MSC Industrial Direct Co., Inc. F3Q08 (Qtr End 05/31/08) Earnings Call Transcript

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 |  About: MSC Industrial Direct Co. Inc. (MSM)
by: SA Transcripts

Operator

Welcome to the MSC Industrial Direct third quarter 2008 earnings conference call. (Operator Instructions) Eric Boyriven, of FD, you may begin your conference, sir.

Eric Boyriven

Welcome to the MSC Industrial Direct fiscal 2008 third quarter results conference call. You should have received a copy of this morning’s earnings announcement. If you have not received a copy please contact our offices at 212-850-5600 and a copy will be sent to you. An online archive of this broadcast will be available one hour after the conclusion of this call and available for one week at www.mscdirect.com.

Certain information pertaining to non-GAAP financial measures that may arise during this broadcast can also be found in the earnings announcement, which is posted on the same website in the Investor Relations section, which you may find under the tab About MSC.

I’ll now take a minute to reference the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements within the meaning of U.S. Securities laws, including guidance about expected results for the next quarter, expectations regarding conversion of net income into operating cash flow, expectations regarding the company’s ability to capture market share, the company’s growth plan, and expectations about the company’s ability to manager costs.

These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these statements. Information about these risks is noted in the earnings press release and in the Risk Factors and MD&A Sections of the company’s latest annual report filed with the SEC, as well as in the company’s other SEC filings.

These forward-looking statements are based on the company’s current expectations and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

I would now like to introduce MSC Industrial Direct’s President and Chief Executive Officer, David Sandler.

David Sandler

Chuck Boehlke, our Executive Vice President and CFO, and Shelley Boxer, Vice President Finance, are with me today on the call.

Earnings for the third quarter were better than expected. We were able to outperform our guidance on earnings per share as excellent cost controls more than offset the effect of a decline in our gross margin percentage. Year-over-year sales growth in a toughening environment was 7.7% for the quarter based on ADS and operating margins reached an all time high of 18.5%.

I would like to share with you what our customers are telling us and provide some color on today’s market place. The effect of the slowing economy is generally being felt by more customers, resulting in a broader slowdown of business activity across our customer base. In addition, customer sentiment about the future has become more negative than what we experienced last quarter. Customers continue to be very careful about managing their own inventories and remain focused on reducing MRO inventory levels and on cost reduction.

As a result, we are seeing an increase in investment in lean manufacturing and other cost savings processes and technologies by our customers. That should bode well for the future as MSC’s business strategy is to reduce our customers’ overall cost of procurement of their MRO supplies through our value-added tools such as our huge product offering, electron commerce option, BMI, CMI, etc.

Our customer surveys also show that summer slowdowns will be broader and longer in duration this year in many business segments, which we expect to have a more pronounced impact on revenue growth than last year. We have included all of these factors into our guidance for Q4.

We have said that we take share during times such as we are experiencing now, and while on a recent trip in the Midwest I visited with a customer that is experiencing tough times. This customer location is part of our national account program and historically 65% of their sales have been to the automotive industry and that portion of their business has certainly diminished, although they are growing in the other 35% of their business.

While their total MRO purchases are down significantly, our business with this customer is up quite dramatically this year. That is due to the tremendous cost savings that this customer described to me as they have implemented our BMI solution and consolidated their purchasing from several local competitors to MSC.

The bad news that MSC brings, combined with excellent execution on the part of the field sales associate, and the branch team, has been rewarded with sales growth of 80% in this customer. We are confident in the sustainability of those share gains and when the economy turns, we expect them to translate into robust revenue growth.

This is a story I have personally seen many times during my field travels and heard from my numerous conversations with our sales associates. That’s why I’m confident that MSC will continue its track record of share gains well into the future and deliver significant revenue growth when the cycle inevitably turns.

Our growth investments continue to pay dividends as we take share and grow across all segments. Our focus on the large customer accounts, including the government sector, continues to generate substantial growth. We will continue our investment focus on this effort as well as our West Coast growth initiative. Both of these areas represent huge opportunities for us and we have just begun to penetrate these markets.

Our sales force grew to 875 associates in Q3, above our guidance, as we took of advantage of opportunities presented to us by market conditions. We expect to finish the year at roughly 895 associates, representing 10% growth in the sales force in fiscal 2008.

I would like to give some guidance for the fourth quarter. As a reminder, this year’s fourth quarter will have 64 business days, four less than last year’s fourth quarter, which would account for roughly $28 million in sales this year.

Based on current conditions, we expect sales will be in the range of $443 million to $449 million and diluted earnings per share will be in the range of $0.74 to $0.76 per share.

In closing, I would like to take this opportunity to thank all of our associates for their outstanding efforts in an increasingly difficult environment and their continued focus on execution excellence.

Charles Boehlke

Sales for the quarter came in at the low end of our guidance range. Sales were affected by the overall slowing environment, particularly in our historical business base of the small machine and tool and die shops. We have continued to see aggressive pricing from small distributors and experienced increased pressure on our costs.

Gross margin came in slightly below expectations for Q3, at 46%. As we have stated in the past, there are many moving parts to gross margin, several of which had an adverse effect on gross margin in Q3.

Number 1, the mix of business between large accounts and our historical highest margin core business of small to medium-sized manufacture and machine shops continues to shift towards these larger accounts and accelerated rates. Large accounts drove 63% of our growth in Q3, well above prior levels.

Number 2, the mix of the products that we sell is shifting as the manufacturing sector slows. Non-manufacturing customers grew at 2.5x the rate of manufacturing customers in Q3. These customers have different product needs which adversely affected gross margin in the quarter.

Number 3, the timing of cost increases, we were able to anticipate some of the Q3 cost increases when we took a price increase in February due to market conditions. Overall, however, Q3 cost increases were more than we had originally anticipated, due to the rapidly changing environment.

We currently expect these same trends to continue in the fourth quarter and expect gross margins to be in the range of 46%, plus or minus 20 basis points.

Expenses remain under tight control. This has allowed us to continue to invest in future growth at historically high levels while expanding operating margins.

Q4 this year has four fewer days than last year’s Q4. Excluding the integration costs that we incurred last year, we estimate that the four extra days last year were worth approximately $0.05 per share in earnings. Consequently, we estimate year-over-year EPS growth of approximately 12% at the midpoint of our guidance.

Balance sheet metrics remain solid. Inventory turns improved versus Q2 and we generated $73 million in free cash flow, which we define as net cash provided from operations less capital expenditures. On a year-to-date basis we have converted nearly 100% of our net income into net cash provided from operations. Year-to-date free cash flow grew 28% over last year’s level, to $133 million. Our strong cash flow has afforded us the opportunity to increase our quarterly dividend to $0.20 per share.

As expected, we continue to see a decline in the number of our customers. This decline represents the effect of the economy on some our small customers and our proactive decisions to cut back prospecting to save some investment dollars as response rates drop during tough times. The revenue decline in customer count is minimal. Overall, the total number of customer locations served by MSC continues to grow as a result of our continuing emphasis on developing our business with large, multi-location customers.

Thank you and I will now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Manthey - Robert W. Baird & Co.

David Manthey – Robert W. Baird & Co.

In terms of the operating expenses, I was really surprised at how well you were able to drive them lower, especially with continue increases in the sales force and other things you’re working on. Was the majority of the decline in the core business or were there remnants from J&L, or could you just discuss which cost items were down the most year-over-year?

Charles Boehlke

Let me explain first, relative to the guidance. Obviously, we were at the low end of the sales range and a little off on the margin side. So, to be where we were on EPS we were actually favorable to the guidance we provided at OpEx by about $0.045. I would say proactive expense management in areas like T&E, outside contractor services, things like that, accounted for about $0.02 of that favorability.

We continue to have, fortunately, some favorable experience in our self-insured medical plan; that counted for another $0.01 of the savings. And the remaining $0.015 is really from productivity gains, primarily from our fulfillment centers and some other smaller items. So, that’s roughly how the $0.045 reconciles to where we thought we would be when we set guidance for the quarter.

David Manthey – Robert W. Baird & Co.

And the second question, could you talk about the impact of price increases on the top line, the current quarter? And then as you’re thinking about the next 12 months, or into the next catalogue, what type of increases do you anticipate next time around?

David Sandler

We’re not going to give you a 12-month forecast at this point. You have seen we talked about pricing and cost pressures accelerating, so we really don’t want to broadcast, so we’ll tell you that we’ve said we took some pricing actions in February. Part of those pricing actions actually anticipated what we were seeing for this quarter, and in a second I’ll give you a breakdown of what our gross looks like, but what I am comfortable talking about is a well-know cycle that we’re on, which is our Big Book cycle, that comes at the beginning of our first quarter, or the end of our fourth; late in August.

And during that time we not only produce our Big Book, but it’s well known that we take that opportunity to make price adjustments as part of that process. So, we’re going to be doing that as that cycle continues. And historically we have seen that we are able to take advantage of inflationary times and pass those increases on to our customers. Sometimes it’s a matter of timing, but overall we’re confident that that process remains intact.

I also said that I would give you the breakdown of revenue growth, and specifically the pricing impact on this quarter, so why don’t I do that now. Of our revenue growth, which we reported at 7.7%, this breakdown is on an ADS basis, pricing was 13% of that gross, or roughly 1%. Large customers accounted for 63% of that revenue growth, or 4.8%. And our core was roughly 1.9% of it, or 24%.

David Manthey – Robert W. Baird & Co.

Just as a follow-up to your previous comment, though. As you look forward to the Big Book, can you give us a ballpark idea of what aggregate price increases would look like in the Big Book this year?

David Sandler

I would rather save that for the next call, Dave.

Operator

Your next question comes from Adam Uhlman - Cleveland Research Company.

Adam Uhlman – Cleveland Research Company

Chuck, just to clarify on the operating expense for the quarter, were any of those items you outlined one-time in nature, the $0.045 of benefits.

Charles Boehlke

We expect most of them to persist. I just want to be cautious, though, in absolute terms, things like T&E, certainly we can, in aggregate, have cost controls in place and manage that tightly but we added significantly more sales folks in Q3 from Q2 than we did previously, so the associated expenses with the sales team additions and the travel and so forth that are incurred by sales associates, in the absolute sense, would be increasing in next quarter versus this quarter. But, most of these things should persist throughout the fourth quarter, as well.

Adam Uhlman – Cleveland Research Company

Just because, if you look at your guidance for the fourth quarter, backing into the numbers, it looks like you’re expecting operating expense down perhaps in the 4% range year-over-year, and it was growing 1% in the current quarter and it sounds like some of these headwind SG&A expenses are growing with the employee additions, so I’m just trying to understand that trend a little bit better.

Charles Boehlke

Adam, one thing is the calendar is a challenge when you do year-over-year comparisons. There are four less days in Q4 this year versus last year because of that extra week less the Memorial Day change. So OpEx is clearly affected by that four-day change so you’ve got to cut the analysis on a comparable number of days in the quarter. We can reconcile that but essentially we’ve got, obviously, more sales associates on board than we had a year ago, so there’s some clear additions to OpEx that have taken place year-over-year, but we’ve really got to get our arms around those four days. That will cause a significant change in the analysis.

Adam Uhlman – Cleveland Research Company

And then, Dave, could you give us some other color on the Big Book? Maybe outside of the price, but new categories that are being added this year, skew additions, etc.

David Sandler

Adam, I don’t want to steal the thunder for what we’ll talk about moving forward, and specifically I don’t want to give a heads up to what’s going to be coming to the competition. I can tell you, though, that we have added 20,000 new items to the Big Book and we have removed roughly 15,000 less productive and non-value added skews. So we’re excited about the launch but I would rather hold back on telling you about some of where we’ve expanded our categories, just a little bit.

Operator

Your next question comes from John Inch - Merrill Lynch.

John Inch – Merrill Lynch

Just curious, the price action you took in February versus the cost basis increase this quarter, what would have been the deficit to close the gap? How much of the delta dragged your cost of goods, would you estimate?

Charles Boehlke

John, we’ve given guidance last quarter at basically a range of 46.1%-46.3% so the midpoint, 46.2%, a big driver of that miss, if you will, from 46.2% to 46%, a good piece of that was on the cost side versus the price. It’s not all of it but it’s in that range to contribute it to what we would call a 20 basis points miss from the midpoint of our guidance last quarter.

John Inch – Merrill Lynch

And just so I’m clear, was the issue that prices rose more quickly during the quarter or was there some other event? Was it more of a volume issue, or how should we think of it?

Charles Boehlke

No, it was costs were clearly rising quicker in the quarter than we had put in the price increase. We anticipated some of that when we made the decision to put in our price increase in February. It actually raised a lot quicker than we had anticipated back in February.

John Inch – Merrill Lynch

Did any of the other sectors’ problems bleed into some of the slightly softer manufacturing trends that you saw? Without being too specific, is that part of what’s going on here?

David Sandler

Chuck talked about the cost element of gross margin and we have tried, and in fact painted a picture of multiple elements, and there really are so many moving parts. Certainly, costs escalating were one of the factors, but some of the shifts in our customer mix led to shift in our product mix, as well. So you just pointed to one.

Perhaps in some regions related to a bit of automotive activity, but what it really points to is that we have seen a slowdown in our core historic manufacturing base. Part of that leads to slower revenue growth which, to a large degree, accounts for why we came in at the lower end of our revenue guidance. And that’s also one of the mix factors that drive our gross margin because

I think it is certainly that our historic customer base in at a higher margin than some of our new larger customers, for example, that drives the margin down. Which also, given the mix that we saw in our business, where we had excellent growth in that segment, well the excellent growth in that segment, which we were very pleased with, put disproportionate weight and pressure on the gross margin line, as well, was another one of those factors.

John Inch – Merrill Lynch

I think last quarter you called out the fact that smaller competitors were cutting price. When you talk about taking share, did you see price actions actually get worse? Like, the environment for price competition in the third quarter, was it sequentially tougher? Is that the way to think about it?

David Sandler

I’m not sure that I would say that the aggressive pricing actions from our traditional distributors were sequentially tougher. I think we characterized it as one of the difficulties that put some pressure on margins in that quarter. I’m not sure that I can distinguish whether that put additional pressure on this quarter.

That pressure is out there the same and really as traditional distributors begin to have some erosion in their service model, and in being faced by a difficult economy as well, they’re out there trying to keep their own share gains and keep their own business in tact. And that becomes increasingly more difficult as their service models, things like inventory due to cash flow, comes under pressure.

Operator

Your next question comes from Jeff Germanotta - William Blair & Company.

Jeff Germanotta – William Blair & Company

I want to explore a little bit the mailings. Chuck commented on doing a little less prospecting. Looking at your stat sheet mailings have come down a little bit sequentially, and they would seasonally anyway, but where have you been with the quantity of mailings lately and where are you likely to go in the near future?

David Sandler

Jeff, if you take a look at our website stats, we do indicate that our mailings have been down year-over-year, with some adjustments that we’ve made. You’ve seen that throughout the year and I think for this quarter they are pretty comparable to what they were last year.

But basically, what you have seen us doing through the year is a combination of cutting back on programs where we’ve seen the return on some of those programs actually shrink. The return on investment actually the breakeven and the profitability time extend. Things like our prospecting where in tougher times you actually see the response rate where it jumps a bit. And indeed the program is still good but even though we turn the dials and need to make adjustments in our overall programs, the whole balance of short-term profitability with long-term investment and growth, that’s one of the areas that we pare back a bit.

Which produces less incoming customers and at the same time patterns, what we don’t break out on that statistic, is also our basic circulation. And we’ve been able to cut back on that circulation, the same thing, but we would target customers, or target circulation, going to customers that have not really been productive for us; those small one-time buyers.

Which is why, as Chuck mentioned in his script, we are comfortable that our customer count has been down, it’s been down by plan, and that optimally it really has a negligible effect on our revenue growth rate. But those are some of the dials that we’ve turned. The other thing that doesn’t show up, Jeff is that we have also talked about being more productive in our programs.

So in addition to adjusting the dial within that plan, the other dial is that we are constantly looking at being more productive and one of the ways of being more productive is to shift some of those, both prospecting and circulation, to electronic channels. We’ve actually ramped some of that up and we do that to reach those customers in a much more cost-effective way.

Jeff Germanotta – William Blair & Company

Should we expect to see mailings, year-over-year, as we move forward, below the prior year?

David Sandler

I don’t want to give you a forward look into 2009. I will tell you that all the factors that I just described, as we watch this economy, we will continue to watch it, and we will continue to adjust where we see necessary. The only thing I can tell you, though, is that we will continue to, in addition to focus on making those adjustments where we think most productive, we will definitely continue to explore where we’re able to shift customers to an electronic channel, an electronic marketing means, where it has value for those customers. So that will certainly be a part of our 2009 program.

Jeff Germanotta – William Blair & Company

And the next question has to do with accounts receivable quality, days in receivable and reserves. Are you seeing any slippage there, in the softer part of the cycle?

Charles Boehlke

At this point in time, no, things have been pretty stable for us. A little bit in the aging, but not so much for economy but again, because the larger accounts, which often have different payment terms, are a bigger piece of our sales and the mass will just drive that out a little bit. But nothing that is related to the economy, per se, that would cause the quality of that receivable to slip.

Jeff Germanotta – William Blair & Company

Whether it’s T&E, discretionary investments, or mailings, how many quarters do you think you can skinny that up before it begins to influence the long-term opportunity?

David Sandler

Jeff, we feel strongly that we’re going to grow through whatever is coming our way unless there is some extraordinarily long and deep recession. And certainly our plan is to continue to invest in growth and in answer to your question, put all that together, the plan is also, and we believe we will continue to grow our earnings as well.

Operator

Your next question comes from Brent Rakers - Morgan, Keegan & Company.

Brent Rakers - Morgan, Keegan & Company

In your international, you added a segment called International and Other, in your operational statistics. I was wondering if you could give a little color about why you decided to disclose right now or maybe how big a part of sales this is?

Charles Boehlke

It’s really understanding the overall growth rate of the company. If you look at the regions and look at the growth rate we reported, we’ve got that International Other Sector on there. The inclination might be to believe that those regions in total then aggregate to the total sales growth for the company. We thought it would be helpful to cut that off at the pass and actually put that section on the website to help make sure that folks understand that the aggregate growth of the company is represented by all the regions and that other category.

David Sandler

And, Brent, just to add to that, the one thing is it’s not to signal that something has changed or that we’ve now got a big focus and new thrust into international. You know that we’ve got our U.K. business; U.K. is part of that metric. And it’s a relatively small part of our business; the team is doing great. But we’re not signaling a bit C change here.

Brent Rakers - Morgan, Keegan & Company

Could you maybe expand on where you feel you’re taking market share and how you’re doing that?

David Sandler

Remember that we compete, this market place has a few of us large, national distributors, but the bulk of it is still controlled by that small- to mid-size traditional distributor. In fact about 75% of the market is still held by that distributor. And that’s really, time and time again, where we see that we are taking share. That distributor is under a lot of pressure.

Especially concerns those large customers that are trying to focus on reducing their overall costs of procurement and acquisition. In particular, large, multi-facility, national customers that need a distributor with a broad footprint scale that plugs the system, the electronic platform, the broad product offering, all to be able to consolidate their supplier base into a much more streamlined, cost-effective distributor. That’s really where we’ve enjoyed market share gains.

And in fact, as days are tough and get tougher, historically what we’ve seen, and frankly anecdotally we’re seeing that today, that distributor service models begin to break down; they struggle with cash flow, they’re not able to maintain their inventory levels. So oftentimes what happens is that a customer that has traditionally been able to get a particular item reliably from a distributor, if all of a sudden they have a break in service, that catches their attention and that gives MSC an opportunity to gain a foothold in that customer.

And typically what we find is as we’re able to gain that foothold and be able to show the service levels that we’re able to provide, that we gain a customer often for life.

Operator

Your next question comes from Holden Lewis - BB&T Capital Markets.

Holden Lewis – BB&T Capital Markets

You talked about all the pressure that you’re seeing on price and that sort of thing, out of your smaller competitors, yet you’ve been able to sustain a little bit of pricing in the model and it sounds that when the Big Book comes out that you’ll be able to get some more in there and then you find yourselves in a position where you are clearly getting price and raising price when your competitors seems to be slashing price. Is that having an impact on your revenues that is noticeable, or can you give some greater color as to why you may not be behaving in a way that the rest of the market seems to be?

David Sandler

Holden, I certainly don’t want to over blow what we’re seeing. You know that our model is geared to selling a solution, but we’re not going to sit back, and this relates to the revenue portion, the answer as well, that we’re going to be undercut in so many cases where a customer may have a larger item or something that they’ve got time because perhaps they’re slower, to do some shopping for. That’s one of the places that a local distributor will try and use whatever they have on the price side of the equation to take that business, and we’re not just going to sit back and let that occur.

So, those are some of the kinds of situations that we will see out there. It’s a pretty typical one. And everyone, typically the distribution is certainly being impacted by the economic slowdown and they’re trying to find ways to maintain their business, as well.

Holden Lewis – BB&T Capital Markets

Could you also comments about, in your releases, the June 2008 DSR bake point 3 is quite a bit better than your forecast for the full quarter. Could you give a little bit of color, are you seeing conditions eroding that way?

Charles Boehlke

Yes. Actually, to complete the picture, we’ve got one more week in June, which includes the 4th of July holiday, long weekend. So what we’re expecting to see is that the 4th of July was actually in this year’s June, which you don’t see on the website because it hasn’t happened, obviously. It was in last year’s July so the comps are off between June and July. Bottom line, what our expectation is, is that while you see an 8.3% growth in June, to date, we are expecting June to be more in line with our overall guidance for what we’re seeing in Q4 once we get through the 4th of July holiday.

Operator

Your next question comes from Yvonne Varano - Jefferies & Co.

Yvonne Varano – Jefferies & Co.

Can you just tell me how many shares you repurchased in the quarter and what remains on the authorization?

Charles Boehlke

Nothing was purchased in the third quarter so everything that’s in the share count was done through Q2 and there are 4.5 million shares remaining on the authorization. We actually had that increased earlier this year by our Board.

Yvonne Varano – Jefferies & Co.

And on the T&E side, it just sounded like a large number. Can you give a little more color on some of the steps you took there to control that cost?

Charles Boehlke

It’s a conglomerate of things. T&E is the full $0.02 I mentioned in that portion of $0.045. In addition to that, outside expenditures for services we can delay, we can defer, we cannot, we can try to do more productively inside, it’s a series of actions that when things slow down a little bit that we take across the board. Challenging trips, asking folks to plan further, all those things in aggregate add up. And during the quarter they were worth, probably in aggregate, just not the T&E piece, but that piece of it that we chalk up to proactive expense management, as I said, probably $0.02 of the $0.045, we experienced in the guidance that we set.

Operator

Your next question comes from Richard Marshall - Longbow Research.

Richard Marshall – Longbow Research

Can you talk a little bit more about the geographic sales breakdown? If you look at the Western region, it had a decline for the second straight quarter there, and you saw a little uptick in the Southeast. Can you maybe give a little more color behind those trends and was there anything surprising about those trends this quarter?

David Sandler

We’re being affected by the softness in the industrial economy. I would say that’s the overriding theme. The greatest impact of that slowdown is concentrated in our sales into the durable sector. Within manufacturing you’ve got what I’ll call heavy, which is durables, and would go to light. That light sector was also included in our manufactured data breakdown and that sector continues to grow at a faster pace.

All of those both light and heavy are sprinkled throughout the regions, so when you couple that with pockets of strength and weakness throughout our varying customer segments, there really isn’t one factor that I can point to, but more the conditions that are woven through all of our regions. As I said, durables certainly have been the hardest hit.

And also, what we’re finding throughout all of regions, which we have signaled as a change in what we’ve seen from our last quarter, is that our historic base of machine shops, small manufacturing plants, have been feeling more pressure in the impact of the business.

The other that I’ll comment on is what we’re seeing out West. The West also has its share of economic conditions and struggles, but what we’re also seeing, as we talked about in the last quarter, is the impact of the culling of some low margin J&L business as well as some tougher comps from some customers that we’ve done extraordinarily well with, grown very, very quickly, and in fact continue to grow very quickly, but those comps are now facing us. So all of that is part of our West as well.

Richard Marshall – Longbow Research

I notice your website channel had a nice uptick this quarter. It sounds from your commentary like you’re trying to drive more business through that website. What’s your outlook for the coming quarter on the website sales?

David Sandler

Richard, we’re not going to forecast what it is. It is an important tool and program for us. It’s important to us because our customers find it very helpful in ordering more efficiently and that takes costs out for them, and that also takes costs out for us. So that it is, and will continue to be, an important focal point for investment and further development.

Richard Marshall – Longbow Research

I noticed in your forecast for direct mail for the fourth quarter is really not that different year-over-year. Should we look at that as a possible place where you might be able to cut back? In other words, should we view that as an upper bound or a lower bound within the forecast?

David Sandler

I think if you take a look at what we’ve historically projected and then come in for an actual, I think we were very close, for example, this quarter. So while I can’t definitively tell you that we wouldn’t find that we would make a change, the reality is on these programs is that they take months to develop and forward planning. So my point is we really don’t put it out there as a range, we really put it out as what we think is actually going to happen in the quarter and that’s still our best estimate of what will actually occur.

Operator

Your next question comes from Dan Beck - White River Investment.

Dan Beck - White River Investment

On the shipping costs, have you seen those go up? Was that part of the 13% price increase you were talking about? I know in your annual report you broke that down for the last three years and that goes in the total net sales number, but in this last quarter have you seen a large increase in that and do you see that as something that you can easily pass on to the customer because they want it delivered, or is that a potential disadvantage compared to a customer going into a retail or local distributor, a Fastenal store, and just buying it there without having to pay that cost?

David Sandler

Again, we do see our shipping costs rising and generally speaking we are able to pass that along to our customers as well. So, that’s a good general statement. Of course, we’ve got arrangements with some customers that may not reflect that, but in general, two things, we have seen costs increasing, and generally that is a component of our business so we are able to pass along to our customers.

Operator

At this time there are no further questions.

David Sandler

I’ll close out the call by saying we appreciate all of your time and interest today and look forward to speaking to you again next quarter. Thank you.

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