MSC Industrial Direct Co Inc (MSM) 2008 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the MSC Industrial Direct third-quarter '08 earnings conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Eric Boyriven of FD, you may begin your conference, sir.

Good morning, everyone, and welcome to the MSC Industrial Direct fiscal 2008 third-quarter results conference call.

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

If you have not received a copy, please contact our offices at 212-850-5600, and a copy will be sent to you.

An online archive of this broadcast will be available one hour after the conclusion of this call and 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 in the earnings announcement which is posted on the same website in the Investor Relations section which you may find under the tab, About MSC.

I will 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 within the meaning of US securities laws, including guidance about expected results for the next quarter; expectations regarding conversion of net income into operating cash flow; expectations regarding the Company's ability to capture market share; the Company's growth plans and expectations about the Company's ability to manage costs.

These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these statements.

Information about these risks is noted in the earnings press release and in the Risk Factors and MD&A sections of the Company's latest annual report filed with the SEC, as well as in the Company's other SEC filings.

These forward-looking statements are based on the Company's current expectations, and the Company assumes no obligation to update these statements.

Investors are cautioned not to place undue reliance on these forward-looking statements.

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 and thanks for joining us today.

Chuck Boehlke, our Executive Vice President and CFO, and Shelley Boxer, Vice President Finance, are with me today on the call.

Earnings for the third quarter were better than expected.

We were able to outperform our guidance on earnings per share as excellent cost controls more than offset the effect of a decline in our gross margin percentage.

Year-over-year sales growth in a toughening environment was 7.7% for the quarter based on ADS, and operating margins reached an all-time high of 18.5%.

I would like to share with you what our customers are telling us and provide some color on today's marketplace.

The effect of the slowing economy is generally being felt by more customers, resulting in a broader slowdown of business activity across our customer base.

In addition, customer sentiment about the future has become more negative than what we experienced last quarter.

Customers continue to be very careful about managing their own inventories and remain focused on reducing MRO inventory levels and on cost reduction.

As a result, we are seeing an increase in investment in lean manufacturing and other cost savings processes and technologies by our customers.

That should bode well for the future as MSC's business strategy is to reduce our customers' overall cost of procurement of MRO supplies through our value-added tools such as our huge product offering, electronic commerce options, VMI, CMI, etc.

Our customer surveys also show that summer slowdowns will be broader and longer in duration this year in many business segments, which we expect to have a more pronounced impact on revenue growth than last year.

We have included all of these factors into our guidance for Q4.

We have said that we take share during times such as we are experiencing now, and while on a recent trip in the Midwest, I visited with a customer that is experiencing tough times.

This customer location is part of our national account program, and historically 65% of their sales have been to the automotive industry, and that portion of their business has certainly diminished, although they are growing in the other 35% of their business.

While their total MRO purchases are down significantly, our business with this customer is up quite dramatically this year.

That is due to the tremendous cost savings that this customer described to me as they have implemented our VMI solution and consolidated their purchasing from several local competitors to MSC.

The values that MSC brings, combined with excellent execution on the part of the field sales associates and the branch team, has been rewarded with sales growth of 80% in this customer.

We are confident in the sustainability of those share gains, and when the economy turns, we expect them to translate into robust revenue growth.

This is a story I've personally seen many times during my (inaudible) travels and heard from our numerous conversations with our sales associates.

That is why I am confident that MSC will continue its track record of share gains well into the future and deliver significant revenue growth when the cycle inevitably turns.

Our growth investments continue to pay dividends as we take share and grow across all segments.

Our focus on the large customer accounts, including the government sector, continues to generate substantial growth.

We will continue our investment focus on this effort, as well as our West Coast growth initiatives.

Both of these areas represent huge opportunities for us, and we have just begun to penetrate these markets.

Our sales workforce grew to 875 associates in Q3, above our guidance as we took advantage of opportunities presented to us by market conditions.

We expect to finish the year at roughly 895 associates, representing 10% growth in the sales force in fiscal 2008.

I would like to give some guidance for the fourth quarter.

As a reminder, this year's fourth quarter will have 64 business days, four less than last year's fourth quarter, which would account for roughly $28 million in sales this year.

Based on current conditions, we expect sales will be in the range of 443 to $449 million and diluted earnings per share will be in the range of $0.74 per share to $0.76 per share.

In closing, I would like to take this opportunity to thank all of our associates for their outstanding efforts in an increasingly difficult environment and their continued focus on execution excellence.

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

Thank you, David.

Sales for the quarter came in at the low-end of our guidance range.

Sales were affected by the overall slowing environment, particularly in our historical business space of the small machine and tool and die shops.

We have continued to see aggressive pricing from small distributors and experienced increased pressure on our costs.

Gross margin came in slightly below expectations for Q3 at 46%.

As we have stated in the past, there are many moving parts to gross margin, several of which had an adverse effect on gross margin in Q3.

Number one, the mix of business between large accounts and our historical highest margin core business of small to medium-sized manufacturers and machine shops continues to shift towards these larger accounts and accelerated rates.

Large accounts drove 63% of our growth in Q3, well above prior levels.

Number two, the mix of the products that we sell is shifting as the manufacturing sector slows.

Nonmanufacturing customers grew at 2.5 times the rate of manufacturing customers in Q3.

These customers have different product leads, which adversely affected gross margin in the quarter.

And number three, timing of cost increases.

We were able to anticipate some of the Q3 cost increases when we took a price increase in February due to market conditions.

Overall, however, Q3 cost increases are more than we had originally anticipated due to the rapidly changing environment.

We currently can expect these same trends to continue in the fourth quarter and expect gross margins to be in the range of 46% plus or minus 20 basis points.

Expenses remain under tight control.

This has allowed us to continue to invest in future growth at historically high levels while expanding operating margins.

Q4 this year has four fewer days than last year's Q4.

Excluding the integration costs that we incurred last year, we estimate that the four extra days last year were worth approximately $0.05 per share in earnings.

Consequently we estimate year-over-year EPS growth of approximately 12% at the mid point of our guidance.

Balance sheet metrics remained solid.

Inventory turns improved versus Q2, and we generated $72 million in free cash flow, which we define as net cash provided from operations less capital expenditures.

On a year-to-date basis, we have converted nearly 100% of our net income into net cash provided from operations.

Year-to-date free cash flow grew 28% over last year's level to $133 million.

Our strong cash flow has afforded us the opportunity to increase our quarterly dividend to $0.20 per share.

As expected, we continue to see a decline in the number of our customers.

This decline represents the effect of the economy on some of our small customers and our proactive decision to cut back prospecting to save some investment dollars as response rates drop during tough times.

The revenue impact of the decline in customer count is minimal.

Overall the total number of customer locations served by MSC continues to grow as a result of our continuing emphasis on developing our business with large multilocation customers.

Thank you and now I will open up the mike for questions.

(OPERATOR INSTRUCTIONS).

David Manthey, Robert W.

Baird.

In terms of the operating expenses, I was really surprised at how well you were able to drive them lower, especially with the continued increases in the sales force and other things you are working on.

Was this the majority of the decline in the core business, or were there remnants from J&L, or could you just discuss which cost items were down the most year-over-year?

Let me explain it first relative to the guidance.

Obviously we were at the low-end of the sales range and a little off on the margin side.

So to be where we were in EPS, we were actually favorable to the guidance we provided at OpEx by about $0.045.

I would say proactive expense management in areas like T&E, outside contract for services, things like that accounted for about $0.02 of that favorability.

We continue to have fortunately some favorable experience in our self-insured medical plan.

That accounted for another $0.01 of the savings, and the remaining $0.015 is really from productivity gains, primarily from our fulfillment centers and some other smaller items.

So that is roughly how the $0.045 reconciles to where we thought we would be when we set guidance for the quarter.

Okay.

Thank you.

The second question, could you talk about the impact of price increases on the top line in the current quarter?

And then as you're thinking about the next 12 months or into the next catalog, what type of increases do you anticipate next time around?

You know, we're not going to give you a 12-month forecast at this point.

You have seen we talked about pricing and cost pressures accelerating.

So we really don't want to broadcast.

I will tell you that we said that we took some pricing actions in February.

Part of those pricing actions actually anticipated what we were seeing for this quarter, and in a second I will give you a breakdown of what our growth looks like.

But I guess what I am comfortable talking about is a well-known cycle that we are on, which is our Big Book cycle.

That comes at the beginning of our first quarter or the end of our fourth right late in August.

And during that time we not only produce our Big Book, but it is well-known that we take that opportunity to make price adjustments as part of that process.

So we're going to be doing that.

That cycle continues.

Historically we have seen that we are able to take advantage of inflationary times and pass those increases onto our customers.

Sometimes it is a matter of timing, but overall that we are confident that that process remains intact.

I also said that I would give you the breakdown of revenue growth and specifically the pricing impact on this quarter.

So why don't I do that now?

Of our revenue growth, which we reported at 7.7%, this breakdown is on an ADS basis.

Pricing was 13% of that growth or roughly 1%.

Large customers accounted for 63% of that revenue growth or 4.8%, and our core was roughly 1.9% of it or 24%.

Okay.

Thanks, David.

Just as a follow-up to your previous comment, though, as you look forward to the Big Book, can you give us a ballpark idea of what aggregate price increases would look like in the Big Book this year?

Yes, I would rather save that for the next call.

Adam Uhlman, Cleveland Research.

Just to clarify on the operating expenses for the quarter, were any of those items that you outlined one time in nature, the $0.045 of benefits?

We would expect most of them to persist.

I just want to be cautious, though, in absolute terms.

Things like T&E certainly we can in aggregate have cost controls in place and manage that tightly, but we added significantly more sales folks in Q3 from Q2 than we did previously.

So the associated expenses with the sales team additions and the travel and so forth that are incurred by sales associates in the absolute sense would be increasing in next quarter versus this quarter.

But most of these things should persist throughout the fourth quarter as well.

Just because if you look at your guidance for the fourth quarter, backing into the numbers, it looks like you are expecting operating expense down perhaps in the 4% range year-over-year, and it was growing 1% in the current quarter.

And it sounds like some of these headwinds to SG&A expenses are growing with the employee additions.

So I'm just trying to understand that (technical difficulty)-- a little bit better.

Okay.

Adam, one thing, the calendar is a challenge from when you do year-over-year comparisons.

There's four less days in Q4 this year versus last year because of that extra week less the Memorial Day change.

So OpEx is clearly affected by that four-day change.

So you've got to kind of cut the analysis on a comparable number of days in the quarter.

We can try to reconcile that, but essentially we have got (technical difficulty) associates onboard than we had a year ago.

So there are some clear additions to OpEx that have taken place year-over-year.

But we really got to get our arms around those four days.

That will cause a significant change in the analysis.

Great, thanks.

And then, David, could you give us some other color on the Big Book, maybe outside of the price but new categories that are being added this year, SKU additions, etc.?

I don't want to steal the thunder for what we will talk about moving forward, and specifically it is because I don't want to give a heads up to what is going to be coming to the competition.

I can tell you, though, that we have added 20,000 new items to the Big Book, and we have removed roughly 15,000 less productive or nonvalue-added SKUs.

So we're excited about the launch, but I would rather hold back on telling you about some of where we have expanded our categories just a little bit.

John Inch, Merrill Lynch.

So I'm just curious, the price action you took in February versus the cost basis increase this quarter, what would have been the deficit to kind of close the gap?

I mean how much of the delta dragged your cost of goods would you estimate?

Well, John, we have given guidance last quarter at basically a range of 46.1 to 46.3.

So the midpoint of 46.2, a big driver of that miss, if you will, from 46.2 to 46, a good piece of that was on the cost side versus the price.

So it is not all of it, but it is in that range that contributed to what we would call a 20 basis point miss from the midpoint of our guidance last quarter.

Just so I'm clear, was the issue that prices rose more quickly during the quarter, or was there some other event?

Was it more of a volume issue, or how should we think about it?

No, it was costs were clearly rising quicker in the quarter than when we had put in the price increase.

We had anticipated some of that when we made the decision to put in our price increase in February.

It actually rose a lot quicker than we anticipated back in February.

And did any of the auto sector's problems I mean bleed into some of the slightly softer manufacturing trends that you guys saw, without getting too specific?

I mean is that part of what is going on here?

You know, John, it is David.

Chuck talked about the cost element of gross margin, and we have tried and, in fact, in the script kind of painted a picture of multiple elements.

And there really are so many moving parts.

Certainly costs escalating was one of the factors.

But some of the shift in our customer mix lead to shifts in our product mix as well.

So you've just pointed to one.

Perhaps in some regions related to a bit of automotive activity.

But what it really points to is that we have seen a slowdown in our core historic manufacturing base.

Part of that leads to slower revenue growth, which to a large degree accounts for why we came in at the lower end of our revenue guidance, and that is also one of the mix factors that drives our gross margin.

Because I think, you know, it is certainly known that our historic customer base is at a higher margin than some of our new larger customers, for example, that drives the margin down.

Which also given the message that we saw in our business where we had excellent growth in that segment, well, the excellent growth in that segment, which we were very pleased with, put disproportionate weight and pressure on the gross margin line as well as another one of those factors.

That makes sense.

I think last quarter you guys called out the fact that smaller competitors were cutting price.

Did you see -- when you talked about taking share, did you see price sections actions actually get worse?

Like with the environment for price competition in the third quarter, was it sequentially tougher?

Is that the way to think about it?

I'm not sure that I would say that the aggressive pricing actions from distributors, traditional distributors, were sequentially tougher.

I think we characterize it as one of the difficulties that put some pressure on margin in that quarter.

I'm not sure that I can distinguish whether that put additional pressure on this quarter.

That pressure is out there and the same.

And really as traditional distributors begin to have some erosion in their service model and in being faced by a difficult economy as well, they are out there trying to gain -- keep their own share gains and keep their own business intact.

And that becomes increasingly more difficult as their service model, things like inventory due to cash flow, comes under pressure.

No, it makes sense.

Jeff Germanotta, William Blair.

I want to explore a little bit the mailings.

Chuck commented on doing a little less prospecting.

Looking at your stat sheet, mailings have come down a little bit sequentially and they would seasonally anyway.

But where have you been with the quantity of mailings lately, and where are you likely to go in the near future?

Jeff, if you take a look at our website stats, we do indicate that our mailings have been down year-over-year with some adjustments that we have made.

You have seen that throughout the year, and I think for this quarter they are pretty comparable to what they were last year.

But basically what you have seen us doing through the year is a combination of cutting back on programs where we have seen the return on some of those programs actually shrink.

The return on investment, actually that the breakeven and the profitability time expands.

Things like our prospecting where during tougher times you will actually see the response rate worsen just a bit.

And it means that the program is still good, but given that we turn the dials and need to make adjustments in our overall programs, the balance -- that whole balance of short-term profitability with long-term investment and growth, that is one of the areas that we pare back a bit, which produces less in coming customers.

And at the same time, part of what we don't break out on that statistic, there is also our basic circulation and where we have been able to cut back on that circulation, kind of the same thing.

But that we would target customers or target circulation going into customers that have really not been productive for us, those small onetime buyers.

Which is why, as Chuck had mentioned in his script, we're comfortable that our customer count has been down.

It has been down by plan, and that ultimately it really has a negligible effect on our revenue growth rate.

But those are some of the dials that we have turned.

I guess the other thing that does not show up is that we have also talked about being more productive in our programs.

So, in addition to adjusting the dials of investment, the other dial is that we are constantly looking at being more productive.

And one of the ways to be more productive is to shift some of those both prospecting and circulation electronic channels.

We have actually ramped some of that up, and we do that to reach those customers in a much more cost-effective way.

So should we expect to see mailings year-over-year as we move forward below the prior year?

You know, I don't want to give you a forward look into '09.

I will tell you that all of the factors that I have just described, as we watch this economy, we will continue to watch it.

We will continue to adjust where we see necessary.

The only thing I can tell you, though, is that we will continue to in addition to focus on making those adjustments where we think most productive, we will definitely continue to explore where we are able to shift customers to an electronic channel or an electronic marketing means where it has value for those customers.

So that will certainly be part of our '09 program.

Again, the next question has to do with accounts receivable, quality, days in receivable and reserves.

Are you seeing any slippage there in the softer part of the cycle?

At this point in time, no, things have been pretty stable for us.

A little bit in the aging, but not so much for economy, but again because the larger accounts, which often have different payment terms, at a bigger piece of our sales, and the math will just drive that out a little bit.

But nothing that is related to the economy per se that would cause the quality of that receivable to slip.

And then the last question and I will give somebody else a turn, whether it is management of T&E, discretionary investments or mailings, how many quarters do you think you can skinny that up before it begins to influence the long-term opportunity?

You know, Jeff, we still feel strongly that we are going to grow through whatever is coming our way unless there is some extraordinarily long and deep recession, and we think we will continue.

Certainly our plan is to continue to invest in growth, and I guess to answer your question, put all that together, that's the plans also, and we believe we will continue to grow our earnings as well.

(OPERATOR INSTRUCTIONS).

Brent Rakers, Morgan Keegan.

(inaudible) -- international you all added a segment called International & Other in your operational statistics.

I was wondering if you could give a little color about why you decided to disclose right now or maybe how big of a part sales this is?

This is Chuck.

I will answer that.

It is really to understand the overall growth rate of the Company.

If you look at the regions and look at the growth rate we reported, without that International & Other sector on there, the inclination might believe that those regions in total then aggregate to the total sales growth for the Company.

We thought it would be helpful to kind of cut that off at the path and actually put that section on the website to help make sure that folks understand that the aggregate growth of the Company is represented by all the regions and that other category now.

And I guess just to add to that, the one thing -- it is a great question -- it is not to signal that something has changed or that we have now got a big focus and new thrust into international.

You know that we have got our UK business.

UK is part of that metric.

It is a relatively small part of our business.

(technical difficulty)-- but there is not a -- we're not signaling a big sea change here.

Okay, that is definitely helpful.

Could you may be expand on where you guys feel you're taking market share and how you are doing that?

You know, remember that we compete -- that this marketplace has a few of us large national distributors.

But the bulk of it is still controlled by that small to mid-sized traditional distributor.

In fact, about 75% of the market is still held by that distributor, and that is really time and time again where we see that we are taking share.

That distributor is under a lot of pressure, especially to serve those large customers that are trying to focus on reducing their overall cost of procurement and acquisition.

In particular, large multinationals, multifacility national customers that need a distributor with a broad footprint, scale, to plug the system, the electronic platform, the broad product offering; all to be able to consolidate their supplier base into a much more streamlined, cost-effective distributor.

That is really where we have enjoyed market share gains.

And, in fact, as things are tough and get tougher, historically what we have seen and, frankly, where anecdotally we're seeing that today, the distributor service models, they begin to break down.

They struggle with cash flow.

They are not able to maintain their inventory levels.

So oftentimes what happens is that a customer that has traditionally been able to get a particular item reliably from a distributor, if all of a sudden they have a break in service, it catches their attention, and that gives MSC an opportunity to gain a foothold in that customer.

And typically what we find is, as we are able to gain that foothold and be able to show the kind of service levels that we're able to provide, that is where we gain a customer often for life.

That is very helpful.

Thank you.

Holden Lewis, BB&T Capital Markets.

Could you -- you talk about all the pressure that you are seeing on price and that sort of thing out of your smaller competitors.

Yet you have been able to sort of sustain a little bit of pricing in the model, and it sounds that when the Big Book comes out, that you will be able to get some more in there.

So you find yourself in a position where you guys are clearly getting price and raising price when your competitors seem to be slashing price.

Is that having an impact on your revenues that is noticeable, or can you give some greater color as to why you may not be behaving in a way that the rest of the market seems to be?

You know, I certainly do not want to overblow what we're seeing.

You know that our model is geared to selling a solution.

But we're not going to sit back, and this relates to the revenue portion of the answer as well, that if we're going to be undercut in so many cases where a customer may have a larger item or something that they have got time because perhaps they are slower to do some shopping for, you know that is one of the places that a local distributor will try and use whatever they have on the price side of the equation to take that business, and we're not just going to sit back and let that occur.

So those are kinds of -- some of the kind of situation that we would see out there.

It is a pretty typical one.

And you know everyone -- traditional distribution is certainly being impacted by the economic slowdown, and they are trying to find ways to maintain their business as well.

So does that help?

Yes, I guess so.

Can you also comment about sort of in your releases the June '08 DSR of 8.3 is quite a bit better than your forecast for the full quarter.

Just give a little bit of color?

Are you seeing (multiple speakers) conditions (multiple speakers) eroding that way?

Yes, actually to complete the picture, we have got one more week in June, which includes the Fourth of July holiday long weekend.

So what we are expecting to see is that the Fourth of July was actually in this year's June, which you don't see yet, posted on the website because it has not happened obviously versus it was in last year's July, so the comps are off between June and July.

Bottom line our expectation is that while you see an 8.3% growth in June to date, we are expecting June to be more in line with our overall guidance for what we are seeing in Q4 once we get through the Fourth of July holiday.

Okay.

Great.

Thanks, guys.

Yvonne Varano, Jefferies & Co.

Can you just tell me how many shares you repurchased in the quarter and what remains on the authorization?

Nothing was purchased during the third quarter, so everything that is in the share count was done through Q2.

And, there are 4.5 million shares remaining on the authorization.

We actually had that increased earlier this year by our Board.

Great.

And then just on the T&E side, it just sounded like a large number.

Can you give us a little more color on some of the steps you took there to control that cost?

Well, it is a conglomerate of things.

T&E is in the full $0.02 that I mentioned.

That is a portion of the 4.5.

In addition to that, outside expenditures for services we can delay, we can defer.

We can not, we can try to do them more productively inside.

It is a series of actions when things slow down a little bit that we take across the board.

Challenging trips, asking folks to plan further in advance, all those things in aggregate add up.

And during the quarter, they were worth probably in aggregate, just not the T&E piece, but that piece of it that we would chalk up to proactive expense management as I said probably $0.02 to the $0.045 in favorability we experienced to the guidance that we set.

Richard Marshall, Longbow Research.

Can you guys talk a little bit more about the geographic sales breakdown?

I mean if you look at it, the Western region had a decline for the second straight quarter there, and you saw a little uptick in the Southeast.

Can you maybe give a little bit more color behind those trends, and was there anything surprising to you guys about those trends this quarter?

It is David.

I will be happy to.

We're being affected by the softness in the industrial economy.

I would say that is kind of the overriding theme.

The greatest impact to that slowdown is concentrated in our sales into the durable sector.

And within manufacturing you have got what I will call heavy, which is durables, and you have got light.

That light sector is also included in our manufacturer data breakdown, and that sector continues to grow at a faster pace.

All of those, both light and heavy, are sprinkled throughout the region.

So when you couple that with pockets of strength and weakness throughout our varying customer segments, there really is not one factor that I can point to.

But more the conditions that are kind of woven through all of our regions.

As I said, durable certainly has been the hardest hit.

And also that what we are finding throughout all of our regions is that which we have signaled as a change and what we have seen from our last quarter, is that our historic base of machine shops, small manufacturing plants had been feeling more pressure in the impact of the business.

And I guess the other that I will comment on is what we are seeing out West.

The West also has its share of economic conditions and struggles.

But what we're also seeing as we've talked about in the last quarter is the impact of the calling of some low margin J&L business, as well as some tougher comps from some customers that we have done extraordinarily well with grown very, very quickly and, in fact, continue to grow very quickly, but those comps are now facing us.

So all of that is kind of part of our West as well.

Great.

Thank you.

A couple of more things.

I noticed your website channel had a nice uptick this quarter.

It sounds from your commentary like you're trying to drive more business through that website.

What is your outlook for the coming quarter on the website sales?

Richard, we're not going to forecast what it is.

It is an important tool and program for us.

It is important because our customers find it very helpful in ordering more efficiently, and that takes cost out for them, and that also takes cost out for us.

So it is and will continue to be an important focal point for investment and further development.

Great.

And just the last thing.

I noticed in your forecast for direct-mail for the fourth quarter, it is really not that different year-over-year.

Should we look at that as a possible place where you might be able to cut back?

In other words, should we view that as sort of an upper bound or a lower bound within the forecast?

You know, I think if you take a look at what we have historically projected and then come in for an actual, I think we were very close, for example, this quarter.

So while I cannot definitively tell you that we would not find, that we would make a change, the reality is on these programs, that they take months to develop and forward planning.

So my point is that we really don't put it out there as a range.

We really put it out as what we think is actually going to happen in the quarter, and that is still our best estimate of what will actually occur.

[Dan Beck], White River Investment.

A question for you on the shipping costs.

I'm wondering if you have seen those go up?

Was that part of the 13% price increase you were talking about?

I know in your annual report you broke that down for the last three years, and that goes into the total net sales number.

But in this last quarter, have you seen a large increase in that, and do you see that as something that you can easily pass onto the customer because they want it delivered?

Or is that a potential disadvantage compared to a customer going into a retail or local distributor or a, you know, a (inaudible) store and just buying it there without having to pay that cost?

You know, we do see our shipping costs rising.

Generally speaking we are able able to pass that along to our customers as well.

So that is a good general statement.

Of course, we have got arrangements with some customers that may or may not reflect that, but in general two things.

Yes, we have seen cost increasing, and generally that is part of -- that is a component of our business that we're unable to pass along to our customers.

At this time there are no further questions.

Okay.

Operator, I will close out the call by saying we appreciate all of your time and interest today and look forward to speaking to you again next quarter.

Thank you.

Ladies and gentlemen, this concludes today's MSC Industrial Direct third-quarter 2008 earnings conference call.

You may now disconnect.