Home » MSC Industrial Direct Q2 2014 Earnings Conference Call Transcript (Presentation)

MSC Industrial Direct Q2 2014 Earnings Conference Call Transcript (Presentation)

Operator:

Good morning, and welcome to the MSC Industrial Direct Second Quarter 2014 Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead sir.

John Chironna – Vice President, Investor Relations and Treasurer

Thank you, Denise, and good morning to everyone. I’d like to welcome you to our fiscal 2014 second quarter conference call. An online archive of this broadcast will be available 1 hour after the conclusion of the call, and for 1 month on the investor relations homepage at www.investor.mscdirect.com.

During today’s call, we will refer to various financial and management data in the presentation slides that accompany our comments, as well as our operational statistics, both of which can be found on the Investor Relations section of our website. Let me reference our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments on this call, as well as the supplemental information we are providing on the website, contain forward-looking statements within the meaning of the U.S. Securities laws, including guidance about expected future results, expectations regarding our ability to gain market share and expected benefits from our investment and strategic plans, including the BDNA acquisition and expectations regarding future revenue and margin growth.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in the earnings press release and the risk factors in the MD&A sections of our latest annual report on Form 10-K with the SEC, as well as in our other SEC filings. These forward-looking statements are based on our current expectations and the company assumes no obligation to update these statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

In addition, during the course of this call, we will refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the tables attached to the press release and the GAAP versus non-GAAP reconciliations on our presentation, which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures.

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I’ll now turn the call over to our Chief Executive Officer, Erik Gershwind. Go ahead Erik.

Erik Gershwind – President and Chief Executive Officer

Thanks, John. Good morning everyone and thank you for joining us today. Also in the room with us is Jeff Kaczka, our CFO.

I will start by saying that  I am pleased with our execution and our overall performance during the first half of our fiscal 2014. As I usually do, on today’s call, I will discuss the current environment where we continue to see positive signs, our recent developments where despite weather-related disruptions we produced solid results in Q2 and progress with our infrastructure and our growth initiatives, including the BDNA integration which continue to go well.

Jeff will focus on our financial results and provide our fiscal third quarter guidance. And I will then conclude with an update of our full year expectations which have not changed since our last call. And finally we will open up lines for Q&A.

I will now start with the environment. Market conditions continued to improve despite some temporary weather-related hiccups in January and February. When we spoke on our last call in January, we’d just come off the holiday season and had seen the first winter storm impact our fiscal second quarter. Those weather-related disruptions continued through January and into February and did in fact impact our growth rates.

Nonetheless, the weather eventually did improve and the environment returned to the levels that we saw in November and the first half of December. In recent months, the ISM readings have come down from the high 50s to its low to mid-50s range. At the same time Metalworking Business Index which had been negative for quite a while has improved with the last reading in the mid-50s at 55.9.

For the first time in a while, those two measures have converged to a similar range. In fact, for the past two months, the MBI has actually been higher than the ISM. We are finally reaching a time when those macro indicators are generally consistent with what we are seeing and hearing from our customers.

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The manufacturing environment, particularly the metalworking sector, has improved considerably from where it had been during the last year and a half. We’ve moved past the contraction that we were seeing during our fiscal 2013, and are now in what we would characterize as moderate growth environment. Customers are reporting slightly more confidence and are seeing steady order flows and backlogs.

To be clear, with some exceptions we would not characterize the current climate as high growth as growth customers remain appropriately cautious with their spending and their capital investments.

Another noteworthy change in the environment was the improved federal government spending climate. That improvement along with passing the anniversary of sequestration is contributing to strong growth which I will talk about in a minute.

So to summarize, we see our core business and metalworking manufacturing improving at a measured pace and we see considerable improvement in the government sector. When put together, these contribute to a positive outlook for the environment in the second half of our fiscal year.

I’ll now turn it to our recent results. Despite the weather-related disruptions, the improvements to the underlying operating environment along with our continued share gains allowed us to post organic growth of just under 4% for the quarter on an ADS basis. After the slow start in December and January due to holiday timing and the poor weather, our organic growth rates improved from the 2% to 3% range to the mid-6% range for February. As I mentioned earlier, the government sector performed well to end our fiscal second quarter and to start out our fiscal third quarter posting double digit growth rates in February and March.

Our national accounts program has also continued to perform well with growth rates well above the company average. This is testament to our customer focused approach. I had the opportunity last month to attend [Ribbon Live] the largest and highest profile conference for supply chain and procurement executives across North America.

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I came away from the show feeling stronger than ever about the value that MSC is delivering for our customers. Our solutions, whether that’s technical expertise, inventory management or e-commerce, are helping companies gain visibility and control over their MRO spend. Since the second quarter ended on March 1, we closed the fiscal month of March on April 5. Keep in mind that our fiscal month of March did not include the Easter holiday this year but did last year.

With that in mind, we posted organic ADS growth of just a shed under 10% for the month. The Easter holiday timing will reverse itself in April which is also factored into our Q3 revenue guidance.

I’ll now turn to the execution of our fiscal 2014 plan and update you on our infrastructure and growth initiatives along with BDNA integration.

Our co-headquarters in Davidson, North Carolina has been complete for a couple of quarters and the incremental annual operating expense is now fully in our run rate. We have over 200 associates located in Davidson and we will begin receiving the related incentives in calendar 2015. Construction on our fifth customer fulfillment center in Columbus, Ohio remains on schedule to begin shipping by the fall of this calendar year. As expected, the operating expense impact will continue to grow in the back half of fiscal 2014 and into 2015 as we staff the facility with inventory and staff it in preparation for opening.

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