Applied Industrial Technologies 3Q16 Earnings Call Notes

Neil A. Schrimsher – President, Chief Executive Officer & Director

Saw a stabilization as we went through the quarter, April was consistent with that

” For us, our sales per day, we had improvements really each month throughout the quarter, with a couple of days remaining April is consistent with March. So, perhaps I’d say consistent with others then, right, (17:10) seeing a stabilization perhaps as we go through the balance of our fiscal year and perhaps on through calendar 2016.”

M&A pipeline is productive

“I’d say short answer would be yes, but our M&A pipeline remains productive. We’re busy, I’d say, we have prospects or opportunities at really each stage of our funnel.”

Didn’t see any noticeable decline in the back half of March

” I’d say no noticeable decline in the back-half of March. So, I wouldn’t have seen or noticed that. And I would say April is consistent. Usually at month end, you can have a pickup in volume activity – hey, to be determined if we see that over this last couple of days, but it is looking like March, which was stronger as we moved through quarter three and we’ll look to being better in May and June to close out the quarter.”

Mark O. Eisele – CFO, Treasurer, VP & Head-Investor Relations

Did see an increase in bad debt expense relating to oil and gas companies

“Yeah. Adam, I’m happy to do that. I would say the majority of the bad debt expense increase really is relating to reserves that we’re putting on the books for receivables for our upstream oil and gas subsidiaries. And so they’ve had a meaningful increase for the whole year.

MSC Industrial Direct FY 2Q16 Earnings Call Notes

Erik Gershwind

The environment remained difficult and root causes haven’t changed

“As expected, the environment remained difficult and the root causes have not changed. Sustained low oil prices and the strong U.S. dollar with its negative impact on export demand continued to be a drag on manufacturing activity. While macro indicators have improved since our last call, they still reflect a significant slowdown in manufacturing with US factory activity continuing to contract.”

Prevailing sentiment is that business will possibly improve

“we just completed a survey of our customers and the prevailing sentiment is that business will at least stay the same and possibly improve in the months ahead. We would certainly like to see a bit more time pass before forming our own conclusions. ”

Pricing environment conditions remain extremely soft

“With respect to the pricing environment, conditions remained extremely soft due primarily to the lack of commodities inflation and a high degree of competitive intensity that comes with a prolonged downturn.”

I wouldn’t say explosive growth, I’d say stabilization

“to me the outlook is less about any sort of explosive growth. The word I would use is potential for stabilization. So things have been at a low level.”

Deflation is causing pricing pressure

” I mean if you look at what’s happened deflation in commodity, so lack of any inflation in this case deflation has resulted in no ability to take pricing. So that’s in these overwhelming headline number one. I guess it depends on your take. From my standpoint that is cyclical, we’ve got decades and decades of history to say that that ebbs and flows.”

Did see aerospace soften a bit mid march

“Anything heavy equipment machine related, infrastructure related, really tough. Aerospace has obviously been a bright spot. We did see, as Rustom pointed out particularly in that mid-March period, we did see it soften a bit.”

There was a softening in March, but we think it’s just timing

“Look, in speaking to customers and government by the way, what we would say is, we also saw really softening in March. As best we can tell, a lot of that has to do with timing. End of March is their quarter end and then there was a squeeze. As best we can tell and we just pulse checked our customers, general sentiment would be things stabilizing. If we looked out to next few months, most felt like stable, maybe some signs of life. Certainly there were some we felt further erosion, but majority not.”

Rustom Jilla

March saw considerable mid month softness

“March started out quite strongly, but we then saw considerable mid-month softness driven by confluence of factors. In terms of end-markets, the extreme pressure in oil and gas and continued challenges in heavy equipment and machinery. Then we also saw some weakness in aerospace driven by a push out in orders of commercial aircraft and in government, the timing of quarter-end budget crunches. Some customers also used spring break to take time off. Finally, if our own recent inventory actions are indicative of the broader supply chain then there was some potential drawdown as well.”

HD Supply 4Q15 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q4 2015 Results

Debt to EBITDA down to 4.6x from 8x in June 2013

“The ratio of net debt for adjusted EBITDA was currently 4.6 times down from nearly eight times at our initial public offering in June 2013. And down 1.5 turns since fiscal year end 2014. We finished 2015 with solid performance in the fourth quarter is well. ”

Will Stengel

No material oil and gas exposure

“oil and gas impacts. We do not believe we have material direct oil and gas exposure. As we have previously disclosed, our exposure is second and third order effect, which is difficult to identify and quantify. We continue to see solid but varied performance in Texas, across city and business unit, Texas today represents approximately 11% of HD Supply annual sales.”

Competitive environment stable

“competitive environment. Our competitive environment is unchanged from when we spoke in December. We have always operated in intensely competitive profit pools, and respect both our small and well-capitalized competitors. We differentiate via customer-centric service excellence that has earned loyalty over many years. We leverage our scale but complement it with fast, agile and precise global execution. The core of our model is our knowledgeable HD Supply professionals, who stand shoulder to shoulder with our customers, to solve their toughest problems.”

Evan Levitt

February benefitted from favorable comps

“However, I note that February sales performance benefited from a favorable comparison. As we disclosed last year February 2015 was impacted by the full or partial closure of 60 branches and distribution centers across the country impacting approximately 140 facility there. For February 2015, the estimated weather represented an approximately 200 basis points sales growth headwind. This headwind did not repeat in 2016.”

3% end market growth

“Our current views for 2016 are for the residential construction market to increase mid single digits for non-residential construction to increase mid single digits. For water infrastructure to be down low single digits to up low single digits, and the MRO market to remain stable, increasing 1% to 2%. These specific end market estimates imply an approximate 3% end market growth estimate for HD Supply’s end markets in 2016. “

Fastenal 4Q15 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q4 2015 Results

59 of our top 100 customers contracted in December of last year

“In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half of our top 100 customers grew and half contracted. In the month of December to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted.”

A lot of companies are feeling pain

“We sell across the continent around the planet, most of our business is in North America and we sell to a lot of different industries. And when you start looking through the list, of lot of names that you recognize standout and you can see the pain they are feeling in their business.”

Before Christmas sales looked like they were trending flat and then in the ensuing days we saw that erode

“In the month of December, the Monday before Christmas looking at the numbers and consulting with a few of our folks internally about what they were seeing in the trends. And trends looked a lot like 2014 in that, the Monday before Christmas, I felt we had a very good chance of having sales being flat December to December. And in the ensuing days, the balance of that week and then the week between Christmas and New Year quickly saw that erode as customers were falling off in their business activity and we produced a number we reported this morning.”

January is trending positive though

“The start of January and again you could question the wisdom of making this commentary with — as of yesterday, our month of January is trending, it looks like there is a potential for us to be positive in the month of January.”

New CEO as of Jan 1

“I officially became CEO on January 1 of this year”

You can’t really tell a lot from November or December

” One thing I have always said over the years is the history in this business, for Fastenal’s business that is, the trends from January to October, the trends that really matter, November and December are months you go through, but history has said they’re never really indicative of anything. We saw some patterns in November and December. I thought they were worth noting, but I don’t think there is anything that we’ve learned in the last two months that tell us if it’s spreading, if it’s stabilized, other than what we saw with 10 days left in December and what we’re seeing in the first eight days or so of January.”

We try to share more when there’s uncertainty, but the month can change on a dime

“when there is more uncertainty, I do believe and I’ve always believed this that we have an obligation to maybe share a little more insight. And so we’re trying to share as much as we can, but always mindful of the fact that the month can change on a dime. One of the reasons we had never talked about January, in the January call, or we’ve done it very infrequently is that we’re always wrong. The question is how much, but I can’t say that we know anything about the contagion.”

Deflation has held pretty steady

“From the standpoint of the pressure on deflation, that’s holding pretty steady to what we were seeing in the third quarter. I wouldn’t say it’s gotten worse. I wouldn’t say it’s gotten better. So I would say that’s holding pretty steady’

MSC Industrial Direct FY 1Q16 Earnings Call Notes

MSC Industrial Direct (MSM) Erik Gershwind on Q1 2016 Results

The environment continued to deteriorate as expected

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.”

Conditions remain extremely soft in the pricing environment

“With respect to the pricing environment, conditions remain extremely soft, due primarily to the lack of commodities inflation. Supplier pricing activity, the primary driver of distributor pricing movement continues to be minimal. As such, we’ve not implemented a mid-year price adjustment and don’t anticipate doing so absent to change in conditions.”

Have gained share despite negative growth rates

“Despite negative growth rates in the quarter, the macro industries industrial distributor surveys and supplier feedback all confirmed that our share gains have continued.”

Visibility is low right now

“It’s pretty much I have described as a very challenging environment but now both on the demand side and on the pricing side and really no surprises, I’d say visibility is quite low right now so tough to identify a catalyst at this moment although with low visibility who knows. So that’s on the environment side.”

Small benefit in December from holidays on Fridays

“So, net-net what we saw in December was similar level I would say of shutdown activities prior years that along with the benefit of the holidays being on Friday counted for roughly 250 basis points or so we have to peg it of benefit in December, but net-net I think for us big picture in terms of outperformance. ”

Our results don’t have the same correlation with PMI that they once did

“I think if you go back and you probably you have seen the same thing with other distributors, but the correlation or historically the correlation with PMI was quite tight and over the past couple of years I think not just for us but for peers it’s not been nearly as tight. So, we certainly look at it, but we look at a bunch of other factors as well in forming judgments. We introduced for awhile now the MVI, which seems to have a tighter correlation. So again, we’ll look at PMI but not with same degree. I don’t think it has the degree of predictive correlation at it did years ago.”

Rustom Jilla

The majority of segments are down and have deteriorated

“I think the overwhelming majority of segments are down and down and have deteriorated over the past few months. There’s pockets like commercial, aerospace that have been reasonably strong. There’s pockets of automotive that have been reasonably strong and again, probably no surprise to you.”

Energy indirect exposure has taken everyone by surprise

“But on the energy front really no change and just a reminder, our direct exposure to energy is really low, meaning, well under 5%. The indirect exposure is I think what’s taken everybody by surprise not only in MSC but in the broader economy. And it’s ugly. I mean, this is a way to say and I think in the past we’ve shared that when we look at our manufacturing end markets, as there what would be traditional saw that metalworking markets in areas that are energy exposed, i.e. Texas, Oklahoma et cetera. The results are really, really poor and not surprisingly.”

Weather hasn’t been a factor either way

“Nothing majored report on weather that would have been a factor either way. We didn’t set anything big there. With respect to shutdown activity, we would characterize the shutdown activity as relatively similar to last year.”

The bigger headline than inventory destocking is that demand is coming down

“what I would tell you is certainly like what MSC is doing, once you see inventory levels have come down, our customers are doing the same thing. However I would say I want to draw your attention to what we see as the bigger headline which is the results we saw and others have seen in terms of the macro for the back half in the last few months. The primary driver there is a reduction in incoming orders in demand in backlogs, not in destocking and I think that’s a bigger headline.”

Wesco 2016 Outlook Call

John Engel

Industrial end market should be down mid to high single digits next year

“Taking a look at our end-markets, we’ll start with the industrial end-market, which accounts for about 40% of our total sales. We expect this end-market to be down mid to high single-digits for the year reflecting continued weakness and tougher comps in the first half of the year. Economic data supports our expectation of near-term weakness. The Institute for Supply Management’s Manufacturing Index recently reached its lowest level since June 2009. Oil is in oversupply which will continue to dampen traditional energy production and investment expectations. A strengthening U.S. dollar and global economic challenges are also expected to continue to limit export growth.”

This is completely different than it was six years ago

“When you go back six years ago, the economic downturn was pervasive it’s unlike anything any of us who are in business have seen in our carrier. And quite frankly we didn’t know how far things would dropped and when and if where the bottom would settle out. And so I think what we are facing now is just is a mixed low growth environment with some areas that are experiencing some pockets of growth and other areas that are flattish and then there is some particular verticals that we’re seeing some pretty significant traction so our view is the markets are completely different now in terms of versus five to six years ago in that economic cycle.”

We’re assuming headwinds persist into 2016

“to put it into context and what I’d say is we’re assuming by and large that the headwinds we’re facing right now persist into 2016. That’s true in construction and it’s true across each of our end-markets.”

November a little better than October. December slightly stronger but not significantly different

“So October came in a little bit further down then where we were at the time of the call. November was still down but better than the month of October and December isn’t tracking, it is tracking a little bit stronger but not significantly different.”

Not expecting anything more than the typical December industrial shutdowns

“what we’re hearing I would characterize overall as being more typical to a standard December. With that said in certain verticals like mining and steel and oil and gas, but we have been facing challenges in some of those verticals with customers and their spend-down right. Some of those have adjusted schedules and such so we will see how the next couple of weeks play out but what we’ve said is at this point in time, we haven’t seen — it’s nothing — we are seeing any indications it’s like it was back five-six years ago the original question where we just have pervasive across the board shutdowns and we are going through that major contraction here.”

HD Supply 3Q15 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q3 2015 Results

Construction end markets continue to be solid

“our end market views are mostly unchanged from our disclosure in September. We believe the construction end market continue to be solid. In particular, non-residential demand continues to be strong in our priority districts. We continue to see cranes across the skyline in most of our major markets and our Construction & Industrial teams are executing well. We believe the projects represent multi-year opportunities. Additionally, our views on residential are largely unchanged. The most recent housing data is mixed with October single-family starts, up only 2% versus prior year. However, we believe that a moderated and prolonged construction growth trajectory is a solid environment for HD Supply.”

Continue to see good activity in construction

“we continue to see good activity from a non-res perspective. I think the C&I’s performance obviously speaks for itself. If you look at all of our priority districts, the sentiment and the customer activity continues to be good. We think there are multiyear projects and so it’s got a runway tail to it. So, I would say more of the same from our perspective. We see all the same third-party data points that everybody else does, including folks like Dodge Data etcetera that have pretty hard to interpret revised datasets and so the best intelligence that we can develop our views from is the local intelligence and that continues to be solid.”

We saw a favorable market in November

“So that’s exactly right, we continue to see favorable market and we think that that manifested itself in November. I would say it’s also although it’s only one month only, one data point is encouraging to see that Waterworks improved from the 1% in the third quarter to a 4% in November.”

We never pass up great talent

“We never pass up a great talent and we are always very, very aggressive in terms of having to pass it on full time no matter what the market environment is for great talent both sales and elsewhere across the company. As the economy gets good or bad I mean there is always the opportunity to help to deploy great talent either from competitive sets or from areas where we see people getting development that we would like to have on team. ”

Watsco 3Q15 Earnings Call Notes

Watsco (WSO) Albert H. Nahmad on Q3 2015 Results

HVAC distributor Watsco champions its tech savvy

“Here are some examples of what we’re doing in technology. We have launched mobile apps in e-commerce to enable customers to buy from us 24 hours a day every day, using the industry’s largest source of digitized product information, which is presently over 300,000 SKUs. We have instituted data-driven culture by developing business intelligence and data analytics capabilities to provide insight and support for greater decision making by our 700 profit-and-loss managers. We are implementing software and other tools to optimize our supply chain to improve service levels with less investment. In the long run, we are targeting a material reduction in infrastructure costs, which will provide the opportunity to increase operating margins as our business grows.”

89 Million installed HVAC units that we have to replace

“We still believe that our position in the marketplace is the after-market. We like the fact that there are 89 million units out there installed, ducted systems that we will eventually have to replace. And we love the consistency and the stability of that, as distinct from new construction, which goes up and down.”

The digital age is here

“This is the most-exciting part of my career here; the idea that the digital age is here and that we have the size and the scope to invest more money than anybody else that we compete with…this is a very exciting time. This will separate us more and more from everybody else. And thank God, we have the size and ability to invest increasing amounts of money. But we will change Watsco.”

We’re trying to revolutionize what we do in tech

“we’re trying to revolutionize what we do in technology and some of this is going to be opportunities as they come up. We’re very much into the software world. We go to conferences. We have people visit us. And when we see a good idea, we pursue it.”

Taken a slow approach to tech

“our approach to technology has been don’t rush into a software or a tool or some idea; be very slow about it. And that’s – probably the first couple of years of this technology effort, we weren’t really spending a lot. We were really studying it. So, yes, I think it is scaling up, because we’ve done that. We’ve taken a lot of time to see what it was that we could do. Some of the software we design it and code ourselves, some we buy. So, it’s been very slow at the beginning.”

Fastenal 3Q15 Earnings Call Notes

Willard Oberton – President, Chief Executive Officer

CFO will be new CEO

“I’d first like to start out telling you how happy the board, Fastenal board and myself are to announce Dan as our new CEO.’

Fastener business now negative but we don’t think we’re losing share

“As you know, it’s been a difficult quarter for Fastenal. Talked a little bit about our sales – September slowed down slightly, and really it’s a story of industrial fasteners and the slowness within or the slowdown within that part of our business. In the first quarter, we grew our fastener business 5.5%, not great but market taking share, and then by the third quarter it dropped to negative 4.4, driven by not only volume but also some deflation in the markets, weak steel prices. We do not believe we are losing share. Actually, we believe we are still taking some share, not at the rate we would like to take or expect, but still taking share”

We need to make our own luck

“The attitude at Fastenal, the mindset that we’re in right now is a mindset of we need to create our own luck. We’re not economists; we don’t know what the economy will do over the next two to three quarters, but we’re not real optimistic that it’s going to bounce back quickly, so we need to create our own luck as an organization. ”

Deflation we experienced this year will help margin comps in 2016 as inventory is marked lower

“our inventory turns about twice a year. That’s our overall inventory. Our fasteners turn slower than that, and so the deflation has been a full this year. It’s hurt our top line, it’s hurt our gross margin, but we really haven’t seen much of the benefits through our cost of goods because that inventory was coming on our shelves, and if you think about the pace of our business, if our business is growing faster than we expect, that inventory is turning a little faster. If we’re growing a bit slower, that inventory stretches out a little bit. But that bodes well for us going into 2016. That will be a friend to our business.”

I’m not real optimistic

“personally, I’m not real optimistic when I look at everything going on in the world, and that’s the way the thinking is, is let’s create our own luck. If I’m wrong, I’ll be the happiest guy in the room, but right now when you look at election year, you look at the turmoil in the Middle East, China, and many other parts of the world, weak economy in Europe, there’s nothing that points–it doesn’t like oil is going to come back, and corn is probably low for a long time. There aren’t a lot of strong economic indicators that are going to push us up”

This is not a non recessionary environment

“First off, the premise of the question, I would argue that anybody selling into the industrial market is not selling into a non-recessionary environment.”

Daniel Florness – Executive Vice President, Chief Financial Officer

Put great people in a low cost organization

“if you put great people closer to customer and you have a business model with a low–with a structurally low operating cost, you can compensate people fairly for what they are doing and you build a great machine over time, and you build a great organization over time.”

Our customers have been hit hard

“the reality of it is, in 2015 we, our customers have been hit hard by the slowdown in the oil and gas sector, and hit hard by the strength of the U.S. dollar and the ability of our customers to compete effectively across the globe.”

Some geographic areas hit harder than others

“If I looked at individual regions around the country, there is a lot of similar stories to our business. It’s just that you have some geographic areas that are getting really–hit really hard, and those areas are big areas for us”

Saw some things worsen in September

“We were disappointed by the September number as well. With 10 days left in the month, it was looking to be slightly negative, as we saw, and so it wasn’t a case of strong finish, weak finish, that kind of thing. It was pretty steady throughout the month. It was more pronounced in certain geographic areas, like I talked about. Like I say, I look around the country and I see a lot of positive things, but saw some things that did worsen.”

Business is slow

“Business is slow, and I don’t think it’s going to–I don’t see anything externally that’s going to cause it to pick up in the next three months, so Will’s point of we need to make our own luck.”

The industrial environment is in a recession, I don’t care what anybody says

“The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do.”

44 of our top 100 customers are negative

“Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend…Of that 44 that were negative, 32 of them were negative more than 10%. Of that 44 that’s negative, 17 of them were negative more than 25%. That’s a sign of a recessionary environment”