MSC Industrial Direct FY 3Q16 Earnings Call Notes

posted in: Notes | 0

Erik Gershwind

Conditions weakened

” Conditions remained quite difficult and in fact grew even more challenging as we progressed through our fiscal third quarter and into June. On our last call, we described a tough environment. And in talking to our customers and looking at the macro indices, commented that we saw the potential for some stabilization on the horizon. Unfortunately, that did not materialize and in fact things weakened.”

Continues to be driven by low oil and strong dollar. Brexit could create further headwinds

“On a rolling 12-month average, the MBI currently sits to 45.3, which implies the continued and significant contraction in metalworking manufacturing activity levels. This is consistent with what we are hearing right now from customers who are describing short backlogs, soft incoming orders and low visibility. It’s also consistent with what we are hearing from suppliers who were seeing very much the same thing. The root causes for this prolonged downturn remain the same, the ongoing effects of low oil prices and the strong U.S. dollar. The uncertainty around the impact of Brexit could serve to create further headwinds on U.S. manufacturing exports, given the stronger dollar as well as the potential slowing of underlying European demand.”

Hearing more about furloughs, time off and even layoffs

” the sense that the industrial economy may have been stabilizing has given way to more belt tightening and less optimism among our customers. We are hearing more talk about furloughs, time off, and even some layoffs. And while our visibility remains very limited, we are beginning to hear about distributors laying off sales people, which we have not heard much of until very recently.”

Pricing environment remains soft

“Turning to the pricing environment, it remains extremely soft. While there has been some upward movement in many commodities during the calendar year, it has not yet translated into the manufacturer list price increases that are needed to trigger distributor pricing moves. ”

Low interest rate environment means good time to return capital to shareholders

“As we have done periodically throughout our history, we see now is a good time to return capital to our shareholders, particularly given the extremely low interest rate environment. At a size of roughly $390 million, this repurchase will put our leverage ratio at about 1.4x, giving us plenty of flexibility for future opportunities, including acquisitions or additional share repurchase.”

stabilization has not materialized

” The weakness is pretty widespread within manufacturing. I would say it is acute within our sphere of the world within metal cutting manufacturing, so many of the segments that we pointed to before heavy machinery, metal fabrications such as job shafts and machine shafts, etcetera. So really, not much of a change, I think you are right, from our perspective a quarter ago, our sense was that there was a chance of may be stabilization. I wouldn’t have called it an uptick, but stabilization. That is certainly not materialized.”

June was a really bad month

“I mean I can just anecdotally tell you that for the month of June, what we heard from customers and particularly, what I heard from some of our key supplier partners that June was a really bad month. So, what you see – the one caution I will give you is it’s always tough for us to sort out this time of year, how much of this as I said is a material step down that’s ongoing versus softening as we get into the summer and customers taking advantage of summer slowdowns in a more serious way”

We have scratched our head at recent ISMs

” The ISM, I would tell you that it’s been – to be honest we sort of scratched our head at the latest reading. But I think we have been – we and the rest of the industry have been scratching our head at the readings over the last several years, so really not surprising. And just if you ran regression analysis against our average daily sales levels in the ISM, you would find over an extended period of time and you would find virtually no correlation, very different from if you ran the regression analysis against the MBI on the rolling 12-months average. So not much do I make of that. I think more relevant with respect to June as you pointed out is we certainly look at the MBI, we will look at other indices and most relevant to us, is talking to customers and talking to suppliers. ”

It’s pretty acute in metalworking

“I think the softness is fairly widespread, but of course, we are coming from a world, Ryan, where our front porch is metalworking end market. So, it’s pretty acute in the metalworking end markets.”

Customers are scratching their heads on Brexit, probably a net negative

“Yes. I think post Brexit, what I would say is again, going back to the comments I made earlier on the UK, uncertainty. I mean I think like everybody else, our customer suppliers kind of scratching their head, not sure exactly what to make of it, so a lot of uncertainty. Look I think the general sense though is net-net a negative, not a positive and that it creates a headwind given both the potential for the stronger U.S. dollar, which hurts exports and then the potential for weakening underlying European demand that would also hurt exports. So, I think the sense would be net negative, but uncertain as to how big of a headwind and how much to make of it.”