MSC Industrial Direct FY 2Q17 Earnings Call Notes

Erik Gershwind

Conditions remained positive

‘Conditions remained positive during our fiscal second quarter with January building upon December’s return to growth. While February reflected difficult comparison for the same period last year, March’s growth rate picked back up to start the third quarter.”

Growing optimism

“Customer sentiment generally matches what we are seeing from the macro industries across a broad range of manufacturing sectors. The growing optimism in the industrial economy has continued as the outlook has turned noticeably more positive over the past two quarters.”

Orders have begun to turn the corner

“While order volumes are not yet as robust as sentiment, they’ve begun to turn the corner for most of our customers, and this is true despite the lack of further clarity on policy topics such as infrastructure spending, lower corporate tax rates, and a more business friendly regulatory environment. Last quarter, we were cautious not to call December’s improvement a sustained trend. Today, we would. If the indices hold the current levels, we should continue to see improving sales trends for our business.”

Hearing more an more conversation about future price increases

“We are, however, hearing more and more conversation about potential future more meaningful price increases from suppliers. And this bodes well as we look ahead.”

We are coming out of a prolonged industrial recession

“For the past two years, we’ve been operating in a deep and prolonged industrial recession. We view that time to capitalize on opportunities that present themselves only during downturns, to focus on the fundamentals of the business and to improve this company. Along the way, we’ve delivered solid financial results given the environment. We are now seeing things start to turn positive as momentum in manufacturing is building.”

Building optimism, not just cautious optimism

“I would say in general we are seeing a building optimism in our customers. So I would describe it more is building optimism than I would cautious optimism. Look, certainly like everybody else in the country there is somewhat of a wait-and-see approach with respect to the various policy reforms, no question about it. But in general, more and more strengthening, more and more confidence and I think a couple of proof points I’d point to, one would be at the turn of the calendar year, we talked about capital related purchases that generally happens when customers are feeling more optimistic in their business. This quarter, this past quarter Q2, I’d point to you may have noticed, our vending growth contribution spiked up. A lot of our vending is metalworking, production related metalworking items. That started to ramp up. So those are indications to me sort of proof points to support the anecdotal evidence we are hearing from customers that there is building optimism, yes.”

Broad based improvement in sentiment

“the good news here is that the improvement we are seeing in the numbers and in customers sentiment is pretty broad based. So we are finding it across most of our customer types and most of our end markets things are improving.”

Even oil and gas is stabilizing

“I wouldn’t underestimate it is oil and gas stabilizing. Not boom but stabilizing so relative where this economy has been in the last two years. The fact that it’s stabilized and showing signs of life now is a big change.”

Tools are getting used

“I think what you are seeing here is a fairly typical cycle of what happens and when things starting to improve. So end of the year, around the December -January time is the year end tends to be time when if there is more optimism customers will put in machine orders. We saw that and that was the capital related purchases. Once the machine get delivered they need to get tooled up and then they start running so they get tooled up with what Rustom refer to as tooling packages which think that is like a starter kit of tooling, large purchase but tends to be lower gross margin. And tooling accessories like holders and things that hold the tools. Once that happens then presumably these machines are going to start running. And they are going to start consuming tools consumables. And so what you are seeing is so when Q2 it was a spike in capital related purchases. Encouraging sign I mean customers are investing in capital. What you are now seeing and we are seeing it in the spike up in the vending growth contribution is tool starting to get used.”

Price increases would come in the August/September timeframe

“What we are hearing more and more from suppliers, look, they are all seeing what we are seeing which is commodity is recovering from a two year low period, they are building almost all commodities now on a 12 year — a 12 months basis or up and suppliers also looking at and saying demand environment is getting better. So commodity is up, demand environment is getting better. There is more and more talk from our suppliers that they are entertaining increases. Those of have not yet come to market but if they do as we suspect they will that could mean a more robust increase in the future. And that look hypothetically I said on the earlier question could be sooner than the catalogue increase, the typical catalogue increase August-September but more likely than not would be then and if this trend continues it would be a healthier increase.”