Applied Industrial Technologies FY 2Q17 Earnings Call Notes

Applied Industrial Technologies’ (AIT) CEO Neil Schrimsher on Q2 2017 Results

Overall trends continuing in January

“So, I would say for us, as we move through the last quarter, the sales per day trends improved from October to November, and really for us through a large part of — a mid part of December. I think, as expected, we had some seasonal softness in comparison to around the holidays but we finished buying. And then, overall in January, I’d say the quarter trends are continuing. We’re showing modest improvements, I’d say, around year-over-year 1% with a few days to go.”

Improvements in oil and gas throughout the quarter

“Yes, but we think about our top industries. I think this past quarter, we had a few more positive, I think 14 out of the 30, still positives around those construction related industries. I think as expected lumber wood products, building materials. I think also in cement in aggregate, and as you talked with customers, there is probably some optimism around infrastructure type projects. They don’t see all of those today, but there’s belief that there will be investments, and those will be going forward.

Food has been steady and a good comparable. And then also in oil and gas and refining, as some of those related industries, just a little step-up or a pick-up in activity, and probably a little bit of optimism. And it’s still early. We touched on year-over-year, we still had a decline. Sequentially, as we move through the quarter in those businesses, we had improvements. So we think, as we go through the back half of our fiscal year and into 2017, we would expect some continued improvements in those markets.”

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.”

Fastenal 3Q16 Earnings Call Notes

Fastenal’s (FAST) CEO Dan Florness on Q3 2016 Results

DOL rules on exempt employees caused us to close stores

“in May of 2016, the Department of Labor published some new rules regarding exempt employees. This rule, while it doesn’t impact our company in totality, because it essentially raised the threshold of what qualifies as an exempt employee from – there is rules for duties that qualify you and there is also a rule for pay, and those rules were increased dramatically in 2016. Because of that change, it does impact our smaller stores, because in our smaller stores, we don’t always compensate above that $48,000 level, because we have folks that are building a business and we are a sales minded organization, but the opportunity is huge. But as you all know from the years of us publishing our pathway to profit data, stores under $75,000 a month are not profitable – are marginally profitable and this damages that. And we decided to close some stores.”

I’m not sharing a secret that it’s not a great environment

“, you all watch the news, I am not sharing a secret here. It’s not a great environment to do business in. But that’s the world we live in and that’s the world we need to contend with. And there is a lot of uncertainty. But the certainty I do know is that we have a great organization”

Coming into this year we took some growth for granted, but I don’t think we’re expecting that anymore

“I think it’s also fair, Ryan, to suggest that coming into this year, we sort of took it for granted that we grow mid single-digits and plan to invest around that. I am not sure that we are making such – that we are making any such assumption about the go forward market given that we haven’t seen any meaningful improvement in the markets. And so we are not necessarily going to assume that we are going to make those same investments for that same level of growth.”

We’re boring midwesterners

” One of the – personally, one of the advantages of bringing in somebody like Holden into the organization is the perspective of Fastenal has historically been we are boringly conservative Midwesterners and we tend to look at the business probably not as financially as still as we should and that’s probably a reflection of the old CFO. I like the fact that we have a voice at the table that is going to challenge us to think about our business differently.”

Holden Lewis

Not a lot of changes in September. US may have been a little bit weaker than international

“when we look at sort of our customers by category or end market grouping, we didn’t see a lot of changes in September. We might be lapping some of the issues around the energy side, but that would be one month in hand with that. We will see how that plays out through fourth quarter. But there may have been some indication on that in some of those customers. We probably saw a little bit of incremental weakness in the heavy-duty truck customers that we might have. But beyond those two items, there is not a lot more to add in terms of end markets. Regionally, we indicated the U.S. was a little bit weaker than the international. Some of that might simply reflect changes in currencies more than anything else”

Fastenal 2Q16 Earnings Call Notes

Daniel Florness

We saw longer term slowdowns in construction but also temporary shutdowns affected the quarter

“In a construction front we saw slowdown in our energy customers in both May and June. And a piece of that is we’re seeing projects that were still going on from year ago that just are not being replaced. I would not look at that as a temporary one. On the temporary front we saw quite a few customers that were shutdown, I think our largest impact was actually on-site we have, where the customer was shutdown for three weeks or the month in doing maintenance, but the week of Memorial Day in early June we saw shutdowns, we saw some shutdowns here in the over the week of July 4th and I believe those are temporary will impact third quarter as well because of the July 4th and I would suspect there’ll be some over Labor Day as well.”

Steel price increases haven’t led to much pricing power

“We were seeing probably more propensity for Fastener prices to rise two and three months ago, while there still is – still our examples of that, some of the propensity had lessen, but I won’t – I’m less certain. I that’s probably more of a – we need some traction in the economy to make some of that becoming a little stickier.”

I think things potentially got a little worse but it’s tough to tell

“I think they potentially got a little bit worse. And sometimes that’s a hard one to gauge Ryan because a lot of our internal information as it relates to some of the plant shutdowns is more anecdotal of talking to our regional VPs around the country and kind of getting from them a feel for what we are seeing or what the impact is, but very much a weakening.”

Some of the shutdowns are back in full force now

“some of the shutdowns which were extended in June they are back in full force now, and so that will give us some lift from June to July and I don’t even want to speculate on July fourth week.”

MSC Industrial Direct FY 3Q16 Earnings Call Notes

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.”

Applied Industrial Technologies FY 2Q16 Earnings Call Notes

Applied Industrial Technologies (AIT) Neil A. Schrimsher on Q2 2016 Results

A continuation of headwinds

“Our second quarter results reflect a continuation of the economic and market headwinds that have been affecting our business, including reduced demand in oil and gas and other industrial end markets, as well as negative impact of foreign currency translation”

January is running similar to December

“I’d say broadly across the company, we would have said or see October and November sales were consistent with the September quarter and then the sales per day decline in December was more consistent with what you’d expect with seasonal trends and holiday timeout. So, for us, looking forward into January, it’s running similar to December. ”

Not expecting a second half improvement to occur

“We know traditionally we do see a second-half improvement, but we’re not counting on that to occur.”

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

We’ll have a clearer picture of January as we do reviews, but different people are giving different color

“we’ve got a round of operating reviews that we will be going through right at the end of January, just to understand. But as we watch it, some guys are caught a little bit more with weather than others. Some are caught as we look at some end customers taking perhaps some extended timeout from end of their calendar year to start their calendar year. And I think we’ve got customers that are looking at their own capacity or their manufacturing footprints. And they’re not necessarily taking all capacity out, but where they’re going to do what, I think customers are making some choices right now as depending on the end markets they serve and kind of that overall industrial outlook or market that we’re participating in right now. So we think that’s all into that January-type result that we’re seeing so far.”