MSC Industrial Direct Co., Inc. (MSM) Q3 2012 Earnings Report, Transcript and Summary

Good morning everyone and welcome to the MSC Industrial Direct Third Quarter 2012 Conference Call. All participants will be in listen-only mode. (Operator instructions). After today's presentation, there will be an opportunity to ask questions. (Operator instructions). Please note this event is being recorded. At this time, I would now like to turn the conference over to Alexandra Tramont. Ms. Tramont, please go ahead.

Thank you and good morning, everyone. Welcome to the MSC Industrial Direct fiscal 2012 third quarter conference call. An online archive of this broadcast will be available one hour after the conclusion of the call, and available for one month on the homepage of the Company's website at www.mscdirect.com. During today's presentation, management will refer to financial and management data included under the section Operational Statistics, which you can find on the Investor Relations section of the Company's website. Let me now take a minute to reference the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This call contains forward-looking statements within the meaning of the U.S. securities laws, including guidance about expected future results, expectations regarding the Company's ability to gain market share, and expected benefits from the Company's investment and strategic plans. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in the earnings press release and the risk factors in the MD&A sections of 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 like now to introduce MSC Industrial Direct's Chief Executive Officer, David Sandler. David, please go ahead.

Thanks, Alex. Good morning and thanks for joining us today. With me are our President and Chief Operating Officer, Erik Gershwind; Jeff Kaczka, our Executive Vice President and Chief Financial Officer; and Shelley Boxer, Vice President, Finance and Accounting. I'll provide some perspective on our strategy. Erik will add details about our investments in the current landscape environment and Jeff will provide details on Q3 financial performance and Q4 guidance. Let me take you back a bit in time, when we experienced the downturn in ’09 I talked about it as the biggest land grab opportunity in my many years in distribution. At that time, I saw that we had a long runway to take share from weekend small regional competitors due to their inability to fund investment spending and lack of a balance sheet to support working capital on the rebound. As it proved out, we will correct and did capitalize on that opportunity. Unlike slowdowns and rebounds where share was gained and then the market return to normalcy we believe this time it is different. I have had so many conversations with you over the years about the reason for the slow, but inexorable shift of market share to larger well capitalized distributors from the locals. We’ve talked about the stickiness of relationships and the quality of the technical abilities of these companies. The top 50 companies in 1995 represented about 14% of the MRO market. The top 50 now control 30% of the MRO market. Rapid share gains usually occur during the slowdown and recovery and then moderated through the in-between years. We believe that this is no longer the case. We think that the land grab continues and it is actually increasing in speed. The difference is technology and value added solutions. The combination of digital…

Thank you David. As you heard from David, despite a moderating growth environment we firmly believe that the land grab continues as industry consolidation is still in its early stages. Against this backdrop we are investing in our future in order to achieve the long term targets that we’ve laid out on the last few calls. Our ultimate vision of 10 billion and our intermediate growth goal of 4 billion by the year 2016 implying a 15% compound annual growth rate. We have a convergence of initiatives the drive-in support our long term growth strategy. They are highly accretive to earnings over a period of years, but put some temporary pressure on contribution margins, particularly in a moderating revenue growth environment like the one we are now seeing. Vending and e-commerce are two examples of how we're using technology to provide value-add to our customers, to firmly entrench MSC within our key accounts and to capitalize on the consolidation trends that David has just described. On the last call I talked about vending and how it's contributing significantly to our growth, adding nearly four points to our recent growth rates. While our vending program overall is contributing to earnings growth, it's dilutive to our gross and operating margin percentages. This is because the account level profitability varies significantly based on how long the solution has been in place. Vending affects margins early on in the lifecycle of an installation as we incur startup, selling and implementation expenses along with a capital outlay for the machine itself that results in depreciation expense. Overtime, the more mature classes of vending customers become highly profitable as we see a large growth delta over Company average. We leverage the early startup expenses across the larger revenue base and we reap the benefits of extremely…

Thanks Eric. Overall, we are pleased with our financial performances through the third quarter compared with the same period last year sales grew 15% and earnings per share and earnings per share grew 13%. Our sales were within the guidance range; however, in the early part of the third quarter we began to see our sales growth trend slightly lower and this trend continued throughout the quarter and into June. None the less, we continue to experience growth from our investment programs during this land grab environment. Of the 15% quarterly sales growth year-over-year, about 4 points came from customers within our vending program and approximately 4 points came from our recent acquisitions. The remaining growth came from other volume and pricing. As I’ve mentioned on previous earnings call, the growth related to our vending program is measured by the total revenue growth in accounts with vending. It is an important component of our investment strategy and is expected to continue to feel growth in the future. Our gross margin for the quarter was 45.7%, down approximately a 160 basis points in Q3 versus the same period in the prior year, but in line with our expectations. As you know there are series of headwinds and tailwinds affecting gross margin, but the 160 basis point decline from last year was driven primarily by about 70 basis points of dilution from the two ATS acquisitions and about 30 points of dilution related to vending program gross margin. I should also point out that gross margin for Q3 of last year was somewhat of an anomaly due to the favorability of price increases taken ahead of product cost catch up as well as increased rebate income. Our operating margin was 18.1% in Q3 and incremental margin was 16%. Our incremental margin was…

Thanks Jeff. In conclusion, we believe that the consolidation of the industrial distribution marketplace is gaining momentum. Certainly, the time when the small and regional distributors were able to hold on to customers purely through long-term relationships, lower prices, and technical savvy, is beginning to come to an end. The long-term winners will be those distributors who can also invest in the technology, e-commerce solutions, infrastructure and all the other value added programs that customers are demanding. We intend to be one of those winners and have chosen to moderate but continue our investment program in the face of slowing revenue growth. Although, this means somewhat slower earnings growth for a time, we will return to historical earnings growth rates as revenue growth returns to higher levels. We remain very excited about our future, and I'll take this opportunity to thank our outstanding team of associates, whose efforts, dedication and focus underpin my high level of confidence in our long-term success. Thanks all and I'll now open it up for Q&A.

At this time we will begin the question and answer session (Operator Instructions). And our first question comes from Robert Barry from UBS. Robert Barry – UBS: Hi Guys, good morning.

Hi Rob. Robert Barry – UBS: Why don’t you first touch on pricing, sounds like you took a small price increase in the quarter. Can you tell us how much pricing contributed in 3Q and what your assumption is for it in 4Q?

Sure Rob, Its Erik. Yes as Jeff mentioned we took what we would consider moderate pricing action in this quarter, that's in Q4. For competitive reasons we’re not going to go into any detail. You could expect, as Jeff described in conjunction with our big book, along the lines of our usual increase upcoming that would account for the uptick in gross margin we would plan to see in Q1 and we will give you more color as we usually do on our big book increase next quarter. Robert Barry – UBS: Okay, was that about 3% in this third quarter? I think that's about where I was tracking for the last couple of quarters.

We are not going – we don’t ask sorry, but we don’t break out in the mid year Robert Barry – UBS: Okay, I guess I just wanted to see if you could unpack a little bit more, you know your outlook for the contribution margin staying. I think you said at around this 13% level that you expect in Q4. It sounds like it's a combination of getting more aggressive with some of the investment spending but also contemplating some slowdown in the top line. I was wondering if you could just, maybe dimension that and also put it in perspective of what we might expect on the gross margin line.

I’ll take that Robert, its Jeff. As we head into FY’13, it's difficult to predict the economy, the impact on the revenues and so forth. What we tried to give you was a sense of the read-through and the read-throughs as always is driven by the revenue trajectory, the operating expenses, investment levels and the gross margins. In Q4, we explained the environment and the ATS growth at around 10.5%. The gross margin in Q4 is typically lower than what you see in Q1, because of the impact of price increases and so forth, and we do intend to continue to invest although balance that with moderate OpEx actions and so forth in a responsible way. But what all this adds up for in Q3 or Q4 is the 13%. As we look ahead to FY'13, there are indications of the moderating revenue growth. There is the intent for us to continue the investments in the growth programs in a responsible way and giving this scenario what we've said is the read-through that we're experiencing in Q4 is somewhat indicative of what we would expect going forward. Now, depending on the varying revenue levels, this could change if we see revenue growth in the mid-teens, we certainly would expect to see read-throughs return to the level where we would again see expanding operating margins. Robert Barry – UBS: Okay. And maybe just finally it sounds like you repurchased some shares in the quarter, just any thoughts on how you're thinking about that going forward, especially with the stock down here where it is?

Robert, Jeff again, as always we take a balanced approach. We've got a very strong balance sheet. As you know, we've got cash on the balance sheet. We're certainly willing and able to use that to fund the right acquisitions that fit strategically and culturally. We pay our regular dividends. We've periodically paid special dividends and we periodically do stock buybacks. So there are no current plans, but we'll evaluate that as we go forward. Robert Barry – UBS: Okay, thank you.

Our next question comes from Adam Uhlman from Cleveland Research. Please go ahead with your question.

Hi Adam

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Well, it would also be a function of I guess, the revenue growth. But I think the acquisition impact was actually similar to the previous quarter. As we look forward to Q4, there'll be an overlapping of the first ATS acquisition. So, there is only one quarter overlap associated with that. The vending impact we mentioned was about 30 basis points in the previous quarter, I believe it was 20 basis points and that's due to the growth in the vending program.

Okay, and then when you talk about the value equation that's shifting in the marketplace right now, I guess as we look out over the longer term, I'm wondering how much of that, the value added is that the company is providing to customers. If you guys think you can actually keep, or how much of that you have to give away as price transparency becomes even greater as more of the model and the industry shifts to online purchasing?

Yeah. Adam, its Erik, it's a good question. And I would say that, taken our vending program is an example, what we see strategically if anything where most of our volume is coming from these deep relationships that we're building with our customers, it's becoming less about price and more about adding value into the customer supply chain and we're doing that in a number of ways. So, we’re streamlining inventory and we are freeing up cash flow. We are bringing in our technical experts and we are taking out cost on the plant floor. All of those are taking the conversation really away from price and towards what we can bring to help them streamline their cost structure. So, I wouldn't draw a conclusion between the increased online percentage of sales going through the web, translating into more focus on price. Most of our customers that are doing business with us on the website, it's a multichannel relationship. In most cases or in many cases, there is technical experts coming in and helping our customers on the plant floor. There's other value added services going in, so it's really what we are describing here is a move towards a deeper relationship with our key accounts.

How much greater share of wallet do you think you get with those tighter accounts with the vending relationship or anything else? Can you give us any kind of data points on that directionally?

Yeah. I mean the short answer is a lot. We see a significant difference in share gain and in how deeply we embed ourselves in our accounts. So, the reference point there would be, number one, we’ve started to break out for you the growth contribution of vending as roughly four points of accounting for four points of recent growth. The reason that happened is because when we put our vending system in, it's very well received by our customers and along with our technical specialists at our full program are producing growth rates well in excess of what we see in the rest of the Company. So, certainly that's one metric and the other one I would point to, that I referred to in the prepared remarks is our retention rates, which we are not going to break out, but are very high. So, what that indicates to us is we really are embedding ourselves in these accounts.

Okay, great thanks.

Thanks Adam.

Our next question comes from Sam Darkatsh from Raymond James.

Good morning folks. This is Josh filling in for Sam.

Hey Josh.

Want to drill down a little bit into the moderation that you're seeing. Could you maybe give us some color on some particular end markets or industries where you are seeing the most moderation?

Yeah Josh. It's Eric, so overall what we would characterize it’s still a very solid environment. We're hearing some caution from customers certainly on the world events on Europe on election and so forth, but it's still solid, activity levels are solid and our customers their order flow and backlogs are solid. The change that we've seen is it's been a leveling off, so the leveling off the moderation is producing lower growth rates for the company and for our customers. In terms of pockets, we pointed durable manufacturing generally and no surprise, so given that manufacturing overall is roughly 75% of our business, but that's accounting for a good portion of the moderation that we're seeing.

Are there any areas you're seeing accelerate?

Yeah. For competitive reasons, I'm not going to break it out. Within the durable arena there are certainly a couple of outperformers and a couple of underperformers, but I'm not going to break those out on the call.

Okay, and then just to make sure I understand your sales growth guidance for the next quarter, what's the contribution from the acquisition, as I think you may have said in the past 1.7%?

For Q3 it was 4 points of the growth associated with the acquisitions and then in Q4 we dropped off half way because of the overlap of the first ATS acquisition. So, that would drop off. We'd go down to about 2.5 points of growth. Call it 2 to 3.

Okay, thank you very much.

Sure, thank Josh.

Our next question comes from Luke Young from Robert W. Baird.

Hi Luke. Luke, are you there?

[ph]Yep, sorry about that (inaudible) Thanks for taking my question you guys. First, I just wanted to touch on the pricing environment again and really I guess as we look out from here and see whether you guys have any change in your thought as to your ability to get price in the 2013 (inaudible) think that the recent moderate price increase that you got here even as growth has leveled off would seem to be encouraging, but any thoughts that would be appreciated?

Yeah Luke, it's Erik again. So in general, we see a pretty solid environment and we feel good about our ability to pass through pricing to the customers. Again I would take you back to the earlier question about our value proposition and the fact that where we're doing most of our most of our volume and where we're spending most of our time, the relationships have moved away from a price transactional sort of relationship to one that's about much deeper value-add into our customers, and as the result we feel good about being able to take pricing given how much we're saving our accounts in total supply chain cost.

That’s helpful. I guess second question since no one else has asked I guess so I'll go ahead and ask. Just if you guys have some general thoughts on the Amazon Supply launch that of course that came out a few months ago here?

Yeah sure. So Amazon yeah, overall Luke what I will tell you is, it wasn't particularly surprising to us, in general not surprising to see a new entrant into the space. It feels like every few years there's somebody else we're talking about. It's a huge market. It's fragmented and the top players are highly profitable, so certainly no surprise. We have a ton of respect for Amazon as everybody does, so of course we take it very seriously. We pay attention. That said, I would tell you we feel very good about our positioning and the strategic direction that we're taking the Company, and that you heard David describe in his operating remarks. A couple of points on Amazon in specific; one is, from what we see, it's much more complicated to take what they do in a B2C environment and apply it to B2B. And the second thing is even if they're successful doing so, again I'll go back to the point that I just made with you about pricing that the price and transaction are really a relatively small percentage of the total equation with our key accounts and where we're bringing value. So, supply chain savings, productivity on the plant floor, that's really where we believe the game is won and lost. And, just as a proof point here, for years and years we've been competing against local distributors in this business. And if you look at most published reports, the average gross margin of a local distributor is around 22%, 23%. Clearly, for years and years, we have been competing against folks who are good competitors but priced lower than we do. So, if price were the game, we wouldn't be able to continue taking share from the locals the way we have.

Okay, thanks a lot Erik.

Our next question comes from Ryan Merkel from William Blair.

Hey Ryan

Good morning everyone. So the first question I've got is on the fourth quarter revenue guidance. It looks like you expect July and August average daily sales to decelerate a bit from June. I know you mentioned of moderating manufacturing environment. But does this also assume just normal seasonal slowdown in July and then a little bit of pickup into August, is that right?

Yeah, Ryan, it's Erik. So, you are correct that implied in our forecast based on what you see from June is some slowdown. So, there is a small piece of it, as Jeff just mentioned, that's the anniversarying of the first ATS acquisition. The majority though is what we're seeing in moderation and the way I would describe it is again going back to, activity levels are still solid, so it's more about a moderation and a leveling off, and when compared to last year in more of a recovery mode, the growth rates are compressing. So, that's how I would describe what we are seeing.

Got it, okay. And then, if I hear you right, it sounds like 2013 is going to be a year of investment and potentially below average EPS growth. But then as I look to fiscal 2014, will some of these investments be kicking in at the same time that spending is falling off, and then we get a reacceleration of the growth rate. Is that kind of the planning?

Yes. So Ryan, let me start, I'll just start. I think you have it right with 2013. I mean I think the theme we are trying to get across here is moderation. So, we are seeing moderating of the revenue growth rates as of now. We are certainly not economists so who knows what's going to happen, but for now that's what we are seeing, and what you are hearing from us is balancing short-term and long-term. So like we always do, you can expect us to moderate in spending, in areas of the company as we see moderating growth rates. The changes what David described is some select investments where we say, they are so important to the future, so strategic that despite the fact that they have a near-term dilutive effect, we are going to press ahead because long-term they are just so accretive. Vending, I tried to put some color on the call, vending is a great example, where just to put some color on that, in the near term with vending, the issue is you have, it's a long selling process, so longer than typically going in and just selling on a transactional basis. Startup, you have significant startup expenses, implementation expenses in putting the machine in place. But over the long run, what happens is, we see a large growth delta. So, all of a sudden we start leveraging all the fixed upfront investments across a larger sales base and we see incredibly high retention rates. So, all of that produces this great long-term picture. So, what you heard from David is for those select areas vending being one of them, we're not going back off although we will moderate in other areas. So, again even in '13, if revenue growth picks up, then it will certainly be a different story. In terms of 2014, for now Ryan, we're really going out one year typical with our normal process where we'll give you a perspective on the year. There are so many moving parts. It's going to be hard to predict for instance vending if it keeps, what's happened is it every quarter that's gone by, the number of new installations have outpaced our plan. If that were to continue, who knows for 2014, so there are many moving parts. We're going to stick with one year for now as we normally do.

Got it and then just last one from me. I calculated this right, growth from national accounts this quarter was about 4%. If that number is right, I am just wondering what explains kind of softness there and aren't those primarily the vending customers?

Ryan, so we don't actually break out. I'm not going disclose the growth in the large account segment. Okay. Remember one thing is when you look at that large accounts, it's a combination of national accounts and government as we mentioned government does pull the number down and I would not assume that vending is definitely not limited to our denomination of large accounts there are many accounts that would be in our core segment that are right in the sweet spot of plan where we also have vending.

Right, thanks for taking the question.

Thank you Ryan.

Our next question comes from Hamzah Mazari from Credit Suisse. Please go ahead with your question.

Good morning, this is Chris Parkinson on behalf of Hamzah. Most of my questions have been answered, but just two very quick ones. The first out of your 9% government sales, can you just parse out what is more MRO facilitates maintenance versus more project activity generally and any differences in growth rates there?

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Okay, sure enough and just a general question on the acquisition landscape. What are you seeing from a multiple perspective and then do you have any updates on what adjacencies in the future you're going to try to target?

Yeah Chris, it's Erik again. So I mean M&A landscape in general we would describe our funnel as pretty full and pretty robust. There’s lots of discussions happening from what we're seeing from a multiple perspective, still pretty solid. And then in terms of your second question was around our strategy and we've identified a number of adjacencies and what we've told you is while we look at a couple, the most likely one and the one that's sort of first and foremost on our minds in terms of the growth strategy is the product line adjacency. So these are the MRO categories that we've referred to over the past several calls that we carry in our catalog, that we've got existing relationships and existing business where they are sold into manufacturing plants in many cases by the same buyers who are buying metalworking that would be the most likely place you'd see us do something in an adjacency move.

Perfect, thank you very much.

Our next question comes from Holden Lewis from BB&T Capital Markets. Holden Lewis - BB&T: Great, thank you, are you able to hear me?

Yes Holden. Good morning. Holden Lewis - BB&T: Okay, good morning. Yeah, a couple of things, first, when you talked about revenue sort, the positives there will be revenue stack of 15%. Is that a statement about if the macro environment reaccelerates or could you get to that 15% because of the traction your investments are getting and also seeing margins grow during that scenario?

Yeah Holden, it's Erik. I think the short answer is both. We could get there either way. Let me start with what we're currently seeing. So you look at our Q3 performance and we think relative to what's going on in the world with comps, with peers that the share gains are pretty good. We think they continue to be pretty good. So, the difference between Q3 and Q4 it's really just moderation in the environment. And to your question going forward, it certainly could happen either way, if share gains were to widen even further, but I do think it would be helpful to have a little juice from the economy as well. Holden Lewis - BB&T: But if the share gains widened further, would that come along with increasing pressures? In other words you're willing to accelerate the growth through growth drivers but that will also mean burning yourself with more cost, so that's really not the path there?

Yeah, Holden, that's a fair point. I mean part of what we're describing here is take a program like vending, as we said it is exploding and it's outpacing our plan. The more we do, the more because of the dynamics I describe, the more near-term dilution there is, so yes, that's fair. Holden Lewis - BB&T: Okay. And then, I guess the second question I would ask, you've sort of given us the end game where it relates to sort of incremental margins and things like that. But I'd be kind of interested, you've laid out the pieces where you're investing and incurring costs. You haven't really suggested to us where you're sort of taking some of the savings. So, I wondered if you might give a little bit of granularity there. And then if you could also maybe when you look at the entire package of costs from investments and savings from those cuts, over the next 12 months what is kind of the relative size of those things? I mean, are the costs that you spend is going to be x-times greater than the savings that you incur? Can you give some color on that?

Yeah, sure Holden, it's Eric. So, I'll start with and Jeff had described in the prepared remarks that we are moderating spending. So, the savings there is that we are doing moderating as part of balancing given the moderating growth rates. And, what you see in one place is our Q4 sales force headcount guidance. I tell you that overall beyond just the sales force, headcount we are moderating the rate of hiring, and we've also looked at select areas, take a line item like professional fees that are tied to certain projects where we slowed down the pace of those. In terms of quantifying it for you, very difficult to break out and compare relative to the dilution from the investments, because again, it's hard to predict just how fast a scenario like vending will grow. So, what we tried to do for you is give you a perspective and a framework on read-throughs given certain revenue assumptions for '13. Holden Lewis - BB&T: Okay, what I am kind of curious about is, if you don't see a reacceleration revenue, but in fact you see a moderation, a further moderation, you're not going to slow down the investments. How can you incrementally go after the costs stronger and stronger or was the spending investments that you have every 100 basis point downtick in revenue is going to have a real negative impact on your results?

Yeah. Holden, look, there's other areas and you've seen us take out different playbooks off the shelf depending upon the environment. Right now with what we see, we still considerate it moderate growth, and we don't think we need to pull a different playbook off the shelf, but even with the playbook that is off the shelf, we've got several areas where we are moderating spend, and depending upon what we see in the revenue environment, if it were to get worse, we would moderate further. Holden Lewis - BB&T: Great, thanks guys,

Our next question comes from Brent Rakers from Wunderlich. Please go ahead with your question.

Yeah, good morning. I think maybe first to follow a little bit on Holden's question about pulling levers. Could you maybe talk a little bit about the natural leverage you have in place on the cost side more specifically that if you are growing kind of a mid single-digit, maybe even high single-digit level next year, what kind of movement happens there in terms of both hiring, but also in terms of the variable portion of compensation?

Brent, I mean I think look, the biggest lever we have in terms of as a percentage of our cost is people and the lever that we have to use is the rate at which we would hire and slow that down. So, I think certainly you mentioned another one. Yes there is a portion of compensation for our sales force in particular. Its variable, but the biggest lever would be the rate at which we add people and it would be other professional type fees related to key projects that we would either slow down or stop depending upon the environment. So, what we described this morning are the ones that we don't want to scale back on. It would not plan to despite near term dilution. There is plenty of others where we would.

And Eric in the past at least on a quarter-to-quarter basis, you have, if you got a little bit more specific about dollars attached to some of the investment spending on a sequential growth rate number, can you elaborate a little bit more in terms of the OpEx impact to some of the investment spending dollars you're talking about for fiscal 2013?

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Eric, maybe as another way of at least somewhat addressing that, if you were growing like a mid to high single-digit number and yet you pulled off some of these gross spending initiatives, do we think that you could manage a normal or traditional kind of a high 20s kind of percent read through with a mid single, high single digit growth rate or would that still be lower than that even without the investment spending?

Yeah. Brent, so what you are hearing from us and what you heard from Jeff today, the answer would be no. so that, at a high single-digits growth rate we would have, we would expect to grow earnings but at lower rates than for at least for the year, lower rates than historical and at read-throughs lower than the 20s.

Even excluding the investment spending, correct?

Tough to break it out. I mean, no, we're giving you kind of an all-in number.

Okay, great. Then just last question, I think Erik specifically, you've talked a lot about activity levels being solid in the marketplace. I guess, I just wanted a little more reconciliation on that because when you look at the guidance number for the fourth quarter, adjusting for price and the share gain tied to some of the vending programs in M&A, it splits out kind of a zero percent year-over-year growth from core activity. I guess first is, is that calibration right, and then I guess, what distinction would you make between activity being solid and kind of at that kind of level of market growth?

Yeah. No sure, how you're getting to the math. It's tough to comment on the breakout of organic without exactly understanding how you're doing on the math, but I mean, what I would tell you is, what we're hearing from our customers, Brent, is that things are solid. Realize, we are coming off of a year last year where activity levels through Q4, kind of over the last couple of years in recovery mode, broke back the normal seasonal trend where things get slow in the summer because it was a recovery period, things kept escalating. So, we're still at solid levels. It's again relative to comps compared to last year. Certainly though, that said, I mean there is no question that you're reading it right, that we do think things have moderated. There is a little more caution being expressed customers in the past, so hopefully that came across as well.

Okay, no great Erik. That’s very helpful, thanks a lot.

Thank you.

Our next question comes from Derek Jose from Longbow Research.

Hi, I was just wondering if you could break out the new hiring’s. You recently just mentioned that you've stopped, it's one of the areas that you can stop increasing hiring. So, I was kind of wondering if you could talk about the breakout between new, like really new people hiring’s or experienced hiring’s kind of the market share gains that you're taking from some smaller competitors?

The only thing we, Derek, it's Eric again. We do provide on the website total headcount by quarter. So, you can see total headcount for Q3, and the only other piece that we'll breakout is the field sales, which is what I shared that we'd expect Q4 to be about at Q3 levels.

Okay and then I guess I'll touch on this.

Derek, I'm sorry, one other point to make, which as you'll see. So if you look at the Q3 headcount, you won't have seen the effect of moderating the rate of hiring growth yet, given that we made the adjustments, it takes a little bit of time before you would see that in the number.

Okay, I guess I am just trying to reconcile, you're gaining share because part of the way to gain share is to pick up good sales people from smaller competitors. And if you're eluding that amount, won't that further curtail your market share gains?

So, a couple of things, Derek. One is that, to date, you have seen us expand our field sales force. The second thing is, so what you're referring to is Q4?

Yes. Or just even over 2013 is you said one of the variable cost you commented is sales force, so I'm just kind of a curious about that.

Yeah. So, two things I'd say. Even with a flat sales force like we would project for Q4, we absolutely expect to take share gains. And then there is a couple of ways we'd do it. So, one is, all the programs that we're describing when we take them to our key accounts is huge share of wallet opportunities. The second thing that you don't see in an absolute number of sales associates is we are constantly upgrading the quality of our sales team. So, there is a churn, a natural churn and attrition to our sales force, and when that happens we have the ability to bring in somebody that's even more talented, more connected in the industry and with more context.

Okay and last one. When you are kind of connecting these new sales people say to more experienced sales people from the industry, of the offerings that you have right now, how much is that adding to what versus what they previously had at their former employer?

Derek, when I get a chance to ride with some of our newer sales associates, meet with them in focus groups, particularly that those that come from the industry are typically coming from a local or regional competitor, and honestly, they are blown away. They've had to – they are great sales people, they typically have a lot of technical expertise, great credibility with suppliers, but for years and years they've had to sell around service. They've had to sell around the solutions that are in MSC, the size of the product offering that we could bring to bear. It's just, it's like they are a kind in a candy store.

And part of this is showing up in the increase in online sales I imagine?

Yeah. I mean it's certainly a piece of it, but again, for our newer associates, I would say web is just a piece of it. It takes somebody that even comes out of the metalworking industry to get a chance to sell the entire MRO offering from MSC and then within our metalworking offering can be able to sell a full suite of brands that they've never had before. It comes out in a whole bunch of ways and it really gives them the ability to sell with confidence.

Okay, thanks guys.

Our next question comes from Steven Raget from Stephens Inc.

:

No. That's not one of the things that we reported out separately.

Okay, thanks.

And our next question comes from Basili Alukos from Morningstar. Basili Alukos – Morningstar: Good morning guys. I just wanted to ask the question you had mentioned since 1995, the large distributors had 15% to-date, now the share is 30% and you weren't taking that share by price. It was done more based on services. I am wondering going forward has the larger players roughly offered the same services. Did that service advantage still hold or does the future look like it's more than becoming a kind of price issue?

This I Erik and I think what you heard from David and what he was getting across is that if anything, the distinction to draw is between the local players are still making up 70% of the market and the large nationals. If anything, David described the technology and value-add solutions as two trend that are accelerating the pace of consolidation and I would say making it less about price that it has been. So, if anything we see the pace of consolidation picking up.

Okay. Great, that does it. Thanks.

At this time, I would like to turn the conference call back over to management for any closing remarks.

Okay. We'll thank you all for your time and attention today and we look forward to speaking to you again next quarter. Thank you.