MSC Industrial Direct FY 4Q15 Earnings Call Notes

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MSC Industrial Direct (MSM) Erik David Gershwind on Q4 2015 Results

Deteriorating and quite difficult demand environment

“I’ll begin by covering the deteriorating and quite difficult demand environment.”

Conditions worsened as the quarter progressed

“We remain in a difficult environment where conditions worsened as the quarter progressed. The root causes for the slowdown remain the same. The prolonged impact of the rapid drop in oil prices, the strong U.S. dollar and its impact on export demand, and foreign exchange headwinds, all of which are negatively impacting broader manufacturing activity.”

Outside of aerospace and automotive, customers have seen significant slowdowns

“indicators confirm a considerable slowdown in metal working activity as the quarter progressed. They’re also very much in line with what we heard from customers and other industry participants. With the exception of pockets like Aerospace and Automotive, customers have seen significant slowdowns in their volumes, their backlogs and their quoting activity.”

We’re beginning to hear about layoffs for the first time in a while

“visibility remains extremely low. We’re now beginning to hear of layoffs for the first time in quite a while. We also believe that some of the slowdown can be attributed to destocking of customer inventory levels, although this is very difficult to quantify.”

Pricing remains extremely soft

“With respect to the pricing environment, conditions remain extremely soft, due primarily to the lack of commodities inflation. Supplier or manufacturer pricing activity, which is the primary driver of distributor pricing movement, remains well below historical levels.”

Economic slowdowns are a time for us to take share

“economic slowdowns are the times when MSC makes its greatest strides and we expect to do the same this time. While the 70% of the market that’s made up of local and regional distributors is on its heels, we are on our toes. While others are cutting inventories and receivables to preserve cash, our strong free cash flow generation allows us to invest and to provide customers with industry leading service.”

It’s be easir to find where it’s not getting worse than where it is

“I would say the answer is more about where it’s not getting worse. It’d be easier to find where it’s not getting worse than where it is. Seriously, I think, we’re seeing pretty much, with the exception of a couple of pockets that I mentioned, it’s pretty broad based. It’s particularly acute within our core metalworking-related markets, heavy equipment and machinery, primary metals guys, machine shops, and I would say, it’s also more acute in the mid-size and small customers than it is at the larger customers. But, it’s pretty broad-based everywhere. And it’s just more acute in pockets.”

Visibility is really low

“our visibility is really low. So, it’s tough for us to look out beyond a month, let alone a year.”

Non-manufacturing has slowed more than manufacturing

“let me talk customer segment, first, manufacturing, non-manufacturing. What I would say there is both have slowed, but in terms of the absolute growth delta, you are right. Non-manufacturing slowed more. ”

An exciting thing about a downturn is the opportunity to acquire strong talent

“one of the most exciting things, if you could call it exciting, about a downturn is the opportunity to acquire some great talent, to make some great investments that really juice the returns coming out of the recession, and we’ve said this time will be no different.”