HD Supply 2Q17 Earnings Call Notes

Joe DeAngelo – Chief Executive Officer

Change in the competitive environment

I think the competitive fit, if you look at it is one were the traditional competitors have been absorbed in some cases into larger players, right? So you have gone from specialty shops that we competed against that provided a specialty service within our markets and now they are part of a larger entity, primarily retailers and then you have e-tailers out there. E-tailers, we have seen a lot of change in terms of what’s going on there, I mean typically that’s available to the various very small customers and I think that’s an extension from consumer to people that own 10 apartment units, 50 apartment units whatever.”

Tough pricing environment

” I think as you look ahead and kind of where it is now, it is very competitive. So I wouldn’t see price increases. We’re certainly not getting gross margin accretion from going out and raising our prices. We’re getting gross margin accretion from having the right line logic, selling the right mix, and doing great cost work with our suppliers. So that’s real category management execution of being the price rise every day and price rise for the appropriate structure for the side and size of customers that we’re dealing with. So it’s going to be a tough pricing environment, it’s always been a relatively tough pricing environment and we don’t see that change and that’s why when we say executing flat gross margins is a really great execution that is a really great execution up there.”

Very little steel being imported

“in C&I, the installation or cost increases are really coming from one major product category and that’s the Rebar. So with the current administrations tough stance on imported steel there is very little steel being imported into the United States for that and so most of the available steel is now being produced by the domestic mills and the domestic mills have taken advantage of that and raised prices. Because of the competitive landscape, it is very difficult for us to pass on that increase in steel cost to our customers.”

Evan Levitt

Steel prices up but can’t pass on price because of competitive environment

” Rebar gross margins continue to be challenged. The flow of imported steel into the US has dramatically slowed due to duties and the threat of additional counter availing duties by the current administration. The result is an increase in the cost of this product with a limited ability to pass the increase onto the come customer, due to the competitive environment. We expect to reap our margins to continue to pressure construction and industrials overall margin through the remainder of the year.”

Headwind and tailwind from hurricane

“Generally what you see is the short-term headwind and then as the rebuilding efforts begin to take place we get a little bit of a tailwind on balance that hasn’t been a huge positive for us, historically. We are certainly going to lean in and make it as positive to our bottom line, as well as to help the communities in which we participate to the extent possible.”

Applied Industrial Technologies 4Q17 Earnings Call Notes

Neil A. Schrimsher – Applied Industrial Technologies, Inc.

Sales trends by month

“Sure. So, Ryan, our sales per day trends for the overall fourth quarter improved 1.1% from the third quarter. May was slightly below April. We finished up in June. July was positive year-over-year probably mid-upper single digits. So, as expected, down sequentially from June with seasonality, and month-to-date August, we started well over these initial seven to eight days.

Overall good activity in the quarter

“All right. So, similar, 18 were up in the past quarter, positives around oil and gas that we’ve talked about year-over-year and sequentially in the U.S. Other related industries, infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food, those are probably the ones in the 18 and I think the others start to narrow a little bit more too. So, I think all-in-all, we saw good activity in the quarter and it’s a good base as we move into fiscal 2018.”

HD Supply 1Q17 Earnings Call Notes

Evan Levitt

Cost pressures in steel leading to significant margin compression

“The new administration is being extremely tough on imported steel products and as instituted from anti-dumping tariffs on imports, particularly imports coming from Turkey; they’ve also instituted some counterfeit — countervailing duties on those imports which can be retroactive. And so as a result, much of the lower cost source of steel and steel Rebar coming into the country has ceased and so we’re seeing a significant escalation in our cost for steel Rebar and the market is such that it’s difficult to pass at all of that on to our customers. So we are seeing pretty significant margin compression pressures within Rebar. We expect that will continue for the balance of the year.”

Joe DeAngelo – CEO

Margin pressure in Rebar will probably impact through the end of the year

“Yes, I do think that the gross margin pressure in Rebar in particular will impact us through the balance of the year. The dynamics within the Rebar market are a little different. Most of the rebar that’s available now is domestic-based Rebar versus imports and the domestic steel mills, they have distribution functions too and so they will sell directly to [indiscernible] and so to some extent we’re now competing with the mills; obviously they’ve got a much lower cost position as they are the manufacturer of the product and so that makes it difficult for us to pass on the increasing cost. In the past we have access to lower cost import sources, it was easier to compete.”

Fastenal FY 1Q17 Earnings Call Notes

Dan Florness – President and CEO

Holden Lewis

Industrial production returned to growth

“Industrial production returned to growth with an even stronger showing from key subcomponents like primary metal, fabricated metal and machinery areas that are more pertinent to our business. And this broadening of industrial demand was reflected by the fact that as Dan alluded to the significantly greater number of our stores were actually growing in the first quarter relative to the 53% to 54% pace that had been set through 2016.”

Transportation markets are the only laggard

“here remains a great deal of enthusiasm around oil and gas, and during the quarter the outlook for the general manufacturing space and the construction space also improved even as the quarter we’re on. The only laggard we could see would be manufacturing that’s going into transportation markets, things like heavy duty truck, rail et cetera. But other than that, frankly on the hold customer demand strengthened and broadened throughout the quarter and we remain encouraged about the near-term trend.”

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.”

HD Supply 4Q16 Earnings Call Notes

Joe DeAngelo

Non-resi construction trending positive

” I think we have said this on the last call is we feel really good about the customers we are talking to. There is no customers that I have talked to in a non-res construction environment, it didn’t say, hey, we feel really good about the year and we are proceeding as we thought. So, I think its line with being a solid market out there. I think that’s the right description of it.”

Evan Levitt

39% taxpayer

“Thank you, Joe and good morning everyone. I will start with areas of recent investor focus on Page 7 and share with you our latest perspective on these topics. First, corporate tax reform, we continue to hear about the new administration’s focus on corporate tax reform and are encouraged by the potential outcome. As a reminder once our net operating loss carry-forwards are exhausted, we will be a tax payer at approximately 39% to 40% of free tax income, which includes the federal statutory rate of 35% plus a 4% to 5% net stake rate. As a predominantly domestic company any reduction in the federal statutory rate will directly improve our future after tax cash flows. Border tax, we are a North American company, have a little direct exposure to international economies. The limited exposure we have is a result of our proprietary brands which we manufacture predominantly in Asia with our strategic vendor partners.”

Construction remains mixed geographically

“The construction market, construction markets remain mix through geographically, but we remain optimistic on the forward outlook. We like others share the growing enthusiasm regarding the prospects of infrastructure investment. However, we expect to see certain large multi-year projects in which we have participated come to completion and create comparability considerations as new projects are breaking ground. For example, in Atlanta we had multi-year projects underway at the new Braves Stadium and the new Falcons Stadium. Both of which will be completed this spring. That said, we continued to see solid pockets of strength in most geographies including our Northern priority districts Denver and the Southeast. We have noticed pockets of unevenness in certain Gulf States Houston and California. Despite this, we expect solid activity trends to continue throughout 2017 in the majority of our markets. “

UNFI FY 2Q17 Earnings Call Notes

Steven Spinner – Chairman and Chief Executive Officer

Ongoing challenges faced by deflation

“And while we are encouraged by these initiatives, we also have to acknowledge the ongoing challenges facing our industry. Our customers are facing a difficult retail environment due to deflation and increased competition. We view deflation as cyclical, inflation will come back at some point but while it’s here, it’s leading to some very real challenges for us and our retail customers. Many of our broadline customer contracts are on a cost plus basis, so when we have less inflation or deflation, the gross profit dollars we generate for case is lower.”

Outlook incorporates little to no improvement in inflation

“We believe our outlook incorporates the ongoing industry challenges, including heightened competition and little to no meaningful improvement in inflation. But at the same time, it reflects our continued commitment and confidence in our strategic initiatives, strength in our new customer pipeline and growth opportunities with our retail partners.”

Deflation is cyclical

“Well Eric, the issue that we have and it is cyclical. I mean obviously it is not going to last forever is that the produce deflation got worse in the second quarter than it was in the first. And so, in the produce world, as the product deflates we still incur the same amount of cost to get the products from the DCs into the retailers. Yes, we have considerably less gross margin to cover the cost. And so, it is a short term issue, and misery loves company; everybody has got the same problem. As far as when it’s going to cycle through, your guess is as good as mine, the only thing I would say is we have a high degree of confidence that is not going to be forever, it will turn but we are just not sure when.”

Would rather buy companies doing well than struggling

“Yes I mean that’s true. I think the challenge for us is we typically don’t like to acquire turnarounds or companies that are financially troubled. We’d rather pay a fair price for a company that’s doing well than a very inexpensive price for a company that’s not doing well. Now the exception to that might be a company that’s recently struggling, that’s small that we can close and put into one of our existing distribution centers but generally we would acquire the healthy companies first.”

Increasingly doing direct to consumer fulfillment for customers

“Yes actually you are right in that we can’t sell direct to consumers as UNFI one of our fastest growing platforms to sell direct to consumers on behalf of our retailers. So essentially becoming the endless aisle for a retail partner where they are looking to expand their product offering to their consumers, we are doing that today, it’s just the consumer doesn’t know that we exist. We’re just doing the back-of-the-house fulfillment. We have a network of e-commerce fulfillment centers across the country. We’re adding to it, so that we get it to our customers in the most efficient and cost-effective manner. So we’re investing in e-commerce’s platform and we certainly spend a lot of time with some of the larger e-commerce providers to ensure that we have – we’re have were giving them access to all of the fresh and vitamin supplements in center store gluten-free organic et cetera as we possibly can. ”

Michael Zechmeister

Inflation outlook is lower

Yes and Steve, this is Mike. You asked a little bit about forward looking. It’s often difficult to forecast where deflation or inflation is going, but we would say the outlook for the remainder of the year would be in the range of minus 0.5% to plus 0.5% which is down about 25 basis points from where we were thinking last quarter

Fastenal 4Q16 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q4 2016 Results

Upbeat finish to a tough year

“First off we had an upbeat finish to a tough year. Secondly, I believe we’ve changed the trends of our business. Third, I believe we’ve improved the health of our business.”

Holden Lewis

General industrial companies are still challenged, but more enthusiasm especially in oil and gas

“On the second question, where we saw the most encouraging signs I would say would have been in the process industries and we go about this a couple of ways. We listen to our Regional Vice Presidents and what they’re seeing in the marketplace and then we look at our top 100 accounts to get a sense of which areas are doing well, which ones are not and what I would tell you is, the general industrial companies on our lists, they’re still challenged. That’s been the case most of the year and I’m not sure that I saw or have heard any meaningful difference in the fourth quarter as it relates to general industrial firms. As it relates to the process industries, I would tell you that a lot of those including oil and gas looked better among our top 100 and then if you sort of listen to some of our RVPs talk about energy there definitely is more of an enthusiasm and some more encouraging facts on the ground in those regions that are heavier in oil and gas. ”

40-45% of COGS are derived from overseas

“So what we have said is that we think that 40% to 45% of our COGS are probably derived from overseas. I don’t know what the competitor, how he is defining the number. I will tell you that of that 40% to 45% not all of that is directly sourced, obviously have a significant operation with passcode that directly sources product, but that does not rise to near the level of 40% to 45%. So the number that we use includes not only the directly sourced, but also that product that we may buy domestically, but ultimately is sourced from an overseas customer.”

HD Supply 2Q16 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q2 2016 Results

Tough to deliver on our 2016 expectations

“Our slower than expected first half performance and elevated investment in costs have created the second half challenge for us to deliver on our previous fiscal year 2016 expectations, especially with challenging comparables, timing considerations associated with our supply chain improvements and typically low sales volume contribution in the fourth quarter. I have challenged the teams to claw back into increased focus on what we can control. However, we really believe it as appropriate to update our fiscal year 2016 performance expectations. ”

Problems with transition from manual to automated systems

“Yes. The systems are different, so we operate SAP in FM and we operate [indiscernible] in Waterworks and Oracle in our Construction & Industrial business. The system is capable of doing everything we needed to do. We did not have the processes and people in place to be able to execute and utilize the full strength of the best-in-class enterprise tools. So we are in the process of making sure that happens. So we retooled these teams and we are aligning these systems, so it’s fully utilized versus utilizing manual processes. Ultimately, you grow yourself out of manual processes and that’s the point that we came to and that’s a point that we needed to address.”

Will Stengel

Remain cautiously optimistic on construction momentum

“Construction markets. As Joe mentioned, we remain cautiously optimistic about the residential and nonresidential construction momentum. We observed the same mixed signals as others, including starts, commercial lending data and third-party data such as Dodge as examples. Our teams are focused on the project and customer activity that we see in the majority of our local markets. The teams across the company are working hard to simultaneously transform and deliver performance”

Evan Levitt

We need to get inventory profile low because we misread demand

“Yes, I think the areas we need to address most aggressively are clearly getting the inventory profile of low. I mean really what we got in trouble with this year is we realized too late that our demand signals were too weak, so we weren’t acquiring enough product. And by the time we figured that out and recorrected, we had too much product available to consume. So, pretty simple, too much going through the pipe in a short period of time.”

Taking longer than expected to right the supply chain

“it’s simply taking longer to right the supply chain, to work the inventory flow through the entire supply chain, including much of this is import merchandise. So, it’s coming from overseas, takes time to bring it over from Asia, receive it into the country, bring it to the distribution centers, receive it into our large distribution centers, and then distribute throughout our network. That does take time. It’s taking more time than we thought. And so we are spending some incremental cost on freight to expedite that to the extent possible, to deliver across the country regardless of where the inventory in the network to meet the customer demand and to invest in surge resources to right-size the supply chain as quickly as possible.”

Applied Industrial Technologies FY 4Q16 Earnings Call Notes

Applied Industrial Technologies (AIT) Neil A. Schrimsher on Q4 2016

Seeing some sequential improvements in August

“Sure. Sure. So, I’d say, Will, our sales per day trends included declines in April and May with improvement in June. July somewhat as expected with seasonality, softer than June. And through the early days of August, we’re seeing sequential improvements in that.”\

Positive industries are construction relatedCustomers took longer downtime in July now planning for more projects in the second half

” think around July, and we’ll see going forward customers took longer time out of their production. And I think many had less preventative maintenance productivity-type projects going on in that time period. Now, as they’re back up and running, right, we see that brake fix demand coming through. And then, it’s early but the dialogue for those that would have planned downtimes, which more of that would be towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity. So, we experienced it around that July time period, but I think too early to call what it may look like going forward.”

Mark O. Eisele – Chief Financial Officer, Treasurer & Vice President

Sales down 7.2% y/y

Thanks, Neil. Good morning, everyone. I’ll provide some additional insight regarding our fourth quarter fiscal 2016 financial performance. Our sales per day rate during the quarter was $9.91 million, 7.2% below the prior year quarter and 0.7% below our rate in the March quarter. We had 64 selling days in the June 2016 quarter and 63.5 selling days in the June 2015 quarter.”