MSC Industrial Direct Exec Insights: Pricing, Vending Program

On Thursday, MSC Industrial Direct Co., Inc. (NYSE:MSM) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Pricing

Robert Barry – UBS: I wanted to first touch on pricing. It sounds like you took a small price increase in the quarter. Can you tell us how much pricing contributed in 3Q and what your assumption is for it in 4Q?

Erik Gershwind – President and COO: Sure. Rob, it’s Erik. As Jeff mentioned, we took what we would consider a moderate pricing action in this quarter. That’s in Q4. For competitive reasons we are not going to go into any detail. You can expect, as Jeff described, in conjunction with our big book, along the lines of our usual increase upcoming that would account for the uptick in gross margin we would plan to see in Q1 and we will give you more color as we usually do on our big book increase next quarter.

Robert Barry – UBS: Was it about 3% in this third quarter. I think that’s about where that was tracking the last couple of quarters?

Erik Gershwind – President and COO: I’m sorry, but we don’t break out the mid year.

Robert Barry – UBS: Then I guess I just wanted to see if you could unpack a little bit more, your outlook for the contribution margin staying. I think you said at around this 13% level that you expect in Q4. I mean it sounds like it’s a combination of getting more aggressive with some of the investment spending, but also contemplating some slowdown in the top line. I was wondering if you could just maybe dimension that and also put it in perspective of what we might expect on the gross margin line.

Jeffrey Kaczka – EVP and CFO: I’ll take that Robert. It’s Jeff. As we head into FY ’13, it’s difficult to predict the economy, the impact on the revenues and so forth. What we tried to give you was a sense of the read-through and the read-throughs as always is driven by the revenue trajectory, the operating expenses, investment levels and the gross margins. In Q4, we explained the environment and the ADS growth at around 10.5%. The gross margin in Q4 is typically lower than what you see in Q1 because of the impact of price increases and so forth, and we do intend to continue to invest although balance that with moderate OpEx actions and so forth in a responsible way, but what all this adds up for in Q3 or Q4 is the 13%. As we look ahead to FY ’13, there are indications of the moderating revenue growth. There is the intent for us to continue the investments in the growth programs in a responsible way and giving this scenario what we’ve said is the read-through that we’re experiencing in Q4 is somewhat indicative of what we would expect going forward. Now depending on the varying revenue levels, this could change if we see revenue growth in the mid-teens, we certainly would expect to see read-throughs return to the level where we would again see expanding operating margins.

Robert Barry – UBS: And maybe just finally it sounds like you repurchased some shares in the quarter, just any thoughts on how you’re thinking about that going forward, especially with the stock down here where it is?

Jeffrey Kaczka – EVP and CFO: Robert, Jeff again, as always we take a balanced approach. We’ve got a very strong balance sheet. As you know, we’ve got cash on the balance sheet. We’re certainly willing and able to use that to fund the right acquisitions that fit strategically and culturally. We pay our regular dividends. We’ve periodically paid special dividends and we periodically do stock buybacks. So there is no current plans but we’ll evaluate that as we go forward.

Vending Program

Adam Uhlman – Cleveland Research: Just a clarification on the gross margin first. The acquisition impact and the vending impact this quarter was slightly more of a drag than it was last quarter, but the contribution of revenues seems to be about the same, can you still remind me why that’s becoming more dilutive?

David Sandler – CEO: Well, it would also be a function of I guess, the revenue growth. But I think the acquisition impact was actually similar to the previous quarter, as we look forward to Q4, there’ll be an overlapping of the first ATS acquisition. So, there is only one quarter overlap associated with that. The vending impacts we mentioned was about 30 basis points in the previous quarter, I believe it was 20 basis points and that’s due to the growth in the vending program.

Adam Uhlman – Cleveland Research: When you talk about the value equation that’s shifting in the marketplace right now. I guess as we look out over the longer term, I’m wondering how much of that – the value added that the company is providing to the customers, if you guys think you can actually keep, or how much of that you have to give away as price transparency becomes even greater as more of the model and industry shifts to online purchasing?

Erik Gershwind – President and COO: Yeah. Adam, its Erik, it’s a good question. And I would say that, taken our vending program is an example, what we see strategically if anything where most of our volume is coming from these deep relationships that we’re building with our customers, it’s becoming less about price and more about adding value into the customer supply chain and we’re doing that in a number of ways. So, we are streamlining inventory and we are freeing up cash flow. We are bringing in our technical experts and we are taking out cost on the plant floor. All of those are taking the conversation really away from price and towards what we can bring to help them streamline their cost structure. So, I wouldn’t draw a conclusion between the increased online percentage of sales going through the web, translating into more focus on price. Most of our customers that are doing business with us on the website, it’s a multichannel relationship. In most cases or in many cases, there’s technical experts coming in and helping our customers on the plant floor. There’s other value-added services going in, so it’s really what we are describing here is a move towards a deeper relationship with our key accounts.

Adam Uhlman – Cleveland Research: How much greater share of wallet do you think you get with those tighter accounts with the vending relationship or anything else? Can you give us any kind of data points on that directionally?

Erik Gershwind – President and COO: Yeah. I mean the short answer is a lot. We see a significant difference in share gain and in how deeply we embed ourselves in our accounts. So, the reference point there would be; number one, we started to break out for you the growth contribution of vending as roughly four points of – of accounting for four points of recent growth. The reason that happens is because when we put our vending system in, it’s very well received by our customers and along with our technical specialists and our full program are producing growth rates well in excess of what we see in the rest of the Company. So, certainly that’s one metric, and the other one I would point to, that I referred to in the prepared remarks is our retention rates, which we are not going to break out, but are very high. So, what that indicates to us is we really are embedding ourselves in these accounts.