MSC Industrial Direct Co Inc (MSM) 2010 Q4 法說會逐字稿

Good morning.

My name is Conchetta and I'll be your conference operator today.

At this time, I would like to welcome everyone to the MSC Industrial Direct fourth quarter earnings call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer session.

(Operator Instructions).

I would like the turn the call over to Mr.

Eric Boyriven of FD.

You may begin, sir.

Good morning, everyone, and welcome to the MSC Industrial Direct fiscal fourth quarter 2010 conference call.

An online archive of this broadcast will be available one hour after of the conclusion of the call available for two weeks at www.MSC direct.com in the Investor Relations section which you can find under the tab About MSC.

Certain information pertaining to non-GAAP financial measures may arise during the broadcast, and can also be found in the earnings announcement which also posted on the Investor Relations section of our website.

During the presentation Management will refer to financial and management data included under the section Operation Statistics which you can also find in the Investor Relations section of the 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 wish the meaning of the US securities laws including guidance about expected future results, statements regarding expected revenue, margin, and earnings growth, and expectations regarding the Company's ability to capture market share and expected benefits from the Company's investment and strategic plans.

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 in the Risk Factors in the Company's latest annual report on Form 10-K filed with the SEC as well as in the Company's other SEC filings.

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

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

I would now like to introduce MSC Industrial Direct's president and Chief Executive Officer David Sandler.

David, please go ahead.

Thanks, Eric.

Good morning, everyone and thanks for joining us today.

With me are Erik Gershwind, EVP and Chief Operating Officer, Chuck Boehlke, EVP and Chief Financial Officer, and Shelley Boxer, Vice President of Finance.

Today I will cover our strategic view of the Company, Erik will provide an update on the landscape, competitive environment and the execution of our model, and Chuck will give details on the Q4 financial performance and our Q1 guidance.

Before I dive into the quarter, I would like to take a moment to talk about the long-term agreement I have entered into with the company and the selection of Erik Gershwind as my successor.

I'm gratified and humbled to have the Board's confidence in affirming my long-term leadership role at MSC.

While my desire in the coming years will be to eventually spend more time with my family, MSC has not only represented a career to which I remain deeply committed, but an important part of my life as well.

Our succession management process, commitment to strong corporate governance, and our track record of successfully transitioning leadership in a seamless fashion is one of the many strengths that truly makes MSC a company that is built to last.

I would like to congratulate Erik on his appointment to the Board of Directors and look forward to working closely with him in the years to come as he grows in his role and builds upon his track record of leadership and key successes.

Our shared vision and values provide a solid foundation from which we will execute our growth strategy and drive towards long-term value creation for all of our stakeholders.

Succession in MSC is grounded by our strong culture and strategic planning process which have been in place for decades.

Rest assured that Erik and our team are partners in that process and will continue to be so through this transition.

Turning to the quarter, I'm thrilled about our fourth quarter performance for two reasons.

First, we exceeded our expectations in sales and earnings growth and drove a high incremental operating margin.

Our team has continued to execute our model at very high levels and our plan to take significant share from the small traditional and regional competitors who comprise the bulk of the market is delivering above expectations.

Second, on a more strategic level -- our fourth quarter reflects exactly what we have been talking about for the past two years.

Over the past several quarters you have heard me refer to this time as the greatest land grab and time of opportunity in my 35 years in industrial distribution.

Just as a reminder, weaker distributors' balance sheets were significantly impacted during the downturn.

They were forced to eliminate investment and to utilize reductions in working capital to compensate employees and owners and to pay down their debt.

This balance sheet weakness has caused a significant dislocation in our industry as business conditions have improved.

These distributors do not have the capital resources, resources to restock inventory, and carry additional customer receivables.

This weakness is compounded by the fact that customers continue to demand even more support from distribution in the form of inventory and in value-added services such as vending machines, enhanced e-commerce, technical support and much more.

The net effect of all this is an enormous and growing value gap between MSC and weaker competitors.

This value gap has contributed to our momentum and is one that we are committed to continue to leverage going forward.

Our leadership and execution and in value-added enhancements has made us the employer of choice in our industry.

It is important to understand that many of the best sales people in our industry have worked in family companies their whole lives.

That often began at the counter or in inside sales and worked their way into outside sales.

Many have been mentored by the owners of these businesses.

Their loyalty to the owners and company runs deep.

However, as the gap in value continues to grow, and they are faced with loss of market share and income, we are attracting many of them to MSC.

You have heard me say that we are poised to capitalize on this opportunity and that we would do so aggressively.

Our plan was to do the following -- use the downturn to take advantage of that unique opportunity by letting the MSC value proposition shine.

Use the opportunity to invest while capital and software was relatively inexpensive and there were great people becoming available.

Grow revenues at accelerated rates representing significant share gains in market share, as market conditions return capitalizing on the weaker competitors and take advantage of a more normal pricing environment to expand gross margins.

Translate those gains into strong earnings growth and leverage, thereby expanding operating margins.

Do so at readthroughs that are high, but not at historical highs, allowing us to further invest in the business at high levels.

And finally, we said that you would see us return to 18% operating margins and beyond over time, but that we would do so while not sacrificing our investments for the future.

Our fourth quarter was a major step forward towards the realization of this game plan.

While our recent performance was encouraging, even more exciting is that we see it as only the beginning of a very long-term growth story, a story that will produce long-term revenue and earnings growth and one that you will hear Erik talk more about in detail in just a bit.

I would like to provide some guidance for the first quarter of fiscal 2011.

We currently expect sales to be between $464 million and $476 million and fully diluted EPS to be between $0.71 and $0.75.

Erik?

Thanks, David.

I would like to begin by thanking our Board of Directors for the confidence that they continue to show in me with the honor of being named a director.

It is a privilege to be part of such a wonderful team and to carry on the legacy that was started by my grandfather, Sid Jacobson, back in 1941.

And David, I would also like to extend a heartfelt thank you to you as well.

As you said, we share a common set of values that makes it so easy to work together.

I couldn't ask for a better mentor, partner and coach.

Turning to our quarter, I'll start with the customer landscape.

Overall the environment continues to be positive.

The ISM remains at a high level which is good for MSC, and is reflective of what we are seeing.

The recovery has gotten a little stronger, and customer sentiments and hiring practices have improved slightly over Q3 levels.

As we anticipated, though, just about everyone is remaining cautious due to the lack of visibility and the uncertainty about what is going to happen in the future.

To date, our customers' memories of the recent downturn remain vivid, so they continue to run inventories lean and take a conservative posture on cash flow.

As you heard us say many times that helps the MSC value props to shine against the local competition.

For example while inventories are up slightly over Q3 they are not yet at historic levels, and that means our customers continue to depend on MSC for just in time delivery so that they can run lean.

Price competition continues at high levels although the growth in the overall business environment has made it even more difficult for distributors to meet customers' demands.

We continue to see a high level of service failures among the small and regional players, which we take advantage of to fuel our share gain.

Revenue trends were strong during the summer months, with growth in average daily sales exceeding 30% in all three months of Q4.

And that strength continued in September with 23.7% growth in sales over prior year and while the growth percentage is down from Q4, that is purely a function of tougher comps.

Average daily sales for the month were up 4% over our fourth quarter.

Leading the charge has been our historic core business which is improving in all geographies and grew faster than in Q3.

Execution was strong, as the statistics that we post on our website show.

As a result of how we managed through the downturn by not laying off our associates, we have been able to maintain the high quality of our service model during times of swift growth.

Our new big book catalog was released at the beginning of September with approximately 43,000 new SKUs.

Roughly 30% of these items are MSC's proprietary or private label brands.

Included in the new SKUs are 23,000 that are new to the big book who have been included in the specialty metal working catalog in the past.

That was the catalog that was part of the former J&L business and is another example of the synergies that have come from that acquisition.

We have also removed about 27,000 nonperforming SKUs from the book.

The price increase in the catalog was approximately 3% and as you heard from Chuck we are expecting our gross margins in Q1 to improve significantly.

As I have mentioned on prior calls, revenue growth is a function of both a growing manufacturing economy and strong gains in market share.

We see our market share improvement evidenced by many data points, including sales by end market against our peer group, growth well in excess of market indices, and extensive supplier feedback on point of sales performance against the rest of their distribution channel.

And while our current market share gains are exciting, much more exciting is the long-term growth story that David referenced earlier on.

What you see now is the result of executing to a long-term multiyear plan.

That plan began with a focus on penetrating our core business of metalworking products into the manufacturing sector, and we see that penetration as an evolution.

It began with a broad-based direct marketing effort to sell lots of products across lots of customers in an effort to build brand and learn the market.

From there, we turned our attention to penetration by developing a field sales force, a robust national accounts program, building out technical capabilities and introducing value-added solutions.

As we have done so, the metrics we use to gauge success have changed over time.

Years back, our raw billed to customer count was a crucial metric.

Today as we turn our attention to market penetration, we use other metrics like customer locations or ship-tos, share of wallet, sales force expansion and sales force effectiveness.

The bottom line, however, is the bottom line.

We are pleased with how our core market penetration has worked out in terms of sales and earnings growth.

Beyond the core market I just described, we see many other product lines and end market verticals that make up the $140 billion fragmented MRO marketplace as a great opportunity for MSC.

Our plan is to use the road map that we built in the core and apply it to these other markets.

It as repeatable formula that we plan to use over and over again.

Today you see us participating in many of those segments through direct marketing and through a broad product selection just as we began in metalworking years ago.

Over time, you will see us prioritize, focus and build out other segments just like we are doing with metalworking.

What is so exciting about our story, though, is that our run rate even within our core is still so large as our market share [inaudible] is low.

So for now, expect to see us continuing to invest in our core business of metalworking manufacturing while building a foundation in several of the other markets I described.

Our goal as always is to balance the needs of our stake holders by weighing short-term profitability against our long-term growth objectives.

The investments we are making in our core are the many that I have referenced on the last several calls.

For instance, our sales force buildout remains a top priority.

We grew the sales force from 947 to 973 associates in Q4 and we estimate that number will be between 985 and 995 associates by the end of Q1.

We also opened a sales office in the Las Vegas, Nevada area in Q4, representing a new geographic opportunity for the company.

And finally, our investments in technology are growing.

Recently, we exhibited our new line of advanced vending machines at the IMTS show in Chicago.

The reaction at the show was extraordinary, with long lines of people coming to our booth for demonstrations.

Our vending program has been very successful to date and we expect this new wave of technology will continue to drive sales and profits for us.

Thanks and I will now turn it over to Chuck.

Thank you, Erik.

MSC's financial performance in Q4 exceeded expectation.

Sales exceeded the high end of our guidance range representing total growth of 30.3% and growth in average daily sales of 32.4% versus Q4 of last year when adjusting for one less sales day.

We are projecting growth in average daily sales in the middle of our guidance range of 22% in Q1 for fiscal year 2011 versus the same quarter of last year.

Gross margin in Q4 of 44.9% was within our guidance range.

We are expecting gross margin in Q1 to be in the range of 46.2% plus or minus 20 basis points, reflecting the effect of the price increase and our new big book of approximately 3% and the turn around in volume rebates partially offset by cost increases and changes in sales and product mix.

Expenses in Q4 were less than expected driven primarily by timing of advertising and investment expenses.

These expenses will be carried forward and included in our guidance in our Q1 expense estimate.

We would expect expenses in Q1 to be approximately $143 million at the midpoint of our guidance an increase of about $6 million over Q4 levels.

The increase is primarily made up of the variable expense necessary to support increased sales, higher levels of incentive compensation and investment spending including the amounts carried forward from Q4.

We continue to balance short-term profitability with long-term growth by an incrementally expanding our operating margins as we invest for the future.

The implied incremental operating margin at the mid point of Q1 guidance is 28%.

Based on the investment program we have targeted this year, we would expect similar levels of incremental margin for the balance of fiscal 2011.

However, the potential of a firming pricing environment and accelerating market share gain could drive them higher.

Operating margin in Q4 increased to 15.3% from 11.8% in last year's Q4, reflecting an incremental margin of 26.8%.

Consequently, fully diluted earnings per share grew 71% in Q4 to $0.70 versus $0.41 in the same period last year.

Balance sheet metrics remain solid.

Inventory turns increased to 3.6 turns and receivables DSO were solid at 42 days.

For fiscal year 2010, MSC converted essentially 100% of that income into cash flow from operations driven in part by our significant improvement in inventory turns.

Our current cash position and our confidence in our ability to generate cash in the future has afforded us the opportunity to once again return cash to our shareholders, this time in the form of a special dividend.

Thanks and I will turn it back over to David.

Thanks, Chuck.

When the downturn began, we recognized there would be a great opportunity to take share by investing in the business.

History has taught us well, and we had a tried and true playbook to follow.

As the downturn deepened, we saw the effects on our customers and the small competitors to be a once in a lifetime land grab opportunity.

We focused our team and investment program to capitalize on the plan that we set in motion.

Two years later we are gratified by the tremendous progress that is now evidenced in our results.

Our plan, fueled by the above and beyond efforts of our team, has positioned us for our continued share gains and market outperformance well into the future.

Thanks and I will now open the lines for questions.

(Operator Instructions).

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

Baird.

Hi, guys, good morning.

Good morning, David.

Good morning.

On the gross margin here, could you talk about the -- any pressure that you have seen lately because of mix or, you know, sort of aggressive share gain, some of the pricing actions you may have to take individually with customers in order to take share?

And then as you look at next year, I think 100 basis points is a pretty big number, you think that is -- is it entirely because of rebates and big book pricing, or are you also anticipating a shift back to the small and mid sized customer next year?

Erik, do you want to start with the current gross margin pressure and then Chuck will talk about what we are looking at for the year.

Dave, good morning.

In terms of the first question was around the pressure that we are seeing if I have it right from the large orders and discounting and share gain activities is, that right?

Yes.

I would describe it as similar to how we described the last few calls.

We continue absolutely to take share gains and our gross margin is a formula with the puts and the takes and as we described one of the takes and one of the pressures is a combination of mix and large order mix along with the share gain activity.

But what I would tell you particularly on the share gain activity, it is pretty targeted.

So when we go in, if we are taking a lower margin piece of business, as we talked about, we have a process where the sales team does a strategically with an eye towards generating pull-through business in the account, meaning using it as an entry point strategically and surgically.

Overall I would describe it as similar to the way we characterized it in the last couple of calls.

Dave, It's Chuck.

I just thought I would to comment I think your question was exclusive pricing and rebates.

Clearly the rebate activity versus where we were has improved given our inventory purchases and need to support the service level with the higher sales volume.

Certainly that's a factor in it, but clearly the bulk of the change in Q4 to the guidance provided in Q1 in the 46.2% range is driven by the big book price increase.

As the year goes on if the pricing environment continues to firm and other things prevail there may be other opportunities for further pricing.

Certainly we would be all over that.

But for now we have given you guidance for Q1 and that Q1 guidance versus Q4 is clearly a function for the most part of the price increase that took place with the big book.

And David, it's David.

I guess one other element to add to the mix was you also had mentioned a question -- customer mix there and our core metal working manufacturer customer, to the extent that our core continues to gain momentum in its recovery overall that is a segment that produces higher gross margins for us and we expect that that will favorably continue to impact our mix.

Okay.

Thanks.

And David, you said that you saw that last quarter.

Are you continuing to see building momentum among those traditional customers?

Yes, David, it's Erik.

We absolutely are.

You saw from the website we posted manufacturing growth rates of 35% for the fourth quarter.

And the color I will add to that is that within our durable sector, we actually saw higher growth rates.

So the answer is yes.

All right.

Terrific.

Thanks a lot, guys.

Thanks, David.

Your next question comes from the line of John Inch with Merrill Lynch.

Thank you.

Good morning, everyone.

Good morning, John.

Good morning.

Chuck, the gross margins came in at the low end of the range but the volume was higher.

Why was that and did you get any benefit from volume rebates this quarter given that the revenue was materially above your guidance?

John, it was certainly within the range where the gross margin came in.

There is so many moving pieces but a volume in related to sales in any given quarter is not going to produce a change in the rebate that we forecasted in any given quarter.

I want to take you down the path of the accounting but the rebates are based on estimated annual purchases on a calendar year basis.

You have to factor in inventory turns.

So it is not exactly when the volume occurs you get the rebate.

It has got to be brought back into the P&L as the product moves out of inventory.

I would not construe any one quarter volume by where the rebates might be.

That being said if you look over the spectrum of multiple quarters for this year, clearly the rebates up versus prior year and will certainly enhance our gross margin relative to last year.

Let me ask this this way if you had done the high end of the gross margin range, your gross margins would have been 40 basis points higher than where they came in and that is pretty material.

So it doesn't look like it's a volume issue.

What would have accounted for a swing factor of the 40 basis points this quarter?

Is there something obvious?

Factor of 20, not 40 because we were at the midpoint.

The thing that complicates it, John, is that there are seven or eight moving pieces and we were not good enough to nail it, but then better than 20 basis points.

That's why we provide a 40 point range.

We would love to have been at the top end just like you say but that is why we provide the guidance, the moving things into gross margin are impossible to nail closer to 20 basis point and we think where we delivered is within the range that we gave.

That's fine.

Chuck, did you say, let me understand this, the 3% price increase in the big book and the 100 basis points of gross margin expansion, you are saying that majority of the gross margin expansion expected next year is going to be that price fallthrough?Is that what you said?

Well, I didn't say that for next year, I said for the first quarter.

46.2 versus the 44.9 is about 120, up to the mid point of the guidance 120, 130 basis points.

The bulk of that clearly in Q1 is from the price increase although the rebates start to factor in.

A small piece of the rebate in Q1 and the bulk of it is pricing and again throughout the course of the year if pricing continues to firm we have a chance to do something else on the pricing we will look at it as well.

It could be that throughout the course of the year it is rebates and multiple prices that will affect gross margin as we proceed throughout the year.

Why did you opt for a special dividend and not perhaps I think you did repurchase shares in June.

Have you repurchased any since?

Why did you opt for a special dividend versus share repurchases and how would you like us to think about that going forward?

We did not purchase any more stock in the fourth quarter.

We returned cash to shareholders in many ways.

You have seen in the last six months we have increased the quarterly dividend.

We did repurchase shares within the last six months.

We still have plenty of cash to fund working capital needs.

We have borrowing capacity to do a large acquisition or any kind of acquisition if we chose to do it.

It's really a continuation of how we have done it in the past.

We have returned cash to shareholders in all those ways in the prior period given our current cash position, which was pretty significant and what we see moving forward is we felt appropriate to do that this time.

Last question.

If you adjust for the one fewer selling day in this quarter that you have guided to, it looks like you are calling for about 3%, if you look at more sequential revenue growth, yet you talk about all the great gains and business momentum.

I think traditionally the fourth quarter to first quarter is much higher than that.

Why don't you think the midpoint of your sales guidance in this first quarter is going to be better than just the 3%?

That seems to be a slow sequential rate of expectation.

John, it's Erik.

There is a couple of things going on with respect to Q1.

I think what you are referencing is midpoint of Q1 versus the fourth quarter?

Yes.

I have adjusted for one fewer selling day so I added that back.

Okay.

Actually if you take a look at September actuals it is roughly 4% over the fourth quarter so I think we are seeing the dynamic you described.

In terms of the midpoint of the guidance range, you know, relative to September a couple of things going on.

One is we do begin to see tougher comps later on in the first quarter, and the other factor that I would point to so the timing of our government spend, you know, the spend of the government I should say with us.

There is a timing issue for the quarter.

But that's it.

John, I just want to be clear.

I mentioned in the script -- there is one fewer billing day in Q4 of 2010 2010 than Q3 but moving from Q4 to Q1, Q1 actually has two fewer billing days than Q4.

I just want to be clear and make sure you are seeing it the same way.

In theory you would take 470 as the midpoint and maybe add $15 million on top of that.

Two fewer billing days for sure in Q1 versus Q4.

So that makes a little more sense.

Great.

Thanks very much.

Thanks, John.

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

Hi, it's Erica Wolford on the line for Adam.

First question is on incremental margin guidance.

In the last cycle and there was a recovery phase you did 40% to 45% incremental margin.

What are the puts and takes between that cycle and the 28% guidance this year?

I'm sorry, it was Erica?

Yes.

Hay, Erica, it's David.

Hey.

We talked about the Q1 projection at 28 and expecting similar levels for the remainder of 2011.

I guess to step back we see really the same great leverage opportunity based on the fundamentals in our business today really being, you know, as compelling if not even more compelling than when we reported higher readthroughs seven years ago.

So kind of going back in time a bit, our primary focus back then was really primarily improving operating margins.

And today, as you can tell from the way that we've been operating the business, it's really much more balanced between improving operating margins and investing for future growth.

More of our incremental readthrough dollars are being put back into the business really to take advantage of this unique opportunity that we have been talking about being presented to us in this environment.

So the other thing to consider is that, you know, we target an investment plan for the year and it is -- consider it, it is not perfectly fixed but let me think about it as a relatively fixed dollar amount in our plans which means that should the economy grow first or the share gains accelerate even faster for us or as Chuck mentioned before the pricing environment if it firms even further then we would expect our readthroughs to actually improve beyond where we are currently expecting them to be for the year and that is really because of all of the leverage in our model than just showing through.

And then just one house keeping question.

What do you expect for direct mail pieces in the first quarter?

Erica, we actually don't forecast out direct mail so I'm not going to give you a specific number.

The color I can put on it is you could pretty much expect us to continue with the theme that you have seen that we had talked about for a few quarters which is if you look back during fiscal year 2010 you see reduced levels of mailing really consistent with the investment philosophy with which is targeting the larger accounts.

That strategy has produced great gains in productivity on the direct mail side and I think in general that theme will continue.

Thank you.

Thanks, Erica.

Your next question comes from the line with Hamzah Mazari with Credit Suisse.

This is Chris Parkinson on behalf of Hamzah.

Over the last 12 to 18 months, most of your growth has been organic.

Are will any larger acquisitions in the market or is it mostly tuck-ins?

And as a follow-up to that is there anything on the valuation front worth noting?

Have they come down or --

Chris, David.

We have certainly been focused aggressively on our organic plan.

Fortunately the strength of our balance sheet opens up a whole another growth opportunity for us as you point out.

And we are actually actively looking at acquisition candidates and we really stepped up the level of activity and our focus on this area.

In fact, we formed a full-time team that is specifically focused here.

We are going to remain opportunistic but I definitely expect our balance sheet in the future to definitely take advantage of the right opportunities.

Great.

And just a quick follow-up.

Given what you are seeing in the market currently and a slight inventory build over the quarter, do you believe the levels are where they need to be and how should we think about this sequentially?

Chris, it's Erik.

I would say that in general we continue to see -- as I described, over the last couple of quarters we characterized it as a slight build in our customer customers' inventory quarter over quarter.

In general, what we are seeing is customers are remaining cautious and we don't see that going away.

Really, since the downturn, people are hanging on to cash.

And for now, we see that sentiment continuing among our customer base and as we said that is a good thing for us because what is means is our customers are going to run lean and they have to lean heavier than they have historically on their suppliers for just in time delivery which really lets as we described on the call lets our value proposition our next day delivery model really shine.

So good thing for us and for now that is what we see as a continued sentiment.

Perfect, thank you.

Thanks, Chris.

Your next question comes from the line of Ryan Merkel with William Blair.

Hi, guys and great quarter.

Thanks, Ryan.

Thanks, Ryan.

First question is on price inflation.

Some of your competitors are saying that price inflation is very minimal and you are talking about gaining 3% in your catalog.

Can you explain how you are able to get price right now?

Ryan, it's Erik.

In general let me start with how we characterize it.

In general I would characterize the environment as stable, as you referenced.

But we do see some signs of potential price inflation creeping in.

One example to point to would be steel.

There are some fits and starts regarding pressure on costs and on delivery.

So it's stable with some inflation creeping in.

And in terms of the degree to which we take pricing.

I think if you look over a 12 month period I think our price increases are pretty much in line, and I think it is just reflective of the MSC value proposition.

We have a pretty compelling value prop right now, and particularly I just talked about with the last caller with Chris the fact that customers are running lean on inventory really puts a premium on service and delivery.

And we think that really helps differentiate MSC from the rest of the pack.

Okay.

That's fair.

And then I want to ask about the shift to number.

I assume that is still moving in the right direction.

Could you comment whether the growth is mostly new customers or gaining wallet share from existing customers or is it both?

Yes, is the answer.

Yes, and, yes.

Yes, you are correct that the ship to number is moving in the right direction Ryan.

And it's really a combination of both in terms of where the growth is coming from.

And overall it is reflective of what we talked about the last several quarters in terms of our growth strategy on focusing on higher potential customers with multiple sites and gaining share of wallets.

The answer is yes and yes.

Great.

And then last one from me.

Is the fourth quarter now the fully loaded SG&A rate in terms of bringing back discretionary expense cuts and now going forward it is going to be about variable costs and investment spending?

Ryan, this is Chuck.

Most of the investment is spending but you have to consider a few other things.

For example within the fourth quarter that we put back our 401(k) match you have that on an annual basis.

More of the total next year than it was in last year.

Some of the fourth quarter, but more in total for the full year last year.

You are right about investment spending and variable obviously going up.

Incentive compensation will, more likely than not, be a little different.

That is all forms of compensation.

Sales commissions, we incentivize our folks in the fulfillment sectors and back office functions and management incentive compensation.

That is one element that will probably be variable next year or changed differently from what you saw in the fourth quarter.

But the bulk of it is investment spending and a larger volume increase.

Great, thank you.

Thanks Ryan.

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

Good morning.

I guess first on the pricing side.

I didn't hear you disclose a contribution number for the fourth quarter.

And then I wanted to get a letter handle on your impression of how that timing of the 3% announced in the big book will actually be incorporated or should be incorporated into the first quarter?

Brent, David.

I'm not sure we were clear on the first question on contribution margin.

Yes, with regard to the benefit from price inflation to the revenue numbers in the fourth quarter.

Got it.

Erik?

Brent, I think you are referring to how the growth decomposed in the fourth quarter.

The reason you didn't see price on the website is it actually rounded to zero which means that the net effect of cumulative mid-year pricing relative to levels of discounting were a wash.

Erik, before we go to the next question could I follow up to that one?

I guess in light of the fact that pricing I guess the mid-year increase was maybe 75 bps, 100 bps, how soon do we think we will recover to the old gross margin level to get the full benefit when the mix shifts back?

Are we expecting a year, two years?

Brent, I mean in general not something we would forecast out beyond typically the way we will do it is quarterly guidance on gross margin.

You are hitting once couple of factors that quite Frankly are hard to forecast out perfectly in the gross margin balance.

What I will tell you is we have a bunch of programs lined up that we had talked about, particularly the private label program.

You heard me mention it in the mix within our new product introductions and Asian sourcing to drive gross margins higher over time.

It's tough to give you a long-term answer in how exactly within a year that plays out.

Yes, Brent, you know that we have got certain tail winds and head winds.

Things like our large customer segment while very favorable is actually a headwind to margin.

Erik mentioned some of the programs that we have been really working on that have been, you know, producing excellent results for us and we know are going to be important in terms of our Asian sourcing private label and all.

And we think there is an opportunity as the year progresses for the potential for a firming pricing environment.

You did see us take pricing actions which -- which we are comfortable with in our big book, which really that went in late in August, consistent with our annual big book cycle and following historical patterns.

And then I guess the follow-up question from earlier.

You announced a 3% price increase but I know there is some timing issues and also mix issues that go into that.

Would you model for, have us model for 1.5% maybe this quarter before we get the full 3% next quarter?

How should we think about that?

Brent, the way to think about it we have very much following, as David said, the historical pattern of how pricing layers in and the guidance we have given you for Q1 factors the pricing into it.

Okay.

And then I guess the last question is on this -- then the investment spending programs.

Maybe first if you could give us a sense for move of that -- for how much of that planned investment uplift for next quarter actually pushed from Q4 to Q1?

And then maybe secondly, can you talk about the timeline of continuous investment spending over the course of the year?

Is this how we should model in a couple, $2 million, $3 million increase each quarter or will some of this start to roll off?

Brent, it's Chuck.

Take the first question.

Talk about the investment spending.

OpEx from Q4 to Q1, maybe that's the easiest way to reconcile for you.

There's roughly a $0.06 increase.

Roughly half of that is from investment spending.

A piece of that is the carry-in that didn't get spent in Q4 or associates or investment type spending for the folks that were hired throughout Q4 that are on full board in Q1.

So that's $0.03.

There is roughly a penny to support the higher incremental sales and another $0.01 of investment or incentive comp, I should say.

So you've got $0.05 or so from those three things and an extra $0.01 from everything else that rounds to a cent.

That's really the $0.06.

I think the way to think about the full year is that we have given you readthrough guidance now.

It is 28% and that factors in everything that we see.

I know right now with our investments with gross margin with obviously a revenue assumption and I think rather than specifically breaking down each one of those elements the best way to think about it we would expect an incremental readthrough plus or minus in that 28 from what we see right now.

Again, a firming pricing environment, improving economy with higher acceleration and growth we should do better than that.

But based on what we see now all that is baked in.

Brent, it's David.

One more thing I want to just go back to.

Talking more about the 3% price increase and given that we have implemented that and the way that we have historically done it, I would caution to not think about a 3% price increase equaling the 300 basis point lift in margin.

You know, you have seen what our range was and you talked about 120, 130, 140 basis points.

We historically find that the realization of our increase, you know, is it will be realized, fully realized in the quarter.

I wouldn't model it as gee, it has been realized in the quarter and it going to continue to increase over the course of the year specifically based on the big book number that was put in.

And David, I guess as a follow-on to that, on the gross margins, similarly the gross margins aren't expected in Q to come down.

There is no one-time component to the gross margin uplifting Q1 is there?

No, it is an ongoing -- once we put the increase in, we generally will realize the piece of it that we going to realize, and then fortunately that becomes a higher baseline as we move through the year.

Okay, great.

Thank you very much.

Thanks, Brent.

Your next question comes from the line of Tim Curro with Value Holdings.

Hi, have you discussed what your planned CapEx is for the fiscal year?

Yes, this is Chuck.

We spent about $30 million last year in CapEx.

The number would be similar to slightly higher for what we see for fiscal 2011 right now.

Like $30 million to $35 million?

$30 million to $35 million, that's right.

I'm curious to know what was your healthcare expense in the fiscal year, and how are you expecting that to change over the next couple of years?

We certainly wouldn't talk specifically about our healthcare.

We know there is a lot of activity on that front, most of the things that would affect us would be more so at a later date and we are studying it and looking at it.

But specifically for dollar amounts we wouldn't disclose our healthcare costs.

I just tell you we are self-insured but the biggest factor in the healthcare costs is the claims experience that we realized since we are self-insured.

So that number can go up and down depending on obviously the health of the overall associate population.

Under the new regulations are you allowed to continue to be self-insured?

Yes.

Yes, Tim, that is our plan and our team has done a great job of digging in to understand what the new law is going to mean both for this year and for future years.

So we have good visibility into the kind of what I will call a modest increase in costs related to the health reform act for 2011.

There are still parts of the regulations that actually have not yet been finalized interestingly enough so this is still a bit of a moving target.

Having said that, the bulk of where the increase would really be gin begin to take effect would be in 2014.

So fortunately as the regulations get finalized we have got time both to plan for and to better understand what that impact might actually be.

All right, thanks.

And thanks for paying that special dividend before the tax rate goes up dramatically.

Okay.

I will now turn the call back over to Management.

Very good.

Well, thank you all for your participation today.

And we look forward to speaking to you again next quarter.

Thank you.

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