk about the Big Book.

The Big Book was basically if you add items one by one by one, basically we took a little over a 1% increase, 1, 1.25% or so.

Then in the quarter, the impact of pricing was roughly, of the 8% growth on an ADS basis, of that growth, roughly 2 to 3% came from the cumulative effect of pricing throughout the year.

And the 1% to 1.25% is for fiscal 2008?

It's for fiscal 2008, specifically what you saw for an increase in September's Big Book.

And a final question on margins at J&L, gross margins.

Could you remind me, in terms of how those compare relative to core MSC margin, is there any material difference?

Now that the business is integrated and the purchasing and so forth is being done, obviously, here that accommodate all customers that are currently buying from MSC, J&L or otherwise.

We had realized and had baked into our forecast that there would be substantial margin improvement both on the growth side and the operating side.

We feel confident right now at post integration, we have achieved all the savings we said we were going to achieve.

Having said that, we do see that the margins between J&L and MSC -- historically, J&L has been lower.

We have achieved, as Chuck said, many of the improvements that we expected.

We don't characterize beyond that.

But your point about them being different -- they are different.

Daniel Whang, Lehman Brothers.

Good morning.

First question was regarding some of the geographic trends that you saw in the quarter.

I think there is some strengthening, particularly in the Northeast, and maybe a little bit of softening in the Southeast.

Could you perhaps go through some of the drivers behind those regional trends?

Throughout all of the regions, certainly one of the drivers is our concentration in manufacturing.

You could see on our website stats that manufacturing was at a significantly lower growth rate than our non-manufacturing business.

But then, within manufacturing, the two major components there are what we'll call heavy versus light manufacturing.

We don't break it out, but it's certainly something that we watch very closely internally.

Heavy manufacturing is actually durable goods manufacturing, and generally we've seen that durable goods manufacturing has been far more heavily hit in terms of softness than the broader manufacturing economy.

Where you're seeing concentrated pockets of durables throughout our region, you'll generally see that our region has been more or less affected in their growth rates.

Having said that, for example, in the Northeast you will notice that the growth rate there has actually picked up.

Given that the Northeast is our most heavily concentrated in manufacturing and specifically in durables, you may come back to me and say, David, I don't understand what you just said.

Based on your explanation, it should be down.

Well, the other thing that we talked about is that, while we don't publicly discuss what customer segments are up and down, the Northeast specifically has a couple of segments within durable goods manufacturing that are, frankly, very hot right now and we are taking advantage of the growth.

Switching over to the J&L, you're making great progress there.

Some of the backroom DC-related integration efforts are complete, focusing on cross selling.

In terms of potential use of free cash that's generated and how another acquisition might play in, could you just comment around that?

If the right opportunity came along at the right price, would you consider another acquisition of something as sizable as J&L, or would it be more kind of a bolt-on?

In our strategic process, first of all, I guess the short answer is we absolutely would consider an acquisition, either smaller -- an acquisition the size of J&L or frankly perhaps even one larger.

The way that we'd make that decision is that, as we look at our strategic plan of the next five years, the acquisition candidate would have to meet a very high bar, as did J&L, in terms of putting the business both in a better strategic position and in driving our results over the next five years, better than if we had not made the acquisition.

Scott Graham, Bear Stearns.

Good morning.

We have several questions for you.

The inventory number -- I know that that was run up a little bit because of the integration of J&L, because of the warehouse stuff and the need to maintain service rates.

When can we see that number start to come down?

I think you'll see for the short term that we have been very cautious with protecting fill rates for customers and have actually used some of that inventory and increased it, actually, to help protect fill rates and make sure that we absolutely ensure the service experience is the absolute best for the customer.

I think it will be towards the latter part of the year when you actually see us start to significantly -- we make progress on that inventory number.

Right now, as you can see from the cash flow and the balance sheet, there has been an inventory build, and we certainly think over time that number will be coming down.

But I would not say it's imminent in the next month or two.

But it shouldn't go up higher?

Again, we're looking at fill rates and balancing those decisions.

I don't want to sit here in an absolute vacuum and say that it's not going to be up any higher.

But for sure, over time, it the turn should improve and we should be making progress in taking that number down.

On the national accounts, could you tell us what that contributed?

For competitive reasons, that's not a segment or statistic that we break out.

Certainly, we measure it internally, but it isn't one that we talk about.

I think you may be talking percent of growth.

(multiple speakers) I can give you those --

Yes.

It's a large number -- large accounts.

Large accounts accounted for 43% in the growth.

David talked about pricing before; that was roughly 29% in the growth, and pure volume was about 28% of the growth when you look at those numbers on an average daily sales basis.

Share repurchases in the quarter, I saw, were about $11 million.

What's left?

And is there a new authorization, potentially, being sought by you guys with the Board?

There are still 2.5 million shares left on the authorization, so there's plenty of run room there.

If we were to go back to the Board, I don't think we would meet with any resistance.

Did you ask anything else?

I do have one more.

On the J&L savings, how will that roll through gross margin versus operating expenses, do you anticipate?

That's split about 50-50.

I'll give you some numbers for the recent quarter in the full year.

In Q4 alone, there was about $5 million of synergies that we expected to see out of J&L.

That was split pretty much 50-50 between gross margin and operating expense.

For all of 2007 including the $5 million for Q4, there was roughly $10 million worth of synergies in there.

Again, that was split roughly 50-50.

As you know, we have commented publicly that we expected to achieve 20, and you should certainly see the full $20 million in fiscal year 2008.

We weighted a little bit more, about 60% OpEx, 40% margin, the difference being, rolling forward, the integration savings and back office savings that we have experience in Q4 obviously will be annualized, and we will have the full year benefit of all 12 months of those savings.

And I think that's why the OpEx portion ramps up a little bit higher.

Jeffrey Germanotta, William Blair.

I'd like to explore some of the levers to the income statement for a bit.

If we look back over the last several years, a lot of the earnings growth has been gross margin derived.

It sounds like, or maybe I misunderstand, that it will be less gross margin derived going forward and more dependent on sales volume and further harvesting SG&A synergies out of the J&L acquisition.

Is that correct?

And if so, can we talk about some of those levers a little bit?

That's absolutely correct.

As you heard, we gave guidance that we thought the margin, for all practical purposes, would be plus or minus were it is about right now, given the less fertile pricing environment that we anticipate next year, which, as you know, has generally been good in terms of expansion of gross margin.

That being said, the operating margins are improving year over year.

We would expect them to continue to improve with some of the productivity plans we have in place, the full-year realization of the J&L savings I just mentioned.

I think a key element to consider, though, as you can see from the headcount increase in terms of investing for sales, is that there's a higher level of OpEx associated with those investments.

Our fourth-quarter hiring was, from an absolute number of folks broad with us was our highest quarter, and obviously that OpEx is reading through the P&L in Q1 and beyond.

WE will continue to invest at those higher levels.

So operating margins would continue to improve, but they would be at a much smaller pace then perhaps you seen in the past, partially because we're aggressively investing for sales growth for the future.

Can you talk a little bit about productivity of your core sales base and then the productivity you expect out of the incremental hires?

We've talked a lot about the information that we make public, and we know that it's very tough for you to get underneath the classes, which is something that we measure, to really understand productivity.

Certainly, we're seeing continued productivity improvements of our collective team.

I will tell you that in this environment we don't get as much productivity as we would like, although the improvements certainly continue.

As we've always talked about from our new members of the team, new associates, it does take time to ramp up.

And you see the effects on our P&L of heavy investment spending.

They are dilutive.

They are dilutive in the short-term, but as time goes on they become accretive and critically important to driving growth and also critically important to driving profitability in the business.

But near-term, certainly, they have a dilutive effect.

Are you publicly talking about any targets for your incremental operating profit margin, as you have from time to time in the past?

We are not.

What we publicly talk about is the fact that we have achieved -- we have used our read-through tools to achieve the levels of profitability that we are right now, which is in the high teens.

From here, our plan is to incrementally continue to expand our operating margin, frankly, albeit at a much more moderate pace than what you have seen us do over the last few years.

I think it is fair to say this, though.

From the guidance that we have just given, at least for the first quarter, we have given sales guidance, we have given you gross margin guidance.

It's not real hard to figure out that the operating margins are definitely expanding in Q1, even with this higher level of investment spending.

Certainly, it's a much higher level of investment spending in the P&L for Q1 versus Q4, and despite that the operating margins continue to expand without any incremental help, if you will, from the gross margin line.

So yes, there's still plenty of leverage left in the business, and margins continue to expand.

Last point, to double back on gross margin.

Certainly, what we have characterized and tried to help provide some guidance on is what we see for this fiscal year.

Obviously, that's as far out as we would be comfortable going with our gross margin.

But remember that we're investing in many programs that will have a long-term effect on improving our margins, and that's certainly part of our long-term focus.

(OPERATOR INSTRUCTIONS).

Brent Rakers, Morgan Keegan.

Just a point, first, of clarification on an earlier comment you guys made.

In talking about the synergies at J&L, I believe you referred to a $10 million number in Q4.

Does that assume that the run rate was $2.5 million at quarter in Q4 and ramps immediately to $4.5 million starting in the next quarter?

Or how should we look at that?

Let me clarify if I was unclear.

For all of fiscal-year 2007, there were $10 million worth of J&L savings baked in the number, $5 million of which occurred in the fourth quarter.

So there had been some build throughout the year.

For example, the executive costs that we've shared previously -- they were out for the entire year in fiscal-year 2007, and there's no ramp on that.

In 2008 that was baked in the entire year for 2007 as well as being the same number for 2008.

The full year 2008 is the realization of the entire $20 million worth of savings that we committed to, that we shared with everybody in the past, when we did the acquisition.

So what you have, really, going forward into 2008 and -- it pretty much is linear in terms of $5 million a quarter to make the $20 million, is basically the savings achieved in the fourth quarter, post integration, which is a big driver behind many of the incremental savings, is now complete; you will get the full-year impact of that quarter by quarter, pretty much straight line for fiscal-year 2008 versus the way we experienced it in fiscal-year 2007, which was a small build because of the executive cost and then a big chunk dropping in, in Q4, given that the integration was complete.

And don't forget, we won't have those integration costs that we had in order to do the work, but we will continue to reflect the amortization of the intangibles into the P&L.

So basically, you extrapolate the Q4 rate into next year; you essentially realize those savings in Q4.

But now, going forward, you lose the integration expense?

Correct, which was roughly $6 million or so, $0.06 a share, throughout the entire fiscal- year 2007.

I wanted to just follow-up briefly on the gross margin adjustments or flat kind of numbers year over year for 2008.

Should we also incorporate an impact on operating costs from not extrapolating gross margin maybe 30, 40, 50 basis points higher?

Is there an impact on compensation expense, for example, of having more flattish gross margin?

No.

The plan and the way we compensate folks contemplated a gross margin in that range of 46.2.

Just to be clear, there's plenty of good things going on in gross margin.

Had we not been doing anything or would we not do anything just for, as I mentioned before, customer mix in the larger accounts growing quicker than the core, that would serve to drive margins down.

We have buy-better programs and other initiatives to mitigate that.

What we don't feel we have in 2008 anywhere near the strength we had in prior years, was this pricing environment that allows us to improve and expand gross margins based on what we saw in our ability to take price increases and pass them along.

That's the major driver, one of the more significant drivers in the maintenance of the margin.

But that aside, had nothing been going on, on cost down, margins by their own mix would have generally -- be dropping.

That has not been the case.

Last question.

Just maybe a clean-up question.

Looking through the cash-flow statement, is there anything going on with bad debt expense in the quarter?

No.

Higher volumes -- if you look at our sales growth in Q4, clearly, it was a little bit less than it was early on in the year.

We basically have not had any kind of real bad experiences.

We obviously, when you integrate a system, the customers that are left over from the integration from J&L -- there's a cleanup that has to take place there, but that's a small piece and one-time and behind us now.

But you do agree it was up on a year-over-year basis fairly significantly?

So that's a one-time clean-up related to the systems, internally?

I think some of it is systems related.

I think some of it is volume related.

Our sales were a good bit higher.

I think there's still a piece of receivables in there we provided for, that were made into the last several hundred thousand dollars of open receivables from the old J&L system is going to be difficult to go back and collect.

But I would not read into that that we've got an ongoing change in credit quality or receivables management going forward.

Adam Uhlman, Cleveland Research Company.

A question for you on the guidance first of all, on the sales growth guidance of 8 to 10% for the quarter -- for the first two months of the quarter, you're already running at the high-end of that range at 10%.

How should we be thinking about -- are you nervous about the sales progression going into November?

I guess the comps are a little bit more difficult.

But I guess, first of all, you're already running at the top end of the range.

Why the cautious comments there?

The reason for is that the one data point that none of us have yet other than, certainly, in the forecast to complete our guidance for the quarter specifically is November.

Two things going on in November that are worth noting.

First of all, we had a comp last year -- we had a pretty significant one-time government order that we're factoring in that won't reoccur this November.

The other than going on is that, in November, the way that the Thanksgiving Day holiday falls, typically what we find is that the following week after Thanksgiving, the beginning of the week is generally a bit more sluggish as customers get back with a full belly of turkey.

What is happening is that the way that it falls this year is that, that second week following Thanksgiving actually falls in this quarter, whereas last year that week fell in December; so a mismatch of quarters.

Switching back to the gross margin guidance again, not to belabor this point.

But, Chuck, you had outlined four different drivers to gross margin -- customer inflation, better-buy programs and product mix.

Keeping the gross margin flat this year, should we assume that those are -- the customer mix is the biggest headwind, and inflation is the second-biggest headwind to the performance in 2008?

For 2008, now, what we've said is that the pricing environment is very different for 2008.

I think if you want to isolate -- all those factors are moving pieces of the margin calculation.

If you want to isolate one that's significantly different than what we've seen in the last, really, 12 quarters, almost, it's that we don't right now perceive the pricing opportunity that we saw in the past.

Mild inflation has been absolutely good for us in terms of helping us to improve the gross margin.

You've seen the steady climb over the last 12 quarters.

We don't see that pricing environment being there right now, and that's the reason for the guidance of the margin or one of the major reasons, if not the biggest, for why gross margin may stay in the area it is right now.

Then the last clean-up question here.

We were talking about inventory levels earlier.

Could you talk about what your working capital targets are for the year?

Where would you like to get inventories to by the end of the year?

We didn't specifically talk about inventories and targets.

But, much like this year, I would tell you that our expectation is to turn a significant piece of our net income into cash flow from operations and provide -- last year it was in the neighborhood of 95% of the income, net income that we generated flowed through in cash.

I think that's the metric that we're looking -- is the conversion of cash without specifically giving you exact data points for where we'll be on inventory and receivables and so forth.

But a similar conversion ratio to --

Similar to last year, yes.

Robert McCarthy, Banc of America.

Can I just drill down a second?

I think you talked about in the Northeast some clients really seeing some pretty nice growth there.

Were those clients levered to a pretty active export market in terms of demand for the growth of their goods abroad?

Do you have any kind of insight into that?

To be honest, I wouldn't want to characterize, probably for two reasons.

One is that I don't want to tip my hand more than I have on what those segments might be.

The other is that there's only so much information that we really have on our customer base and any specific customer.

Certainly, a lot of the larger multinationals are -- some are having a lot of success based on the weak dollar and what's happening with the exporting environment.

I probably wouldn't want to go further than that.

Understood.

Then, just obviously we could be at the tipping point here in the US economy.

I think you've adequately highlighted some of the risks surrounding that.

Could you perhaps articulate what your rainy day strategy would be in that case, when we would start to hear about it and how it would maybe alter some of your spending patterns, some of your emphasis on investment and your pecking order in terms of capital allocation?

I'm not going to give you an exact pecking order.

I will tell you that we've had a process in place, call it our rainy day strategy, for some time.

Part of it depends on whether it's a rainy day or whether the monsoons are here for a protracted period of time, as to how we would kind of turn the dials on our business.

Certainly, we've got the ability to turn down a bit, based on the timing of some of our hiring, some of our investment hiring, some of our sales programs like direct-mail, the degree of which we are investing in our business, the degree of -- the level of investment hiring and all.

We try and gauge all of that, and we've got those dials to turn, which we do turn in the spirit of, frankly, balancing what we see, achieving short-term profitability coupled with the appropriate balance of long-term growth.

So those dials get turned, depending on what we're seeing coming around the corner.

I think we've got a -- unless something really dramatic occurred like what we saw many years ago after 9-11, I think we are able to turn those dials so that we can certainly maintain our operating margins and also maintain what we target, which is earnings growth in excess of -- significantly, actually, in excess of our revenue growth.

Have you seen any, basically, retrenchment in terms of investment by competitors or any kind of smaller competitors in terms of inventory service, etcetera, that would lead you to believe that we are entering a slower patch?

I'd rather not characterize anything that we're seeing, certainly, from some of our larger competitors.

Smaller competitors are always scrappy in a more difficult environment.

They generally only have one weapon -- that's not so; they've usually got two weapons.

But the primary is pricing; the other is the depths of their relationship.

I guess the only other kind of indicator -- and that's pretty typical of what we would see in an environment like this.

I guess the only other is that we've been extraordinarily successful in attracting new candidates to MSC.

We are, I guess, a pretty exciting place in industrial distribution, and so it has been really fertile ground for us to attract new candidates, and new members to our team.

I think that's also indicative of the environment -- being at a place where you can really count on the level of service that's going to be consistently and reliably delivered to a customer and having a value basket that, frankly, we think can't be beat.

Yvonne Varano, Jefferies.

I know J&L UK is a small part of the business, but can you just comment on what you're seeing in the markets over there, what the plans might be for that business going forward?

As we've said, we've done a lot of work through the spring and through the summer on systems migration, getting the back end fully assimilated.

The team is very focused on now beginning to train, assimilate and grow our business.

Frankly, one of the core drivers, we said, is taking the MSC product line and, in particular, our MRO line and beginning to penetrate the J&L customer base.

That's really the primary focus.

Some teams have been fully trained.

Other teams that drive growth are in varying stages of being trained.

That's a current focus, and it's something that will occur, really, throughout all of 2008.

And we think that once we're fully assimilated and trained, the growth, which is relatively small now but growing, will grow throughout all of 2008 and contribute in a much more meaningful way in fiscal 2009.

Do you see J&L UK, though, as a platform to continue to make acquisitions?

Certainly, we're not ready to comment on what we see for the UK.

We will tell you that the business very well could be a platform.

They've got a great team.

We've really got a nice little infrastructure over there.

The market, as we are learning and continue to learn, seems to be very fragmented and we think may in fact be a platform, certainly, to the UK and maybe even beyond, into Europe.

It's a bit premature.

Certainly, it's not what our current focus is, although certainly the focus of the terrific UK team and just continuing to execute their plan and grow their business.

But the bottom line is we do think that it's a really good opportunity for us, long-term, in the future.

What are you currently seeing in the UK in terms of the overall market?

Actually, their economy has been pretty good.

But we don't breakout or characterize the growth rates that we're achieving over there other than to say that we're very pleased with the results.

Adam Uhlman, Cleveland Research.

I had a couple of questions regarding the supplemental data on the website.

First of all, the Web sales category -- it looks like you added J&L and income to the numbers.

What was the growth for only mscdirect.com, on a comparable basis?

I'm looking at them, and -- do you have --

Yes.

We're not going to break that out anymore.

The Web sites do have different value statements on them.

They're all being processed together.

There is a lot of crossover buying going on now between J&L customers and MSC customers, frankly, both ways.

That's great for us, so that statistic starts to lose any real meaning.

So we're looking at the things together.

That's the way we're going to report it from now on out.

So that $115 million in a quarter, actually, on an annualized run rate -- I don't know if it shows there, but we are now at just under 26% of our business.

That growth, with the three sites on an apples-to-apples is actually about 29%, 28.8%.

So very strong growth and a very meaningful contributor in the business.

Typically, you provide a forecast of what you are thinking about direct-mail shipments pieces, either for the first quarter or out a couple of quarters.

How should we think about that in the first quarter and the out a few?

I'm actually looking to see if --

If it's not on the website -- in the past, we have included information about the rest of the year on an estimated basis.

We'll put it up again probably at the end of the first quarter.

I don't think you're looking at anything in the first quarter that's substantially different than where we have been going.

We will get that projection re-posted.

You are right; we typically do that.

Then the last question I had for you is that it looks like you had included the J&L numbers into the average transaction size as well.

Was that dilutive to your average transaction size or accretive?

Or how should we think about the underlying progression of the average order size?

It's now all blended in, but I will tell you that is dilutive to the average order size which means that obviously, since we grew, there are other factors within MSC and some of our large customer programs that drove it higher, given the fact that the J&L, when we blended in, was dilutive to it.

You have been running like 6% to 8% year-over-year growth in average transaction size for most of the year.

Do you think, on a comparable basis, we're still in that same range?

Or how would you think about that on an apples-to-apples basis?

I think I'm not going to characterize breaking it out between the two because, again, it's one of the reasons that we have been very careful to not break it out is because the accuracy of breaking out those metrics -- we don't want to go there.

There are no further questions at this time.

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

Thank you, Matthew, and thank you all for your time and your interest today.

We look forward to speaking to you next quarter.

Bye-bye.

This concludes today's MSC conference call.

You may now disconnect.