MSC Industrial Direct Co., Inc. (MSM) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the MSC Industrial Direct Second Quarter 2013 Conference Call. [Operator Instructions] Please note, this event is being recorded. And I would now like to turn the conference over to John Chironna, VP of IR and Treasurer. Please go ahead.

Thank you, Emily, and good morning to everyone. I'd like to welcome you to our Fiscal 2013 Second 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 mscdirect.com. During today's presentation, we may refer to financial and management data included under the section, "Operational Statistics", which you can find on the Investor Relations section of our website. Let me take a minute to reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This call contains forward-looking statements within the meaning of the U.S. securities laws, including guidance about expected future results, expectations regarding our ability to gain market share and expected benefits from our investment and strategic plans, including the previously announced Barnes Distribution North America acquisition. 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 of 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 reconciliation in the Investor Relations section of our website, which contain the 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, go ahead.

Thanks, John. Good morning, everyone, and thank you for joining us today. Also with me on the call is Jeff Kaczka, our Executive Vice President and CFO. I remain pleased with our company's performance and execution of our plan in a challenging environment. Revenues came in about as expected for Q2, impacted by fiscal cliff uncertainty and by the sluggish start to calendar 2013. At the same time, adjusted earnings came in at the top end of our guidance range, demonstrating strong execution and expense control. We've also seen significant growth in our cash balance, reflective of tight working capital management, especially on inventory levels, and we're increasingly excited about the pending Barnes Distribution North America acquisition as we get closer to closing and to better realizing the tremendous growth opportunities that the business creates for us. This morning, I'll take you through an update on the current landscape, talk about our execution and about several of our growth initiatives. Jeff will then take you through a financial review of Q2 and of our Q3 guidance, and I'll wrap it up. As you may recall, when we last spoke at the beginning of January, economic conditions were hampered by fiscal cliff uncertainty, holiday impact and generally low visibility. With those conditions and a slow start to the quarter with December growth of 0.3%, we anticipated Q2 revenue growth of 1%. As we move through the quarter, we saw ISM readings for January and February continue to move higher, reaching 54.2% in February. We reminded you along the way that historically our growth has tended to lag the ISM by 4 to 5 months. And then, of course, last week, the March ISM reading dropped considerably, coming in at 51.3%. Like others in the industrial sector, we did not find that business conditions matched the more optimistic ISM readings from January and February. In fact, the drop-off in March is more consistent with what we've seen and heard from our landscape service. While we did see some strengthening towards the latter portion of January, we found those improvements to be short-lived. February and March returned to softer activity levels, and all of this is evidenced in our monthly growth rates. We delivered roughly 1% growth in Q2, and we're guiding to similar levels in Q3. So I thought I'd take the logical question that's going to arise in Q&A and address it upfront this morning. Even at flattish ISM levels, we'd expect higher organic growth rates; something closer to mid-single digits based on historical performance. So why the change in trend? Well, the root cause behind the recent lagging in growth rate is the relative softness in metalworking-related sectors of the economy. Let me explain to you how I reached that conclusion so confidently. As part of our ongoing operating process, we recently conducted an extensive market analysis. Included in the process are market research and analytics, customer visits and extensive supplier discussions. And what we realized is that the metalworking-related sectors have been particularly hard-hit relative to others. We've seen it in heavy industrial manufacturer and distributor comps. We've heard it extensively in discussions with our supplier community. We've seen it firsthand in our customers, and we've seen it in leading metalworking activity indicators. We've also heard that our share gain performance remains as strong as it's always been. While there are certainly pockets of growth like commercial aerospace and automotive, the core of metalworking, segments like primary metals, machinery metal fabrication and others, is soft, softer than what's reflected in the broader ISM figures, which reflect an average across many industries. Having completed our most recent round of analysis, I remain very confident in our plan. We continue to invest in our leadership position within metalworking, and I'm pleased with our performance in our core market. Through programs like vending and technical metalworking support, we're taking share by bringing enormous value to our targeted accounts and assuming a critical strategic position with them. We remain committed to our plan of account penetration, investment in growth programs and share gains. As we've always done historically, we will benefit disproportionately when the metalworking-related sectors improve. The pending acquisition of Barnes Distribution North America opens up several new growth paths for the company that we're excited to capitalize on. To remind you, they include the following: a product line adjacency into class C items that allow the MSC sales force to sell these high-margin consumable products into our customer base; an expansion of our inventory management capabilities from vending in the production floor to VMI in the storeroom; cross-selling of our Big Book offering with next day delivery into BDNA's newer customer segments such as transportation and natural resources; and geographic expansion across the U.S. and into Canada. These are all initiatives that will add to our growth over time. The acquisition is proceeding according to plan, and the more we get to know above the business and their team, the more convinced we are about the fantastic growth platform that BDNA provides. We expect to close the transaction in the next few weeks. Let me now turn to some details of our Q2 performance. Reflecting the economic backdrop that I just described, we posted revenue growth of 1%. As anticipated, we did not implement the midyear price increase, which would have otherwise positively impacted our growth rate. Sales from our manufacturing customers grew pretty much in line with overall company at just above 1%, while sales from our nonmanufacturing customers were essentially flat, up less than 0.5%. Within nonmanufacturing, government was a tale of 2 stories during Q2. We saw a significant growth in December and January but a precipitous drop in February as sequestration fears came to a head, and that netted out to roughly a flat quarter. March trends continued the extreme softness in federal that we saw in February once again due to sequestration, and we've assumed a similar picture for April and May in our Q3 guidance. Gross margin came within our guidance range of 45.0% based on what we would still describe as a very spotty pricing environment, particularly in metalworking-related product lines. We've not factored the midyear price adjustment into our Q3 guidance. Given the current economic conditions, we continue to monitor and manage our discretionary spending very closely. At the same time though, as we've described, we continue to execute on several strategic investments for the future. As I like to do on these calls, I'll update you on a few of them. Customers with vending continue to contribute to our growth and delivered nearly 3 points of sales growth in the quarter. Signings also continued to exceed our targets and that, along with our vending profitability improvement programs, should bode well for the future. Our e-commerce sales and other key growth initiative also continued to grow and surpassed 43% of company sales for the second quarter, up from 40% a year ago. The growth is coming from several of our electronic channels, including mscdirect.com. In fact, we just launched our new web platform in its entirety this month, and we're excited by early customer feedback and the prospects for future growth. I'd encourage you to go and visit the site and see the difference for yourself. Regarding our field sales force, we've kept headcount relatively flat over the past few quarters. This was done as we managed investment trade-offs, given the uncertain environment we experienced through the latter part of calendar 2012. Given that things have at least stabilized, although not improved, and given the compelling return of our sales force investments, we will begin to moderately expand the sales force. We anticipate adding between 2% to 3% to our field sales headcount through the end of our fiscal year. Of course, that could change up or down based on changes that we see in the environment. With respect to our headquarters co-location in Davidson, North Carolina, we remain on time and on budget, with a target opening date of late summer 2013. Many in our Melville location are excited and energized over the move. As for our Columbus Fulfillment Center, we also remain on track to break ground on the facility this year and open it late in 2014. Given the current conditions and based on customer feedback, our Q3 guidance assumes that there's no improvement in the environment during the quarter. Accordingly, we'd expect the following: revenues to be between $597 million and $609 million, and diluted earnings per share on an adjusted basis to be between $0.95 and $0.99. With that, I'll turn things over to Jeff.

Thanks, Erik, and good morning, everyone. Our second quarter was impacted by the continuation of the soft and uncertain economic environment that Erik just described. We, of course, anticipated that softness and managed the business tightly to come in at the high end of our earnings guidance. Since second quarter compared to the same period last year, sales grew 1.2%, just above the midpoint of our guidance. Our adjusted EPS, which excludes our nonrecurring costs associated with the co-location of our headquarters in North Carolina and now excludes our nonrecurring transaction and integration costs relating to the BDNA acquisition, was $0.90, down 5.3% but at the top end of our guidance range. The costs associated with the co-located headquarters were minimal in the quarter. The nonrecurring BDNA transaction costs amounted to approximately $1.6 million in the second quarter or $0.02 of earnings per share and consisted primarily of professional fees. This is right on target with what we provided in our press release announcing the BDNA acquisition. We will continue to report the nonrecurring BDNA transaction and integration costs and other onetime costs associated with the co-location of our headquarters on a quarterly basis. Breaking down the sales growth of 1.2% in the second quarter, nearly 3 points came from customers within our vending program and approximately 1 point came from the ATS West acquisition. The offsetting decline is a direct result of the softer demand environment, particularly in the heavy industrial end markets and metalworking-related sectors that Erik mentioned earlier. Please note that we reached the anniversary of the ATS West acquisition at the end of January and, therefore, future revenue growth will no longer benefit from the initial inclusion of this acquisition. Our gross margin of 45% for the quarter was within our guidance range. As compared to the same period last year, the margin was down approximately 110 basis points, driven by 40 basis points of dilution from our vending program, another 10 basis points of dilution from acquisitions and the remainder primarily due to purchase cost increases without the benefit of the midyear price increase. As a reminder, while current supplier increases are sparse, the impact of last year's increase is still lingered due to our average costing inventory method. The primary reason we were able to achieve adjusted EPS at the top end of our guidance was our continued management of operating expenses. In fact, for the first half, our operating expenses as a percent of sales, excluding the nonrecurring expenses related to the BDNA acquisition and the co-located headquarters, were 28.4% versus 28.7% last year, despite the lower growth environment. For the second quarter, excluding the nonrecurring costs mentioned earlier, operating expenses came in roughly $2.5 million better than we guided, which led to a 16.2% adjusted operating margin in the quarter as compared to 17.1% in the prior year period. We continue to aggressively and carefully manage our spending with lower levels of variable compensation and reductions in discretionary expenses such as professional fees and travel and entertainment. We have also held headcount levels relatively flat since last summer. The tax provision for Q2 came in at 38.1% as expected. Turning to our balance sheet. Our Q2 metrics were strong. DSOs were 45 days, improving from 47 days in Q1. Inventory turns were 3.31, similar to Q1 levels. From a cash flow perspective, our cash flow conversion historically is weaker in Q2 due to the fact that we make 2 tax payments in the quarter. Despite that, we converted 81% of our net income into cash flow from operations. This compared to 46% for the same quarter last year. The increase was the result of our successful working capital management, where, particularly in view of the soft demand environment, we worked hard to reduce inventory and manage our receivables. In fact, inventories are actually down nearly $29 million or 7% since the beginning in the fiscal year, further evidence that we have proactively managed the business. We had approximately $244 million in cash and cash equivalents at the end of Q2, and our current cash balance now stands at $298 million. Of course, we will use a portion of that and new borrowings for the BDNA acquisition. Just as we've seen historically, we expect improved conversion for the balance of fiscal 2013. Of the last few years, we've seen total year cash conversion well over 90%. And this year, I would expect conversion to remain close to or above those levels. In regard to capital expenditures for the second quarter of FY '13, our CapEx was approximately $23 million. This included an increase in vending and approximately $9 million associated with the Davidson facility when compared to the same quarter last year. As we've mentioned on earlier calls, we expect CapEx in FY '13 to be elevated and likely to be in the $100 million range, driven by infrastructure investments of nearly $50 million in Davidson and Columbus combined, in addition to increased investment related to our vending program. Let me now turn to our guidance for Q2. This guidance, of course, excludes any impact from the BDNA acquisition. Please refer to our previous announcement on the transaction to gauge that impact. In addition, please note that our fiscal third quarter for 2013 will have one less selling day than the same quarter in fiscal 2012. So excluding BDNA, our anticipated average daily sales growth at the midpoint will be flat, reflecting our assumption of a continued soft demand environment, particularly for the metalworking-related sectors. This guidance is consistent with what we saw in March, the first month of our fiscal third quarter, excluding the holiday impact. We expect gross margin for Q3 to be in the range of 44.9%, plus or minus 20 basis points. Sequentially, this would be nearly flat with Q2, thanks to the success of our strategic programs, namely private brand and discount management, that are offsetting the headwinds of vending and purchase cost increases. As I mentioned last quarter, in the absence of pricing actions, gross margin tends to decline as we progress throughout the year. In Q3, we expect operating expenses will increase at the midpoint of guidance by approximately $6.6 million versus Q2, excluding nonrecurring costs. Sequentially higher volume-related costs account for roughly half of that increase, with the remainder being primarily investment spending and medical costs. We are continuing to manage tightly in this environment, but we will also continue investing in key growth initiatives. And regarding our tax rate, we expect the Q3 tax rate to be about 38.2%. Finally, our adjusted EPS guidance for Q3 is $0.95 to $0.99, reflecting the low growth market environment and our continued tight expense controls. This, of course, excludes the Davidson relocation expenses and BDNA transaction and integration costs. So the message I'd like to leave you with is that we're experiencing a temporary softness in sales growth, primarily due to the weakness in the metalworking sector, but we have been on top of that forecast and are very effectively managing the business. This is evident in our OpEx, our inventory, our cash flow and our ability to achieve the high end of our adjusted EPS guidance. At the same time, we're investing in key initiatives and expect to close a historic transaction this month. Thanks, and I'll turn it back to Erik.

Thanks, Jeff. I remain pleased with our company's near-term performance in a challenging environment. What gets me really excited, though, is the vision that I see 2 years from now, so let me articulate it for you. I see a field sales team that is nearly double our current footprint, thanks in large part to the acquisition of BDNA. I see a support team that is stronger than ever, thanks to the Davidson facility and our ability to attract top talent. I see a geographic footprint that now includes virtually every zip code in the U.S. and also includes Canada. I see a full suite of value-added capabilities, including a new mscdirect.com; an improved and streamlined vending offering, thanks to our vending improvement initiatives; and a top-notch VMI solution, thanks again to BDNA. I see leadership in metalworking and now consumable class C products. I see leadership in manufacturing end markets and a growing presence in new segments like mining and transportation. I see an even more scalable infrastructure, including Davidson and Columbus, which, along with the new inventory forecasting system, will make for even more efficient inventory management. And finally, I see the organic and the BDNA-related growth initiatives that put us well on our way towards achieving our goal of $4 billion by the end of 2016. This is the vision that gets our organization excited and what we're working so hard towards. I'd like to thank our entire team for their hard work and dedication. And now we'll open up the lines for questions.

[Operator Instructions] And our first question will come from Ryan Merkel of William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: So the first question I had, I want to start off with this relative weakness in metalworking because you can't see it in the numbers. And I'm wondering, what do you think explains that, first of all? And then second of all, what do you think can change that? What makes it get better?

Ryan, it's Erik. So yes, good question. And look, as I said in the remarks, we wanted to take what would be the logical question, which is the growth trend relative to ISM and hit it head on. We -- as we always do, as part of our operating process, we follow a very similar methodology in how we get at what's going on in the market. So we will look at comps. We'll look at supplier comps. We look at a series of metalworking activity indicators and then what I think is even most important as we talk to customers and we talked to suppliers. And the picture -- what our job is, is to give you guys a window into our world and let you know exactly what we see out there, and that is the picture that we described. And particularly, the closer we got into the core of the core of metalworking, the segments that are really tied to our core business, the softer we saw things. I think if there was one scene to answer your question directly about what's driving it, it would be primarily lingering effects from fiscal cliff towards the end of 2012 and just a sluggish start to not ramping up the way many thought. If you remember back to our comments, we were kind of skeptical as to whether the floodgates would really open as there were lingering effects of government spending and so forth. I think that's really how it's played out. So certainly, there are pockets within the economy and even within the metalworking umbrella where you've got a stronger picture. And we pointed to a couple that probably are no surprise to you, automotive being one, commercial aerospace would another. But outside of those pockets, there is pretty broad-spread -- widespread weakness. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay, that was helpful. And then secondly, I want to ask you a question on government. I mean, I think it's appropriate to be guiding -- assuming government stays pretty flat, pretty weak. Do have any view on does that last all year? Does it get worse? Does it get better? Is there any read into that, that you have that you can share?

I wish I did, Ryan. So I'll give you a little more color on government, and I'll go back to what I said in the prepared remarks. So we actually saw -- first of all, I'll tell you I'm quite pleased with our execution in the government sector. So I'll start there and say that from a share gain perspective and execution perspective, where I see us winning on the playing field, I feel quite good. And we started to get really excited by what we saw in December and January with our growth rates there. And then things really, as you would imagine, fell off the cliff in February, and they stayed there in March. The typical pattern, if it were a "normal year," what you would see is from an average daily sales perspective, government sales, particularly on the federal side, building through the course of our fiscal year. And their fiscal year ended September and kind of coming to a crescendo to a peak in the end of September and then resetting and building back up. That would be a normal pattern. It's hard to say. We honestly don't have a lot of visibility into what's going on. So what we've done is, given that we saw the softness in February wasn't surprising, given that it continued into March and we're pretty confident, no change in our performance over the course of a couple of months, that we decided we're basically projecting that out through the quarter. So should the government spend follow a more typical pattern, where you start to see strong acceleration through the months in average daily sales, that would be upside.

And the next question is from Adam Uhlman of Cleveland Research.

I might have missed it, just to piggyback on Ryan's question about how much were the metalworking sales down?

So Adam, we don't break out -- typically, we don't break out our product line sales. I mean, so what we do -- what I could point you to is what we do is with the end-market perspective, so we'll give you manufacturing, nonmanufacturing for Q2. So total growth for the quarter was 1%; manufacturing, a smidge above that; nonmanufacturing, a little below that.

Okay. I'm just curious because -- I guess that's helpful. The second thing I wanted to ask about is some of the metrics posted on the website and it looks like the active accounts declined a little bit in the quarter and the e-commerce sales slowed a bit. And I was wondering if you could dig into both of those a little bit more, please.

Yes, you got it, Adam. Let me start with customer count because that's one that particularly I'm thinking back to '08 and '09 period where it got attention. So let me try to give you some more visibility into the customer count number and why we're not particularly troubled by -- you've seen a sequential decline for 2 quarters and why we really chalk that up primarily to economy. So when we publish our customer count number, it's essentially a net number. And so think about the moving parts of customer count where you've got new customers coming in, customers that you retain year-over-year and customers that are trimmed out as part of our normal business cycle. What we've seen is -- I should say, the number we pay the most attention to internally is retention, retention of existing customers one year to another. That's for us the best gauge of execution of customer sat and customer loyalty. And I'll tell you that our retention rates are strong, and they get really strong in our targeted segments of accounts. Where we've seen the biggest change sequentially over the last 2 quarters is in what we would call new customer drive-bys and let me explain what I mean by that. So for the portion of the customer count that's made up of the new guys coming in, there's really 2 buckets of new customers. One is the bucket that is program-related. So we have a bunch of programs: the direct marketing programs, our e-commerce and electronic marketing, some of our sales force and national accounts programs that are designed at account acquisition. Those tend to be, because they're our programs and where we're focused, the higher potential accounts that we're focused on. And I'll tell you to the last 2 quarters, that bucket remains on plan. We're doing as expected to be doing. The second bucket of new customer acquisition is where we're off, and it's what we refer to as drive-bys. So we get the number of customers that will come year-to-year and find us on their own. They tend to be the lower potential, in many cases, individuals, folks who will come and buy once or twice. And they also, because they're not program-related and targeted accounts, tend to have very high attrition rates or very low retention rates. That's where we've seen the biggest change. And the reason we primarily chalk that up to economy is it's following a very similar pattern in terms of the change as it did a few years back. So with economy going down, that's where we saw the change. So that's the story on customer count. Your other question was on e-commerce?

Right.

Yes, so the metric for us, Adam, what we look at is e-commerce percentage of total. Obviously, the number Q1 to Q2 could be down. But as a percentage of sales, it could be up. So that's really as we talked about -- so year-over-year in Q2, e-com is up roughly 300 basis points. And given our new metric, there's a few drivers there, vending sales being one. But another big one that we're encouraged by is mscdirect.com. So we actually feel quite good on the e-commerce front, and we're very encouraged by the launch of the new website this month.

Okay. And it looks like the website got delayed a little bit for the launch, and that's maybe typical of a new website. But I'm just wondering if the cost to launch that are now behind us. We could start to pull back on some of that investment spending and harvest it.

Yes, so what you'll see, Adam, is the CapEx is primarily behind us. We do, though, with the launch, you'll see an increase in the depreciation line, in part, related to starting to depreciate the CapEx from web. Well, absolutely, look, from our standpoint, our focus is now driving growth and customer loyalty through it.

Our next question is from Sam Darkatsh of Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of questions. First off, the inventory drawdowns, are they in any particular verticals or product lines worth noting?

No, no, Sam. They're pretty much across the board. And as you can see, that's something that we very actively managed in accordance with our demand environment and to keep our service levels up. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. Next question, if you're considering going to be doing a midyear price increase this year at some point, based on the timing of when it would have to go in versus your normal price increase, when would you have to see a meaningful recovery in demand, Erik, for you to go through with another midyear price increase?

Yes, Sam, a really good question. So let me start with a little bit on pricing environment and then I'm going to answer your question directly, which pretty consistent from last quarter and the 2 primary data points, and I'll point you, too, there, for us are our customer sentiment and given in our core markets, given that things are soft; when things get soft, customers have more time, they tend to be more scrutinous of price, so we're sensitive to that. And then the other really big driver is what happens on the manufacturing landscape and how many manufacturers are pushing through new increases to market. And again, particularly, in metalworking, that's very spotty. So those are the 2 primary drivers behind our action or really lack of action to date, on midyear pricing. To answer your question, what we've done, if you go back over time, we've historically done midyears as late as end of Q3, beginning of Q4. Obviously, it would really -- it would be dictated by the environment. It would have to be a pretty frothy pricing cost environment for that to happen. So what I would say is the later we move through the fiscal year, if we were to reach that point, unless there were significant uptick, it would be more likely than not that we then just wait and time it with our normal Big Book catalog increase that our customers have come to expect. And by the way, despite a sparse pricing environment now, we feel -- if you were to ask me how confident am I in that price increase, my answer would be very. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And then the last question would be, Jeff, you mentioned that you believe this is a bit of, this is my words maybe, but an air pocket, a kind of short-term dip in demand. What gives you confidence in that? Is it the easier comparisons going forward? Is it expectations you're hearing from suppliers or the field? What gives you -- the reason why I would say that and you addressed this a little bit earlier, Erik, that the customer count is down but your transaction count is also down, which doesn't usually happen unless we're in a recession, based at least on my math. So I was curious as to why the confidence and this is short term.

Yes, Sam, a couple of questions embedded in there. Let me take that one. I think the -- look, the confidence is in -- so we gave you Q3 guidance that basically said from what we're hearing from customers and we, by no means, are economists here. So what we try to do is listen carefully, analyze carefully and give you our best perspective. We gave you Q3 guidance that basically was taking March and running out the conditions. So it's not like we're saying near term, we're expecting a huge uptick. I think what it gives us confidence is a time-tested plan that has worked over and over again, that when there's -- we can never predict exactly when things are going to turn up. But what we know we can focus on is execution of our plan, share gains in our targeted accounts. And that when things do turn and we know they will turn, that we benefit disproportionately. So it was less about saying when than it was about saying we've been through this drill before and we know how it plays out. Your observation was a good one on average order size. That was what you were referring to in the metrics? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Not average order size, the opposite, the transaction count. The traffic levels, in other words, because it would be the inverse of your average order size would be the count. And the count is now down, has been down on a year-on-year basis, a couple of quarters in a row, which the last time that happened was 2009.

I'm not sure what you're referring to, Sam. The 2 metrics that we saw, obviously, one was the customer count sequentially being down. And the second was average order size slightly down, which, for us, was another thing that pointed to economy. I'll touch on that one since I raised it. Let me touch on that for a second because as we look under the covers there, that was actually the first time sequentially from Q1 to Q2 that average order size was down slightly. We really believe that's economy. And the reason is one of the metrics that we don't share publicly but we track internally is lines per order. So not the dollar value of how much stuff is the customer placing, but how many different items are they putting in their order. And we've seen that pick up sequentially for the past few quarters. To us, that's, internally, one of the things we look at for, number one, are we driving mix to larger, higher potential accounts; and then number two, are we getting share of wallet. Because if you see lines go up, it's a sign of share wallet. We're getting that and yet order size was slightly down. To us, that says customers are spending less, it's economy. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Got you, okay. I was looking at it on a year-on-year basis, and order size was still up on a year-on-year basis, which means that on a -- again, year-on-year transaction count would be down. I mean, in terms of number of transactions. But okay, that -- so the way we should look at it, that was sequential, not year-on-year?

I mean I think that from our standpoint, obviously, both are relevant, but in terms of gauging what's happening right now, the way -- we tend to look at sequentially to understand what's changed in the environment of the business quarter-to-quarter.

The next question is from Hamzah Mazari of Credit Suisse. Flavio S. Campos - Crédit Suisse AG, Research Division: This is Flavio in for Hamzah. We've heard you say that your customers have been ordering on an as needed basis, and inventory levels at the customer level have been quite lean. Are we still a long way from restocking? Do we hear anything from the customers or any change in tone on that front?

Good question. I would characterize -- so what we've said about demand environment is basically from what we guided to in our second quarter and what we were hearing hadn't changed that much from the actual to what we guided to. And then if you look at our Q3 guidance, it's pretty much more of the same. I would say inventory levels fall into the same bucket of pretty consistent. Again, somewhere between, they're definitely not overstocked the way pre-2008 before recession, but not totally stripped to the bare, somewhere in the middle. And I would say quarter-to-quarter, not a big change in inventory levels. Flavio S. Campos - Crédit Suisse AG, Research Division: Great. That's great color. And on the capital allocation front, especially after the Barnes deal, can you give us some detail on how you're going to think about your leverage from now on and what kind of leverage levels are you comfortable with?

Sure. This is Jeff. Obviously, we'll be deploying some cash, our cash and having some debt to close the pending acquisition of BDNA. But even after that, we're still going to have plenty of dry powder to look for opportunistic M&A. We'll still be at little less than 1x leverage. And the strong balance sheet, essentially, and the cash position we currently have allows us to have financial flexibility going forward. Our priorities are going to remain the same; reinvesting in the business for organic growth, ongoing quarterly dividends and special dividends, share repurchases and opportunistic M&A. We still have dry powder, but again, we're conservative by nature in terms of the level of debt that we carry, but we're comfortable carrying even more than we would have post-acquisition. Flavio S. Campos - Crédit Suisse AG, Research Division: That makes sense. That's great to hear. And just a very quick follow-up. This is going on, a trend, you partially answered this already. On your investment spend priorities after Barnes, are we still -- less on the CapEx sense, more on ongoing spending, are we just seeing the focus being on e-commerce and vending first followed by order initiatives like private label and hiring sales people or are you seeing priority shift?

Flavio, I would say from what we see now, the ones that you mentioned are all priorities for us. I don't see a dramatic shift in priorities. I will tell you that obviously, we're really excited, you mentioned BDNA, about all of the harvesting the growth opportunities there. We do still intend, though, to press forward on the key investment programs, the organic ones that you mentioned. So I would say all of the 4 that you mentioned are part of the arsenal. And just related to the inventory management one, vending, Fabio, one thing that strikes me following up on your question on inventory levels and changes that we've seen, as I reflect on it, I think one of the reasons for not quite significant movement quarter-to-quarter is the fact that more and more, our value proposition, when we go into our targeted accounts, is around inventory management, which is great for us. It makes us really sticky to key accounts. It's also helping our customers optimize their inventory levels. So would be part of the reason for not a lot of change is where we've gone in, where we put vending in place, where we have a VMI in place. We've done the work to optimize the inventory levels already, so it's why we probably won't see as much movement.

Our next level is from John Baliotti of Janney Montgomery Scott.

Erik, I was wondering, it's interesting to get the column on the lines per order. It sounds like the trends you're seeing have similar tones from the last quarter in terms of, I think you guys characterized it that customers are operating hand-to-mouth. Is that what you're hearing?

Yes. I think that's, John, I think that's a very fair assessment. And I think you're right that the notion that lines per order could sequentially be up with average order size down is a good proof point, so yes.

Right. Because, I mean, see they're buying more thing than they were buying from you before, but they're just buying less so they're being careful. But obviously, at the same time, they're consolidating. Is that...

I think that's fair and consistent with what we've seen historically in a soft environment. And it's not necessarily, was one of the things I wanted to hit in the prepared remarks because you'd look at the ISM in an absolute basis and even I -- look, a big drop from February to March, 54 to 51. Even so, you'd say, okay, 51 is growth territory. That's obviously an average across a wide range of industries. As we burrowed in, what we found is the closer we got to our core, the more we saw softness.

Yes. I mean, what about the -- anything anecdotal from suppliers? Because obviously, they're -- if you're feeling it from your customers, then the suppliers are going to feel it from you, but the supplier deals with just more than you. So are you hearing anything that your behavior with them is any different from the small guys?

John, great question because I tell you, we -- so of all of the components to the analysis that we do, we put as much stock in anything as we do in our supplier feedback for the reason you referenced. They're seeing -- they have a good incentive to be very objective with us, and they are seeing performance across a wide range of distributors. So when we talk to our suppliers, what we always try to do is get past -- don't -- we don't want to talk about our purchases to you, we want to talk about point-of-sale. And we want to talk about point-of-sale across the industry, how you're doing with the nationals, how you're doing with the locals more importantly because that's where the big share gains come from, and it's really a point-of-sale discussion because to your point exactly, a lot of this can be masked when you talk about purchases, and inventory levels can move that. And what we heard from suppliers is very much what we described to you. We had a lot of suppliers who were scratching their head saying, sort of like, "I don't get it, the macro data is just not meeting ISM. It's not supportive of what we're seeing on the ground." And in terms of MSC's performance, it was, "You guys are killing it in your markets, and you're doing what you've always done. You're taking share from the locals."

Okay. So is that helping -- so obviously, they're pleased that you're still buying from them albeit at lower rates, but certainly relative to the majority of the market that is smaller, this is, I guess, further solidifying your position with them?

Yes. Look, and I think the answer is yes. And that's why I said supplier, we're pushing all the time, our partner suppliers, to improve our position and our deal, whether that's costs or field support. But to do that, obviously, if we're not getting it done, we're going to hear it from suppliers when we're asking for preferential treatment. We're going to hear it if we're not producing preferential results. So I think your answer is yes, from a supplier's standpoint, it's cementing their feeling on betting on MSC.

Our next question is from Stephen Ragard of Stephens.

Just a couple from me. So first on the operational statistics, it looks like March was estimated to be down about 1.5% on average daily sales growth. Your 3Q guidance implying roughly flat in ADS growth at the midpoint. I know we're just a little over a week in April, but can you comment on whether you've seen any pickup in sales thus far from margin to April?

Yes, as we look at March, Stephen, I think we look at that as the equivalent of being roughly flat. There was a holiday effect due to the timing of the Easter holiday, Good Friday there, which we think impacted the sales by about $4 million or $5 million. So we think March was about flat. The way our fiscal calendar works, we've only got about 2 days of April behind us, so we can't comment on April. It's obviously all our thoughts are included in our guidance for the quarter.

Okay. And then the last one for me, just on the previous call, I think you had mention roughly a $0.07 EPS impact as a result of not taking a midyear price adjustment. Is it fair to say that would be a similar impact on Q3 assuming no midyear price increase?

Yes, Stephen, actually, slightly higher due to the timing of when that midyear would have come in during the course of the quarter. So I would estimate it to be about $0.09 to $0.10 for this quarter.

Our next question is from Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets, Research Division: A few things for me, guys. First, if you're only 2 days into April, doesn't that mean that the effects of Good Friday, both the positive and negative from a timing standpoint, would have fallen into March, and so that 1 5 [ph] technically may not be holiday affected?

I don't believe that's the case, Holden. I -- let's see, as it fall -- no, the impact to the holiday effect, and this is something that we've looked at historically in our FP&A group, is we estimate it at $4 million to $5 million. So we think that's correct. Holden Lewis - BB&T Capital Markets, Research Division: Okay. But the swing, right, wouldn't -- since you have the early part of April really in your March number, wouldn't you be capturing both the negative that happened in March, as well as the early -- that has all the positive that would happen in early April?

Well, we think we lose about 1/2 to 3/4 of the day in the month of March just due to that Friday impact. And that is something that affected our March levels and doesn't necessarily come back during... Holden Lewis - BB&T Capital Markets, Research Division: Got it. And then I just want to make sure, in the quarter, you said you had $1.6 million in charges, but that was all sort of BDNA services. Did you essentially have no expense from your DC and your headquarters this quarter?

You'll see actually in the reconciliation in the press release, there was about $133,000 related to the relocation. So the total impact was $1.8 million. Holden Lewis - BB&T Capital Markets, Research Division: Got it. Okay. And then in Q3, I think you said that the 94 to 98, that does not include the impact of any sort of BDNA services, as well as the headquarters and DC?

Yes. Holden, it's actually 95 to 99, and it excludes Davidson relocation, BDNA integration and transaction costs, and it has no impact of BDNA at all, even though we expect to close that transaction sometime during this quarter.

And $0.01 in the Q3 guidance would be for the relocation type cost nonrecurring.

Correct. Holden Lewis - BB&T Capital Markets, Research Division: Got it, okay. And then just last thing for me, you said that you were increasingly confident as it relates to the BDNA transaction. Sort of curious, how much -- it hasn't closed so I would assume that there's still a bit of an arm's length relationship there, how comfortable are you with sort of the quality of the sales force, that you'll be able to retain them all or will they leave? Have you been able to get more color than you had when you originally announced this about those sorts of matters? Are those still sort of question marks to be determined?

So, Holden, the answer is yes and very. And what I mean is yes, we've been able to, within the confines of -- and both sides have been acutely aware and have had lawyers with us every step of the way to make sure that we are acting in an arm's length fashion, but to whatever degree we can, get to see a little more of the business. So yes, we have a better view now than we did, and I would say our confidence has grown in terms of the quality of the team, the people. And in terms of, your question was around retaining the sales force, yes, I think there's a lot of excitement on both sides. Both sides see the promise for the revenue synergies here and what it can mean.

Our next question is from David Manthey of Robert W Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, I'm struggling a little bit with the metalworking issue here. And I guess if you're seeing that sort of decline and that's the issue here, I'm wondering why it is that your nonmanufacturing customers are doing so poorly as well. That second part of that question is if metalworking, let's say it's down and it's a significant portion of the manufacturing segment, that would imply that the rest of that is actually up, I guess, and doing even better. And I'm just trying to sort out what this all means because some of your larger comps have given us numbers that look more like mid-single digit growth, double-digit growth within the nonmanufacturing arena, and your number's flat. It looks like it's not just a metalworking issue, it's something bigger than that. Can you help me understand that?

Yes, sure, Dave. So I think for starters, realize that for us, if you're going to compare the peers, each has a different segment exposure. So even within, you got manufacturing to start with, which is a very broad umbrella, that our manufacturing profile is going look different than others and is going to be much more heavily skewed by what we're seeing going on in metalworking. So that for starters is over 75% of the business is in the manufacturing universe. Obviously, that's going to be a big driver of the number for starters. In terms of the nonmanufacturing performance, we called out one of the significant segment, the single most significant would be government, and we gave you the story there. I mean, I think that's a heavy influence anyway on the nonmanufacturing story, is what we see going on with sequestration. And also, Dave, the one other thing I point to is realize what we've been talking about as the strategic roadmap for the company is the company has been focused on primarily penetrating the core metalworking products and manufacturing customers. So that's where we look to see -- basically, we look to see the largest payoff where we put the largest amount of focus and investment, and that's into manufacturing. So obviously, when metalworking isn't as strong as some of the other sectors on a relative basis, we're going to look worse. And then when metalworking is particularly strong relative to others, we're going to look an awful lot better. So what we focus on is how are we executing relative to plan. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. In terms of the trends within those 2 big categories, and I'm not trying to just set them on the side and say they don't matter, but if you say metalworking is down at an amplified effect to the overall manufacturing arena and government is down to an amplified effect versus the overall nonmanufacturing arena, can you talk about have they -- directionally, have they gone the same way as the remainder of each of those respective segments?

I'm not sure I follow, sorry. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Well, I'm just wondering, in terms of trends, I mean have they -- those 2 segments follow the trends of the segments and the overall company? Or have they declined while other things have been accelerating, getting even better, is what I'm saying.

I got you. Look, so within -- generally, I mean we get -- we try to give you as much color as we could. Metalworking for us and manufacturing for us are such a big portion of the company's total that the company's total is going to largely be reflective of what happens there. There's no question about that. And then government, I think it's a different picture. I think it's purely about sequestration and what's happened with federal spending. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. And then last question I have is when Kennametal sort of divided up the Kennametal brand and the WIDIA brand, did -- were there any lines or products that you phased out or you had to lose to protect the core Kennametal brand? And did you lose some sales because of that or was that not the case?

Yes, so what I would say is that what happened with Kennametal was they went to, as you probably know, a dual-brand strategy. So effectively, the portfolios of Kennametal being one brand, which is the high-performance line and the one that we partnered with, and the other brand would be WIDIA, which, for the most part, there were -- the portfolios of the products are pretty much the same. Sure, in the transition, there were certain products that we didn't retain and others that we got that were new products. But overall, what I would tell you is we feel pretty good, actually quite good about our choice with Kennametal and the performance of that product line. Of course, you could imagine we pay very careful attention to the conversion, so -- and the movement of some of the products. Overall, what I would tell you is it's been a very good story. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. So net, you didn't lose any sales because of that strategic move?

Certainly, what I would say is nothing significant.

Our next question is from Bhupender Bohra of Jefferies. Bhupender Bohra - Jefferies & Company, Inc., Research Division: I'm sitting in for [indiscernible] here. Two questions, actually. Number one, could you guys give some color on the vending program? I mean it contributed like 3% to the quarter, just kind of overall vending and the attraction with some of your customers?

Yes, sure. You're hitting on, obviously, one of the key growth drivers for the company. The story, I would say, remains very much the same as the one we've provided over the past few quarters, which is we think we have a solution that's really working in terms of meeting and exceeding customers' needs, which are around streamlining inventory, freeing up cash and providing a better view into their spend into critical production items like metalworking, which is where we pointed our vending solution. So we think it's bringing a lot of customer value, and it's evidenced by the fact that our signings did, once again, despite the softness, continue to exceed plan. So we think it's working from our benefit. It's obviously producing growth. We've talked about it being a near term and it continues to be a near-term drain on the gross margin line, and it's pretty much, for the last few quarters, moved within a narrow band in terms of the dilution that we're seeing. And all of that is aimed towards getting strategic positioning in our key accounts, and over time, then pulling through a lot of additional products. So overall, what I would say is very pleased with the program and it's one of the drivers behind our share gains. Bhupender Bohra - Jefferies & Company, Inc., Research Division: Okay. Now I don't know, have you done this before like have you given like on a monthly basis, how it moved actually during the quarter, like the trend, vending program trend?

No. So what we provide is on a quarterly basis, we'll provide it, and we gave -- we actually don't give the number of installs and signings. What we talk about is the growth contribution to the company and then the gross margin dilution. So those are the 2 metrics Jeff shared. Bhupender Bohra - Jefferies & Company, Inc., Research Division: Okay. Because some of your competitors like Fastenal and those guys, they do actually give the number of vending programs, like how many they install and all those things. I don't know if that's something you would be doing in future or as it becomes scale and becomes bigger and everything?

Yes, we -- look, we always take a balance in terms of -- for us, it's a balance between, obviously, we want to give you as much information as we can to give you meaningful insight into the company and help you model. And at the same time, we're fairly sensitive to some competitive intelligence that we'd rather not share publically. Bhupender Bohra - Jefferies & Company, Inc., Research Division: That's fine. Yes, the last question basically, just kind of discuss your strategy. You talked about like market share gains. Just wanted to know like if there's any change in the strategy over here as we see kind of the markets kind of slowing down, moderating from last year.

Yes, I think the answer there on strategy is the update is absolutely, we're staying pretty steadfast to a tried and true strategy that's worked -- we've seen work for a long period of time. So we're executing on what we believe is a really time-tested formula here. So you're going to see us continue to focus on our core market, to continue to invest in metalworking, continue to invest in value-added solutions like inventory management, vending, VMI, mscdirect.com that embed us in our customers, so penetrating our core customers by getting stickier. And the other thing you're going to see us doing is executing on the BDNA growth opportunities, which are essentially the next phase and step that we've talked about in our growth roadmap. So think of it as priority 1, is focus on our core business of metalworking into manufacturing. And priority 2 is then to extend on the rest of the plant floor with additional products and services and solutions as we're doing -- we're going to do with BDNA, and to do adjacent end markets and geography, which that also brings us mining, transportation and, of course, Canada. So I think the answer is very much staying true to the strategic plan that we've seen work for so many years.

Our next question is from John Inch of Deutsche Bank.

It's Karen Lau dialing in for John. So I just want to go back on pricing. Could you give us a sense of the magnitude in terms of the pricing delta between various product groups, metalworking versus MRO? I'm just trying to get a sense of how much was metalworking a drag on pricing.

So for pricing, when you say delta in pricing, so we executed a pretty significant increase of around 3.5% to 4% in conjunction with the Big Book. What we've been talking about on the call is not doing a midyear. Were you referring to the price increase that we did?

I'm just trying to get a sense of is it -- the lack of pricing increase, is it broad-based versus over MRO and metalworking, or just you weren't able to raise prices on metalworking but still see pretty healthy pricing environment on the MRO side?

Okay, I see. So pricing environment, I would say the characterization we gave you was broad-based in terms of describing it as sparse, and particularly on the manufacturer's side, but a little bit more heavily skewed. Kind of the same picture we're giving you on the demand environment is what I described on pricing. And obviously, given that we're heavily influenced by metalworking, a little skewed towards metalworking.

And you haven't seen, in any case, that you have to give back on some of the metalworking product prices, right?

No, we've not. And fortunately, we've seen over a long number of years, that really hasn't happened fortunately.

Okay. That makes sense. And then just on spending, are we still sort of in a ramp mode where we would still see meaningful drag on gross margin or should we expect the gross margin drag to kind of moderate over the coming year, given that you may be able to bring more, for instance, private label into your vending customers and that would help boost margins a little bit?

Yes, Karen, it's Jeff. And I think you'd see some of that as, in terms of our sequential gross margin, only declining 10 basis points as we move toward Q2. We still have the vending dilution associated with the gross margin there. The product cost increases in the absence of the price increase had added some pressure to that. But that tends to moderate as we go out, and we're seeing some of that moderation in Q3. Just a word of caution, as we go to Q4, we talk about this all the time, there is a mix factor to bring into the equation in terms of Q4 gross margin, which, at that point, would add some pressure.

Karen, just a little more on vending. I think generally, the program is still growing as we see signings continue to escalate. So I think what you've seen from us is the program's growing, the gross margin dilution is still move, though, in a relatively tight band. So I don't think you have to extrapolate huge changes in the gross margin dilution as the program continues growing. And I think what you described, things like private brand, introductions of private brand, selling kind of additional pull-through products, is part of the promise for us and why we see the potential to grow the margins. We're really focused on out-of-the-gate, and I had a couple of recent customer visits that really cemented the point for me where you're talking to presidents of companies where we've embedded ourselves with vending and they're saying, other than raw materials, you are my most critical supplier. So we're entrenching ourselves in our key accounts. We have to be careful because obviously, we want to grow gross margin but to introduce private brands, particularly in metalworking items that are critical to production. You want to be very careful and have built up enough of a track record of credibility before doing that. So that's all upside for us as part of this vending story.

It's more of a multiyear process?

That's right.

And our next question comes from Brent Rakers of Wunderlich Securities.

I was hoping to follow up. You've talked about price and the Big Book up 3.5% to 4%, yet price in Q1 was up 3% for your disclosure, up 1.5% now in Q2. Can you give us maybe a sense of Q3 directional? Will that start stabilizing, do you think, in the guidance or...

Brent, so I'm not sure I'm following. So what we gave you is the price increase, kind of the gross price increase.

Right. And then how much of the volume was related to -- how much of the sales growth was related to price, which is 1%.

Yes, Brent, I would say on what you're looking to, now I understand, there's a bunch of factors that go into that number. So if you look, I believe that's pricing, discounting and mix changes all sorted in there. So it's not a pure category. So to the extent that we move along in months or quarters, and there's no change to list sale prices, there's a good chance that comes down if mix moves in the wrong direction or discounting moves up.

Okay. And I guess I'm as much focused on the anniversary of the midyear price increase from last year. Exactly when did the midyear go into effect last year?

Just holiday time. It did just...

During Q2, right around the holiday time in Q2.

Okay. Great. And then, obviously, you guys have gotten a lot of questions on metalworking and market share and all that. I think earlier in your conversation, when you were talking about what the market was doing, how it's doing much worse than overall manufacturing, you referenced some metalworking indicators you use. Would you mind maybe providing a couple of those reference points for us?

Brent, you know what, we don't, but I know this is going to frustrate you because we don't share our metrics. But we have a few that we look at, a couple that we don't share publicly what we look at. I mean what I would tell you though is that they're out there. I mean it's not like -- we're not making up our -- these are public indices that if you look at metalworking activity related indices, we're looking at what's available publicly.

And I don't think it's something that you can look at in isolation at one particular indice (sic) [index] . We look at it as the group of indices and evaluate that with the other market information and feedback that we get.

Okay. And then maybe just last question. You finally reached the anniversary point for all of the acquisitions pre-Barnes, and there's an attempt to improve the gross margins of those businesses and then also vending as you become -- maybe mature is maybe not the right word, but anniversary some of the initial vending or some of the early vending advances, the gross margins would attempt to be elevated as well. Could you maybe talk about how to think about gross margins structurally longer-term and when can you implement some of the improvements both to the acquired businesses and in your vending programs?

So strategically, Brent, I think what you've seen, if you look over a number of years, what I would say is that there has been a series of headwinds and tailwinds that have netted out to a relatively stable gross margin picture. And I say relatively stable. Right now, we're in a bit of compression. And really, the movement within a relatively tight band has been largely a function of where we are in an inflationary cycle. So the biggest change right now that you're seeing in the gross margin -- headwinds to margin are nothing new to the business. So there's always been, for a while, there's been mix changes and mix elements that have put pressure on gross margin, and those have been offset through price and through strategic programs. Now, it happens to be a big one. And you're right, we've anniversaried some of the bolt-on businesses. So without the noise of those, the big headwind certainly now has been vending, and that vending along with other normal, like large account mix gets offset by pricing plus strategic programs. And I think what you see from us is that early in an inflationary cycle, you're going to see the tailwinds exceed the headwinds pretty significantly and you see expansion. And as you get later in the cycle, what we're seeing is the headwinds are exceeding the tailwinds because the headwinds haven't changed all that much, but on the tailwinds side of the equation, we've got significant less contribution from price even though we continue to execute on the programs. So I would say that's still our intent, nothing really dramatically changed other than what you're seeing now, is sort of a temporary pressure point due to the lack of pricing.

And I apologize, one last, maybe, housekeeping question. You talked about closing the Barnes deal, hopefully, the next several weeks. And initially, you talked about year 1 being, I think, slightly diluted, this is the terminology you used. Would we expect an EPS guidance revision to revenues and EPS when you closed that deal?

We're going to evaluate, Brent, what we actually share at the close there. Certainly, we'll provide all the required filings. Nothing's changed in our view that this would be slightly dilutive, that we're very positive on the transaction. Slightly dilutive in the stub period for this year, but accretive in FY '14 to the tune of $0.15 to $0.20 and $0.30 to $0.40 in FY '15 and beyond. There are transaction and integration costs that also will flow through. So at some point in time, when we feel comfortable, we'll probably provide even more specific guidance in terms of the effect in the coming quarter.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Gershwind for any closing remarks.

Thank you very much, everybody, for your time and attention this morning, and we'll see you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.