MSC Industrial Direct 2Q17 Earnings Call Notes

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Erik Gershwind – Chief Executive Officer

Conditions improved as manufacturing firmed

“Conditions steadily improved through the quarter as manufacturing continued to firm up. This was reflected in the most recent MDI readings with May reaching 57.1, the highest reading in more than 5 years. June’s reading came in last week at 56.2. Feedback from customers who is consistent with the theme of continued and steady improvement and this is reflected in their order volumes, backlogs and general sentiment.”

End markets were strong

“From an end market perspective, aerospace, fabricated metals and machine jobs continued to improve as did oil and gas related business. While automotive was still strong, it wouldn’t have been spottier than it has been over the recent past. Other end markets like heavy truck and agriculture have appeared to bottom and showed some improvement. As customer sentiment continues to be positive and the industries hold at their current levels, we should continue to see improving sales trends.”

Prices haven’t really moved yet

“what I would say there so we track a number of commodities, okay, a bunch. You could imagine given our exposure to metal working, we will look at the materials in particular that make up cutting tools whether that’s steel or carbide and tungsten and such. What I would say though is the vast majority of our sales as a percentage are connected to branded manufacturers. And so unless manufacturer moves I mean generally what we are going do is mirror where their list prices are and not get out ahead of their list price. And so unless the manufacturer moves it’s – even if the commodities have moved and to be honest that’s something that surprised a bit over the last call it 6 months to 12 months these commodities certainly for a while have firmed up and there wasn’t as much manufacturer movement. Now, that could change. We are hearing bits and pieces that that could change as capacity starts to get fueled out by the manufacturers. But really for us the trigger is seeing a manufacturer move their list prices.”

Core customers are paying up for performance because of competitive threats

“I actually see different dynamic happening, particularly look, we realized our sweet spot called a medium size manufacturer and what we find with most of our customers right now they are facing competitive threats, they need more productivity, they need to get product to markets faster, etcetera, etcetera. They are starving for productivity. And in a lot of cases the productivity – if they can move the needle on their productivity, their manufacturing process, it dwarfs the savings they can get on the product itself. And so what’s actually – what’s interesting and what’s happening like if you take our cutting tool portfolio, it’s actually migrating up in quality of products, because in a lot of cases they are going to spend more for the product if they are going to get a much better length of cutter, the length of the tool life and the productivity coming out of the tool. And it’s actually moving the other way towards high performance. So I think our core customers anyway the big lever for them is productivity and getting more output for less dollars.”