MSC Industrial Direct Co. Earnings Call Insights: Metalworking and Product Line Sales

MSC Industrial Direct Co. (NYSE:MSM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Metalworking

Ryan Merkel – William Blair & Company: So, the first question I had, I want to start off with this relative weakness in metalworking because you can’t see it in the numbers. And I’m wondering what do you think explains that first of all, and then second of all, what do you think can change that and what makes it get better?

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Erik Gershwind – President and COO: Ryan, it’s Erik. Yes, good question, look as I said in the remarks we wanted to take what would be the logical question which is the growth trending relative to ISM and hit it head on. As we always do as part of our operating process, we follow a very similar methodology in how we get at, what’s going on in the market. So, we will look at comps, we will look at supplier comps, we look at a series of metalworking activity indicators and then what I think is even most important is we talk to customers and we talk to suppliers. And the picture, what our job is to give you guys a window into our world and let you know exactly what we see out there and that is the picture that we describe. And particularly the closer we got into the core of the core of metalworking, the segments that are really tied to our core business, the softer we saw things. I think if there was one seem to answer your question directly about what’s driving it, it would be primarily lingering effects from fiscal cliff towards the end of 2012, and just a sluggish start to not ramping up the way many thought. If you remember back to our comments, we were kind of skeptical as to whether the flood gates would really open as there were lingering effects in government spending and so forth and I think that’s really how it’s played out. So, certainly there are pockets within the economy and even within the metalworking umbrella where you got a stronger picture and we pointed to a couple that probably are no surprise to you, automotive being one, commercial aerospace would be another, but outside of those pockets there is pretty broad spread, wide spread weakness.

Ryan Merkel – William Blair & Company: And then secondly, I want to ask you a question on government, I think it’s appropriate to be guiding assuming government stays pretty flat, pretty weak. Do you have any view on does that last all year, does it get worse, does it get better, is there any read into that that you have that you can share?

Erik Gershwind – President and COO: I wish I did. So I’ll give you a little more color on government and I’ll go back to what I said in the prepared remarks. So we actually saw – firstly, I’ll tell you, I’m quite pleased with our execution in the government sector, so I’ll start there and say that from a share gain perspective and execution perspective where I see us winning on the playing field, I feel quite good. And we started to get really excited by what we saw in December and January with our growth rates there and then things really, as you would imagine, fell off the cliff in February and they stayed there in March. The typical pattern, if it were a ‘normal year’, what you would see is from an average daily sales perspective government sales, particularly on the federal side, building through the course of our fiscal year and their fiscal year end is September and kind of coming through a crescendo to a peak in the end of September and then resetting and building back up. That would be a normal pattern. It’s hard to say. We honestly don’t have a lot of visibility into what’s going on. So what we’ve done is given that we saw the softness in February wasn’t surprising, given that it continued into March, and we’re pretty confident no change in our performance over the course of a couple of months that we decided we’re basically projecting that out through the quarter. So should the government spend follow a more typical pattern where you start to see strong acceleration through the months in average daily sales, that would be upside.

 

Product Line Sales

Adam Uhlman – Cleveland Research: I might have missed it to piggyback on Ryan’s question about how much were the metalworking sales then?

Erik Gershwind – President and COO: So, Adam, we don’t break out – typically, we don’t break out our product lines sales. So, what we do – what I could point you to is, what we do is with the end market perspective. So, we’ll give you manufacturing, non-manufacturing for Q2. So, total growth for the quarter was 1%. Manufacturing a smidge above that; non-manufacturing a little below that.

Adam Uhlman – Cleveland Research: The second thing I wanted to ask about is, some of the metrics posted on the website, it looks like the active account declined a little bit in the quarter and the e-commerce sales slowed a bit and I was wondering if you could dig into both of those a little bit more please.

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Erik Gershwind – President and COO: Yeah, you got it. Let me start with customer count, because that’s one that particularly I’m thinking back to the ’08-’09 period where it got attention. So, let me try to give you some more visibility into the customer count number and why we’re not particularly troubled by – you’ve seen a sequential decline for two quarters and why we really chalk that up primarily to economy. So, when we published our customer count number, it’s essentially a net number. So, think about the moving parts of customer count where you’ve got new customers coming in, customers that you retain year-over-year and customers that are (traded out) as part of our normal business cycle. What we’ve seen is – I should say, the number we pay the most attention to internally is retention, retention of existing customers one year to another. That’s for us the best case of execution of customer set and customer loyalty and I’ll tell you that our retention rates are strong and they get really strong in our targeted segments of accounts. Where we’ve seen the biggest change sequentially over the last two quarters is in what we would call new customer drive by and let me explain what I mean by that. So, for the portion of the customer count, that’s made up of the new guys coming in, there is really two buckets of new customers. One is the bucket that is program related. So, we have a bunch of programs; the direct marketing programs, our e-commerce and electronic marketing, some of our sales force in national accounts programs that are designed that account acquisition. Those tend to be because there are programs and where we are focused to higher potential accounts that we are focused on, and I’ll tell you, to the last two quarter that bucket remains on plan. We’re doing as we expected to be doing. The second bucket of new customer acquisition is where we are off, and it’s what we refer to as drive by. So, we get a number of customers that will come year-to-year and find us on their own. They tend to be the lower potential, in many cases individuals, folks who will come and buy once or twice and they also because they are not program related and targeted accounts tend to have very high attrition rates or very low retention rates. That’s where we have seen the biggest change and the reason we primarily chuck that up to economy is its following a very similar pattern in terms of the change as it did a few years back. So, with economy going down that’s where we saw the change. So, that’s the story on customer count. Your other question was on e-commerce?

Adam Uhlman – Cleveland Research: Right.

Erik Gershwind – President and COO: Yes, so the metric for us and what we look at is e-commerce percentage of total, obviously the number Q1 to Q2 could be down but as a percentage of sales it could be up. So, that’s really as we talk about. So, year-over-year in Q2, e-comm is up roughly 300 basis points and given our new metric there is a few drivers there, vending sales being one, but another big one that we’re encouraged by is MSDdirect.com. So we actually feel quite good on the e-commerce front and we’re encouraged by the launch of the new website this month.

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Adam Uhlman – Cleveland Research: And it looks like the website got delayed a little bit for the launch and that’s maybe typical of a new website, but I’m just wondering if the cost to launch that are now behind us and we can start to pull back on some of that investment spending and harvest it?

Erik Gershwind – President and COO: Yeah, so what you will see Adam is the CapEx is primarily behind us. We do, though, with the launch you will see an increase in the depreciation line, in part related to starting to depreciate the CapEx from web. Well absolutely, look, from our standpoint, our focus is now on driving growth and customer loyalty through it.

A Closer Look: MSC Industrial Direct Co. Earnings Cheat Sheet>>