MSC Industrial Direct Co Inc (MSM) 2009 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the MSC Industrial first quarter 2009 earnings conference call.

(Operator Instructions) Thank you.

Mr.

Joyce, you may begin your conference.

Good morning, everyone, and welcome the MSC Industrial Direct fiscal 2009 first quarter conference call.

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

If you have not received a copy, please contact our office 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 the call and available for one week at www.mscdirect.com.

Certain information pertaining to non-GAAP financial measures may arise during this broadcast and 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 our 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 US 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 plan 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 in the MD&A section of the Company's latest annual report filed with the SEC as well as 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, Chief Executive Officer, David Sandler.

David, please go ahead.

Thanks, Bob.

Good morning and thanks for joining us today.

With me is Chuck Boehlke, our CFO and Executive Vice President; Shelley Boxer, our Vice President of Finance, isn't here today as he's been feeling a bit under the weather.

Before I begin to discuss our financial performance, I want to be very clear about how the leadership of our Company views the current economic climate.

First of all, like many of you, we are saddened by the number of people without jobs and by the devastating losses that continue throughout our country.

However, we remain optimistic about our country, the future and the world in which we live.

Our leadership team has always been careful to keep the Company balanced and capable of prospering through boom and bust times.

When high degrees of leverage were the order of the day, we avoided it as we understood that it would limit our options should the economy turn on us.

In August, when we sensed that things were changing, we moved quickly to shut off any spending which might jeopardize our ability to capitalize on this downturn.

That is how we are positioned today.

We view this downturn as an enormous opportunity for our Company to take disproportionate share from the competition.

We are uniquely positioned to prudently add top performers, open new geographies, strengthen our position with key customers and suppliers and invest in accretive technology to position our Company to benefit greatly when the economy turns.

While we do not wish for a long downturn, our smaller and mid-sized competitors will suffer the most and as this downturn grinds along, they will be forced to eliminate investment spending, reduce inventory, slash capital spending, and ultimately suffer from deteriorating customer service.

They will fall further and further behind and we will be there with the infrastructure and team to take advantage of those opportunities.

When the economy turns, and it will, we will have taken tremendous share from these competitors.

Recently, I received a telephone call that illustrates the share gain.

For seven years we've been trying to break into a large manufacturer in the west.

All of their metal working supplies were being purchased from a local distributor with whom they had been doing business with for years.

That distributor experienced exactly what we have described.

Due to a downturn in revenues and the effects of the credit crisis, their cash flow was impacted, they reduced inventory and service and ultimately were placed on credit hold by several suppliers.

They could no longer service the customer and today we are fulfilling the metal working needs of that plant.

We fully expect to seek see such opportunities increase as the environment continues to worsen.

Moving to our results and what we are seeing today, net sales decreased by approximately $4.5 million for Q1 versus last year as a result of the slowdown in the global economy.

This decrease consisted of a core business decline of $28 million partially offset by approximately $15 million in pricing, and approximately $8.5 million related to the growth of our large account customer programs.

Earnings per share for Q1 came in at the top of our guidance range even though revenues came in just below the guidance range.

Revenues in the last two weeks of November were lower than originally anticipated, and reflected a change in the overall market environment as the effects of the economic slowdown have broadened and deepened.

Gross margins improved as we took advantage of previously announced price increases.

As I said earlier, we moved quickly to control spending and benefited from these early moves, improved gross margins combined with our strong controls over spending more than offset the effects of the lower than anticipated revenues.

I'd like to share with you what our customers are telling us about business conditions.

They have reported that conditions have worsened substantially in the quarter as compared to the previous quarter.

There are very few customers who are growing.

Many report declines in orders and revenues.

Customers continue to reduce their inventories as conditions worsen and as we had anticipated and discussed in the last call, shutdowns for the holiday season were greater in number and longer in duration than at any time in recent memory.

Large and small customers are reporting layoffs and a lockdown on non-essential spending.

Revenue trends in December are consistent with what we have seen and heard from our customers.

Our team is focusing on taking care in this market, and we believe that we are being successful as the competition begins to show the stress of reduced revenue and reduced credit availability.

Customers that we have talked to have confirmed that in many cases, we are taking share from the competition as they shift their buying to MSC.

And, as expected, the positive effects of share gain are masked by the extent of this downturn.

MSC's model of cost control is very attractive to customers during times like these.

Our huge assortment of SKUs combined with our very high fill rates, very late cutoff times, next day delivery, and services such as VMI, CMI and other eCommerce tools make MSC the choice for lowest total cost and for supply chain security.

We have continued to invest in our business during this quarter.

While maintaining our sales force at 912 associates, we expect headcount to be in the range of 910 to 920 for Q2 and we will take an opportunistic approach moving forward as we continue to invest prudently in sales, geography, and technology.

We do not have the same degree of confidence in the reliability of our Q2 guidance that we historically have.

Given the months of December being as unusual as we can remember due to the degree of plant shutdowns, it provides limited insight into January and February.

We have, therefore, formulated Q2 guidance relying upon the December data point, the ISM, other external factors, and our customers' feedback.

Based on that, we estimate sales to be in the range of $354 million to $366 million EPS to be in the range of $0.39 to $0.43.

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'll now turn the mic over to Chuck.

Thanks, David.

We are pleased with the execution on our gross margin and cost control initiatives in Q1.

Despite revenues below guidance, we achieved earnings at the top end of guidance primarily by reducing expenses below forecast.

Many of the actions taken in Q1 will continue in Q2 as well.

These include reopened contract negotiations, avoiding filling positions that we [petrited], encouraging voluntary time off, reducing travel, and further encouraging all departments to find creative ways to reduce costs.

I would like to share just a couple examples that gives you the flavor for how our associates are getting creative on reducing costs.

One is repairing and reusing pallets in our fulfillment centers rather than buying new ones and another is utilizing our own in house labor pool where our associates have identified that we could reduce third party contract costs.

We have also recently announced the salary freeze which will be in effect throughout calendar year '09 and we continue to invest in productivity projects such as warehouse optimization.

We estimate gross margin for Q2 to be 46.2% plus or minus 20 basis points.

This is a significant drop from Q1's 47.1%.

Our customer mix is driving accelerated gross margin declines as our large accounts continue to outpace our core business.

Additionally, the success of our promotional campaign's accelerated in December and we expect that trend to continue throughout Q2.

Our balance sheet remains very strong.

We have significant sources of available credit in addition to the significant cash balance that we have built.

Our total borrowings outstanding, less cash balances at the end of December, were approximately $112 million, down from $190 million at the end of fiscal year '08.

In Q1, we converted net income into cash flow from operations at a rate of 160%.

We expect to continue to convert our earnings into cash at rates in excess of 100% for Q2.

We have done modeling for sensitivity purposes with business conditions at levels significantly worse than current expectations for very prolonged periods of time.

Based on the modeling results, we believe that MSC will remain profitable with significant cash generation, should these conditions materialize.

We have every confidence that we can execute on our plans while taking share to be well positioned for the recovery.

Thank you.

Now, back to David for the wrap-up.

Thanks, Chuck.

There is no longer a question as to whether this downturn will be the most severe of my career and I suspect of the careers of most of us.

However, if you look at our history, take a look at other industries, it is clear that companies with superior value propositions, developed infrastructure, seasoned leadership teams, and strong balance sheets perform significantly better than the sectors in which they operate.

In fact, during severe downturns, the gap between strong industry leaders and second tier performers gets larger.

We understand this and are taking advantage of the downturn to lengthen our lead over the smaller distributors.

We will prudently invest through this downturn in order to maximize our position in the marketplace.

To reiterate, we are in a position to hire top associates, penetrate new geographies, acquire technology at relatively inexpensive prices in order to increase our advantage in this area, and strengthen our position with suppliers.

We were fortunate to anticipate this downturn and move quickly to rein in spending.

We did so in order to maintain as much dry powder as possible as we knew that opportunities grow in an attractive downturn.

These opportunities have just begun to surface and we believe will grow in the quarter to come.

We will be prudent.

We will maintain our discipline, and we will be sure to capture the best opportunities across all of the investments outlined above.

We do thank our shareholders for their support and our associates for their hard work and dedication to this division.

Thanks, and now I'll open up the line for questions.

(Operator Instructions) Your first question comes from the line of Adam Uhlman with Cleveland Research.

Hi, good morning.

Good morning, Adam.

My first question here is on the revenue guidance for the second quarter.

Sales down 16% so far in December and the guidance suggests that sales growth becomes even worse over the next couple of months.

So you talked about it a little bit in the prepared remarks, but could you flush out some of the issues such as differences in selling days and presumably customer shutdown days should be less worse in January and February, so could you maybe talk about what your customers are saying about their own production schedules?

Yes.

Adam, thanks for coming right out of the gate with the question.

You know, we tried to hit it head-on in the script, that the reality is that our forecasting right now is about as cloudy as it's absolutely ever been and so we tried to, I'd almost say be conservative with the guidance but to tell you the truth, the way that we see it, given that the guidance was based on the only data point we have, which is the holiday season.

I could make a case that the guidance would be much better to the extent that things bounce back to let's call it pre vacation levels but, unfortunately, that's on one side of it but, unfortunately, on the other side of it I could probably also make the case that given what we're seeing with layoffs, the harshness of this environment, the fact that the ISM we know is something that historically anyway has been a leading indicator of what's to come and the reality is that that trend continues to come down.

I could make a case that based on that, and the limited visibility that we have, that it could actually be worse.

So, we've tried to put it out there and caution as much as we can that it's just very cloudy for us right now and it's our best guess at this time.

Okay.

And then I guess a follow-up to that is, Chuck, you had mentioned that you had done some modeling and expect the Company to be profitable this year and understanding that you don't provide guidance more than one quarter out, I guess would you care to share your current thinking on maybe what a high end and low end earnings potential is for the Company in 2009?

Adam, I can't do that.

What I will tell you, what we did in the modeling is in ranges of let's say minus 15% to minus 20% on the revenue line.

Operating margins are in the 11% to 12% operating range.

You guys can do your forecasting based on what you guys think are common.

That guidance would include the current level of investment spending baked in there.

Obviously if conditions got better or worse than that and we chose to accelerate or decelerate investment spending, that would give you a different answer.

Based on where we're investing today in a range of minus 15% to minus 20%, lots of cash and operating margin in the 11% to 12% range is probably the best I can give you.

Okay.

Great.

I'll get back in queue.

Thanks.

Thanks, Adam.

Your next question comes from the line of David Manthey with Robert W.

Baird.

Good morning, guys.

Hey, Dave.

Was wondering if you could address the number of days here in fiscal 2009.

By our calculations we have you losing a day in each of the first and second quarters and then picking one up in the third with the fourth even.

Is that correct?

And, if not, where are we wrong?

I'm looking Dave.

Hang on just a second.

We don't see it any different in '08.

We have the same number of days quarter by quarter.

In '08 and '09.

Maybe offline afterwards we'll straighten out where the difference would be.

You're saying in each of the quarters of fiscal '09 you have the exact same number of days as fiscal '08?

Right.

Okay.

All right.

Sounds good.

Second, in terms of the gross margin, I would expect that with volumes the way you're seeing them right now based on your forward-looking guidance, that you've made an adjustment in your gross margin also for lower levels of rebates and I would also assume that given you've seen that going into the end of the quarter here, did you already make an adjustment in the first quarter that we won't see an abnormally harsh adjustment in the second quarter for rebates and then, Chuck, just to follow up on that, if you could address your ability to maintain selling margins in a deflationary environment.

Okay, Dave, I'll take a first crack.

Rebates, we talked about this for a couple calls now.

With the potential for volumes coming down, clearly, on the surface that would have an impact on rebates and that's been consistently factored in now for a couple calls.

We are challenging our teams and our product teams are going back to suppliers and looking for the opportunity to renegotiate thresholds.

As you know, we feel we're taking share in those suppliers that choose to work with us through this downturn will reap the benefits coming out the other side.

All that being said, the absolute volumes certainly is down and it's been factored in for a couple quarters now.

So the change is not from Q1 to Q2 in an abnormally large drop in rebates quarter-over-quarter.

That major margin mix there or change in margin is a function of what we pointed out in the script.

Our promotional offerings, we saw in December a significantly higher percentage of our sales were occurring around those promotion activities that were in the marketplace and as well, that mix we talked about forever where the large accounts continue to outperform the core, that's been even more exacerbated, it looks, in the second quarter.

So it's more of a mix issue and focus on the success of our promotional offerings that are driving that change rather than a big change in the rebate.

Dave, I guess the only thing I would add to it is that our team is doing a really good job out there of maintaining selling margins, where we're proactively have gotten more aggressive and really getting great results out of many of our promotional activities, something that customers look for during times like this.

And we are also seeing a bit of additional discounting in this environment where we've got to meet competitive pricing.

But by and large, we're very comfortable with the way that that's being managed and that's not having a significant drag as one of the components on our margin other than the greater disproportionate success that we've been having on our promotional programs.

Okay.

Thanks, guys.

Sure, Dave.

Your next question comes from the line of John Baliotti with FTN Midwest Securities.

Good morning.

Good morning.

Dave, I had a question, if you just think about the trends, the first quarter obviously got worse than the fourth quarter.

I'm wondering, would it be fair, obviously total lack of visibility for a lot of companies, to kind of think about even the quarter after this one in the similar light that if people had made -- placed orders in the fourth quarter or they may have that stuff sitting around that they're going to start to use when they do come back and maybe that it makes the recovery a little bit slower as we go through the year?

John, it is just so hard to say.

Right.

I think you can make a case that things will begin to level off and consumption has been shut off.

Inventories at customers are low, perhaps, at some point too low and they will begin to build.

On the other hand, with the layoffs that we've been seeing at customer locations, perhaps that inventory and the amount of inventory that a customer has is still too high and will persist for longer.

So very hard to say where this thing is going to head.

But, whatever direction it goes, we're certainly managing and ready for it.

But I think in particular, as I said, through this time we're going to use it to take share and, unfortunately, if it goes very long, that really does bode well for us because of the enormous pain that that puts on our smaller competitors that control the bulk of this market.

I would think that whatever you're feeling, that very long, that really does bode well for us because given that most of your competitors have far fewer customers, that they're feeling it more acutely and credit obviously going to be more of an issue for the private small guys.

I would think that you probably prefer that people think much more conservatively, obviously, as we go through the rest of this year given the layoff discussions you had and I would imagine that even those customers, when they do start to come back, that they may even operate with you fewer shifts.

Yes, I think we're seeing those shifts dramatically reduced, shortened or eliminated all together for some that were running multiple shifts and I think the point that you make is a really important one.

When you take a look at the markets that we're in, and how highly fragmented it is, the pressure on the small players who control the bulk of this market is absolutely acute.

So when you take a look at MSC and how well positioned and how well capitalized and how strong our balance sheet is, when you think about that across a small Company, the credit crisis and the crunch that they're under is magnified many, many times over.

Okay.

Great.

Thank you very much.

Thanks, John.

Your next question comes from the line of Brent Rakers with Morgan Keegan.

Yes, good morning.

And I know, guys, you typically don't like to talk about trends between manufacturing versus non-manufacturing customers and kind of this one month after the quarter stub period but I guess in light of kind the unprecedented conditions going on I was hoping maybe you can give us more color on manufacturing customers kind of of versus metal working customers and even versus your non-manufacturing customers, what the trends have been over the last let's say four or five weeks or so.

Sure, Brent.

I'll try and give you a little bit more color.

We saw the slowdown broaden across our really entire industrial base with declines accelerating throughout the quarter.

As we mentioned, the holidays were like nothing we've ever seen because of the number of shutdowns, length and duration through the period.

What we also saw were the effects of these declines were not just on our small customer base but also affecting our large customers as well and that also was accelerating through the quarter.

So that was another trend that was emerging.

Hardest hit, of course, has been our historic base of small to mid sized shops and manufacturers that make up a considerable part of our business.

But, overall, small, large, durable goods manufacturers in general have also been really hardest hit.

So, as we said, we're seeing customers across manufacturing and non-manufacturing really clamping down on spending, holding off on purchases wherever they can and moving to reduce inventories.

So the layoffs that we hear about in the headline news, in the headlines every day on the news, they're the big ones but I can assure you with our kind of antennas up and the way that we're plugged into our customer base, we hear of many, many more throughout, really going on throughout the nation.

So when you look at our regions and our regional breakout, I think you can see the effect in particular of the concentration in durables because the midwest has a disproportionate share of that.

So hopefully that gives you a little color.

But coming back to where you originally started, the pain through the quarter and the declines through the quarter absolutely not only affected manufacturing, although much more disproportionately so, but also non-manufacturing as well.

David, just as a follow-up to that, I mean, when you look at your disclosures for the first quarter, I mean, and actually over the last several quarters, manufacturing, I guess that's probably fairly obvious that manufacturing has been a lot bigger drag on your business than the non-manufacturing customers.

Is this relationship through the -- with the talk of all the December shutdowns, is that even being exaggerated more on the negative side for the manufacturing customers?

Well, I think the mix, could see the mix in the business between manufacturing and non-manufacturing, 72 manufacturing, 28 non-manufacturing.

Unfortunately, while -- our direction over the years has been to continue to diversify our portfolio of customers, unfortunately we got the diversification gains the wrong way by shrinking the manufacturing base.

So I guess to the extent that that's exacerbated, it will put more pressure on that mix.

Then just one final related question.

You talked and obviously the guidance is hazy and conditions are hazy in general but given all the plant shutdowns that you saw in December, and now that we are now I guess January 8 today, have you seen or in conversations with these customers have these plants that have gone down, have they come back as of yet or do you have any information as to when the majority of some of these plants will come back?

Yes, I think we're -- listen, there are still some that have not yet moved through this period but by and large the holiday period, thankfully is behind us.

I would love to share a couple of days in January.

The reality is that until we get this full week under our belt, it's really not a meaningful data point.

So whether it's better or whether it's worse, until we get the week, I think it would only be misleading to share a couple of days.

Thank you, David.

I appreciate it.

Absolutely.

(Operator Instructions) Your next question comes from the line of John Inch with Merrill Lynch.

Thank you.

Good morning.

Good morning, John.

Good morning.

So I want to ask you, the same-day shipping, same-day shipping program, how much dollar cost does that represent kind of on an annualized basis?

I'm not talking about the revenue benefits, purely the dollar, and does that have a material impact in the second quarter in terms of coming up with the kind of 12% margins to get to your guidance range?

John, it's Chuck.

The same-day shipping, are you talking about the enhancement we've just introduced?

Yes, what you've talked about last quarter, yes.

The piece of that's on the cost side to us is a little more on the freight side with the obvious tradeoff in benefit of pulling the sales in and improving top line.

I think in the environment we're in right now, it's difficult to say dollar for dollar here's what we've got on the freight side and here's what we experienced on the sales side.

We're confident it's working.

Our customers tell us they like it.

We can see order patterns that say that they like it but for us to try to break it out and give you dollar amounts it's just not something we're able to do.

Okay.

So to go to the sequential margin decline, I think you're suggesting that there is no real material impact from this initiative, is that what you're saying?

Not from Q1, if you're trying to go from Q1 or into Q2, that's not the case now.

It's more the sales decline than a deleveraging that's taking place given the model and how it's structured.

That's what's driving the margin change.

I understand.

How much of the demand downturn would you guys, as you've kind of talked to your customers and done your modeling, would you maybe attribute to the liquidity squeeze or lack of availability of financing on the part of your customers?

A good question, John.

I don't know that we could pinpoint out that it's a lack of availability.

It's end user demand that's driven back through the manufacturing channels that's driving the shutdowns, it's the major driver of the change in our sales revenue, not so much, boy, they could make it and have customers to buy it, they just can't get the credit to finance their working capital.

It's the manufacturing shutdown and end user demands.

To that extent certainly the credit crunch that's affecting the user demand that's working its way back through the supply chain.

It's the manufacturing piece with the shutdowns and so forth that's really hurting us.

Yes, I'm just wondering if sequentially you're talking down 16%, 17% if you thought maybe anecdotally half of that might be attributable to lack of credit on the part of customers.

I don't know if there's a way to quantify that.

I don't think we can even --

Impossible to break it out and quantify which component is attributable to that.

That's fair.

Let me ask you one more thing.

You guys have sort of talked a lot about taking share and positioned for recovery and I guess there's a fairly healthy contingent of folks who seem to think that this downturn could extend well into 2010.

Wondering, at what point do you begin to realize, well, we're going to have to take a charge and lay people off?

Like at what point do you say this is going to go on for much longer than any of us would have anticipated, we need to adjust our cost structure or convert.

Obviously you're happy to let the earnings continue to drop and still focus on the top line.

John, first of all, we're not happy to let the earnings just drop.

We will and are continuing to take actions throughout the business to clamp down on spending, eliminate waste, figure out how to get more productive wherever we can.

We've got a very extensive plan that's in place that we've taken many actions in conjunction with,of course, normal attrition that occurs that we think positions us appropriately moving forward.

But by no means are we sitting still.

As business conditions either persist or worsen, we'll continue to take appropriate additional actions and we've developed many contingency plans so that we've got the steps that we'll take and we'll continue to take as the business moves forward.

So we -- at the same time that the we are going to prudently invest, we're also going to stay very focused on cost management and the organization, frankly, is rallying around trying to improve our business performance as well, not only in the revenue side and on the share gain side, but being very mindful that conserving every dollar is -- adds to the mix of our ultimate focus which is share gains and making sure that we continue to deliver great -- strong cash flow, which is a very high priority and we're very confident that we'll continue to do that.

All right.

I hear you.

But your sales associate count is at its high, it sounds like you want to maintain that or do you want to manage it lower depending on market conditions?

No.

We are, as I said, we do (inaudible) and that we will (inaudible) in the volume areas through the normal process.

One of the things that Chuck had mentioned in his script that I guess I'll elaborate a little bit more on is how our team is getting creating to reduce costs by pulling in some work that was previously outsourced, which is a great use of our workforce.

We're also doing many things that by being able to get the projects that are very tough to focus on when things are busy, we're using today's opportunity to do that and we know that that's going to create lots of value in the future.

So part of it is that and then part of it is you will see head count coming down through normal course.

Thank you.

Thanks, John.

Your next question comes from the line of Richard Marshall with Longbow Research.

Good morning.

Good morning.

I guess looking at top line, while top line was a little bit weaker year-over-year, I think it was still a little bit stronger than many of us expected.

I mean, to what extent do you feel that maybe orders might have been pulled forward or year-end budget flushes for those who are on a calendar year end might have contributed to somewhat higher than expected top line growth this quarter?

Richard, I have to tell you that year-end spending from everything that we could tell was basically non-existent in our customer base.

Typically at the year end you have a Company's budget or capital that they want to get in and that usually gives a bit of a pop on a relative basis to some of what we see in December.

Our anecdotal feedback from customers was that that was absolutely shut down and that any release of budgets or any year-end capital spend was absolutely obliterated.

So we don't think there was any of that and you could make the argument that based on not having a December perhaps it's going to come later on as the year progresses.

We don't know.

Okay.

Great.

Any further color on end markets that were stronger, weaker, maybe any surprises in terms of end markets that were stronger or weaker than you expected this quarter?

We do have an extensive process to look at end markets.

There is some relative strength in some that we measure and watch and in part that's how we direct our sales force and some of our programs.

It isn't something that we like to share publicly for obvious competitive reasons.

Of course, as I said earlier, the in general durables have been more hard hit but I can't say that that's a surprise when we look at what's happening in manufacturing and certainly in goods that last longer for multiple years, not surprising to see the kind of declines that are happening there.

Okay.

Great.

Just one last thing.

You talked a lot about market share gains in your remarks.

Just was curious if you had any sense for what market share gains might add on a full year basis looking at '09?

Very tough to talk about specifically.

We certainly look at things like many of the industry benchmarks, segment analysis, really relevant industry information but very hard to specifically measure and I think the most compelling gauge that we use that's anecdotal we really think that it tells an accurate story is the feedback that we get from our customer suppliers and from our own sales force.

All right.

Great.

Thanks very much.

Thanks, Richard.

Your next question comes from the line of [Ben Shamsian] with (inaudible) .

Hi, good afternoon, gentlemen.

Good afternoon.

Could you just talk a little bit about pricing, you've had the price increase go through.

How do you see that maintaining going forward, especially with sort of commodity prices as well as the general sort of pressures that your customers are facing?

Well, I guess I'll talk a little bit about what we're seeing on the cost side, which the environment has been extremely volatile.

But we've experienced cost increases when commodity inflation was escalating but where products are raw material and petroleum sensitive, we're now seeing some lower prices and wherever those prices have abated, our product management team has gone back and is negotiating with our suppliers to reduce our costs, so on that side we really do view it as an opportunity.

As I mentioned earlier on the customer side, customers in this environment certainly are more price sensitive.

We largely address that with our promotional campaign and with the flexibility that we give our sales force but we're very comfortable with the pricing that we've implemented for example we had a big book increase and we don't see real risk on that side of the business.

Okay.

Thank you.

(Operator Instructions).

Your next question comes from the line of Susan McGarry with Granahan.

Hi.

Just a couple things.

I was wondering if you could address the international sales.

They seem to be weaker than the other geographies.

Sure, Susan.

Good morning.

Hi.

Actually, the international, as you know, it's a small part of our business but primarily what you're seeing there are the effects of currency.

The strength of the dollar has actually turned that metric to a negative where had that not been the case, there would have been positive growth.

Okay.

And then just so I'm clear, did the non-manufacturing sales deteriorate through the quarter kind of in the same -- following the same pattern as the manufacturing?

I can't say that it followed the same pattern but there was overall deterioration through the quarter, although non-manufacturing, as you could see, still grows, it still grew quite strongly.

But it did weaken?

Susan, we put the -- the website has the growth broken out and yes, I mean, for the non-manufacturing sector which grew at 10.6 for the first quarter, that was down from 12.7 in Q4 and 13.4 from Q3 so, yes, it's certainly weakened as well.

But the manufacturing piece which is obviously the bigger piece of our business, weakened more substantially.

I guess what I just want to get a sense of, though, is sales weakened during the quarter month by month and that happened in both manufacturing and non-manufacturing?

Yes.

You saw the declining trend through the quarter affecting the entire business.

Okay.

And then just one other question about bad debt and just the credit health of your customers in general.

Susan, it's Chuck.

Yes, there was a slight increase in our DSOs from year-end so where we finished Q1 some of that's seasonal in nature with our quarter ending right around the Thanksgiving holiday pretty much every year.

There's a bit of a stretch in DSOs over where we would have been over the previous quarter, but we did start to see for the first time some slowdown due to the economy in payment trends and if you look at where our bad debt reserve is now as a percentage of receivables, from year-end to the end of Q1, we actually increased that from about 2.6% of receivables to 3.1%.

The provision is really an end result of the process.

We look very rigorously at our large accounts one by one and in any account in a region over about $100,000 in either credit line or balance.

We go through a very rigorous process, set the appropriately serve and the end result is what the provision needs to be.

To answer your question, a slight deterioration but we think we're adequately reserved and don't anticipate any large write-offs coming.

Just anecdotally, what are you hearing from your smaller customers and bigger ones in terms of their access to credit?

Not from -- I mean, not from the Company but bank credit and other forms of credit.

I mean, have there been -- have you heard about them being shut out or not?

Yes.

I think it's fair to say, there's obviously the smaller the customer the more difficult, but I think it's fair to say across the board, it certainly has some impact on their ability to get money and, therefore, to invest in capital expenditures and other things that would have an impact on our business.

Clearly there's a piece of that going on.

Thanks.

Thanks, Susan.

Your next question comes from the line of Adam Uhlman with Cleveland Research.

Yes, hi, guys.

Can we talk a little bit more about the average transaction size?

It's been rising for some time now, I guess, and a big piece of that is the -- those large customers that are becoming a bigger piece of the mix but it's somewhat counter intuitive now with even those large customers buying less as the smaller customers are still a majority of the business and presumably they would be placing smaller order sizes, so do you have any further color on what's unfolding there?

I think you hit it in your opening part of the question, Adam.

The reality is that the large customer segment who has a significantly higher average order size, given the weighting of the mix of our customers, is driving the overall average order size higher and that's really the driver.

What would be the average order size for a small customer versus a large customer, in dollars, if we were to -- ?

We have it but we don't break it out.

Okay.

We don't share that publicly.

Okay.

And then the active customer count has slipped again in the first quarter, I guess.

Could you talk about what's unfolding there and it looks like you're ramping up ad spend a little bit relative to the previous trends, maybe you could just -- those two issues together, is that -- trying to drive additional customer creation or -- ?

Good.

Yes, absolutely, I'll comment.

Historically the decline in customer count has been part of a proactive way that we're managing our growth investments and it's been a choice on our part.

And as we've discussed in the past several calls, we're constantly looking to prune and improve productivity within our programs, constantly testing, constantly looking to get the biggest bang for the buck and I guess just to step back further, kind of a reminder of our strategy has been to focus on acquiring larger customers which typically have multiple ship to locations and atriting those small one-time buyers that really have very little potential for the future and as a result our total customer count, which remember is measured in bill to only, you've seen it dropping and because of this multi-location effect, it really doesn't tell the whole story.

But that's what's been happening and our strategy to reduce those one-time -- those small one-time buyers absolutely has been effective.

But I do want to say that for the first time what we saw in Q1 was a bit different than previous quarters where while our direct mail metrics have all remained solid as we dig in, we did see that the customer loss did extend beyond those one-time small buyers into the next layer of customers that I'll call that small to mid-sized revenue customer.

So, we expect that what we're seeing is absolutely the effects of the economy, a year of recession in the manufacturing sector, but we can't yet predict whether what we recently saw is temporary or whether it's part of was we're going to see moving forward.

I can tell you that the team is very closely focused on it and watching it carefully and continuing to dig in.

Are you seeing growth with your ship to location customers the way that you look at it, do you slice the data that way?

We do.

Okay.

Great.

Thanks.

Thank you.

Your next question comes from the line of Brent Rakers with Morgan Keegan.

Yes, guys, just a couple follow-ups.

First, you talked a little bit about deflation in terms of product costs and all that, but I was hoping you could maybe quantify that a little bit more specifically.

I think in this quarter year-over-year I think it works out to about 3.5% year-over-year increase.

Do you see -- I mean, given where we are right now and given your negotiations, do you still see pricing up until the point where you anniversary the big book price increases next year?

Brent, are you talking about interim price increases between now and the next big book?

Is that your question?

I'm sorry.

I guess more so in terms of -- obviously I think we're going to see some price decreases and you talked about on specific products we already are.

But will those price decreases be so large that in the third quarter or fourth quarter let's say of this fiscal year, you would actually be seeing net deflation?

No, I think I've got what you're digging for here, Brent.

Basically, we're very fortunate that when you look at our business the raw material costs are a relatively small component of the cost component and the bulk of our mainstay product lines and we've also got some additional protection there given our high gross margins, which is kind of another shield.

So for any lines that we've identified, where we could have exposure from a deflationary standpoint, if for example it's commodity-type product that has a very high copper content like an extension cord, for example, we're managing those areas very, very closely but overall we're very comfortable that the risk of the Company is very minimal.

So to answer your question about through the year we would see overall macro decline?

Absolutely we don't see that at all.

Great.

And then just one other question, and again it relates to the guidance for the second quarter.

It looks to me kind of backing through some of your guided numbers, it looks like your midpoint revenue down about 17% I think sequentially, and then SG&A down about 4.5% to 5% sequentially.

Do you see that as the relationship kind of giving us a sense of what your fixed to variable cost mix is, meaning that it's somewhere in the neighborhood of variable costs being 25% to 30% of overall SG&A?

Does that sound reasonable?

Brent, it's Chuck.

I think more so what you're seeing, I wouldn't draw any model conclusions out of it right away.

Some of the cost reduction activities that I talked about in the script, some things that are in place, some things that are in place and accelerating, and some new things that we talked about that are going in there is having an impact in the second quarter and will moving forward, that's a little bit different perhaps than what it had in prior quarters.

So I wouldn't draw the conclusion about that.

I mean, we've said publicly before at the margin in our variable cost in the 10% to 12% range, something like that, on incremental sales up and down.

But we think this environment, it's dangerous to think that way, that often the rate of change in the environment is a factor when things fall off a cliff, even the ability to adjust some of the variable is different than if there's a precipitous decline and those types of things.

Other than the metric that at the margin the variable is in that 10% to 12% range, I'm not so sure I would use the guidance as drawing any conclusions bouts variable and fixed mix.

Chuck, is there anything at all in the first quarter SG&A that strikes you as somewhat unusual on the positive or the negative side?

No, I would -- peering to it prior quarters, only thing I would mention is our, and we talked about it a little bit already, we did increase our reserve for bad debt allowance a little bit relative to what you may have seen booked last year and even in the fourth quarter but that's not huge.

It's somewhat of a factor but not big.

Thank you, Chuck.

You're welcome.

Your final question comes from the line of David Manthey with Robert W.

Baird.

Question's been answered.

Thank you.

At this time, I will now turn the call back over to management.

Okay.

Well, thank you all for your interest today and participation and we look forward to speaking to you next quarter.

Bye-bye now.

This concludes today's conference call.

You may now disconnect.