MSC Industrial Direct Co Inc (MSM) 2009 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the MSC Industrial second quarter 2009 earnings 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 Alex Tremont of FD.

Please go ahead, ma'am.

Thank you.

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

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

If you have not contact 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 and available for two weeks 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 Web site 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 Web site.

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 the US securities laws, including guidance about expected results in 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 of the Company's last 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 and Chief Executive Officer, David Sandler.

David, please go ahead.

Thanks, Alex.

Good morning, all and thanks for joining us today.

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

Before we get into our financial performance, I'd like to tell you about how we are dealing with the current economic situation.

First of all, we continue to be troubled by the economic upheaval that has left so many people without jobs and by the devastating losses that continue to be felt throughout the country.

We have made several moves that position our Company to not only weather the current economic storm but flourish once the economy turns and the growth cycle resumes.

We remain optimistic about the future and steadfast and confident in our belief that it is not about if but rather when the economy will recover.

We have moved to further reduce our operating expenses and at the same time have maintained our focus on protecting and maximizing gross margins.

We view the current climate as a unique time and also a significant opportunity to take share from many of the smaller, less well capitalized distributors who still dominate this industry.

We will continue to strengthen our customer relationships, further penetrate and gain market share by delivering exceptional levels of service and inventory availability, provide superior value-added services and leverage the relationships our sales force is dealt.

Their knowledge of the customers' business is a critical success factor in helping our customers to reduce their costs of procurement for MRO products.

Our customers generally continue to tell us that the impact of weak economic conditions have not abated and the majority of customers we have spoken to feel the overall business conditions are worse now than three months ago.

Certainly the macro indicators like the ISM, factory utilization and latest GDP have all pointed in the same direction.

We saw continued lay offs by our customers during our second fiscal quarter and some lay offs in March as well.

Our customers also report that many of the smaller distributors are suffering due to their decreased customer service levels, lay offs, and lack of inventory.

This trend has increased from the previous quarter.

Consequently, although customers' overall MRO spend levels are down, we believe that a larger portion of the customers' business is being shifted to MSC from these smaller competitors.

Customers continue to tell us that this is happening and we have a process that tracks these instances and provides us with an important anecdotal data point that supports our belief that we are taking market share.

Historically, small distributors suffer the most during these times and we tend to keep the share that we gain.

Consequently, when the economy improves, we are confident that MSC will grow faster than most in our sector.

There continues to be pressure on our customer base to reduce their inventory levels, even more than they have already been reduced.

This is especially so among the small and mid-size customers.

We have received some reports that this pressure is lessening among some areas within our large customer base, which might indicate a leveling.

However, we have not yet seen this in our sales results and are not assuming that a bottoming has occurred.

MSC has continued to execute its value-added model at historically high levels.

Customers continue to embrace our ecom and our inventory management solutions, in order to help them reduce costs.

Our fill rates remain at or above goal.

We continue to ship orders complete with very few errors and we answer the phone by the third ring.

In short, our team continues to do an outstanding job of providing our customers with exceptional service levels.

MSC continues to invest for the future as well.

We have resumed our west coast build out, as we think this area continues to represent a significant growth opportunity for us.

We added some excellent new associates to our team in Q2 and will continue to prudently do so.

The sales force consisted of 914 associates at the end of the second quarter and we project we will reach approximately 920 by the end of Q3.

Additionally, we are investing in our fulfillment centers, our ecom capabilities and improving the customer service experience.

And in the previous two quarters, visibility continues to be poor, and we do not have the same degree of confidence in the reliability of Q3 projections as we have historically had.

Consequently, our guidance for Q3 is based upon current sales trends.

On a preliminary basis, sales for March '09 declined approximately 22% versus March of last year.

However, the Easter holiday fell in March in 2008 and this year will fall in April affecting that comparison.

Sales guidance takes the reversal of that affect in April into account.

We expect that sales for the third quarter of fiscal 2009 will be between $339 million and $351 million and diluted earnings per share to be between $0.37 and $0.41 per share.

Thanks.

I will now turn the mic over to Chuck.

Thank you, David.

In Q2, sales came in just below our guidance range as business continued to deteriorate throughout the quarter.

Earnings however, came in near the top of guidance.

Gross margin slightly exceeded the top of our guidance range and we were able to further reduce our operating expenses.

The business environment remains difficult with an acceleration of discounting by the competition.

We have reduced our gross margin guidance for Q3 to 46% plus or minus 20 basis points to reflect this acceleration.

Q2 operating expenses were well below guidance.

While some of this expense reduction was due to lower sales volume, most of it reflected further tightening on all expense lines.

We have recently taken further actions on expenses, which should lead to lower expenses in Q3 than in Q2.

These steps include reductions in our associates' hours in volume sensitive areas such as the fulfillment and call centers.

We have also temporarily suspended the Company's matching contribution to the 401-k plan, and significantly reduced our incentive accruals for the year with the greatest share coming from executive and senior management.

We are revisiting all of our contracted service and lease arrangements in anticipation of further reducing costs.

Although the efforts are still in a very early stage, we are encouraged by initial results.

The aggregate savings are significant and have been reflected in our guidance for Q3.

Cash generation continues to be strong.

Balance sheet management yielded excellent results as receivables and inventory were reduced substantially in Q2, while maintaining our customer service levels.

Overall cash balances rose significantly in Q2 and this trend has continued in Q3.

Our balance sheet remains very strong with significant sources of available credit, in addition to our cash balance.

Our total borrowings, less cash balances, were below $40 million at the end of March.

Our credit facility still has over two years left to run before it expires.

So we are not under any pressure to renegotiate at this time.

As expected in this economy, receivable balances are aging.

We have made an additional provision in the quarter to increase our bad debt reserve to reflect this fact.

Consequently, our reserve as a percentage of our total receivables increased during the quarter.

We believe that we are adequately reserved given the detailed approach we employ to determine the reserve.

Inventory reserves continue to be adequate and we do not see any material risk in our inventory due to inflation.

Thank you and I will turn it back over to David.

Thanks, Chuck.

We are managing through the most severe economic situation of our time.

We continue to execute on our model and we are confident we are taking share from many of our smaller competitors.

Historically, we keep these share gains when times improve and we have no doubt the same thing will happen again this time.

Our excellent cash generation and low debt levels combined with our high customer service levels and investment for the future have given us a significant competitive advantage.

We remain very optimistic about the future of our Company and I want to take this opportunity to thank our associates for all of their hard work that they continue to put in to making MSC such a successful organization.

With that, I will thank you all.

I will now open up the lines for q-and-a.

(Operator Instructions).

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

Hi guys.

Good morning.

Hi, David.

When you are talking about the guidance and extrapolating your current sales trends, are you referring to a dollar basis looking sort of at average daily sales dollars as they are running right now and dragging that forward?

Or are you making some kind of a seasonal adjustment to those numbers?

David, this is Chuck.

No.

What we have done, for the guidance, we have given you March results for what we have seen so far and we looked at making the adjustment internally here for the Easter holiday that David mentioned and then running out the other two months based on what we [see on an] average daily sales trends.

When we give you the midpoint of the guidance at roughly 345 that's an average daily sales number that's minus 24.5 compared to, on an average daily sales basis, Q3 of last year.

Got it.

Okay.

And second question, where do you think we are in the inventory destocking cycle?

David, I think you mentioned a little about this and I know you talked to a lot of customers.

Where do you think your customers are in relation to destocking and can you talk about your own inventory levels and where you think those might go?

David, on the customer front, you know, we are seeing a tremendous amount of ongoing destocking in our small to mid-size customer base.

We've seen a lot in the large customer base as well.

We don't see any signs at this point of innovating in our broad customer base.

We have seen a couple of indications that perhaps we are getting to a leveling in some of our large customer base, but in general, we are by no means ready to (inaudible).

So I would say that we are seeing a few signs that perhaps declines are slowing.

Although, frankly, that is in the broad customer base our customer we are still seeing significant destocking.

And I guess just jumping over to our own inventory, we have made great progress and we think we've still got significant runway for continuing to make progress in reducing our inventory and having it adjust to the kind of sales levels that we are now experiencing.

All right.

Thanks, guys.

Thank, David.

Your next question comes from Adam Uhlman with Cleveland Research.

Yes, hi.

Good morning.

Hi, Adam.

A question on the supplemental data.

I think we brought this up last quarter but the active customer count continues to slip.

You know, we are down like 7% year-over-year.

Have you seen any, any signs of stabilization of the number of customers going bankrupt or what is unfolding there?

Adam, let me give you some color.

You know, the historically as you know, the decline in customer count really isn't part of managing our growth investments.

That's been a proactive choice in our part.

The ongoing program is to constantly be looking to prune and improve productivity within our direct-mail and marketing programs and reduce wherever we don't see that the program components are even meeting the ROI threshold or conversely, we adjust where they're exceeding and it and it is really a dynamic process.

Just one more kind of connecting the dots as a reminder in our strategy that we have been really focused on acquiring that large multi-plant location, and also focused on trading that small time, you know that one-time buyer.

So I guess specifically giving more on, you know, what you are asking.

As we have retreated these customers, which has been the primary driver of our decline, that was by design.

What we started seeing in the quarter though, that has continued into this quarter is that while our direct marketing metrics have remained solid, the customer loss that we saw in the small group has actually extended a bit above that into the next layer of customer, that small to mid-size group in revenues.

We have done a lot of work and research on it to date and so far everything we are seeing is that the cause is the fall out from the effect of, you know, this recession dragging on in the manufacturing sector for now well over a year.

So we can't predict that that decline actually in the segment is going to abate, stabilize if it is temporary but I will tell you we are watching it very closely.

Okay.

And then the average order size slipped quite a bit this quarter relative to the last quarter.

What are you seeing with order frequency and the underlying trends of average order size?

Yes.

We actually in digging into it.

You notice a decline but we don't report it this way.

We saw declines that were pretty consistent across all of our customer segments and the conclusion that we see on that is clearly that the recession that is taking its toll on the size of the order and customers trying to squeeze that down a bit but we did see it pretty consistently across all groups.

The lines per order are not that much different, if it is the amount per line, if you will, that we are actually shipping.

Instead of picking five from the bin, the order is for three or something like that which is causing the sales dollars per line to be down as opposed to a collapse of the number of lines on an order.

Great.

Thanks, Chuck.

That's helpful.

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

Yes.

Good morning.

I'd like to talk a little bit more if we can about the operating cost side.

Maybe if you can give us a sense in terms of how the head count at MSC has maybe changed over the first six months of the year and possibly even within the last month.

And then on a secondary basis, if you can just maybe delve a little bit more into some of the components within SG&A, maybe starting with you know, is, if you have reduced head count, is there any offsetting severance in the period?

And then maybe just again, more details particularly with regard to shipping and handling as well.

Hi, Brad.

This is chuck.

A couple of things.

Head count wise, let's start at the top.

We have been making investments as you know throughout the course of the downturn but literally when you look at Q2, where we are now versus last year, there are approximately 60 more or so sales associates that are on board that weren't here at the end of Q2 a year ago.

So that run rate if you will is baked in.

That's a net number of where we stand on sales associates.

That is in the results now that weren't in before.

So from the sales perspective, that is up a little bit.

Also, in Q2 you may have noticed in the supplemental data we provide, our mailings were up from 6 million or 7 million or so, in Q2.

The promotional activity that we put in place to try to attract and gain more market share was evident in Q2 and we redirected more spending in areas in Q2 that frankly had fairly high returns results for us from a direct mail point of view.

So there are a couple of areas are actually up in spending in Q2 but for conscious investment reasons.

On the down side, we mentioned some of these in the call, in the terms of reducing expenses, that the head count that actually has come out in the overall organization is through attrition and attrition only.

I want to be very clear in that.

Going forward for Q3, we have reduced hours in our volume sensitive areas; that has been in the form of days off and time off and not the elimination of overall head count in our volume sensitive areas like our call centers and our customer fulfillment centers.

While you're not going to see that translate into a pure head count reduction, there hours and money coming out to adjust to the volume levels without physically having to resort to taking people out of the organization.

That has been our strategy and our policy for years and we are adjusting on the variable side by reducing hours as opposed to taking folks completely out.

Does that give you some perspective?

Chuck, no that's a great start.

Maybe just a clarification on the health care cost side, has there been any change there?

I know that has been an area that I think in the first quarter was down despite the head count increases in the first quarter.

Was that down again in Q2 year-over-year?

That trend fortunately, Brent, continued in the second quarter.

It was one of the reasons that given our, where our sales is relative -- was in Q2 relative to the guidance, we actually were at the higher end of the range, in guidance rather than down below even with the sales (inaudible) was and benefits in total were actually behaved well again in Q2 as they did in Q1.

I want to make one other point that I want to drive home, and that is the incentive accrual particularly as it relates to senior management in the organization.

We have, in fact, reduced those incentive accruals based on the activity level we are seeing now and what the anticipated performance might be for the year.

So there is also some expense coming out moving forward that relates to reduction in incentive pay.

Chuck, maybe just as a last question as a follow up to that comment.

After you guys had a pretty good, a really good November-quarter, and the revenues really hadn't broken down then.

Is there any possible like adjustment to that accrual in this quarter tied to kind of reversing out some of the incentive comp paid in Q1?

Is there anything like that going on?

No.

The bonus pay out, Brent, is on an annualized basis.

So that wouldn't have been necessarily be the case.

The other areas of incentive comps, such as -- you know, everyone is hurting for this.

The commission on the sales line and some of the incentives we pay in our distribution centers and so forth.

They have come down in the second quarter and will continue to do so throughout possibly the year versus where we were in Q1 but the annual incentive is just; it's an annual incentive and wouldn't be booked every quarter 1/4, 1/4, 1/4.

It is adjusted and will be adjusted between now and the end of the year.

Thank you, Chuck.

Your next question comes from the line of Jeff Germanotta with William Blair and Company.

Hi.

Good morning.

Hi, Jeff.

I wanted to explore some of these cost take out things from another angle if I may.

Year-over-year, your SG&A is down $3.8 million you said you might step it up a little bit in the third quarter.

So is it fair to say on an annual basis we can see a run rate of SG&A cost take out in the $15 million to $20 million range?

Jeff, a couple of things.

Number one, we have to talk about growth spending.

So any cost out when you are looking at the macro numbers year-over-year, you need to contemplate what the level of growth spending would be.

So we have given you some guidance as to where we plan to be for next quarter in terms of sales head count and again, as I just mentioned with Brent, we are up.

At the end of Q2, approximately 60 sales associated versus the prior year.

I think what is -- given the change in the volume from Q2 to Q1, remember Q1 was virtually flat for us year-over-year, and was pretty consistent with where we ended the year in Q4.

The real volume change occurred in Q2 and we couldn't strip out the variable expense, if you will, as quickly as the volume dropped in Q2 over Q1.

Going forward for Q3 and which wasn't in our results in OpEx for Q2 is somewhat of this reduction I spoke of in hours in the more variable intensive areas such as the call centers and the customer fulfillment centers.

So there will be more OpEx coming out for that and other variable OpEx coming out for freight and other things that support the reduced sales volume.

But I wouldn't want to characterize just take what we have seen in Q2 and bang it times four and there you have the answer.

We should actually be a little bit better in Q3 than Q2 for the things that I mentioned.

However, be cognizant of the fact we will be doing some growth spending for the rest of the year that would add some SG&A back.

And Jeff I will add a bit to that as well.

There is also a lot of other kind of cost down initiatives throughout the organization whether that is renegotiated contracts, getting more creative as an organization on how to either reduce waste, eliminate things that perhaps we were having done outside we are now doing internally.

Some of those initiatives have taken shape and they're in the numbers now.

Many of them though are just getting started and you will see helping to reduce our expenses next quarter and in future quarters as well.

So let me kind of ask a follow-on question to that.

If you take the cost take out net of the investment spending, part A would be, what do you think the net savings you will have achieved going into fiscal 2010 could be?

And then part B is what is the sales growth rate, having made those structure cost changes, that represents the inflection point between negative earnings leverage and positive earnings leverage as you look forward?

That's a loaded question, Jeff.

We will have do a little more modeling I think to give you the answer to the last one.

I can tell you about operating margins a little bit and tell you where we think we would be if that's helpful, where we are right now with the guidance we provided.

You know, for all practical purposes, Op income as a percent of sales in the midpoint of the guidance here is in that 11%, 11.5% range for the guidance, that we just provided.

Something below minus 25 would probably push us into high single digits on the operating income level if that helps address your question, without doing all of the specific modeling.

The cost down stuff again for the gross spending and net all that out, I guess we are uncomfortable telling you exactly dollar for dollar what everything amounts to other than it is fairly significant and most of that is reflected in here, in the guidance.

I would also say there is a fair amount of cost avoidance as well.

We've had a salary freeze since the beginning of the year.

While you don't see that in terms of cost down year-over-year, it is certainly cost avoidance in terms of not adding more OpEx back to the numbers that we have in place for this year.

Okay.

Now I'll give you an easier question.

The UK -- the UK was a little softer than North America.

Can you comment on some of the differences you are seeing there versus North America?

The number that you see in the street there, the minus 34% is somewhat misleading because 19% of that 34% is foreign exchange.

Okay.

Based on the relationship of the dollar to the pound.

So their actual volume there is roughly down 14% in the quarter.

So they're not quite in the same position as the rest of the businesses but things are (inaudible) in the same direction in the UK.

David, did you want to add something.

The only thing I'll add is just your last point there.

It is a very difficult and harsh environment out there as well.

Well, on the currency question, what do you think currency detracted from earnings per share in the quarter?

It is deminimus given the overall operations; when you talk about for Company as a whole, I wouldn't, wouldn't see how that is significant enough to make a difference.

And then my last question, gross profit margins were surprisingly strong being flat year-over-year.

What do you attribute that to and how confident do you feel about your range going forward?

Jeff, they were actually strong in Q2.

You can see from the guidance we gave, we backed it down a little bit going forward in Q3.

Don't forget that we are still realizing some of the benefits of some of the pricing actions that were taken throughout most of last year and actually the big book increase that went in early on in the year.

What we noticed in March and what is really the driver behind change in our guidance (inaudible) from Q2 to Q3 from an actual 46.5% to a range of 45% plus or minus 20 is.

As I mentioned earlier in the script, the discounting and the price competition from the small local guys, which you know, frankly is expected and as things get worse continue to accelerate.

We did see in March, for us who sells on value but still have to be come competitive.

There was an increase in manual discounting that took place in March.

Our sales team would tell you they are getting a lot more quotes than what they've gotten in recent memory and to be competitive, not solely on price, but to be competitive, there was more discounting going on in March.

We factored that trend in throughout the rest of the quarter.

That is what is taking the margin from a Q2 46.5% level down to what we projected for Q3 of closer to 46%.

Thank you.

Jeff, I guess some of the thing that you consider as this thing -- in our gross margin line, things like our buy better program, overseas sourcing, our private branding initiatives, all of those initiatives have the effect of increasing our margins and other programs that create head winds as Chuck just mentioned on the discounting side, our promotional campaigns and rebates put downward pressure on it as of course does the change in our customer mix.

So, I wanted to kind of give you the view of kind of the puts and takes to the big items we see in that margin line.

Of course, in the near term, all of which have been factored into our Q3 guidance.

Jeff, last point on gross margin, even if the guidance of 46% were basically where the gross margin that we incurred Q3 of last year.

So to your earlier point of margins holding to comparable periods of last year is gross margins still valid even in Q3 with that guidance of 46%.

Thank you very much.

You're welcome.

Thanks, Jeff.

Your next question comes from the line of Daniel Mon with ING.

Hi.

Good morning.

Morning.

You are generating so much free cash flow now, even when times are tough.

Could you give us a sense of, if you start to see a little bit of light before dawn, I guess, what do you think you will start to use that cash for?

You said you are resuming the west coast build out.

Is there a point where you start to buy back stock again?

Dan, this is Chuck.

The cash flow has been pretty solid.

I would say while we might feel a little bit better about the overall banking sector and ability to borrow and so forth.

I would say our bias is still towards right now, conserving the cash which we have a fair amount of.

We would use that opportunistically, if the right acquisition came along, we wouldn't be adverse to using the cash for some of that.

And we as a matter of policy haven't telegraphed when and how much and at what level we would buy our stock back but historically we have done that in more stable times.

We think the bias now is still toward hanging on to the cash until we are very clear where this place is going and opportunistically having cash available in the event the right acquisition comes along.

Okay.

Thanks.

And then for the quarter can you give us a sense of what the pricing contribution was and how you expect that to evolve in the fourth quarter?

Daniel, the break down of the quarter, roughly $9 million of the $85 million decline -- I will dissect it for you -- $9 million or so came from price.

About $81 million of the decline came from the core and from volume, and roughly $13 million came from our large customer segment.

And then on a going forward basis, we have, you know, we have included whatever, there's a lot of moving parts on gross margin, and you know, we have included that into, into that go forward guidance.

Okay.

Thank you.

Your next question comes from the line of Gregory Macosko with Lord Abbett.

Yes.

Thank you.

Just one question regarding your outlook and kind of what you've seen I guess, you were talking about the -- this was with regard to the -- March in terms of your outlook and the fact that the small and mid-size customers were continuing to reduce inventories?

Right, Greg.

And the stabilization with regard to the larger customers, in other words the possibility that you've seen some of the larger customers stabilize in the terms of their orders?

Greg, I wouldn't want to quite make the leap that large customers have stabilized.

I think that, you know we have seen the decline slowing is maybe a better way to characterize it.

But in particular, with inventory, you know, there has been a lot taken out.

There's still a lot of pressure in that area and we have seen a few spotty signs, which make us hopeful.

But you know, I wouldn't go to the place yet that gee it looks like all of the destocking is done.

Way early to call that.

You know, I think better to think of it that it is still occurring perhaps in that large set, the declines have slowed.

But, you know, we certainly wouldn't be ready to call a bottom in that area.

I understand.

With regard to the customer account reduction, is the idea that basically you're trading up in terms of customers, you talk about gaining share.

Is it share gain within existing customers or is the idea that you will trade off the undesirable customers for those that have more opportunity going forward?

Yes.

There's a lot of assets going on.

We have a focus on the preferred customer set, the customer set that we are going after.

There are some that, you know, that fall out that are customers that are let's say less desirable or frankly, ones that we choose to not have long-term because they're not profitable.

Having said that, you know, to say that the, that slice that we are talking about has customers falling out that we would not want to have moving forward, that wouldn't be a correct statement and that is an area that we are watching very, very closely to fully understand what is going on there.

But, you know, right now, everything that we can tell in that slice of customers is that it is related to just how long this recession is grinding along.

And then finally, with regard to the associates you expect to have 920 by the end of the third quarter.

Is there a metric that you use to define as to the, you know, what number makes sense for you on a going forward basis?

How, you know, what you use, dollars each or geographic coverage, how do you look at that?

Well, you know, Greg, for how many we actually put in there's a lot of factors we consider and that's really balancing short term results with long-term investment ensuring that you know, that we are making all of those trade offs.

You know, the runway and our goal for building on our sales force, the runway is huge and we see that as a very important long-term growth driver in the business.

Some of the metrics that we use within our sales force really in this environment while -- while long term, it is a great investment, critical to our model, generating value in the long, over the long term.

In the short term, it is unquestionably a dilutive investment and the couple of key things we look at.

One is time to profitability of the sales force, and the other is the break-even point.

Both of those metrics in this environment lengthen considerably.

So it is much more dilutive in the near term.

Longer term we are very comfortable with this investment.

It is a great one for the future.

Greg, last point on associates.

In a downturn, there's some times availability of associates that you could never get.

You know, when businesses, everybody is on a high note, so the other piece of that equation would be, when the opportunity presents itself, you need to seriously consider, you know, doing it and that doesn't fit into any metric box or anything else.

It is just the opportunity is there to grab them and you go do it.

That's a factor in this marketplace, in this environment that is not generally the case when things are good across the board.

Good point.

With regard to turnover are you still seeing sort of general levels of turnover?

In other words, are you replacing some as well.

Yes.

We are turnover levels are relatively low, and we, you know, as a matter of course, we have got a high performance environment and you know, much of the turnover relates to those that don't meet the performance criteria but it is all, that's nothing that has changed.

That is part of how we manage the business overall.

Thank you very much.

Thanks, Greg.

(Operator Instructions).

Your next question comes from Brent Rakers with Morgan Keegan.

Just a couple of follow ups.

I was hoping maybe you can talk in a little bit more detail about some of the maybe more specific customer verticals, most specifically metal working.

Also, if you can address maybe the heightened amount of weakness within the Midwest market.

And lastly, within the nonmanufacturing category, obviously that's holding up significantly better, if you can talk about some of the end markets there that are doing maybe better than some of the others.

All right, Brent.

I will try and take it in slices.

Hopefully, I covered it all.

First of all, on the customer vertical side, in any of the end markets versus any metal working on the product horizontal I would rather not talk in detail.

We do see some industries obviously faring better than others.

Some are actually doing fairly well, others are absolutely on their backs and we don't like to talk specifically because that is part of how we manage our focus and our focus of where we adjust our time to ensure that you know we are focusing on those that have the greatest potential for growth.

That is why we don't really like to break it out.

We are doing a lot of things on the metal working side of the business in continuing to add more value and solution to, to our customers, and so we are feeling like we are making a lot of progress there.

But, I would rather not split out, you know, specifically comment on those end markets.

Fair enough.

Just one final question, again back to the head count, you said there has been no lay offs, no changes in head count other than attrition.

Could you maybe give a sense for what that attrition rate has been on a year-to-date basis?

Well, it varies in each part of the organization.

I will tell you in this environment, that attrition levels in all areas, I can say this across our CFCs, our call centers, sales force et cetera, they're absolutely lower than what I will call a normal or traditional environment would be and that is I think that's for obvious reasons, we have many, many less associates that are choosing to change jobs or that frankly are very thankful to have a job.

So, attrition levels are lower than we have historically, what we have historically seen.

Hey Brent, this is Chuck.

I want to add that some of the benefit of savings that we are seeing now, folks who are trading out and I'm speaking more in the overhead areas here.

In the fourth quarter of last year, when business was still good, even though that seems like a lifetime ago, we were growing, and so forth, but we started to see the change in the growth rate and started to take action that when positions in the overhead area were being attrited out that we didn't aggressively turn around and go fill them.

So while you come up on the comps if you will for that and maybe in later in Q3 and Q4.

They're savings in Q2 relative to where we were for Q2 of last year and some of that attrition, at least in the overhead areas a fair amount of that was for positions that attrited out in the latter part of last year.

That's helpful.

Thanks a lot.

I am going to actually go back to one of your --one more part of your multi-part question, now that I am looking at my notes.

I just want to give you the last piece.

You asked about manufacturing, nonmanufacturing in the Midwest.

And as you can imagine, what we are seeing in the Midwest in particular, the declines there are a direct result of the high concentration of durables.

Manufacturers in that, in that region, and that is unquestionably the customer group that has been hit hardest by this recession.

You are seeing that in our nonmanufacturing break -- sorry, in our manufacturing versus nonmanufacturing break out as well.

Really, what we have seen is that manufacturing in general has continued to be very hard hit and the declines have also hit our nonmanufacturing customer base.

Although, nowhere near to the degree that we have seen it in manufacturing but durables which would equate to the Midwest have been extraordinarily hard hit.

Thank you.

Sure.

There are no further questions at this time.

I will turn the conference back to management.

Okay.

Thank you so much for your time and attention today, and we look forward to speaking to you on next quarter's call.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.