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MSC Industrial Direct (NYSE:MSM)

Q4 2013 Earnings Call

October 30, 2013 11:00 am ET

Executives

John G. Chironna - Vice President of Investor Relations and Treasurer

Erik David Gershwind - Chief Executive Officer, President, Chief Operating Officer and Director

Jeffrey Kaczka - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Analysts

Ryan Merkel - William Blair & Company L.L.C., Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

John G. Inch - Deutsche Bank AG, Research Division

Matt Duncan - Stephens Inc., Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

Eli S. Lustgarten - Longbow Research LLC

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

R. Scott Graham - Jefferies LLC, Research Division

Operator

Good morning, and welcome to the MSC Industrial Direct fourth quarter of fiscal year 2013 earnings conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

John G. Chironna

Thank you, Denise, and good morning, everyone. I'd like to welcome you to our fiscal 2013 fourth quarter conference call. An online archive of this broadcast will be available 1 hour after the conclusion of the call, and available for 1 month on our homepage at www.mscdirect.com.

During today's call, we will refer to various financial and management data included under the section Operational Statistics, as well as presentation slides that accompany our comments, both of which can be found on the Investor Relations section of our website. Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the U.S. securities laws, including guidance about expected future results, expectations regarding our ability to gain market share and expected benefits from our investment and strategic plans, including the BDNA acquisition and expectations regarding future revenue and margin growth. 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 our latest quarterly report on Form 10-Q filed with the SEC, as well as in our other SEC filings. These forward-looking statements are based on our 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.

In addition, during the course of this call, we will refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the tables attached to the press release and the GAAP versus non-GAAP reconciliations in our presentation, which contain reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

I'll now turn the call over to our Chief Executive Officer, Erik Gershwind. Erik, please go ahead.

Erik David Gershwind

Thanks, John. Good morning, and thank you for joining us today. Also in the room with us is Jeff Kaczka, our CFO. On this morning's call, I'll start with a discussion of the current operating environment, our recent developments and progress with key initiatives, including BDNA. Jeff will take a deeper dive into the financial results for the quarter and provide our fiscal first quarter 2014 guidance. I'll then provide you with a framework for thinking about fiscal 2014 in its entirety, and discuss our longer-term outlook. And finally, we'll open up the call for Q&A.

Let's begin with the market environment in the fourth quarter, which remained consistent with the outlook that we've provided on our last call and that of the last several quarters. The weak demand environment persisted, and this was particularly true in metalworking, where spending on cutting tools remained depressed. Nonetheless, the success of our share gain programs and customer penetration initiatives continued. Looking ahead, I'd characterize the indicators as mixed, with some signs of possible improvement on the horizon. Recent ISM readings of 55-plus suggest improvements in the future. You'll remember that there's a lag of roughly 4 to 5 months historically between ISM trending and our results. You may also have seen the recent analysis published by the U.S. Cutting Tool Institute. It showed that U.S. cutting tool spend was down over 8% for the first 6 months of 2013, but the most recent reading for July indicated a spend that was roughly flat with the prior year. Customer feedback also remains mixed and fairly cautious. While most are not seeing large declines, they are not seeing significant growth or increasing backlogs either. There are pockets of strength in certain markets, such as aerospace and automotive, but in segments like primary metals, metal fabrication and machine and equipment building, which represent a much greater percentage of our revenues, conditions remain pretty soft. MRO inventory levels continue to come down, albeit at a slower pace, as customers employ LEAN and productivity tools to streamline their operations.

I'll turn now to our performance since the quarter ended, and we're encouraged by improvement in our September and October organic average daily sales growth rates, which are trending to approximately 3%. This is a testament to our continued share gains. The improvement is a function of growth in our national accounts program and core business, along with the realization of our Big Book price increase, which I'll touch on in a bit. I'm particularly encouraged by some recent wins in the national accounts arena. Not surprisingly, the federal government segment muted some of the improvements due to the shutdown and more general clampdown on spending due to sequestration. We estimate the impact of the shutdown to be roughly 1 percentage point of growth in Q4, and are anticipating another 1 percentage point in our Q1 guidance. We also implemented our price increase in August, and it averaged roughly 3% across our various product lines. Price realization has been strong, thanks to good execution, and the high value add that we bring to our customers.

I'll now turn to our investments for the future. We continued our actions to strengthen our infrastructure and enhance our growth engine. On the infrastructure side, we completed the construction of our co-headquarters in Davidson, North Carolina. All of the 120 associates who we expected to relocate to the Charlotte area have done so, and they are thriving in their new environment. We had our grand opening in late September and the buzz around the building and the community was sensational. We also broke ground on our fifth Customer Fulfillment Center in Columbus, Ohio during the quarter and it remains on schedule to open late in fiscal '14. As I mentioned earlier, our growth initiatives continued fueling share gains. Our vending program added roughly 3 points to our growth in the fourth quarter, and e-commerce reached 44% of sales for the full year as compared to 41% a year ago. Those programs, as well as other inventory management capabilities like VMI, will add significantly to our recurring revenue stream over time. Additionally, as I've alluded to on prior calls, we've been investing in SKU expansion on our website. We added a total of 100,000 SKUs during fiscal 2013, bringing our total web-based SKU offering to around 700,000. We have plans to add an additional 150,000 SKUs during FY '14. That will also contribute to growth and share gain in the quarters to come.

Turning to our integration of the BDNA business. I'm extremely pleased with the progress made thus far. Conversations with customers, suppliers and our new associates continue to reinforce the potential that BDNA brings to us. The business model is very sticky, lending itself to tremendous up selling opportunities over time. Sales were trending down versus prior year in the low- to mid-single digits for the past few quarters, but revenue growth is starting to show some improvement. September average daily sales growth was up in the low single-digits, and October will also finish up over the prior year. This is the result of improved execution and focus on customer service. We're also encouraged by new account signings and how that bodes for the future.

With respect to the integration plan, we remain on track. Moving quickly on back-end integration and methodically on the front end. We're in the process of closing the first 3 distribution centers between now and early calendar 2014. We'll also be moving the Cleveland headquarters to our new Davidson location by September of 2014. Additionally, realization of purchase cost and contract synergies is progressing as expected. Overall, we remain on track to achieve our targeted cost synergy run rate of $15 million to $20 million by the end of fiscal year 2015, and to achieve our $0.15 to $0.20 accretion range for fiscal '14. I'll return shortly to discuss our fiscal 2014 framework and our longer-term outlook.

And now, I'll turn things over to Jeff to discuss the financial results in greater detail and provide our first quarter guidance.

Jeffrey Kaczka

Thanks, Erik, and good morning, everyone. We're very pleased that we were able to exceed our EPS guidance even though the soft environment continued in the fourth quarter. We did it through a lift in our gross margin and effective management of our expenses. The BDNA integration is going well and their fourth quarter results were better than expected. And as Erik mentioned, September and October improved somewhat, and this gives us greater confidence going forward.

So let's go through some of the detail of our fiscal fourth quarter results. Just as we've done throughout the past year, I'll speak in terms of our reported results and our adjusted results, which reflect the exclusion of Davidson relocation costs, as well as BDNA integration cost. Our reported sales growth on an average daily sales basis was 12.7% compared to the same period last year. This include the full quarter of BDNA sales. Excluding BDNA, our organic sales growth on an average daily sales basis was relatively flat. In terms of total sales, there were also 4 fewer sales days in our fiscal fourth quarter this year as compared to the same period last year, which became virtually a week, given that the Fourth of July holiday fell on a Thursday this year. While our overall organic growth was flat, customers within our vending program contributed roughly 3 points of growth. Excluding BDNA, sales from our manufacturing customers were flat, while sales from our nonmanufacturing customers were up 1%. Within nonmanufacturing, our overall government sales declined, showing the continuing impact from sequestration that started during the second quarter of the year. Our state business, on the other hand, continued to grow.

In regard to gross margin, we posted 45.6% through the quarter, above the midpoint of our guidance of 45%, primarily driven by BDNA. As compared to the same period last year, the margin was up by approximately 40 basis points, also driven by BDNA's higher margins. Our reported EPS for the quarter was $0.89 or $0.95 on an adjusted basis, which excludes roughly $0.04 for BDNA transaction and integration cost, and about $0.02 for the Davidson relocation. The $0.95 was well above our guidance of $0.87 to $0.91, and reflects not only sales and gross margin above the top end of our guidance range, but also our tight management of operating expenses. Finally, the tax provision came in at 38.3%, above what we had expected due to a slightly higher-than-anticipated overall state tax rate.

Turning to the balance sheet. Our metrics remain strong, DSOs were 45 days and inventory turns were 3.39, a slight improvement from fiscal third quarter levels. From a cash flow perspective, we continue to generate significant levels of cash. This allowed us to pay down over $40 million of debt, including all of the remaining balance of our revolving credit facility. The only debt we have from the BDNA acquisition is the remaining balance on the $250 million term loan. And we closed the year with $56 million in cash and cash equivalents, and our current cash balance now stands at $103 million.

Now let me turn to our guidance for the fiscal first quarter of 2014. Consistent with last quarter, this guidance will include the impact from the BDNA operating results and exclude the nonrecurring items like BDNA integration cost, as well as the relocation costs associated with our Davidson facility. We expect revenues to be between $662 million and $674 million. On an organic basis, the expected ATS growth is about 3%, reflecting our assumption of a slightly improving demand environment. This guidance is consistent with what we saw in September and much of October, the first 2 months of the quarter. We expect gross margin to be in the range of 46.5%, plus or minus 20 basis points. It will be enhanced by higher gross margin BDNA products and tailwinds from the recent price increase, as well as strategic programs like private brand and discount management. These tailwinds will be partially mitigated by the usual headwinds of purchase cost escalation, which is moderating, and vending. We also have a new headwind from the higher relative growth rates in national accounts, which carry lower gross margins. We expect adjusted operating expenses will increase at the midpoint of guidance by approximately $4 million versus fiscal fourth quarter. This increase primarily relates to projects like Davidson, as well as growth initiatives like sales force expansion in our vending program. We expect our tax rate to be about 38.2%. Finally, our adjusted EPS guidance is $0.92 to $0.96, reflecting the current market environment and our increased spending on infrastructure and growth initiatives. This, of course, includes BDNA operating results and excludes the integration costs associated with the acquisition and Davidson relocation cost. This impacts EPS by a total of approximately $0.06. Also, the BDNA business is expected to be accretive by about $0.04 in the fiscal first quarter.

Before I close, let me touch on capital expenditures. We finished fiscal 2013 at approximately $89 million, lower than we originally expected. This was due to the timing of our Columbus-related CapEx, which moved into fiscal 2014. We expect CapEx to be slightly over $100 million for fiscal 2014, with nearly half of this associated with the infrastructure projects, primarily the Columbus CFC and the completion of Davidson.

So in summary, we were able to exceed our EPS guidance in the fourth quarter despite the soft market conditions, thanks to a lift in gross margin and continued effective management of expenses. In fiscal 2013, we began laying the foundation for the future success of the company with the BDNA acquisition and the Davidson co-location, along with other key investments. We've also begun to see a slight pick up in sales growth in the first quarter which is somewhat encouraging as we begin the new fiscal year.

Finally, I'd like to note that last week, we announced a 10% increase in our quarterly dividend. Thanks, and at this point, I'll turn it back to Erik.

Erik David Gershwind

Thanks, Jeff. I'll now turn to 2014 and beyond. Typically, we provide guidance for one quarter at a time, and at the start of a new fiscal year, we offer you a framework for thinking about incremental margins for that year. Today, I'm going to give you a more granular picture of what we expect in fiscal 2014 and in the years to come. I'm doing so because I recognize that fiscal 2013 and 2014 are unusual relative to our historical performance. We're in the midst of building a foundation that will support the next leg of our growth story. We're taking actions to ensure that we not only continue to outgrow the market, as we have in a tough environment, but accelerate our growth through share gains no matter the market conditions. As we execute on this plan, I want you to have the same picture that I do, so that you can feel as confident as I do about the payoff that we expect as we leverage our current priorities.

Let me explain our framework for fiscal 2014, starting with 3 organic growth scenarios: High-growth, which we define as double digits; moderate growth, which we define as mid- to high-single digits; and low growth, which we define as low single-digits. And now we'll take a look at how we expect adjusted operating margins to perform under each of these scenarios. In either the low or the moderate organic growth scenario, we expect operating margins for the full year to be in the range of 14% to 15%, the further we move up the curve from low to moderate growth, the closer we get to 15%. And on the other hand, the operating margin moves towards 14% for the year in the low growth scenario. As we move into the high organic growth scenario, operating margins move above 15%. When it comes to the quarterly development of operating margins during the course of fiscal 2014, there are 3 factors to consider: One, the growth environment; two, the pricing environment; and three, the ramp in spend that we expect over the year. Assuming the expected conditions in the fiscal first quarter continue, i.e. modest pricing and low growth environment, we expect the second quarter of our fiscal 2014 to be the low point for operating margins in the year. For FY '14, in the low and the moderate growth scenarios though, adjusted operating margins are down in the neighborhood of 200 basis points compared to fiscal 2013.

So let me explain why. The single largest factor is that we'll now have a full year of BDNA in our results, which by itself, contributes to roughly half of the 200 basis point GAAP. Embedded in our assumptions is BDNA top line growth in the low single-digits, and accretion consistent with our guidance of $0.15 to $0.20. Of course, substantially higher growth from BDNA would change the overall mix of the company and impact operating margins. The other half of the GAAP in FY '14 is due to operating margin suppression in the base MSC business, and there are 2 factors that are driving this. First, we project roughly $12 million to $15 million in infrastructure-related expenses. The impact on operating margins of some of these infrastructure-related expenses is temporary in nature, and will moderate in 2015 and 2016. The rest are an increased level of spend that get leveraged with additional growth. And behind this planned infrastructure spend, there are primarily 3 drivers: Number 1 is the new Davidson building. While the cost of operating Davidson will be offset by the payroll tax incentives that we received from the city and the state, they don’t start kicking in until during FY '15, creating a gap before generating measurable cost savings. Those incentives extend for a decade. Number 2 is the new Columbus Customer Fulfillment Center. In order to prepare for the opening in late fiscal 2014, we're staffing up the building to receive inventory, train our associates and get ready to ship product. At the same time, since the building is not yet operational, we're maintaining headcounts in the other distribution centers to handle current volume levels. The full switch to Columbus will happen during fiscal 2015, creating a temporary increase in expenses as we transition. Of course, some expenses, depreciation in particular, will not step down once we ramp up Columbus. Those expenses remain in our P&L on an ongoing basis, but get leveraged with revenue growth. Keep in mind that Columbus will support our next leg of growth, and we don't see the need for another one through at least $4 billion in sales. And #3, we're outsourcing our data center and are incurring upfront project related fees to do so. This move will provide us with ample room for growth and reduce the risk of a potential outage. This was a decision that was coming in the near future anyway, and the BDNA acquisition pushed us to address it now as we increase our volumes. In addition to the infrastructure expenses, the other factor accounting for the temporary operating margin suppression in the base business is growth investment. Our plan is to continue our programs from fiscal 2013, including vending, e-commerce, private brand, SKU expansion and marketing investments. In addition, as I mentioned earlier, we will accelerate our sales force expansion. This is in comparison to most of fiscal 2013, when we held sales headcount flat. As we shared with you last quarter, our plan was to begin expanding our sales force as the environment stabilized, and we began doing so in our fiscal fourth quarter by adding roughly 2% to our sales force. Barring any significant downturn in the environment, we anticipate expansion in the range of 5% to 7% over fiscal 2013 levels. Given the nature of our sales force investment, this means incremental spending and some dilution in fiscal 2014. However, we are highly confident that restarting this expansion will contribute to improved growth as we approach fiscal '15.

Let me now turn to how this operating margin framework translates into EPS performance. Our inflection point for EPS growth falls right in the middle of our moderate growth scenario. Mid-single-digit organic revenue growth is the break even point for EPS growth, where adjusted EPS is essentially flat with FY '13. Below mid-single-digit organic growth levels, we expect EPS would decline, and above that level, EPS would grow. Double-digit EPS growth would occur as we get into the high-growth scenario of double-digit organic top line growth rates. Once again, we're assuming that BDNA produces low single-digit top line growth and $0.15 to $0.20 of accretion. Should BDNA outperform those assumptions, it would further enhance the overall EPS picture for the year. In addition, should commodity inflation add significantly to the current pricing environment, that would also enhance the EPS picture.

Let me now turn to fiscal 2015 and beyond, a growth story that I'm very excited about. I'll begin with an update on our revenue goal of $4 billion by the end of fiscal 2016. We set this goal at the close of our fiscal 2011 as we hit $2 billion in sales. That goal implied a 15% compound annual growth rate, inclusive of organic and acquisitive growth in a moderate growth environment, with the majority of the growth being organic as it had been in the past. We're now just over 2 years into that plan, closing fiscal 2013 at around $2.7 billion on a run-rate basis, inclusive of annualized BDNA sales. Our organic growth rate since fiscal 2011 though, has been lower-than-anticipated, due to the impact of softness in the metalworking sector this past year. Clearly, we've not been operating in a moderate growth environment. Nonetheless, achieving our $4 billion goal requires a CAGR of just under 15% over the next 3 years. So we remain on track, although we will need to see an improvement in our organic growth rates to achieve the goal. Assuming that the metalworking and the manufacturing environments return to growth, we anticipate strong organic growth for 3 reasons: First, we'll continue to take advantage of our share gain programs which should benefit from incremental growth spending; second, we see the potential for accelerated industry consolidation, which should serve as a growth tailwind; and third, we're encouraged by the prospects of a renewed manufacturing renaissance in North America, which would create a new and additional tailwind that we've not yet experienced. M&A remains an important part of our growth story as well. However, we'll not acquire growth simply to hit the $4 billion target, or to hit any other metric for that matter. We'll maintain the same rigor that we always have. Any acquisition will have to be a strong strategic fit, cultural fit and meet our financial hurdles, including long-term returns on capital.

Now, the question we've been asked most frequently, with respect to our growth plan, is about operating margins. And specifically, what happens to them as we march towards $4 billion and beyond. The answer to this question is central to our confidence in the plan. Let's focus on the profitability of the base business, which includes MSC and BDNA, as timing and mix are uncertain when it comes to future acquisitions. We see FY '14 as the low point for our operating margins. Assuming a moderate growth scenario, we would expect the fiscal 2015 increase in operating margins to be modest, and then pick up steam in 2016. Should we see a higher growth environment, the operating margin recovery accelerates. Over time, we see the base business operating comfortably at operating margins in the high-teens, and will reach that level when the base business, meaning the combined MSC and BDNA, reaches around $3.5 billion in revenue. That's about a 30% increase over the end of FY 2013 annualized revenue run rate. How quickly we get there is a function of the trajectory of our organic growth.

Before we turn to your questions, I'd like to thank our entire team for their continued hard work and dedication. I'm very excited about the future of our company. A lot of hard work has gone into the plan, and now it's all about execution. With the experience of this team and our history of prudent management, I remain very confident that our actions in laying the foundation for growth will pay off in the form of exceptional returns. And we'll now open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Ryan Merkel of William Blair.

Ryan Merkel - William Blair & Company L.L.C., Research Division

So kind of a lot in the call there. Let me just start with, I think what you said was, you expect 2015 would be more of a modest increase in the operating margin. But then that -- and that will accelerate in '16. So could you just walk through why it would be more modest in '15 if growth spending is falling off?

Erik David Gershwind

Yes, sure, Ryan. My pleasure. I'm going to answer you in a second. I do want to take a second though, in talking about '15, '16 and kind of looking at the whole picture here, to step back and talk about the context in which we're operating. Because I think that's very relevant to the story that I just laid out. We're operating in a market right now that's in the early stages of a consolidation story. And we believe that as the industry consolidates, there's going to be clear winners. And those winners are going to be defined by those who capture market share, who achieve scale, and therefore, as a result, who capture the majority of the profit pool. And the steps -- what I outlined in this multiyear plan here, are the steps to ensure that MSC is positioned as a clear winner. So what you're hearing is that, we're investing in growth drivers to accelerate our share gain. We're building the infrastructure now that's going to support this next leg of growth, and that's going to give us the scale that we need. And hence, allow us to achieve the kind of profitability that we want. So that's really why we're taking a more moderated approach to this op margin acceleration, particularly in FY '15. Now, to answer you specifically, with respect to '15, it's really a story of 2 issues, Ryan. One is that, the infrastructure spending that's being put in, that $12 million to $15 million that I referenced through '14, much of that carries through to '15. And so the story is about leveraging that fixed investment and that happens as we achieve growth. The second piece of the story is that the growth investments that we're accelerating, take a little bit of time before they kick in with the higher returns and accelerated growth. So we need to see returns on those growth investments. So those are the 2 factors that are driving the more, what we consider to be, expect to be, a more modest pickup in '15 that accelerates in '16.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay, that makes sense. So we should think about it in terms of, you're going to see accelerating share gains that are going to boost the top line, and then a lower level of SG&A growth than we've seen. That's more a '16 story than '15 story, but a little bit in '15 as well.

Erik David Gershwind

You got it.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. And then, I just talk about vending. It continues to add nicely to growth. But you have an initiative, I think, to improve vending margins. And I'm wondering, how that's going, first of all? And then second of all, do you have any machines that are in their third year of operation, that are doing close to the MSC company level EBIT margin?

Erik David Gershwind

Yes, great question. So let me start, Ryan, by saying, vending, you heard the update, continues to go well, you're exactly right. we've talked about programs that are actually in the rollout phase right now, in the execution phase, in terms of improvements. So the headlines on vending continues to be a key growth contributor, continues to appeal to customers in this environment. Who, really what we're hearing is a heavy emphasis on productivity and lean from our customers. This is a great match, and that's why I think you're seeing the growth, the high customer retentions. As we've called out, the area that wanted to improve was productivity and profitability. So to answer you directly, yes, we do have machines in their third year. We've reached the point where the third year -- so the profile of a third year vending account is now right around the company op margin. Total program margin, when you combine all the classes, is still below, as we've described, but we expect that to reach company average within the next couple of years.

Operator

The next question will come from David Manthey of Robert W. Baird.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

First off, yes, a lot to digest here. But I'm thinking about the progression here, and thanks, it's a lot of information. If we look at that, down 200 basis points year-over-year in the second quarter of the next fiscal year, I guess there's a typical step-up from 1Q to 2Q, just because of payroll and salaries and benefits and that sort of thing, of usually a couple of $3 million. And of course there's variable expenses as the sales reaccelerate. But I'm coming up with -- that would be something along the lines of maybe, I don't know, $9 million of sequential first Q to second quarter, meaning that maybe the initiatives or the spending, the incremental spending, is $5 million or $6 million. Does that sound about right? And then, are you saying that, that's going to peak -- those dollars are going to peak in the second quarter and then continue to moderate through '14 into '15?

Erik David Gershwind

Yes, David. It's a really good question. Let me go back and explain to you what -- here's what I can tell you. What we wanted to make clear is that so -- the framework we gave you is an average for the year. So here's what I can tell you: For the year, in a low or moderate growth environment, we expect op margins to be all in between '14 and '15, that's one. Two, we expect that to move around quarter-to-quarter. Okay? Three is that, the movements quarter-to-quarter are a function of 3 things: One is, what happens in the demand environment; two is what happens with the pricing environment; and then three is the sequential increase in spend that you're talking about. So the other thing I can tell you is that, if the demand environment and the pricing environment remain as they are now, what we'd expect is that Q2 would be the low point of op margins for the year and it's very much for the reasons that you described, which is, you're very well aware, there typically is a seasonal pattern to the business, both in terms of revenues and some expense step-up in the second quarter.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay, thank you. Yes, we'll spend some time going through that. I did want to ask a broader question, a more secular question. As your customers are demanding more of these higher end supply chain solutions, and clearly that's what driving a good portion of the company's specific growth here. How do you define MSC's competitive advantage, particularly in vending. I think it's pretty clear on the e-commerce side that you're one of the best-in-class companies. But when you think about vending, what do you go in with your competitive advantage when you're selling that to customers?

Erik David Gershwind

David, it's a great question. And I would step back and say, the way we sell to a customer, our value proposition is much more than just about vending. So the advantage that we're bringing to the table is not so much lining up one vending program against another, it's the total package of what we can do for a customer. And fundamentally, our customers want to save time and they want to save money. When you clear all the noise out, they have 2 objectives. And we believe, in the industrial distribution world, we are best positioned to save our customers' time. And we do that through the broad SKU offering, through an excellent web experience, through great service and through terrific logistics for next-day delivery. We also believe we can save our customers money like nobody else in the space. And that comes in a number of ways. It comes by streamlining inventories and freeing up cash, i.e. inventory management solutions. It comes with product choices and exclusive brand alternatives that are at attractive price points. And it also comes with generating productivity savings right on the plant floor, which we do with technical metalworking capabilities. So I think you got to think of our value proposition as the total package that's unique and different, particularly for a manufacturer.

Operator

Our next question will come from John Inch of Deutsche Bank.

John G. Inch - Deutsche Bank AG, Research Division

Hey Jeff, why were -- just remind me, if we can go back to the quarter for a second. Why were the gross margins so much higher, given that the volumes were sort of flat all in, kind of on a daily sales basis? Did you get the benefit of -- were there program rebates or something unexpected? I'm just curious, because you normally don't exceed your gross margins by that much versus expectations?

Jeffrey Kaczka

You're right, John. It wasn't related to rebates. The gross margin was actually 60 basis points above the midpoint of our guidance, and that was a significant reason why were able to exceed the EPS guidance, and BDNA was the driver there. I think you'll recall that we had said that BDNA, we expect it to drop from the low 50s to -- or from the high-50s to the low-50s. In fact, it dropped to the mid-50s. Two things there. The inventory valuation adjustment was slightly less than we had expected. And the business performed better operationally than we had estimated. We expect it to return to the high-50s in Q1.

John G. Inch - Deutsche Bank AG, Research Division

Right. So, on that, just to pick up on that point then, shouldn't the high 50s, I would -- we were coming up with the back of the envelope, of that BDNA's just over 10% of your revenues. It should be driving gross margins higher by about 1 point. But that's not really your guide in the first quarter. It's below that. So was there some reason why the gross margin isn't a little bit higher?

Jeffrey Kaczka

Are you talking -- from quarter-to-quarter, you would have to look at BDNA's increase from the mid-50s to the high-50s. So that's a much...

John G. Inch - Deutsche Bank AG, Research Division

I was thinking -- I was actually thinking year-over-year, right? So BDNA is not in the first quarter a year ago, you did 45 9, you add 1 point, that's 46 9, but you're sort of saying 46 5.

Jeffrey Kaczka

So many headwinds and tailwinds from last year, John, including the price increase or the lack of the mid-year price increase, and then the headwinds and tailwinds, the normal headwinds from things like purchase cost escalation and vending and things like that. And then the tailwinds from the programs that we're implementing. So we are going to see a 90 basis point sequential lift. And we think that's pretty meaningful in the soft environment that we have today. So that is coming from certainly the price realization, the BDNA margins, returning to the high-50s. But again, we have tailwinds and headwinds, and one of the additional headwinds we have, which I mentioned is the higher relative growth rate in the national accounts.

John G. Inch - Deutsche Bank AG, Research Division

Yes, and was the price of 3%, was that normally what you would you have expected? It's a little bit more than what, sort of other distributors typically get in the catalog. So just remind me again, is that, did that help the margins at all this quarter? Or prospectively in the first quarter?

Jeffrey Kaczka

Yes, absolutely.

John G. Inch - Deutsche Bank AG, Research Division

What, it sounds like 2, right?

Erik David Gershwind

John, I would say, this is Erik. I'll touch on -- sort of how this fits in. I would say 3 is somewhere in the range of "normal." So it's -- we've been higher, last year it was higher. There's years we've been lower. But remember that we didn't do a mid-year price increase this year. So that was part of the thinking, in terms of the 3%. We would still characterize the pricing environment as pretty modest right now.

John G. Inch - Deutsche Bank AG, Research Division

But you didn't do a price increase, Erik, because the business conditions, all else equal, were pretty competitive, particularly metalworking. And so I'm just wondering now that you've done this 3%, which sounds like it's a little bit above average, or maybe back toward normal. Does that just imply that business, forgetting about sort of your September, October results, does that also just imply business is getting better, because you're now able to raise pricing whereas before you were not? Did anything kind of change since that point, I guess?

Erik David Gershwind

John, the way I characterize it, I think we feel very good about the price increase we put in place. When you look at what we did over the course of the year, we feel very comfortable relative to the value we're bringing customers and the cost savings we're generating. We feel comfortable with it. I think view that more as a function of, this was the cycle and the time in the year in which we do it, as opposed to a dramatic change in the external pricing environment.

John G. Inch - Deutsche Bank AG, Research Division

Okay, that's fair. And then just maybe, just one more. E-commerce, which I believe includes vending. I realize there's 4 fewer days in the quarter, but -- and you did have tougher compares, but with vending, which you said was 3 points of contributions, same as last quarter, it's only 2% year-over-year growth. So I guess my question is, it's 2-part. Really, is e-commerce on a daily sales basis with vending, has it picked up sequentially, if you kind of strip that out? And then, are you as part of the spending initiatives, Erik, into next year, you talked about sales but, maybe you could kind of get the e-commerce piece of this back to more of an elevated trajectory, because that seems to be an area could be taking some share gains, right? Because smaller players don’t have e-commerce capability. Are you really spending incrementally more in '14, what's your thought there?

Erik David Gershwind

So, John, you're absolutely right. E-commerce is a huge portion of our growth plans and the share gain story. You're absolutely right. I would tell you that, I think the best way to look at e-commerce and its growth trajectory, is e-commerce as a percentage of total company, and that's continued, I don’t have the numbers handy, we can get it to you. But that's continued. I gave you the number on an average across the year of 44%. But sequentially, quarter-to-quarter, that's gone higher as a percentage of total, which indicates that it's grow -- it's well outpacing company average. I think the story there, a piece of it is vending, although realize that vending, it's only what's actually going through the vending machines. The bigger piece of the story on e-commerce is our website and it's the new platform that we put in place, which is working well. Quite well, getting great customer feedback. And to answer your other question, yes, it is, we do envision more incremental spend. We don't view e-commerce as a one and done, meaning you put the site out there and stop investing. We think that would be a big mistake. So we anticipate, and part of our plans and the OpEx, there is a portion of that, that's going into continual enhancement store E-com efforts.

John G. Inch - Deutsche Bank AG, Research Division

And then just finally, just how much of the 3% price increase did you -- do you think you realized in the first quarter -- I'm sorry, in the fourth quarter, in terms of your total revenues? How much of that would have been price?

Erik David Gershwind

In Q1?

John G. Inch - Deutsche Bank AG, Research Division

Q4, this fourth quarter?

Erik David Gershwind

Much more -- price is much more of a factor in Q1 than it was in Q4. Realization was -- we'll tell you, the realization has been strong. But more of a factor in Q1 than in Q4.

Operator

Our next question will come from Matt Duncan of Stephens Inc.

Matt Duncan - Stephens Inc., Research Division

Just want to try to and dig in a little bit more on sort of the operating margin ramp in FY '15. So it sounds like the all -- Erik, just to make sure I understood you correctly, the all-in operating margin, which would include the integration expense at BDNA is 14% to 15% in FY '14, if we got low- to mid-single digit organic growth, is that correct?

Erik David Gershwind

Matt, one correction. So let me restate it. The all-in operating margin for the company, in a low or moderate growth scenario, is 14 to 15 points, that's adjusted operating margins. So that excludes one-time integration expenses. Severance payout, things of the sort. That's adjusted operating margin, okay? So the middle of that range, what we would reference is that's around 200 basis points down from FY '13 levels. About half of the 200 basis points is strictly the math of bringing BDNA into the total, because we only had a stub period in FY '13 of BDNA results. We have the full year's worth of results in FY '14. The other half of that 200 basis points is coming from the temporary suppression in the base business, and that 100 basis points, think of it as two-prongs. Prong 1 is the infrastructure investments, prong 2 is the accelerated growth investment.

Matt Duncan - Stephens Inc., Research Division

So then, if we were to add in the integration cost from BDNA, what should the all-in operating margin then be? I mean, I don’t know, Jeff, if you have any, if you could give us some help on the impact on operating margin from the stuff that's going to be adjusted out on EPS?

Jeffrey Kaczka

Again, Matt, what I can tell you is that, the total nonrecurring integration and transaction costs for BDNA is $25 million to $30 million. Most of that incurred in FY '13 and '14.

Matt Duncan - Stephens Inc., Research Division

Okay. And I think, if I remember correctly, you got $15 million or $20 million of that left, correct?

Erik David Gershwind

Right, yes.

Jeffrey Kaczka

After Q1, right? Yes.

Matt Duncan - Stephens Inc., Research Division

Okay. So then, as we look out to FY '15, obviously the flow through of those expenses is going to decline. And when you're talking about moderate operating margin expansion, you're talking about the adjusted operating margin. So I'm trying to think through, in terms of how many basis points of operating margin expansion we should translate that to? Is it 50 to 100 basis points, plus then, the extra leverage because the BDNA integration costs are going down? I just want to make sure we don't get carried away with how to translate moderate into the amount of operating leverage you can get?

Erik David Gershwind

Yes, Matt, for now, I'm going to stick with the characterization of modest. And the reason is, there's so many -- going out another year, it becomes very difficult to pinpoint a specific op margin expansion, because so much of it is tied to what happens in the revenue environment, what happens in the pricing environment. The further we move out, the more variables you are. What we did want to do though is give you a sense for how it ramps back up into the high-teens. And I think the relevant point is that, '15, we expect to improve. But not to improve the degree to which it does in '16. So Matt, just a little more color on what's happening and why, is, take the infrastructure expenses. Okay, something like Columbus, which so -- '14, what we described as Columbus opens up in the very tail end of '14, and we have this -- there's 2 factors going on with Columbus. One is the temporary build in headcount. And that temporary build in headcount is because we're not yet shipping out of the new distribution centers. As we move through the course of FY '15, that temporary headcount build will come down. But for a good part of 2015, that will remain a headwind. The other factor on Columbus is depreciation will kick in. So Columbus alone, when you combine those 2 things for 2015, Columbus could be in the neighborhood of a 30 to 40 basis point drag on op margins in '15. So that's just to give you a little color on why it is that we think it's going to be a modest recovery in '15, and what happens is, certain things in '15 into '16 drop off, and we also anticipate getting -- generating growth that's going to leverage the fixed cost.

Matt Duncan - Stephens Inc., Research Division

Okay, that's helpful. Sorry for getting so granular there. And then the last thing, I just want to make sure we understand the monthly sales patterns that you guys are seeing. Were the organic revenues, I guess, down through the quarter, until maybe August, and then they flip positive? Can you give us some help with that month-to-month trend? And then, talk about what end market specifically, you are seeing improvement in? And as you talk to customers, what is sort of the general feel on customer outlook for their own businesses as we move into calendar '14, just to help us think through what growth might end up looking like for you guys?

Erik David Gershwind

Good question, Matt. So let me start with the sequential revenue trending. I don't have the numbers handy. We can get them for you on June, July, August. But I think of note is that we didn't see a significant ramp up through the quarter. So to ramp nearly started in -- there was a difference, a significant difference between August and September. Okay, so what we said was September and October, were both in the 3% and that's what our guidance implies on an organic basis. Okay, but don't think of it as Q4, there was this progressive ramp through the quarter. There was not, it was roughly flat. Your other question was around customer outlook. The word I would use right now, Matt, is mixed, is probably the best way to put it. When we put together this whole mosaic of what we're hearing from our customers directly, what we're seeing in terms of the macro indicators and how that all plays out, it's very mixed. There are certainly pockets of growth in the economy, and it's no rocket science, I'm sure to reveal that aerospace and automotive are 2 that people are citing. But there's also pockets in more general industrial. The sectors that I called out, the primary metals, the metal fabs, kind of the big chunk of our base, that's still pretty soft and still pretty cautious. Then you go to the macro indicators, then on the one hand, the ISM would be quite encouraging at 55-plus, and yet you look at many of the metalworking-specific indicators that we'll look at, and we referenced one of them, and the cutting tool, that has been soft, and in fact, considerably down for much of the year. So it's really a mixed bag right now.

Operator

Our next question will come from Hamzah Mazari of Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question, Erik, is just a little bit more big picture. You talked about September and October seeing improvement. I'm just curious if the growth does stall out over the next 12 months, at what point do you start pulling back some investment spend, or is the view that we should go full speed ahead to take share, longer-term?

Jeffrey Kaczka

Hamzah, maybe I'll take that. This is Jeff. I'll tell you, one of the things we do is manage our operating expenses very closely from quarter-to-quarter. We've done that for years and we are stepping up the investments. We're committed to that. We think that will drive the growth in the future and also provide the infrastructure. We're committed to the framework that we've provided in terms of the operating margin. And we do have levers. We don't anticipate the revenue growth rate being below that low to moderate, but we don't have a fixed point of a fall off. Obviously, if the conditions deteriorated very significantly, we would take some steps. But at this point, we feel comfortable we'll fall in that low to moderate range.

Hamzah Mazari - Crédit Suisse AG, Research Division

Great. And just a follow-up. On the Barnes deal, you talked about taking a more prudent approach on front-office rationalization in order to avoid disruptions. Could you maybe add some color on where the risk may be in that process? And any sales force compensation changes you're making, as you bring in Barnes, or is that too early or that's been done?

Erik David Gershwind

Hamzah, it's a great question. And what I would say is that, I -- so when you think of the notion that we're moving methodically on the front end, I wouldn't think of it in terms of that translates into risk. Really, this goes back -- the philosophy we're applying to BDNA is very much the philosophy that I described at the outset in terms of how we're looking at this business. We're looking at creating something here that's built to last, and that's going to sustain growth for a long period of time. And what you want to avoid is rushing to jump on revenue synergies, only to find any time you're into something new, there's going to be unanticipated things, there's going to be pitfalls. We want to hash all of that out. Certainly, you raise sales force compensation, I'm not going to get too much into the detail for -- on that one for competitive reasons. But certainly, that's one factor we'd want to consider. Shared accounts, product pricing, there's a whole number of factors that aren't necessarily a matter of risk, but a matter of making sure that when we move, we like to move in the right way and get it right. And we're going to take our time on the front end and pilot it, recognize that it's a different business and make sure that when we scale it, it's done right.

Operator

Our next question will come from Eli Lustgarten of Longbow Securities.

Eli S. Lustgarten - Longbow Research LLC

Can we talk a little bit about supplier incentive rebate. One of the things I'm starting to hear in the marketplace is that there is some attractive prebuy thing offered by suppliers, better costs or something going on that may help results over the next couple of quarters. Are you seeing any of that or taking advantage of any of that, we just heard on another call where the company was making a pre-buy, particularly when you need to have a little bit of higher inventory because of Columbus?

Erik David Gershwind

Eli, I would say there's a bit. So when Jeff describes the gross margin picture, is rebate a piece of it, yes. But I will tell you that when we work with our suppliers, we're really focused on sell-through and share gain. So I mean, yes, I mean to some extent, there's the occasional buy opportunities and we try to be entrepreneurial and there's win-win cases where we take advantage. But the real focus with our supplier partners is on share gain and sell-through.

Eli S. Lustgarten - Longbow Research LLC

So at this point, it's normal incremental, whatever it is, there's nothing material taking place in the first half of the year?

Erik David Gershwind

That's right. That's right.

Eli S. Lustgarten - Longbow Research LLC

And you threw so much at us, I'm going to -- I just want to make sure I understand it. Your basic premise is that, with the 3% kind of comparisons going on at this point, you need to have that, plus on the middle to have -- not to have 2014 be a challenge to match 2013 results, with the difference being the investment being made in the core business. That a fair way to contrive?

Erik David Gershwind

Eli, so I would say, yes, so I would say another way to state it is, mid-single digit organic revenue growth is the breakeven point for adjusted earnings per share, relative to prior year, and the drivers of that suppression are: One, growth investment; two, infrastructure expense that gets leveraged with growth.

Operator

Our next question will come from John Baliotti of Janney Capital Markets.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Just, Erik, maybe, I think you gave us a lot of information to chew on, in a lot of different scenarios. And I was thinking maybe the market seems to be still digesting because the stock's kind of bouncing all over the place. So I just -- I was just thinking, maybe, if I took a high-altitude summation of what you're talking about, is it fair to think that you guys are obviously investing, as you point out for the long-term, this is not about the next 12 months or the next 24 months, but you've got some plans, long-term plans that you want to continue, with some, obviously subjectivity, if things really fall apart. But in a traditional distribution sense, if volumes pick up, you don't have a corresponding variable cost to service that. And therefore, the more efficient MSC going forward would deliver better margins than what you have in the past, is that fair?

Erik David Gershwind

Yes. John, I -- yes, I think it's a fair characterization. I think if there were 2 headlines here, headline 1 is the fact that you're right, that we're looking at the big picture here. And looking at operating in a market that's in early stages of consolidation. And with knowledge that there's is going to be clear winners. And the winners are going to be driving share gains and they are going to achieve scale, and be able to generate leverage, thereby -- and therefore, profitability. We're taking the steps now to ensure that MSC is a winner. I think that's headline 1. I think headline 2 would be that, we're really confident in our plan, and one of the things that gives us the confidence is history. We've been at this for decades and we've been through cycles like this. We've been through step functions before, we were in one as recently as right around the 2000s. And saw what happened as that played out, and the kind of returns and the leverage that we generated in the decade to follow.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Yes, because it seems like -- and you don’t benefit from some of the SKU mix that some of your competitors have, in terms of sort of the tailwinds to gross margins. But you do have some pretty significantly -- you had some -- very high margin to start with, I know it's on a nominal basis. But it seems like the benefits you're getting from BDNA and the obvious strategic benefit of BDNA, and what it can do for customers in consolidating their spend, laid on to the fact that you've got a good infrastructure to support that, seems that you're far from maxed out, in terms of your profitability?

Erik David Gershwind

Yes, for sure. I mean, that was why we wanted to make the point that we do see this business comfortably in the high-teens in operating margins. I think that's absolutely right.

Operator

The next question will come from Brent Rakers of Wunderlich.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Yes, just wanted to follow back up on the catalog price increase announcement. I think 3% is what you said earlier, Erik. I think last year, the number, if I recall, was about 3.5% to 4%. And I guess by this fourth quarter, it faded away to about 30 bps in price realization. If you just maybe could talk us through why that would not occur again in the current fiscal year, and maybe even think ahead about -- talk ahead about possible mid-year price increases and what you're seeing out there on that front?

Erik David Gershwind

Yes, so Brent, what you're getting at is the outlook for gross margins as we move through the year. A little early to tell, because so much of it, as you pointed out, look there is a natural -- in the base business, there is a natural progression to our margins which you're familiar with, which says that Q1, absent any additional pricing action, tends to be the high point through the year. And there's a series of headwinds that will then gradually bring that down during the course of the year. The big variable is pricing, certainly. I would say there's another variable this year which is BDNA, which high gross margins to the extent that, that business outperforms our assumptions, that would be another tailwind. And look, we have another tailwinds, in terms of our strategic programs on the exclusive brands in the discount management. So I would say, a little early to tell on the pricing environment. If you ask me if the rest of the year looked like it does now, how would you characterize that, I characterize the pricing environment as modest.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Does that mean, Erik, that by the time we get to second, third, fourth quarter, we think the company will still be realizing 2% to 3% price increase contribution?

Erik David Gershwind

I think 2 separate issues and -- the price realization, even through fiscal '13 was quite good, Brent. So what happens is, during the year, as absent pricing action, there are headwinds that will bring that down. But the price realization, in terms of getting price, is still good. The one other thing I should mention, we saw in fiscal 2013, pretty significant headwind in terms of purchase cost escalation. And that's the result we always talk about, that there's a delayed effect from the time, there's an inflationary environment. And we get the purchase cost to when it works through P&L. We do see the headwind of purchase cost escalation. Jeff had pointed out we see that moderating through this fiscal year. So at least one of the headwinds should be a little less than it was during FY '13.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. And then great, just one last question. I think you talked about seeing some modest -- some improvements, I guess in September, October month. I guess, if you could talk on that frame, in terms of more sequential patterns, because when you go back and look at kind of September to August, October to September, the patterns look very similar to 2010, 2011. If you could maybe comment directionally, as opposed to the year-over-year change?

Erik David Gershwind

Yes, I think you're right. I mean the sequential change in daily sales is pretty consistent. I guess, if anything, we would view that as encouraging, because 2013 was not consistent with that pattern. So to the extent that it's consistent with the 2010 or 2011, we view that as encouraging. In terms of putting color on it, as we said, obviously the federal government is quite weak. So that's muting some of the results. Where we're seeing strength, the first place I called is , I think we're doing well in our national accounts program. A lot of the larger companies in particular, in this difficult environment, are heavily focused on LEAN and on productivity. And I think our value proposition plays really well there, which is part of the reason why we're seeing success and then some success in our core business.

Operator

The next question will come from Sam Darkatsh of Raymond James.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

The formatting of this call was terrific, sometimes the message is not always as exuberant as we would like to see from an earnings standpoint, but the formatting and the information flow was excellent. Most of my questions have been asked and answered. I noticed and that this apropos of nothing, but your direct mail pieces were up, year-on-year for the first time in I can't remember how long. And that seems a little counterintuitive, based on what some of your growth initiatives may prescribe. It -- was that just a funky thing with the timing, or is that indicative of some sort of initiative that you're also looking at, over the next year or 2?

Erik David Gershwind

You're pretty good, Sam. You catch up, we've got to get up pretty early to pull one over on you. So the answer is, no, you're right. What you're seeing is, some increase in marketing investments. So there's -- and I'm not going to get too much into detail for competitive reasons, but there is some marketing activity, some of which involves print. If you looked at the total pie of marketing activity, the heavier weighting is still digital, no change there and no surprise. But there are some programs that did, part of our growth investment that did involve some print pieces that are working quite nicely.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

And then my last question. And you've talked around this a little bit, Erik. When we're looking at out year leverage, you've talked in the past about pennies, OpEx, leverage on sales, or at what point do you begin to leverage sales on an OpEx standpoint. How should we look at that in terms of -- what would you have to grow top line in excess of -- in order to begin to leverage OpEx in the out years? Maybe if that could help us, for modeling purposes.

Erik David Gershwind

Well, so what we said was for 2015, assuming a moderate environment, so the moderate environment, as we described, it's the high-single digits. We expected op margins to improve, just albeit modest. So by 2015, that means earnings should be growing faster than sales, assuming that environment are better. And basically, what happens, as you know, given how high the incrementals are when we're growing, as our revenues move from the moderate, mid- to high-single digits into the double digits, the ratio between earnings and revenue growth starts to really improve considerably. But the idea is beginning in 2015, earnings should grow faster than sales, assuming our assumptions hold.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

So the thinking then would be, let say, if you only grow low single digit, you don’t leverage OpEx, but over a certain low single-digit rate, maybe OpEx grows at maybe half the rate of sale, something like that, would that be unfair?

Erik David Gershwind

I don't know if I'd get that specific in terms of 2015. But what I would tell you is, you've got pretty good experience with us over time for knowing how we generate leverage. The one caveat I'd offer, Sam, is that just going back to this theme about an early -- the early stages of a consolidating market, we want to make sure that as much as we want to get op margins quickly, that we're not doing it at the expense of the needed growth investments that are going to ensure share gains and ensure our position as a winner.

Operator

Our final question will come from Scott Graham of Jefferies.

R. Scott Graham - Jefferies LLC, Research Division

So I might have missed this in everything that you said, Erik. Did you give the MSM-only operating margin?

Erik David Gershwind

For what period?

R. Scott Graham - Jefferies LLC, Research Division

For the fourth quarter, for the fourth quarter.

Jeffrey Kaczka

The operating margin for the fourth quarter. I don’t think so.

Erik David Gershwind

No, we didn't. No, we didn't.

Jeffrey Kaczka

I was going to say, the one thing we did provide that the impact -- expected impact throughout the year for BDNA would be about 100 basis points, dilution to the operating margin.

R. Scott Graham - Jefferies LLC, Research Division

And there's no reason to believe that it was any different this quarter, right?

Erik David Gershwind

I would say it's probably fairly consistent this quarter, yes.

R. Scott Graham - Jefferies LLC, Research Division

Got you. When you guys put out that it's $0.04 accretive, and I noticed that you paid for this all with cash. Do you impute an interest expense within that $0.04?

Erik David Gershwind

Yes, we do.

R. Scott Graham - Jefferies LLC, Research Division

You do, great. Last question is private label. You've heard me ask about this before. What is the percentage of total company sales that's private label right now? And directionally, what are you thinking? I know that the answer's going to be up, of course, but I mean, maybe as these investments take place, a portion of them are going toward improving your private label program. Could you talk about, kind of where we're at today and where we'll be tomorrow?

Erik David Gershwind

Yes, sure, Scott. So what we've given you is the percentage of products that the private brand products represent of our total offering. And we've said that, that's roughly comparable to revenues. And figure that's in the 13% to 14% range as a percentage of total. That number is continuing to climb year-over-year by a pretty nice clip. And obviously, as you'd imagine, of course, a higher margin, great customer value. It is going up year-over-year by a pretty nice clip. If you ask, you would -- without giving a specific target, if you ask me over time, could that number get to 20%, would I think that's possible? I think that's possible. But I'm hesitant to give you a specific time, but that gives you a sense of runway.

R. Scott Graham - Jefferies LLC, Research Division

And would you be willing to tell us how much that's worth, how much every point is worth to the operating margin?

Erik David Gershwind

Scott, we don't break out, for competitive purposes, what we don't do is break it -- to do that, we'd have to share the margin differential, and we don't do that. I mean, suffice it to say, it's a needle mover. I mean, it's a needle mover to the point where it's getting significant amount of investment, because the differential is very real.

R. Scott Graham - Jefferies LLC, Research Division

Okay. And will the spending behind expanding private label increase on a year-over-year basis like everything else is? I mean, is there as much going toward private label, sort of pro rata as the other programs?

Erik David Gershwind

Yes, and it's very similar. So the answer is yes, Scott. That's part of the increment in the growth spending is diverted to private brand. And it's a fantastic investment. But much like a sales person is, there's parts of the investments into private brand that are dilutive near-term. So there's some dilution to the spending. So just to give an example. If part of the investment is to a marketing program, it will take time for the marketing program to gain traction, generate buzz and get incremental business in before we start seeing the margin benefit. But a highly, highly accretive investment over time.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. John Chironna for his closing remarks.

John G. Chironna

Thanks everyone, again, for your continued interest in the company. Our next Earnings Day is set for January 8, and we certainly look forward to speaking with you then or over the coming months. It's a little early, but we'd like to wish you and your families a safe and happy holidays, and look forward to speaking to you then again. Bye now.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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