MSC Industrial Direct Co. Inc. (NYSE:MSM) Q2 2020 Earnings Conference Call - Final Transcript

Apr 08, 2020 • 08:30 am ET


MSC Industrial Direct Co. Inc. (NYSE:MSM) Q2 2020 Earnings Conference Call - Final Transcript


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Erik Gershwind

COVID - 19 and the resulting economic ripple could mute some of the benefit in the near term as purchase levels and hence rebate payouts come down.

The third fiscal 2020 initiative is realigning our operating model to reduce expenses and improve productivity. You'll recall that some of this began at the end of our fiscal 2019 with offering voluntary early retirement to some associates and ratcheting up performance management intensity for others. We also selectively eliminated positions where our focus was changing. All of that continued into our fiscal second quarter, and we began selectively hiring in certain customer-facing roles as I mentioned. We also continued our assessment of additional opportunities to align our operating model to the new strategy. That exercise confirmed our hypothesis that we see the path to 200 basis points in improved productivity, as measured by the opex to sales ratio.

Many of the identified initiatives require travel and team meetings. So, as you could imagine, they're on pause until things settle down. However, there are other initiatives such as some contract improvements in indirect procurement savings that are moving forward as we speak. Our transformation effort is being led by Kari Heerdt.

I'll now turn to our fiscal second quarter financial results before providing an update on the environment and then turning it over to John to review the details of the quarter. Greg Clark, our Interim CFO, is under the weather right now and, out of an abundance of caution, staying home. I would note that he and his team have been doing a great job in finance, as expected. We'll then open things up for questions.

Our fiscal second quarter results reflected solid execution in an uncertain environment. Both sales and gross margins came within our guidance ranges, with sales falling below the midpoint while gross margin was above it. Operating expenses were also better than the guidance midpoint, and this was despite an extra roughly $1 million of consulting fees related to the acceleration of the review of our operating model that I mentioned earlier. All told, both our operating margin and earnings per share came in at the midpoint of our guidance range.

Turning to the environment. Industrial demand trends overall for the quarter remained relatively soft. We did start to see a couple of encouraging data points, with January and February MBI readings improving to 50.2. But this was of course quickly erased by what unfolded with the COVID - 19 outbreak, and you no doubt saw the March reading of 41.0, which did not surprise us. In terms of end markets, the weakness in industrial demand broadened further, with pockets of softness in areas like automotive, heavy truck, oil and gas and agriculture. Aerospace has also weakened due to the Boeing developments and the building concerns around COVID - 19. With regard to the pricing environment, we continued to see list price movements from our suppliers, and we took a midyear price increase at the beginning of our