MSC Industrial Direct Co Inc (MSM) 2008 Q4 法說會逐字稿

Good morning, my name is Kristen and I'll be your conference operator today.

At this time I would like to welcome everyone to the MSC Industrial Direct fourth quarter 2008 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)

Thank you, I would now like to turn the conference over to Eric Boyriven of FD.

Sir, you may begin your conference.

Good morning everyone and welcome to the MSC Industrial Direct fiscal 2008 fourth quarter and full-year 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)580-5600 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 can find under the tab About MSC.

In addition, during the presentation, management will refer to financial and operating data included under the section Operational Statistics which you can also find under the tab About MSC on the company's website.

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 within the meaning of U.S.

securities laws including guidance about expected results for the next quarter; expected benefits from the company's recently-launched new customer enhancement; 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 Director, President and Chief Executive Officer, David Sandler.

David, please go ahead.

Thanks, Eric and good morning everyone and thanks for joining us.

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

Earnings for the fourth fiscal quarter, exceeded our guidance range.

We executed on our gross margin initiatives and controlled operating expenses.

There was a non-recurring gain in the sales of certain property that Jeff will expand upon later.

For the year, we were gratified to see our operating margin reach 18% and earnings per share increase by 17% over last year, even though there was one less week in fiscal '08 than in fiscal '07.

But we understand that August was a very different time from today and in recognition on that, I am going to depart from our usual format.

I want to make sure that I highlight three thoughts that I hope will help you understand where our company is today.

First, is how we're positioned to take share as a result of the dislocations being caused by the seizure in the credit markets and the soft and likely worsening economy that will follow.

Secondly, I want to assure you that we are moving forward aggressively rather than watching things happen around us.

Third, I want to provide you a realtime feeling for what we are hearing in the marketplace.

MSC is on the move as we speak.

In September, we launched a new customer enhancement to our service levels.

In fact, it's one of the more significant improvements in our history.

We have been investing in this initiative for almost a full year and while the service concept is easy to understand, building it required a huge cross functional effort of many associates and was actually quite complex.

I congratulate the team on its execution and am pleased to note that it took the market by surprise when we launched on Labor Day.

To date, it has been extremely well-received.

Essentially, all qualified orders placed by 8:00 p.m.

eastern time in the lower 48 states, are now not only ship same day but delivered to our customer next day at no additional costs.

In order in to be sure that you all understand the magnitude of this improvement, I want to take a minute to explain its benefits to our customers.

Your first reaction might be that, well, we ship same day with UPS and UPS delivers the next day, so what's the difference?

Well, there are a number of major differences that makes this an enormous value enhancement for our customers and vastly improves our logistics position versus our branch inventory base competition.

For example, if you had a manufacturing facility in Boston, your cut off time for placing an order from our Harrisburg facility was 4:30 p.m.

Now, it is 8:00 p.m.

Prior to the enhancement, even if you placed the order before the cutoff time for Harrisburg, if the item you that needed was non-Harrisburg, but in either one of our other fulfillment centers, ground shipment for that portion of the order took two to three days.

Now, if you place an order by 8:00 p.m.

and the inventory is in any of our centers, you will receive the item next day.

Our combined fill the rate across all of these facilities is 99% and our error rate is substantially less than 1%.

Basically this means that almost anything ordered from MSC today will arrive flawlessly at our customers' door tomorrow.

The difference is enormous.

We can now firmly position ourselves as the first and only telephone call a customer makes rather than the customer taking the time to call a few local distributors and send their driver to spend precious time picking things up.

Locking in our position as the first call will have an enormous long-term impact on revenue and gross margin.

The story gets even more compelling if you're in places like Denver, where delivery was two days or more.

This improved service will greatly enhance our competitive position versus those with local inventory in former two-day markets.

By leveraging this service, we are sending a very strong message to our entire customer base, both large and small.

For our large customers, the strength of our balance sheet, our suite of services and this new logistics initiative enables us to position ourselves as protection against supply chain risk.

Something that is very real in today's economy.

Many of our customers risk disruption from suppliers who have cash flow constraints that impact product flows.

MRO supplies represents a very small percentage of the finished costs of the products that our customers sell, but an interruption in supplies can be extremely costly.

Our smaller competitors will not be able to maintain their inventory and will struggle to pay suppliers on time, as their balance sheets get squeezed.

And let me remind you that this remains a very fragmented industry.

For our smaller customers, we have a very strong and compelling message.

We can extend credit as long as they remain creditworthy and give us a greater share of their spend.

The smaller distributors can not afford to do this and will need faster payment to support their cash flow.

Secondly, we are moving aggressively on the cost side.

We will use our strong balance sheet and cash flow with our suppliers to achieve better cash discounts from those who need swift cash flow and better volume discounts from those who need order flow.

Since MSC's credit is excellent and considered to be very safe by suppliers, we will seek more field and more supplier preference for larger end users as well.

We will remind our suppliers that if the customers order for their goods goes through MSC, they will get paid quickly and reliably and their products will reach the customer quickly and without disruption.

On the expense side, we move very quickly to clamp down on discretionary spending several weeks ago as we sensed that the troubles in the credit market were escalating.

We continue to opportunistically seek great growth investments and outstanding field sales people who might lose confidence in the strength of the company that they currently work for.

Our field sales force grew to 912 associates at the end of Q4 and we expect to maintain this level throughout the first quarter.

Finally, although the slowdown might be more severe than we have experienced in the past, our team has been through this before.

We have navigated through tough economic periods and used them to position our company for rapid earnings growth once the economy turns.

We've done this before and we'll do so again.

In the last several weeks, customers' sentiment has turned dramatically downwards.

Here are just a few of the things that we've recently heard and I'll quote a few of them.

One quote is, "our new orders are down substantially in the last few weeks." Another is that corporate has told us to reduce inventory.

What we've also heard is make due with what you have.

And finally, another quote is capital expenditures are on hold.

Customers are concerned about the economy and the lack of available credit.

They are reducing inventories, orders, and order size and they their has been a trend toward deferring capital expenditures.

There is a lack of visibility and until that improves, customers will continue to act in this manner.

This has affected the smaller manufacturers and machine shops that still make up a significant portion of MSC sales to a greater extent than our larger customers.

Before turning the mic over to Chuck to talk in more detail about the quarter and our cash flow and balance sheet, I would like to give some guidance for Q1.

The deterioration in the credit markets has exacerbated the effect of the slowing economy on the industrial sector.

The ISM is at its low point since the post-9/11 time period and industrial production declined sharply in September.

Our sales to the industrial sector, which accounts for about 75% of our total sales, has been declining as well.

MSC continues to solidly grow it's sales to the non-industrial sector and to national and government accounts.

Visibility is extremely limited at this point.

We don't know when the credit markets will return to a more normal state nor do we know what effect, if any, that will have on the industrial marketplace.

Therefore, we have chosen to project Q1 results on the basis of the first seven weeks of Q1 being representative of the entire quarter.

Based on that assumption, we project that first quarter sales will be between $436 and $446 million and fully diluted earnings per share will be between $0.68 and $0.72.

However, again, we caution that this guidance should be viewed in the context of the unprecedented market conditions and the resulting variability in actual results versus expectations.

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

Thank you, David.

In Q4, MSC delivered excellent financial results given the market conditions.

We came in at the top of our guidance range in sales and over the top of our range in EPS.

Included in our earnings is a non-recurring gain from the sales of certain real estate that we no longer utilize in the business and a tax benefit from the utilization of a capital laws carry-forward, which, taken together, improved earnings by $0.025.

We anticipate that the effective tax rate for fiscal 2009 will be approximately 38%.

Gross margin came in as expected and we anticipate an increase in gross margin in Q1 of '09 to approximately 46.8% plus or minus 20 basis points as you realize the benefit of the price increase in the big book just published.

Given the limited visibility in this environment, we will be guiding quarter-by-quarter on gross margin.

We continue to maintain tight control over operating expenses in Q4.

As the macroenvironment continues to soften, we have aggressively reduced discretionary spending.

This includes the obvious areas such as travel and entertainment and training, but also includes strategic and growth spending as evidenced by our flat guidance for sales head count.

These actions will serve to partially offset increased expenses associated with salary infringe increases, the full year impact of associates hired in FY'08 and other inflationary increases.

Cash flow in Q4 and for all of fiscal '08 was outstanding.

We generated free cash flow, which we define as net cash provided by operating activities, less capital expenditures of $198 million in fiscal '08, including $65 million in Q4.

That represents an all-time high for the year.

We purchased another $1.493 million shares of our stock at an average price of $44.70 in Q4, bringing our total stock purchases for fiscal year '08 to 4.621 shares at a total cost of $187 million.

These purchases were funded out of our operating cash flow and through our revolving credit agreement.

We fully expect to continue to generate significant amounts of free cash flow from operations.

When sales growth slows, cash conversion improves at MSC as we're able to reduce working capital.

We currently have significant cash reserves on hand as well as committed lines of credit from a syndicate of top banks.

As David noted, our strong cash flow and liquidity combined with a strong under leveraged balance sheet, gives us a powerful advantage against the small distributors who control the bulk of the market.

During these times, there may also be more acquisitions that make sense and generally in tough economic times, acquisition multiples tend to decline.

Our balance sheet remains significantly under leveraged and as credit markets improve, we expect that we will have more freedom to utilize it as a weapon in the marketplace.

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

Thanks, Chuck.

In conclusion, we at MSC are on the move.

We fully expect MSC to emerge from this extraordinary time with increased market share, continued strong cash flow and a strong growth rate.

While this team is not experienced the depth and extent of the current crisis, I can assure you that we are managing through these unprecedented times and will emerge stronger than ever.

Our plan is very similar to how we manage during the post-9/11 period and that worked very well.

Today, we are a much stronger, better managed company with many more customers, including a vibrant large customer segment, many more skews to service our customers, extensive electronic tools that will enable our customers to reduce their costs, significantly improved service levels and a well-trained greatly expanded and highly motivated work force of associates ready to help our customers.

I offer my sincere thanks to all of our associates for their continued dedication, their hard work and tremendous flexibility in the face of adverse conditions.

Thanks and I will now open the line for questions.

(OPERATOR INSTRUCTIONS) The first question is from the line of Adam Uhlman with Cleveland Research Company.

Good morning.

Morning.

Hello, Adam.

Hello, Adam.

I guess, Chuck, the first question for on the guidance of next quarter sales up slightly but margin guided down quite a bit with gross margin expansion.

You know, it sounds like there is going to be quite a bit of SG&A deleveraging -- SG&A growing perhaps 7% year-over-year.

Could you talk about what's behind the SG&A growth?

Sure, Adam.

Well, first thing I would say, you saw that we significantly exceeded our expectations for sales head count in Q4.

So, the sales hires that were on board for a partial, if you will, Q4 Op-Ex [experience] are all imbedded and in for an entire quarter in Q1.

We also have an uneven distribution, if you will, of our annual merit review poll.

A significant portion of our organization has their merit reviews done in the first quarter of every year.

So, there is imbedded spending and salaries and fringe benefits, probably $2 million, if you will, Q1 versus where we were in Q4.

You also have things like advertising in Q4, are at their low levels during the year, as plant shut downs and so forth, means we generally reduce circulation and advertising spending.

Just getting that back to levels of last year or even slightly higher than that is about an additional $1 million and advertising spent above the Q4 levels here.

So, there is some imbedded spending that's in place that, yes, there is a net increase in overall spending because of some of those imbedded things.

But and anything that's discretionary, it should be very clear that Q1s spending numbers is not a function of adding stuff during Q1.

It's a carry-in of what happened last year with a return of more normal levels at Q1 traditionally that we spend in advertising that's caused that number to be higher on the OpEx line.

The other piece, Adam, I need to point out is fright expense.

Both versus Q4 and versus last year.

Yes, over time this year with the reduction and oil we would expect some of the surcharges to hopefully evade a little bit.

But, where we were in Q4 and, frankly, where we were in Q1 a year ago, the freight expense is much higher than it had been this time a year ago.

So, those factors all net to an increase in Op-Ex over where we were in Q4.

Okay, it also sounds like you're absorbing some of this incremental expense for next-day delivery this year for your customers.

I guess, could you talk about what the expected benefit is in terms of revenue, the initial year that this new service is launched?

Adam, it's David.

You know, we want to be careful about how much we would share publicly with that.

Certainly, a point about a component of our freight expense coming from this program is part of our Op-Ex moving forward as Chuck had commented.

You know, we're really excited about what this enhancement will mean.

Understand that it's going to take time to actually work its way in.

Part of our expenses, frankly, one of our advertising expenses is going to be on marketing this new program.

And it's going to take time for our customers that have been typically knowing that late in the day or for their second shift, they now need to either send a driver out or they need to start shopping around to another local distributor that they're going to be able to now rely on MSC up until very late in the day knowing that [parts] is going to come tomorrow.

We're excited because we have already started to see with some customers buying behavior where we're now able to reach the second shift and we're seeing our late orders start to rise, which is really indicative of the fact that we're now take business that we hadn't previously been able to take.

So, I'm not going share what our revenue projections are.

I, you know, I will tell you that we think that the return on this investment is going to prove to be a really good one over time and that the competitive advantage is something that we're going be able to capitalize on to years to come.

Okay.

Great.

And then just the last question, a quick one.

It looks like the active customer account slipped again sequentially this quarter.

Can you talk about what is unfolding there?

Yes, sure, happy to.

To a larger degree, the customer count really is a part of managing really proactively and making choices proactively on our part.

You know, we have said that we've tweaked the dials on where we see -- we want to spend our growth investment dollars and how we kind of shift those around.

And one of the areas that we've cut back, at least a piece of, is in prospecting those areas where we tend to find that the pay back is going to take longer and, therefore, we get a lower return on that investment.

That's something that we have cut back on because we think it makes good bottom-line sense to do that.

And so as a result of some of that, we have less new accounts being generated.

And we also adjust some of our circulation mailings as well.

But I think the overall effect of these changes do represent a reduction in what we've really targeted the cutbacks in, which is that one-time small buyer where revenue implications are very, very small in the near-term and in the longer-term as well.

Remember, the other thing that is a metric that we don't share that we do see continuing to grow is that our active customer base is based on "bill to," not on "ship to." And remember a large part of our focus for several years has been on that large customer segment which tends to have multi locational buyers.

Those multilocations, that ship to number, we do see growing but you're not able to actually see it in the way that we measure our active customer base.

That is helpful.

Thank you.

Sure.

You're next question is from the line of David Manthey with Robert W.

Baird.

Hi, good morning, guys.

Good morning, David.

Hey, David.

Just for clarification, could you let me know what the average daily sales growth was in the month of September?

ADS in September was 3.9.

3.9.

And are you releasing a schedule of the other months or -- that I haven't seen yet or is there --

It's on our website, David.

Yes, we'll read them to you right now though.

Chuck do you have them right there?

Yes.

July was 8%; August was 4.7%; September 3.9% and again through a couple of weeks in October, it's basically flat.

Okay.

Great.

Thank you.

And in terms of the environment we're dealing with here today, I am interested in all of your opinions; your viewpoint in terms of how does this current environment look to you relative to past down turns that we've?

Are there pros and cons?

And just how are you thinking about it as it relates to past slow downs?

You know, David, I'll tell you one thing is that really we view this time as unprecedented in history.

The economy is undergoing a huge change, how that is going to shake out all remains to be seen, but I think what's important to note is that it's a huge fee change that, frankly, no one had a chance to really see coming.

So, we know that specifically in our customer base there is a tremendous amount of fear that's gripping customers and evidenced by what we've seen the last couple of weeks in October, almost buying paralysis.

That's really the way that we think about it.

And frankly you know, in speaking to so many customers what we see happening.

I think one of the things that even in the 9/11 period was that if you go back to 9/11 -- pre-9/11 the economy was coming down.

In fact on a sequential basis over a period of many, many months, it had slowed down and then there was the obvious tragic event of 9/11.

What's happened here with the credit crisis though, is that while the economy was by no means booming.

It was kind of rolling along.

And we almost think that 9 months of what would typically have taken six, seven, eight, nine, twelve months to actually start to come down, happened almost literally overnight.

If you think about the ISM and you look at the ISM being in a kind of a flat 49-ish - 50 range for many, many months, probably throughout the year.

And then to have it swoon as it did in September at 43, which by the way as I am sure you know is at 9/11 levels.

From all of the time that the ISM has even been tracked, I don't believe there's ever been a point where we've come upon, or the ISM measurement, has ever dropped off the cliff as fast.

Even pre-9/11, the ISM had been drifting downward to ultimately hit that level but it was not at kind of the steady state where it was which is with the slower economy.

But, frankly, with the latest measurements shows is that things absolutely fell off a cliff.

So, until we can get some more visibility into this thing, we're just going to stay really fast and flexible.

And we're going to use this time.

We intend to take share and leverage the great investments that we've been putting in place for the last few years.

Hey, Dave, this is Chuck just one other thing.

Compared to the last slowdown around 9/11, we were in single-digit operating income land.

So, even a slowdown now, there would be a significantly more cash flow generation and more opportunity to use that cash in the most productive way that's very different than the environment we as a company experienced back in the 9/11 -- or the 2001 era.

And I guess I will jump back in, David.

One more thing is to also note that our customer base is much more diversified.

Very different then it was back then.

We were just getting started with our large customer segment.

For example, where today the large customer segment is a much larger and vibrant part of our growth equation.

And that will, as it's already shown, will help to diversify us from that small to midsized manufacturing customer where the pressure on them is just enormous.

Okay guys.

Thanks a lot for the color.

I know nobody knows for certain what's going happen here, but I appreciate your comments.

Thanks a lot.

Thanks, David.

Sure.

(Operator Instructions) Your next question is from the line of Brent Rakers with Morgan Keegan.

Good morning.

Chuck, I think in past calls you've given some information on the growth rate broken down into price increases, large account programs and other.

Could you maybe provide that again for this fourth quarter?

Sure, Brent.

I'll take it -- I have it right in front of me.

So, growth in Q4 in an ADS basis was 5.8% and the breakdown of that is 3.9% or 68% of the growth came from our large customer segment.

Pricing encountered for 0.9 of a percent or 16% of the growth.

And about 1% or 16% came from all other volume in the business.

Great, okay.

Thank you.

Could you also maybe expand upon -- I know we saw some pretty sizeable price increases in the catalog, I think, effective at the end of August.

Could you maybe comment what that price factor is looking like through the months of September and October?

You know, I'm not going break out specifically September and October, Brent, but we did take about a 3.5% increase in the big book.

What we are seeing on the cost side of the equation is that many raw materials have started to come down over the past few weeks as the economy has slowed.

So, you know, things like aluminum and nickel and stainless and, obviously, petroleum and petroleum-based products have dropped.

But interestingly, cost pressure from suppliers have still remained high.

So, you know, given the changing environment, we're certainly taking steps and some very aggressive actions on the supplier front to mitigate those increases by resisting any proposed incremental increases to where we are.

And, frankly, based on what's happened to the raw materials and petroleum environment re-opening negotiations on previous increases, where with those increases that frankly drove or justified what was happening on that front.

And I guess finally, we're also starting to see opportunity buys where suppliers really need the volume.

They look to MSC to give us to provide some large orders at favorable pricing and we're also, you know, we'll use our strong balance sheet to use that as an opportunity for us.

So, you know, you put all of that in the blender and that's where we come up with our gross margin guidance of 46.8 plus or minus.

Everything that we see right now is factored in.

Okay, great.

And then just last question.

And I think you talked about a $0.025 impact from the items in the quarter.

I guess I was computing closer to a $0.05 impact?

Was there something with regards to the core tax rate that was also maybe lower than kind of that 38% that's kind of been normal lately?

Brent, it's Chuck, absolutely it was.

The sale of the building the gain on that was in the neighborhood of $1.5, $1.6 million.

That would normally after tax yield $0.015 in EPS.

So, there was other things going on there with the carry loss -- tax loss carry forward and some other true-up of tax reserves and State things that closed out that added -- basically provided the other $0.01.

So, between the sale of the building and other tax things that were going on, that was about $0.025 of the $0.05 difference that we experienced above the midpoint of our guidance.

And you add another $0.025 beyond that that was made up of the fact that we were at the top end of the sales range, which caused us to be in a better position and some other things imbedded in the business that provided that upside to the midpoint of our guidance.

Great and I guess, Chuck, maybe one more question.

It looks like from a cash flow statement that you had some true-ups, if you will, on the bad debt expense line in the quarter.

Do you have a sense for where that trend might be occurring in the quarter?

Yes, I would say, Brent, we did a great job in the fourth quarter.

Our credit team and our collection team of actually collecting come moneys that we have previously thought were uncollectable and did a tremendous job cleaning up our outstanding receivables.

So, you're absolutely right in the fourth quarter.

We actually had virtually no expense for bad debt other than our normal accruals and that one got reversed out.

So, I wouldn't say that would be the trend going forward.

I would say for the environment we're in right now, again, because of the lack of visibility, I wouldn't want to predict exactly where we'll be.

But at this point in time, we've seen no deterioration in the quality of our receivables at all.

The fourth quarter, that was a one-time event, if you will, by collecting some moneys that we previously thought were not collectible and that's what you saw when the bad debt reserve reversal.

Thanks a lot.

Yes.

Thank you, Brent.

(Operator Instructions) Your next question is from the line of Holden Lewis with BB&T.

Good morning, thank you.

Thanks.

I believe that you've sort of been going through your five-year planning, as you do every five years or so.

And I just want to know if you would give any insight into sort of what elements may have come out of that represent, not necessarily the next quarter's benefit but over the next couple of years, initiatives that might support margins, you know, and that sort of thing.

Can you give any colors in terms of the initiative that will come out of that?

You know, Holden, we've made a tremendous amount of investments in our website and in our service enhancements, to our customers, value-added services.

Those are all things we've been investing in that are still core to our strategic plan.

We're also investing in our private brand products to help us bolster on the margin side.

So, we're pretty comfortable that the plan that we're marching towards is going to give us the kind of results that over the long term, we aspire to deliver.

Obviously in the short-term, we've pulled back and temporarily shut down spending on lots and lots of fronts.

Just until we can kind of let the economy and customer base regain its footing so that we're able to regain our visibility.

But we continue to now leverage the great investments that we've made on the customer front; on our service-enhancement front; sales force buildout; what we're doing with our product development area; and building out our private-branded products.

All of which will help drive growth and revenues and profitability.

Holden, its Shelley.

There's a lot of initiatives in that five-year plan as it stands right now.

And our history has been that we don't tell you guys about them until they're actually getting initiated.

So, the service enhancement was in our strategic planning for awhile and went through a buildout and whatever.

And we were able to initiate it over the Labor Day weekend along with improvements in our website that make transaction much easier for our customers.

So, we would not normally share those types of things with you because of their competitive nature.

If you take them over a long period of time, say the five-year period, and if you just lump them all together, so not distinguishing.

Do you know do you have a sense of what kind of savings you're expecting out of that?

Or what it could do to growth rates?

And maybe compared to the last five year plan?

Any guidance in terms of what we can expect or how we can expect these things to impact your model going forward?

Can't really give you any guidance there.

And, frankly, I don't know that I could say that let's use a quarter blip or two that would change that guidance in any way regardless.

So, I think right now we've to sea change, something that we're tightly managing to.

We really feel very comfortable that we've got our hands on the wheel.

This ship was sailing through smooth seas taking a look at beautiful clouds and islands out there.

And all of a sudden now, there are glaciers and the water is very rough.

So, to the extent that that calms quickly, frankly I don't know that there is any change to the wonderful islands that are ultimately on that horizon.

Okay, and then just taking sort of the full-year look at the balance sheet, the working capital assets, you know, it seems like you did a pretty good job.

Inventories, it looks like they were down year-to-year.

Not a lot of movement on the receivables.

Your DSR growth and your total revenue growth was certainly up.

So, it seems like you did a pretty solid job on your working capital assets.

You know, do you expect to continue to keep a lid on that or do you think that because of the opportunity buys and that sort of thing that maybe the working capital assets have become a bigger use of cash this year?

How should we view that?

Holden, this is Chuck.

You're right.

First of all, let me just say fourth quarter over third quarter, we dropped the inventory by $27 million.

Historically, in a down cycle or slower times, we've actually converted cash into better [rate] because our ability to manage working capital actually increases in a downturn.

But we've had these opportunities before in the downturn as it relates to opportunity buys.

To the extent they make a lot of economic sense for us, it's pretty easy to determine.

We're willing to take a few more dollars in working capital on the inventory side for a big reduction in cost.

So, I would have to see every deal before I could tell you whether it's good enough to take advantage of or not.

But, I would say in general terms, you've seen in the past in slowdowns, even with opportunistic buys on the inventory side and with just a slight deterioration of the DSO's, we've converted a lot of our income into cash because we managed the working capital even in the downturn.

So, I don't see any major change from where we're operating today in terms of management of working capital but we will take advantage of those economic opportunity buys that make tremendous sense for us.

Yes, and Holden, the only thing I'll add to that is that the team -- in fact we met with many of the members last week on one of our review sessions.

The team has been through this many times.

Both in the credit side, the inventory side, both understanding how to frankly mine the opportunities out there.

And at the same time doing a great job of managing our working capital.

And at the end of the day, it's that great management and execution that produces the solid cash flow generation and conversion that we have historically seen.

So, while we'll take advantage of the opportunity, we think we'll manage that in conjunction with being able to still provide some great cash flow conversion.

Okay, and given the trends that you see in the inventory.

I mean, what have you seen in terms of rebate levels?

Is gross margin pressured because you didn't clear the same sort of rebate thresholds?

And, in 2009, can we kind of expect that rebates are going to be better or worse as a percentage of sales?

How should we be looking at that variable?

You know, I'll give you -- you're pointing to an item that, as you know, there's lots of puts and takes in the gross margin line.

Rebates are adding some downward pressure to margin.

Frankly, that's all factored into our guidance and I would rather not characterize or give you guidance into '09.

But, definitely that is a component.

One of the negative items are what puts pressure to the downward side on gross margin is rebates but that's all been factored into our guidance.

Thanks, guys.

Thank you.

You're welcome, Holden.

Your final question comes from the line of Susan McGwirey with Granaham.

Hi, I have two questions.

Sure.

The first is on your anecdotes about your customers.

And I was wondering if you're hearing from any customers, big or small, about funding constraints and whether their caution or their shock paralysis is based more just on fear and prudent measures or are they actually having difficulty accessing cash?

Susan, this is Chuck.

Again, we keep pretty close tabs through our feet on the street, which is our sales team.

And we're hearing basically things like, "I don't know where this is going so I'm going conserve cash." And one of the first things that would go is that, gee I might normally keep two in safety stock, I'm keeping only one in safety stock and things of that nature.

Again, this is changing pretty quickly.

We don't get, you know, instantaneous feedback, but I am saying the last couple of weeks -- the last five or six weeks, it's been more along the lines of cash conservation is the driver behind the lack of spending on MRO items and everything else they have to buy going forward.

That may soon translate into, "I really can't get the credit I need," but it's been, so far, from what we've heard anecdotally has been, "I've got to sit on cash, because I don't know where this is going, I've got to make my payroll and I've got to do other things."

Yes.

Then the other question is about stock repurchase and what your plans are for that in the current environment?

Susan, Chuck again.

We don't publicly advertise what we are or aren't going to do on our stock buyback.

We obviously have a strong operating cash flow.

We tend to use that historically, opportunistically on stock buybacks.

We periodically increase the dividends and we've got a reasonable war chest if we decide to go do something on the acquisition front.

So, it's a combination of those events and those things that is where we would keep our cash without specifically talking about a plan that is already in mind to buy stock back.

We do have 3 million shares left under our authorization, I'm sure if we needed more, the Board would consider that and typically has approved it.

But you haven't changed your thinking, kind of getting a bit more conservative given what is going about stock repurchases?

I think that's fair.

I think like I mentioned on the customer side, given where the credit markets certainly were and are in the last few weeks, yes, we've -- you know, cash is king and we've kind of taken a more conservative approach until things settle down and the visibility comes about that clears out here, we're going to probably sit on some cash.

And, Susan, it's David.

I guess the only thing I'll add is that as Chuck has mentioned, we've got a pretty conservative and under leveraged balance sheet.

And, frankly at times like this, it's nice to have an under leveraged balance sheet.

So, that's not something that, you know, we're going to quickly be looking to change.

Thank you.

Thank you, Susan.

Okay, we have one final question from the line of Yvonne Varano with Jefferies.

Thanks.

I wonder if you could just talk a little bit about your sales associates.

Because (inaudible) it came up in the quarter, its seems like you're on hold right now.

But as things get materially worse, do you think that that number is going to come down or do you want to maintain good people for the upside.

How should we think about that?

Yvonne, no question we will always maintain and keep a great sales force.

But we're, you know, we're really going on to take this thing quarter-by-quarter.

You can see that we added a new -- a lot of new associates that we were fortunate to have available in this marketplace that actually exceeded where we had initially targeted in Q4.

The associate flow and adding to our team actually exceeded -- pleasantly exceeded our expectations.

And for Q1, given how we pulled back, we absolutely want to maintain roughly the same number, which is the guidance that we've given.

You know, having said that, as great people become available in a market that often times, you know, you work for a small local distributor for a long time.

And it's only during very stressful times where that distributor is no longer able to service their customer that one of the great folks that has been there finally says, "you know what it's time for me to move on." We'll certainly take advantage of those opportunities.

Okay.

And then I would think at this point acquisitions are probably few and far between given the constraints in the credit market.

But, maybe talk a little bit about what you're seeing there.

Are there companies that are in dire positions that are coming up and available and what would you be looking for?

You know, we're not going to specifically say what we're looking for other than to certainly characterize that the type of company that we would want to buy has got to be similar to J&L in terms of opportunity.

Meaning, the thresholds that we would make this acquisition because we think it's going to position us five years out better than just maintaining status quo of our organic strategic plan.

And so, we will continue to look for opportunities that way.

We are seeing that deal flow had actually begun to pick up and we were starting to see some opportunities that may be attractive beginning to fill the pipeline.

Having said that, some projects we even see be put on hold because of the credit crunch.

And to your point of on -- until there's more liquidity out there we suspect that the deal pipeline is going to be pretty locked on.

But that -- we expect that at some point that will change and we think that the acquisition valuations might also be attractive.

That's certainly one of the opportunities that we're putting in the mix in terms of how we think about using our very strong balance sheet and building on our plan moving forward.

Okay, terrific.

Thanks very much.

Thank you, Yvonne.

Thanks, Yvonne.

There are no further questions at this time.

I will turn the call back to management for closing remarks.

Okay.

Well, thank you, Kristen and thank you all for listening in today.

We appreciate your attention and look forward to speaking to you next forward.

Bye-bye now.

This concludes today's conference call, you may now disconnect.