MSC Industrial Direct FY 4Q16 Earnings Call Notes

MSC Industrial Direct (MSM) Q4 2016 Results

Erik David Gershwind

Conditions remain very difficult

” Conditions remain very difficult throughout the quarter, much as they have for the past few quarters. Low oil prices and the strong U.S. dollar continue to weigh on manufacturing activity. While we did not see the more extensive summer plant shutdowns that some of our customers were talking about back in late June, demand levels remains depressed particularly in metalworking and heavy manufacturing.”

MBI readings have ticked up, bode well for the future

“As you may have noticed, MBI readings have ticked up over the past two months posting over 48 for both August and September. While these levels still denote contraction in metalworking end markets, the readings are nonetheless a significant improvement over the trends of the past year. If they sustain, it would bode well for our future prospects and indicate a potential leveling in the metalworking industry. That said, for now we remain cautious.”

Conditions continue to be extremely soft

“Visibility remains extremely low with some customers taking a wait-and-see approach as is typically the case in a presidential election year. With respect to the pricing environment, conditions continue to be extremely soft”

Example of services provided to customers

“So how are we achieving this better than market growth? I’ll give you a simple real-life example. For a number of years, we were doing a modest level of business with a metalworking company in the southeast. This manufacturer had a strong relationship with a local distributor that was providing good service and high levels of technical expertise, so the company didn’t see a reason to change. However, as conditions softened and its business started coming under pressure, this company became more receptive to hearing about our inventory management program in order to reduce cutting tool inventories, our high service levels that shrink lead times, and our metalworking experts who produce documented cost savings on the production floor. Fast forward two years and we have now more than quadrupled our business with this customer.”

Not really seeing much material change in the environment

“So if you look back over the last few months, you’d say, oh August looks like things are getting better, September ticked down, October back up, and the reality is it’s moving around. We don’t see, at this moment, material changes than what we did for November was took the average of the two.

A lot of our customers are telling us they want to wait and see what happens after the election

“I would say for the most part, and what you heard from our comments was more of the same. With the one added dimension, so you know, generally pretty soft, low backlogs, low order flows, some pockets of activity as we pointed to, oil and gas continues to weigh, we have not seen that pick up; heavy machinery, infrastructure continues to weigh. I think the one added thing that I would add in as we have gotten closer to November to the election is, from many of our customers, we’re hearing wait-and-see and that’s pretty typical in an election year. I mean, that’s the one new thing I’d call out over the last quarter and it’s typical that it builds as you get close to November. So, I don’t make much of it either way. I don’t think any of our customers have a sense of what it’s going to mean for after. The only thing I think it means is that, we always say our visibility is low, it’s probably even a bit lower just because of the cautious perspective that many of our customers have.”