MSC Industrial Direct FY 1Q16 Earnings Call Notes

MSC Industrial Direct (MSM) Erik Gershwind on Q1 2016 Results

The environment continued to deteriorate as expected

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.”

Conditions remain extremely soft in the pricing environment

“With respect to the pricing environment, conditions remain extremely soft, due primarily to the lack of commodities inflation. Supplier pricing activity, the primary driver of distributor pricing movement continues to be minimal. As such, we’ve not implemented a mid-year price adjustment and don’t anticipate doing so absent to change in conditions.”

Have gained share despite negative growth rates

“Despite negative growth rates in the quarter, the macro industries industrial distributor surveys and supplier feedback all confirmed that our share gains have continued.”

Visibility is low right now

“It’s pretty much I have described as a very challenging environment but now both on the demand side and on the pricing side and really no surprises, I’d say visibility is quite low right now so tough to identify a catalyst at this moment although with low visibility who knows. So that’s on the environment side.”

Small benefit in December from holidays on Fridays

“So, net-net what we saw in December was similar level I would say of shutdown activities prior years that along with the benefit of the holidays being on Friday counted for roughly 250 basis points or so we have to peg it of benefit in December, but net-net I think for us big picture in terms of outperformance. ”

Our results don’t have the same correlation with PMI that they once did

“I think if you go back and you probably you have seen the same thing with other distributors, but the correlation or historically the correlation with PMI was quite tight and over the past couple of years I think not just for us but for peers it’s not been nearly as tight. So, we certainly look at it, but we look at a bunch of other factors as well in forming judgments. We introduced for awhile now the MVI, which seems to have a tighter correlation. So again, we’ll look at PMI but not with same degree. I don’t think it has the degree of predictive correlation at it did years ago.”

Rustom Jilla

The majority of segments are down and have deteriorated

“I think the overwhelming majority of segments are down and down and have deteriorated over the past few months. There’s pockets like commercial, aerospace that have been reasonably strong. There’s pockets of automotive that have been reasonably strong and again, probably no surprise to you.”

Energy indirect exposure has taken everyone by surprise

“But on the energy front really no change and just a reminder, our direct exposure to energy is really low, meaning, well under 5%. The indirect exposure is I think what’s taken everybody by surprise not only in MSC but in the broader economy. And it’s ugly. I mean, this is a way to say and I think in the past we’ve shared that when we look at our manufacturing end markets, as there what would be traditional saw that metalworking markets in areas that are energy exposed, i.e. Texas, Oklahoma et cetera. The results are really, really poor and not surprisingly.”

Weather hasn’t been a factor either way

“Nothing majored report on weather that would have been a factor either way. We didn’t set anything big there. With respect to shutdown activity, we would characterize the shutdown activity as relatively similar to last year.”

The bigger headline than inventory destocking is that demand is coming down

“what I would tell you is certainly like what MSC is doing, once you see inventory levels have come down, our customers are doing the same thing. However I would say I want to draw your attention to what we see as the bigger headline which is the results we saw and others have seen in terms of the macro for the back half in the last few months. The primary driver there is a reduction in incoming orders in demand in backlogs, not in destocking and I think that’s a bigger headline.”