Exhibit 99.1
------------
MSC INDUSTRIAL DIRECT
MODERATOR: ERIC BOYRIVEN
NOVEMBER 4, 2003
10:00 AM CT
Operator: Good morning. My name is (Ginette), and I will be your
conference facilitator. At this time I would like to
welcome everyone to the MSC Industrial Direct Fourth
Quarter Earnings Conference 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 period. If you would like to ask a question during
this time, simply press star, then the number 1 on your
telephone keypad. If you would like to withdraw your
question, press star then the number 2 on your telephone
keypad.
I will now turn the call over to Mr. Eric Boyriven of
Financial Dynamics. Sir you may begin your conference.
Eric Boyriven: Thank you and good morning everyone. Thank you for joining
us today to discuss MSC Industrial Direct's Fiscal 2003
Fourth Quarter and Full Year Results. You should have
received a copy of this morning's earnings announcement.
If you have not yet received a release, just call our
offices at 212-850-5752.
Also an online archive of this broadcast will be available
within one hour at the conclusion of the call, and will be
available for one week at www.mscdirect.com.
Certain information pertaining to non-GAAP financial
measures that may arise during this broadcast can also be
found at the same Web site in the Investor Relations
section.
Let me take a minute to reference the Safe Harbor
statement under the Private Security Litigation Reform Act
of 1995.
This conference call may contain forward-looking
statements that are subject to the significant risks and
uncertainties including the future operating and
Exhibit 99.1
------------
financial performance of the company. Although the company
believes that the expectations reflected in its
forward-looking statements are reasonable, it can give no
assurance that such expectations or any of its
forward-looking statements will prove to be correct.
Important risk factors that can cause actual results to
differ materially from those reflected in the company's
forward-looking statements are included in today's
earnings release and the company's filings with the
Securities & Exchange Commission.
In addition, the information contained in this conference
call is accurate only on the date discussed. Investors
should not assume that the statements made in this
conference call remain operative at a later time. The
company undertakes no obligation to update any information
discussed on this call. With that said I would like to
introduce MSC's Industrial's Direct Chairman and Chief
Executive Officer, Mitchell Jacobson. Mr. Jacobson, go
ahead.
Mitchell Jacobson: Thanks Eric. Good morning everyone and thank you for
joining us today. With me are David Sandler, our newly
appointed President and Chief Operating Officer, Chuck
Boehlke, Executive Vice President and Chief Financial
Officer and Shelly Boxer, Vice President of Finance.
I'll begin with an overview of the fourth quarter of '03
and our expectations for the first quarter of '04. David
will cover our fulfillment model, and Chuck will provide
details on the fourth quarter's financials.
Following Chuck, I'll wrap up and open the line for
questions.
I want to begin today's call by congratulating David
Sandler on his most deserved promotion. David and I have
worked together in various roles since we acquired his
company in 1989. He's an outstanding businessman. David
combines intelligence with an uncommon blend of common
sense and a killer work ethic.
However, as or more importantly, David and I share common
vision, values, ethics and sense of the special community
that MSC has become.
I'm 100% confident that MSC will be a better performing
company as David grows into his new position. I'm
energized by our future and excited to continue to work
with David in his new capacity.
We're also taking several steps to upgrade our corporate
governance to the highest levels. These changes which will
be ratified at our upcoming Annual Shareholders' Meeting
including changes the composition of the board of
directors to a majority of independent directors and
instituting two new board
Exhibit 99.1
------------
committees -- a Nominating Committee and a Corporate
Governance Committee.
MSC has always embraced the highest levels of corporate
ethics and accountability. And these changes reflect that
commitment.
MSC continues to grow in a challenging environment in the
fourth quarter. We did see some extended summer shutdowns
and abbreviated workweeks. Our growth was once again
driven by the success of our diversification efforts as
the industrial sector of the economy continues to lag.
We're executing our plans with outstanding results as we
maintain our service model, leverage our position as a
market leader, take share and grow.
We achieved our gross margin target for the fourth quarter
and exceeded our expense control objectives. Operating
expenses in Q4 benefited from an adjustment reflecting
better than expected experience throughout fiscal '03 in
medical benefits and worker's comp.
Outstanding expense control drove 67% read through this
quarter excluding the Q4 benefits adjustment and 45% for
the entire fiscal year. Operating income grew to 10.3% of
sales as we continue to capitalize on the excellent
leverage inherent in the business.
We are very proud to see the business return to double
digit operating margins and are competent that we will see
further operating margin expansion as we take advantage of
an infrastructure with enormous leverage.
In Q4 net income grew 53% and earnings per share increased
by 54% over the fourth quarter of '02. Free cash
generation at 26 million exceeded our internal
expectations in Q4 due to the success of our asset
management program.
Overall, MSC generated 74 million in free cash flow for
fiscal year '03.
We'd like to provide some guidance for the first quarter
of '04. Although the industrial sector continues to
struggle, our success in the non-industrial areas is
reflected in our expectations for the first quarter.
Consequently, we expect revenues to be in the range of 218
to 222 million with earnings per diluted share in the
range of 21 to 23 cents.
Thank you and I'll now turn the microphone over to our new
President, David Sandler. David?
David Sandler: Thanks Mitch. First I want to express my deep appreciation
for the opportunity that you and your dad have provided me
over the last 14 years.
Exhibit 99.1
------------
MSC is a very special place, and I consider it a privilege
to lead our team of dedicated associates. I've never been
more excited about our future and firmly believe we are in
the early days of realizing our fullest potential.
I know that I speak for our entire senior management team
when I say that I am committed to achieving superior
performance for our shareholders and all of our
stakeholders in the future.
I'll begin my update by sharing what we're hearing and
seeing in the field and sharing some observations from my
customer visits in the south region just last week.
While there are some pockets of increased activity, there
has been very little in the way of overall positive
developments in the industrial sector. Employment and
inventories continue to shrink and activities still well
below the levels of three years ago.
Although the ISM is on the upswing which is encouraging,
the effects are not really noticeable as yet. We think
that we need to see a few more months of positive
indicators before there's a measurable effect in the core
manufacturing sector.
MSC however continues to execute our model, take share and
grow. And I witnessed that first-hand during last week's
road trip that encompass visits to a distribution center,
some branches and many customers. One of those visits was
to a facility where we had installed a VMI program about
two years ago.
Due to cost pressures, the maintenance supervisor had to
do the work of three people. And it was his job to figure
out how to get that done. He share with me that the way he
solved the problem was to utilize MSC in the latest
version of our VMI program.
He explained to me that by going paperless and moving to
automatic replenishment, the time necessary to source MRO
supplies have literally been reduced to minutes per week
from hours per day.
Our volume with this customer has increased 40% this year
to more than $70,000 annually and continues to grow as
more products are added to the VMI program.
It was very clear to me that the MSC value-added model is
very attractive to all sectors of the potential customer
universe. And it's only one example of why MSC is gaining
share.
Exhibit 99.1
------------
We talked about the success of our diversification program
during the last several calls. In Q4 our entire growth
came from the non-industrial sector while the industrial
sector was essentially flat.
We expect that the non-industrial business will continue
to outgrow the industrial sector by a significant amount
for the foreseeable future. I'm sure you're all aware of
the movement of US manufacturing business to other parts
of the world. Even so, the remaining business is still a
huge market. And MSC has a very small but continually
growing portion of it.
When you combine the diversification effort with the share
growth in the industrial sector as well, MSC has a very
long runway for growth.
Last quarter we noted our success and started to penetrate
the government sector and in the postal service in
particular. We're pleased to report that our efforts to
convert that business to MSC are starting to bear fruit
and we're seeing growth from both of those areas.
As planned, we have to work hard to build our brand and
convert that business. And although the total dollars are
growing as we expected, the business is not yet
significant.
Turning to details for the quarter, once again I'm pleased
to report that the execution of our model continues at
very high levels, and our metrics are coming in at target
levels or better.
Our customers tell us that our service is the best in the
business. And that is one of the main reasons we gain
share and ensure future growth.
Overall fill rates continue at about 99%. And the VCs hit
their first past fill rate goals. Accuracy levels continue
to be excellent with run rates at about 1.3 errors per
thousand.
Call center staff continue their high levels as well. The
call abandonment rate was less than 1% and we average 60
calls per associate per day.
We ended the fourth quarter with 428 field sales
associates and plan to increase our sales force to a range
of about 440 to 450 associates by the end of Q3 based on
the timing of opportunities to hire outstanding
associates.
Starting this past September, we have changed the
conversation for field sales associates to relate more of
their cost to their success in growing their sales
profitably. We think that this change will benefit all
stakeholders. The associates can make more money. The
company will see more sales and income growth. And
therefore, shareholders will benefit as well.
Exhibit 99.1
------------
In the fourth quarter, we mailed 7.2 million pieces of
mail -- about what was initially planned. By concentrating
our efforts in more productive sectors, we continue to
generate excellent overall response rates. Total active
customer count was 343,000 at the end of the fourth
quarter compared to 340,000 last quarter and 329,000 in
the last year's fourth quarter -- an increase of 4%.
We expect that we will mail approximately 7.8 million
pieces in the first quarter versus nine million pieces in
the first quarter last year.
As a result of the improvements we've made over the last
two years, we're now positioned to reduce our regular
circulation and prospecting mailing in FY '04.
We'll reduce regular mailings to customers who generate
marginal sales and plan to reduce prospecting to levels
below those in '03 but that are still above historical
levels.
Our total mailings in FY '04 are planned to be roughly 30
million pieces or about 90% of FY `03's total.
We'll be redirecting some of those savings into other
growth programs and believe that these changes will have a
positive effect on the bottom line in FY '04 and into the
future.
All of our regions continued to grow in the fourth
quarter. The Midwest continues to lead the way, and all
regions grew in low single digits.
Sales to the manufacturing sector were down about 1% in
the fourth quarter and sales to the non-manufacturing
sector grew by 17%. The sales split was 72% manufacturing
versus 28% non-manufacturing. And our average order size
improved slightly to $224 in Q4 primarily driven by larger
accounts.
Mscdirect.com's outstanding growth continued in the fourth
quarter. Sales through the site grew to 24.7 million --
now representing 12% of consolidated sales with an
annualized run rate of $98 million. This represents growth
of approximately 40% over the fourth quarter of FY '02.
In conclusion, I'm extremely pleased with our performance
in the fourth quarter. We executed our plan and grew in a
very difficult environment. Although the macro situation
has not changed meaningfully, we are confident that we can
significantly outperform the sector for the foreseeable
future. We know how stressed the small distributors are
that comprise the bulk of the market. And we are taking
significant share from them.
Exhibit 99.1
------------
Our diversification program is very successful, and our
model taken as a whole will drive outstanding performance
on the top and bottom lines.
Finally, I'll take this opportunity to express my thanks
and deep appreciation to all of our MSC associates who
continue to stay focused and execute at such high levels.
Thank you. And I'll now turn the mic over to Chuck.
Chuck Boehlke: Thank you David. Once again, we've completed an excellent
quarter financially and exceeded our financial goals. In
the fourth quarter we beat the 25% read through yardstick
generating 89% incremental operating margin on our sales
increase.
The fourth quarter was aided by a reduction in our
accruals for medical expense and workman's comp cost
totaling about $1.6 million.
That was the result of better than expected experience and
that benefited the quarter by about 1 cent per share.
Excluding that benefit the read-through for the fourth
quarter would have still been almost 70%.
For the year, the read-through was 45% and operating
margins increased to 9.8% of sales from 7.6% in fiscal
'02.
As a reminder, we are committed to a read-through of no
less than 20% in fiscal '04, and we will deliver the
read-through based on leveraging on fixed cost.
In Q4 gross margin came in at 44.7% within the expected
range and should be between 44.5% and 44.9% in the first
quarter.
Turning to our balance sheet, we continue to produce
excellent results. Cash flow for the quarter exceeded
internal expectations as we generated $29 million in
operating cash flow. And free cash flow after capital
expenditures of $3 million was 26 million.
Depreciation and amortization once again exceeded capital
expenditures as net fixed assets declined in the quarter.
We expect free cash flow to be positive in fiscal '04 as
well. Our free cash balance grew to $114 million at the
end of the fourth quarter and is currently at
approximately $120 million.
Since our last conference call we have repurchased more
company stock buying a million shares at a cost of
approximately $19 million.
Exhibit 99.1
------------
Working capital excluding cash declined by approximately
$15 million in the fourth quarter reflecting a decrease in
inventory and receivables. DSOs decreased to 40 days in
the fourth quarter from 42 days at the end of last
quarter. Inventory turns were an annualized 2.25 turns in
Q4 and 2.28 for the year.
In summary, we had an excellent quarter financially. We
exceeded our expectations on improved operating margin,
delivered excellent cash flow and continue to manage our
balance sheet. Thank you and now I'll turn it back to
Mitch for the wrap-up.
Mitchell Jacobson: Thanks Chuck. MSC went public in December of 1995. We
proceeded to grow revenues and earnings in excess of 25%
for our first 13 quarters as a public company.
Based upon this growth we built three new distribution
centers, new corporate offices and new information systems
to support a business running at or in excess of 1.5
billion in sales.
At that time, sales for the industrial sector were about
80% of our business. We could not have foresee at that
period, the longest post-war industrial downturn. Over the
last few years, we have not removed bricks and
infrastructure. In fact, we've upgraded and improved our
capability. Our management team has grown and it's
matured.
We've shifted our business to 28% non-manufacturing and
will continue our focus on diversification. For the last
12 quarters we have improved asset management. And in
fiscal '03 we have proven that there's significant
operating leverage in the business.
We believe that the value of our investments over the last
few years are just beginning to be realized. We cannot
control the economy. However, we can and we will control
the direction of our company.
We're competent in our vision and competent in our future.
And (Ginette), if you would, we will now open up the
phones for question and answers.
Operator: At this time, I would like to remind everyone, in order to
ask a question, press star then the number 1 on your
telephone keypad. We'll pause for just a moment to compile
the Q&A roster.
Your first question comes from (Holden Lewis) with BBT.
Exhibit 99.1
------------
(Holden Lewis): Good morning. Thank you very much. Can you give some
greater detail here sort of post-fourth quarter? You've
heard a lot of companies that have talked about, you know,
some meaningful, you know, more than seasonality inspired
improvement in end market demand in September with some
follow-through in October. You know, you've got a couple
months under your belt.
And can you comment whether or not, you know, in these
last couple months, you've seen some tangible evidence
that the recovery may be starting or are you not really
experiencing as much?
David Sandler: (Holden), it's David. I guess first of all, let me give
you the monthly sales numbers for Q4 and what we're seeing
with revenue growth in September and October. And then
I'll add a little bit of color to it.
So in June through the fourth quarter, June was plus 5.
July was plus 3 - sorry - right, July was plus 3. August
was plus 2. And then in September and October, our growth
rate in both months was at 5%.
And now to I guess give you a little bit of color of what
- you know, what we're seeing and hearing out there. I
mean the core industrial market largely remains unchanged
from six months ago. Certainly while we do see some
positive pockets, overall, you know, I have to tell you --
and it was just reinforced to me last week -- it's tough
out there. The environment is still difficult.
The macro indicators that we're all seeing at absolutely
encouraging. And we are cautiously optimistic. Seeing the
ISM in positive territory is encouraging. And as you know,
our business has historically lagged indicators like the
ISM by several months.
If that trend continues and the experience that we have -
that we've historically seen during these times, you know,
we eventually believe that that effect is going to
translate in the form of increasing growth rates. But
frankly I want to express caution only because while the
macro indicators are very encouraging, we want to be able
to see it in our core customer base. And right now other
than in pockets, we don't see it there yet.
(Holden Lewis): Okay, well the September/October numbers are plus 5. We
know presumably also come against a tougher comp. So it's
a nice step up. I mean have you seen further acceleration
in the non-industrial or have you also - has that - you
know, the plus 5 numbers been fueled in equal part by
better industrial numbers too?
David Sandler: Yes, I mean - you know, our sense of it (Holden), is that
we are seeing the effects of - the positive effects of our
diversification program and the fact that
Exhibit 99.1
------------
we've, you know, got a team that's out there gaining share
every day. We think that's what we're seeing translating
to in our growth rates.
(Holden Lewis): Okay. With regards to the government and post office
business, I know you don't really want to talk about what
the total size of that business is -- I don't think you
gave a percentage change -- but, you know, can you just
give us a sense in terms of, you know, dollars? I mean how
much incrementally can the government and the post office
together provide you in fiscal '04 at the top line just in
terms of incremental dollars? Any guidance or...
David Sandler: Yes, (Holden), I want to be really careful here. I mean,
you know, we've talked about the fact that it's early in
the game with these exciting new segments for us. And, you
know, so far we are getting the results that we've
expected.
But I want to remind you that we're still in the startup
and the learning mode. And I guess the only additional
color that I'd like to say -- frankly for competitive
reasons I really don't want to say more in this call --
other than we're, you know, confident long term they're
going to be important components of our growth in the
future.
(Holden Lewis): Okay, and then last thing -- I'll jump in the queue --
when did you buy back stock in the quarter and what's your
shares outstanding sort of at quarter's end because they
didn't really seem to budge much, you know, in the quarter
despite the buyback?
Chuck Boehlke: All right (Holden), it's Chuck. The shares outstanding are
at 66.5 million, the actual shares. You might not have
seen a change because obviously the movement in the stock
- the price with options and dilution impact of that. But
the shares outstanding are at 66.5 at the end of the
quarter.
(Holden Lewis): Is that diluted with the options or is that your primary?
Chuck Boehlke: The primary. And the diluted is 68.3.
(Holden Lewis): All right. So I see. You finish up kind of where you were.
Okay. All right, thank you.
Man: Thanks (Holden).
Operator: Again, I would like to remind everyone, if you would like
to ask a question, press star then the number 1 on your
telephone keypad.
Your next question comes from (David Nancy) with
Robert W. Baird.
Exhibit 99.1
------------
(David Nancy): Hi. Good morning.
Man: Hi (David).
(David Nancy): I was wondering if you could talk about this ISM given
that you historically would lag that number by -- I think
we've talked in the past -- about three months or so.
Shouldn't you start to see some building strength very
soon? And I guess you talked about the confidence that
gives you. But a 57 number sure has to give you some
pretty good confidence based on what you've seen in the
past relative to the ISM does it not?
David Sandler: (David) it's David. Yes, I mean we were pleased to see a
57 ISM, you know, come out yesterday. And if, you know,
the fact that we've had now a few good months of a - of
building (ISM), you know, to the extent that it continues
and doesn't come off that track and to the extent that it
continues to follow what we've seen historically in our
business (baked in the lag), yes, that's what certainly
gives us cautious optimism for the future.
(David Nancy): Okay, and then on the gross margin side, could you talk
about your expectations for 2004 overall? And I'm just
wondering if there is any possibility that we actually
would see gross margins declines next year due to negative
mix maybe if industrial customers come back or anything
else that might be positively or negatively impacting the
gross margin.
Because when I look at fiscal '03 excluding the gross
margin improvement, your contribution margin was about
25%. And so I'm just wondering if the 20% that you expect
for next year will actually end up being 20% or
potentially something less than that even?
Chuck Boehlke: (Dave) it's Chuck. First of all, you're absolutely right
on the (REPU) for this year. Certainly the difference
between 25 and 45 for this year '03 with 140 basis point
improvement in gross margin that went on top of of course
entire 844 million in sales, that opportunity doesn't
exist as we see it now for next year in terms of adding
additional 140 points of gross margin. In fact, we'd
expect margins to be at or slightly below where they
finish this year for the reasons you've cited.
As we continue to grow the non-industrial market there's
mix issues that come about. Although we've got active
programs in place to improve gross margin unrelated to
that that we hope mitigates anything that would come about
because of mix changes to keep it plus or minus 30, 40
basis points from what you saw for this year.
The 20% (REPU) number we've committed to for next year is
more a function of what David talked about earlier. It's
too early in the game with
Exhibit 99.1
------------
some of the new sectors of business we're in right now to
predict exactly how that's going to shake out and what
kind of expenses we may have to incur and invest in to
make that come about.
So again, we're going to be cautious and say we certainly
are committed to the 20%. And as we get arms around this a
little bit more as we start to get further down the curve,
we'll update you on that.
(David Nancy): Okay. And then I think this refers back to David's
comments on the environment overall. When you say that
your industrial customers are flat right now, how much of
that, if you look at the customers you have today that you
had a year ago, are those customers actually up and then
that's offset to some extent by some big customers that
are moving to China?
And if that is the case, could you talk about that trend?
Is that an accelerating trend or is it about the same as
you've seen over the past year or so?
David Sandler: Sorry (David) - sorry about that. Did you want to say
something? (David)...
Man: Would you mind repeating...
David Sandler: Sorry. We got distracted in the room. If you could just
come back a bit and frame the question.
(David Nancy): Okay. My question was that when you're talking about
industrial customers being flat, if you looked at the
customers you have today that you had a year ago, I would
imagine that there's some amount of those customers that
have defected and gone to China or wherever that you don't
have as customers anymore.
So I'm wondering of the customers that you have year over
year, I would imagine those are actually up slightly
offset to some extent by these - the customers that you've
lost that have moved overseas. And I was wondering about
that trend. You know, we are hearing more about it of
course. What I'm wondering is in your business, are you
seeing it more that big OEMs are leaving the US?
David Sandler: (David), thanks for being patient with us there. Yes,
certainly we are seeing some of that trend in our core
customer base. And overall, you know, we - the - our
customer growth in the industrial sector as you saw in Q4,
you know, is relatively flat. But what I will tell you is
even with that trend, two things. One, it's still an
enormous market. But I think beyond that, remember that
we're gaining share within our existing base so that while
some of the business may be eroding, may be shifting away.
Exhibit 99.1
------------
You know, we are successfully gaining share. And that's
what gives us so much encouragement both in terms of what
our current results are and what we can expect as the
overall segment begins to enjoy a bit of economic pick up
which we still even with some of the movement overseas, we
still fully expect that - you know, that historical trend
to continue.
(David Nancy): Okay. And so as you look at those three moving parts,
you've got sort of your core customer growth rate offset
by customers that are leaving. And then the addition would
be customers that you're adding -- new customers.
David Sandler: Right.
(David Nancy): When we look at those three moving parts, you know, do the
- those that are leaving, are those completely offset by
new customers and the core is flat or is there actually
growth in that core business?
David Sandler: Well I mean you have seen - I don't think that we've
shared, you know, the way that we slice and dice and break
it out. You certainly have seen our overall customer base
growing.
You know, we do gain lots of customers on a monthly basis,
new core industrial customers. Some of those additions
certainly offset those businesses that are, you know,
frankly drying up or, you know, going away altogether.
What we're encouraged about is a combination of being - of
having the opportunity to see that as the industrial
economy begins to strengthen and come back, we'd like to
see that core segment grow in addition to what we're
seeing right now as the growth coming primarily from our
non-manufacturing segment as a result of our
diversification program.
So we're kind of - you know, we're gaining share and we'll
say holding our own in terms of growth in the - our core
segment. We've got the non-industrial segment that's
really been producing some very solid growth. It's - you
know, it's very encouraging to think that we'll get both
pieces working for us through '04 and beyond assuming that
the trend and the strength continues and, you know, we get
the historical experience that, you know, we've seen,
certainly for as long as I've been around.
(David Nancy): Okay, thank you.
David Sandler: Thank you (David).
Chuck Boehlke: (Dave) this is Chuck once again. I just want to circle
back to your earlier comment. You talked a little bit
about is there a possibility that the margin would cause
us to have concern we would miss the 20% read-through. I
just
Exhibit 99.1
------------
want to reinforce that we've said all along, the 20%
commitment is a minimal amount of read-through that we
anticipate moving forward. And obviously we're going to
push ourselves hard to get to an even higher number if at
all possible.
But I just want to reiterate that we don't see any
circumstance in margin mix and so forth that would drive
us below 20. That's the minimal commitment we've made.
Operator: Your next question comes from (Jeff Arnada) with William
Blair.
(Jeff Arnada): Hi. Congratulations on a fabulous quarter fellows.
Man: Thank you (Jeff).
Man: Thank you.
(Jeff Arnada): My question relates to the change in compensation for the
sales force going to a more variable structure. What have
you seen there in terms of productivity measured in sales
per person and/or turnover or other effects of that?
David Sandler: Hey (Jeff), it's David. Well it's still, as you know, we
went on to the plan in September. So we've only had a
couple of months in where, you know, we're certainly on
plan with anything that we've anticipated. I'm going to be
careful to not share much on this call. But you asked
specifically about turnover.
We have seen a bit of increased turnover over the last
couple of months. Frankly that was planned. But I'll tell
you that the majority of that turnover was completely
unrelated to the comp plan and was primarily driven based
on performance. So we're not concerned either with that or
we're not seeing anything that wasn't anticipated. And so
far we're - you know, we're pleased with the direction.
(Jeff Arnada): But directionally, are you seeing an increase in sales per
person as a result of it?
David Sandler: Yes. I mean overall sure. We are seeing an increase there
both in productivity, you know and growth in the business.
(Jeff Arnada): Thank you.
David Sandler: Thanks (Jeff).
Operator: Your next question comes from (Yvonne Varano) of CIBC.
Exhibit 99.1
------------
(Yvonne Varano): Thanks. Your depreciation in 4Q when I calculated it out
seems to be about 4.1 million. And that seems to be a bit
of an increase from the prior quarters. Could you tell me
what's going on in that number?
Shelly Boxer: Yes. Hi (Yvonne). It's Shelly. We went back and looked. We
had a slight catch-up in depreciation in the fourth
quarter. We're a little bit under-accrued in the previous
three quarters. So we've picked up about 250,000, 300,000
in the fourth quarter.
(Yvonne Varano): Okay. And in the past you have broken out some of the
growth that you've seen by region. Is that something you
could do for me?
David Sandler: Sure (Yvonne). It's David. All of the regions were in low
single digit as I said. The Northeast was about 3%. The
Midwest was about 5%. And the Southeast and the West were
about 4%.
(Yvonne Varano): Okay. And then lastly as you add salespeople and change in
compensation going into next year, what kind of impact do
you think that that's going to have on your SG&A in terms
of I guess a percentage increase?
David Sandler: (Yvonne) as we've talked about our expectations for Q1 and
certainly our game plan for the year hasn't changed. I
mean any adds that we've made in the sales force and with
all of the investments that we've either been adding or
shifting will all contribute to improved productivity all
with a - you know, all mindful of delivering on the
read-through, continuing to expand our operating margins,
you know, with a push towards historical levels. And
that's - and delivering, you know, consistent earnings
growth. I mean that's the game plan that we've been on and
we're not wavering from it.
(Yvonne Varano): Okay, thank you.
David Sandler: Thanks (Yvonne).
Operator: Again, if you would like to ask a question, please press
star then the number 1 on your telephone keypad.
Your next question comes from (Holden Lewis) with CIBC.
(Holden Lewis): Great thanks. It's (actually) the last question, maybe a
little bit differently. Can you give some sense of the
extent to which your SG&A benefited in the fourth quarter
from the departure of some of these salespeople, you know,
perhaps the amount which, you know, ultimately you're back
at your targeted run rate in fiscal Q4 sort of the amount
that is not in the numbers that seems to be more of a
temporary item?
Exhibit 99.1
------------
Chuck Boehlke: I mean the expense numbers are - from the sales associates
weren't overwhelmingly significant in the fourth quarter.
The fourth quarter op ex as we talked about earlier, had a
big adjustment for our fringe cost if you will, along with
some of the advertising David's talked about in Q4.
So they were the drivers of expense change in just about
any period you'd want to be, you know, be comparing us to
in Q4. There wasn't a significant dollar amount associated
with the sales attrition in Q4 that affected the numbers.
(Holden Lewis): Okay. And do you feel that there were any revenues lost at
all from the departure of any of those sales people or do
you believe that was equally insignificant?
David Sandler: You know, (Holden), certainly, you know, to say that
there's no piece of revenue that's ever lost by a sales
rep that may have departed, I wouldn't be able to say
that.
I will tell you that, you know, we're comfortable with how
we're positioned. We're certainly comfortable that most of
the turnover was driven based on performance. And, you
know, and therefore we're not concerned that revenues were
impacted.
(Holden Lewis): Okay. And then last, can you comment just on pricing? Is
pricing still nominally positive or has that kind of been
anniversarying away? And any sense of whether you're going
to step up again on the pricing in Q1?
Chuck Boehlke: Yes. I mean (Holden) the pricing as you know, with the big
book goes out. Any pricing that we would have taken would
have been in the big books beginning of the year. And
other than unforeseen significant changes in commodity
prices and so forth, there's no plans right now to adjust
pricing in the first quarter.
(Holden Lewis): But can you give a sense of - I mean with the big book
going out, I mean what do you sort of expect the net
pricing change to be at the outset? Any idea?
David Sandler: (Holden), we certainly have modeled it internally for how
we see it layering through the years, through the
quarters, you know, throughout the year. I think we're
more comfortable staying with the overall annual guidance
that we've given. There's just so many factors that play
into margin.
We've got, you know, programs across the board to address
many of those factors, but we're more comfortable just
kind of giving you the overall guidance for the year.
Exhibit 99.1
------------
(Holden Lewis): Okay, thank you.
Man: Thanks (Holden).
Operator: Your next question comes from (Mark Koznerick) with
Midwest Research.
(Mark Koznerick): Hi. Good morning.
Man: Morning.
(Mark Koznerick): A couple questions here. One on inventory trends. You
know, even though sales were up, inventories were down
here in the quarter. And, you know, seasonally it looks
like they sort of swell up in the first part of the year
and then trend down again in the second half when you
generate cash.
First of all is inventory unusually low at the end of the
fiscal year here? And can we expect the same kind of
seasonal behavior next year?
Chuck Boehlke: (Mark), this is Chuck. First thing you should know in the
beginning of any new fiscal year, we add obviously the new
SKUs. They start to obviously come in inventory towards
the end of the previous fiscal year.
But if you take a look at our inventory numbers, you see
some pretty substantial improvement in our inventory turns
over the course of a year. If you took a full, just a 2
point average beginning and ending inventory and compared
that in '02 versus '03, our turns actually improved a full
quarter from about 2.04 to 2.29, 2.3.
So what you're seeing in inventory yes, there's a little
bit of cyclicality in terms of adding new SKUs. But we've
had a very aggressive program to improve our inventory
turns. And we achieved that in '03 and have aggressive
plans to continuing improving in '04. Although I think
it's fair to say with the growth that we're experiencing
-- and hopefully that continues -- the absolutely dollars
of inventory more likely than not will be going up
although we'll be improving the turns from here on out.
(Mark Koznerick): Okay. And then actually you touched on the - next one I
had was the SKUs. What kind of numbers or percent increase
did we have and in what kind of broad general areas are
they?
David Sandler: (Mark) it's David. We are currently coming off of
September with roughly 545-odd thousand in our offering.
You know, we added about 35,000 in September gross SKUs in
the big book. And we're not actually talking about what
our plans are yet for what we're going to be adding for
'04.
Exhibit 99.1
------------
(Mark Koznerick): Okay and then finally what was, on an overall annual
basis, what was price realization this past year? And
just, you know, with regards to (Holden)'s question a
minute ago, was there - is there guidance so far and what
you expect for '04?
David Sandler: (Mark), we'd rather stay away from splitting out any one
component of our gross margin. And we'd rather be - we'd
rather just, you know, leave it with our overall guidance
for the year.
(Mark Koznerick): Your overall margin guidance?
David Sandler: Correct.
(Mark Koznerick): Okay. All right, thank you.
David Sandler: Thank you.
Operator: At this time there are no further questions. I will now
turn the call over to management for closing remarks.
Mitchell Jacobson: Thank you (Ginette). Thank you fall. And once again I want
to congratulate David on the new promotion and express my
confidence and my excitement of working with him well into
the future. Thank you all.
Operator: This concludes today's MSC Industrial Fourth Quarter
Earnings conference call. You may now disconnect.
END