Good morning and welcome to the MSC Industrial Supply Fiscal Second Quarter 2015 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Chironna, Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, Andrew and good morning everyone. I'd like to welcome you to our fiscal 2015 second quarter conference call. 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, 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 filed 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 table attached to the press release and the GAAP versus non-GAAP reconciliations in our presentation which contain the reconciliation of the adjusted financial measures to the most directly comparable GAAP measures. I'll now turn the call over to our Chief Executive Officer, Erik Gershwind.

Thanks John. Good morning and thank you for joining us today. Also with us is Jeff Kaczka, our Chief Financial Officer. As I typically do on this call, I'll first cover the operating environment which has changed significantly since our last call. I will then turn to our business developments where we continue to see sales growth but at lower levels as a result of the macro conditions, and then our progress on key initiatives where I remain quite pleased with our execution. Jeff will focus on our financial results and provide our fiscal third quarter guidance, and I'll then conclude with an update of our expectations for fiscal 2015 with the perspective on the current environment and the opportunities that it creates for our business. We'll then open the calls for Q&A. I will now turn to the environment. We've seen a significant and swift change in demand conditions since the start of the calendar year. We heard this in a change in tone from many of our customers and saw it in sentiment indicators like the ISM and MBI, both of which trended down through the quarter. Root causes included the impact of the rapid drop in oil prices and softening export demand. As you know, our business has very little direct exposure to the oil and gas sector. There is little doubt, however, that the dislocation in this sector and the resulting uncertainty is currently impacting broader manufacturing activity, particularly in energy producing states. Softening export demand is also impacting manufacturing and heavy manufacturing in particular as exchange rate headwinds have become more severe. In addition, while weather was certainly a factor in the quarter, we believe the broader weakness that we're seen is more than a temporary disruption. With respective to the pricing environment, conditions remain…

Thanks Erik and good morning everyone. In our fiscal second quarter we faced the rapid change in the environment and poor weather conditions that led us coming in below the low end of our guidance on sales. We were pleased however with the gross margin stabilization and operating expense management that resulted in adjusted earnings per share coming in within our guidance range. So let's get into the second quarter results in more detail. I'll continue to speak in terms of our reported results and our adjusted results, which reflect the exclusion of non-recurring costs associated with the CCSG integration as well as executive transition costs both of which were very small for the quarter. Our sales growth for the quarter on an average daily sales basis was 6.8% compared with the same period last year. This reflects the swift change in the demand environment that Eric described, it also includes strong growth from our large account customers as well as continued benefit from customers within our vending program, which contributed roughly three points for the growth. With regards to gross margin we posted 45.4% for the quarter at the high end of our guidance. We're pleased with this as our counting measures have begun to have a positive and sustained impact. I should point out that net favorable adjustments of about 20 basis points primarily driven by supplier rebates also contributed to the gross margin out-performance in the second quarter. Even so we expect the gross margin stabilization to continue in our third quarter. Our reported EPS for the quarter was $0.83 and adjusted EPS was $0.84 which was at the low end of our guidance of $0.84 to $0.88. This reflects sales below our guidance range offset with a pickup in gross margin as well as effective management…

Thanks Jeff. Before I close the call, I want to do two things. First I'll reconfirm the fiscal 2015 operating margin framework and second, I'll pull back and look at the bigger picture. With respect to our framework we find ourselves at best in the lower left quadrant in terms of environment, meeting moderate demand and soft pricing conditions. There's no question that the price environment remains soft, the demand environment is the trickier one to characterize. We have seen segments who have changed. At this point without more visibility it's difficult to say whether we move to a low growth environment. We'll have a better feel with the few more months under our belts, without weather related disruptions and current results and in prior year comparisons. At this point we see annual operating margins landing towards the lower end of the lower left quadrant of our framework. As you can see on the provided slides, the operating margin range for the soft pricing moderate growth quadrant is 13.4% plus or minus 50 basis points. Regardless of the demand and pricing environments though we will remain focused on what we can control, achieving share gains, enhanced growth rates well above market, executing the gross margin counter measures that are producing sequential stabilization, managing expenses carefully and executing on our growth programs. As I pull back from the near-term I remain as excited as ever about the growth story that's building at MSC. We operate in a $140 billion highly fragmented MRO marketplace with clear signs that we've entered the early stages of a consolidation story. We are well positioned in the U.S. manufacturing sector that is strong and will only benefit over the long run from lower energy prices despite the near-term dislocation. We are positioning the company into value add high retention businesses by getting to our management, middle working, class c and more. On top of all of this, history has proven that times of dislocation create even more opportunity for MSC to forge ahead in the years that follow. If the recent softness continues or even worsens local and regional distributors will be hit disproportionally hard. Cash flow, margins, talent, customer payment terms, these things will all come under pressure if the demand and pricing environments persist. That would mean even more opportunity for MSC to execute our growth plan. We've been poised to capitalize on whatever environment is in front of us. In the mean time I'd like to thank our entire team of associates for their hard work and their dedication to executing our plan and delighting customers. With that we'll now open the lines for questions.

We will now begin the question and answer session. [Operator Instructions]. The first question comes from David Manthey from Robert W. Baird, please go ahead.

Thank you, hi guys, good morning. First question on the top line, you're saying that you would expect stable daily sales growth rate underlying in April and May to hit the midpoint, what gives you confidence in that outlook, did it try and stabilize through March and end of the first couple of selling days of April, or what gives you that confidence?

Yes David, one point I want to make sure that we connect is that the March growth rate that's posted on the website of 1.9%, you really need to back out our March because our fiscal calendar extends into April includes the Good Friday impact that will reverse itself in April, so on an effective basis, it was more like the mid three is consistent with our guidance, and in terms of guidance, Jeff gave the caveat that certainly visibility right now, things have changed in a hurry so our visibility is lower than it normally is, but with that said, we're giving you our best sense of what we anticipate happening which is roughly stable growth rates with what we saw on an underlying basis in March.

Okay, you're saying that through March, it was fairly stable at that growth rate?

Yes, that's right, when adjusting for Good Friday then again what you'll see is that will reverse itself in April because last year we'll have the benefit of a lower comp on that day which hurt us in March, so yes.

Okay, and then second, could you discuss the sustainability of your current gross margins in terms of price mix and lower revenue growth rates and inflation, it seems that it would be even harder going forward to sustain given those -- the situation, and could you remind us how you accrue for rebates, is there any possibility that when we get to the fourth quarter, say there's an adjustment out there if sales don't accelerate the way you think they will.

Yes, so I'll give you our perspective on gross margin, Dave, which overall, we're pleased with our performance on gross margin, if you think back we had a few quarters back, seen a couple of quarters of sequential drops, we felt we implemented some counter measures, we felt we would see stabilization certainly Q2, Q3, we're executing as we thought, and you're right, I mean this a difficult environment to sequentially hold gross margins in light of lack of price, and yes it is a significant customer mix headwind, so we feel good about it, we do anticipate gross margins being relatively stable, I'll remind you that our Q4, yes, we do typically see a seasonal drop, so I would anticipate this year being no different although certainly if we continue to execute a chance that the drop would be more modest. As I look out and I think of where you're going at the bigger picture, if the current pricing conditions were to persist and if customer mix remained a headwind, what's our take on gross margin, I'll give you the caveat certainly that it had so many moving parts through it on the headwinds and tailwind side each that there's a lot of variables, but what I would tell you is I think looking out if conditions stayed as they were certainly would be a challenge to expand gross margins, but our aim would be to do what it is that we're doing now and that's keep them relatively stable. Your question regarding rebates is a good one, and it's one of the reasons why we point to all of these different moving parts and variables. Rebate has been certainly a tailwind for us. Jeff pointed to it in the second quarter. You are correct that if the demand environment were to remain as we're seeing it right now or even to worsen, yes rebates could turn to a headwind later on in the calendar year as we moved into fiscal '16, that certainly is possible.

And I'll remind you Dave that we usually see some seasonality in the gross margin in the fourth quarter due to the product mix. In other words, some pressure on gross margin versus third quarter.

The next question comes from John Inch from Deutsche Bank, please go ahead.

Hey, good morning everyone. I don't remember if you talked about this even just at a broad level, but what exactly is your mix, do you think of sales to the energy driven or producing states. Is there a way to concise that?

Yes, John, on the last call we started to share just in light of the initial disruption that had happened in that sector, it's a tricky one, the direct exposure is very clear, the direct exposure is 3% or less to the oil and gas sector. Where it gets trickier and what we're now seeing where the impact is much broader based is all of the tiers of that supply chain and particularly in our core manufacturing base that are actually influenced by oil and gas. So we are seeing pretty pronounced changes in growth rates and in conditions in manufacturing, and particularly when we go to manufacturing and look at our numbers and look at manufacturing activity in states that have an oil and gas influence, it's really pronounced. So it's pretty clear to us that while the direct exposure is small, the indirect exposure is pretty broad based.

Yes so the state trends have sort of been the big job creators, North Dakota, Texas, Alaska, South Dakota, are you seeing then or is what you're saying in it where you have manufacturing in those states, you're actually seeing that or is it -- are you talking about maybe, like Pennsylvania, for instance is kind of a quasi-manufacturing state that has oil and gas fracking. Is that what you're talking about? Or is it a bit more –

John, exactly I mean you rattled off a handful of the states where -- so if you looked at what described in our total company growth rates here, you saw a pretty pronounced impact. If you looked at the growth rates in those states even if just in our core customers and manufacturing they would be considerably more pronounced than what's happening with the company average.

And do you have Erik, outsized exposures to anyone [indiscernible] for instance, [HT] supply which I realize you don't really compete with but they have a big proportional exposure to Texas, is there any one of the sort of energy producing states that we should maybe just keep our eye on I don't think there is, I'm just curious if there is.

No, you are correct there is no one that's disproportionally high but when you take the collective group of them it's a meaning for influence, and what I'd also point to it, even beyond the oil and gas impact the other that we've seen outside of those states we have seen the change in the manufacturing landscape and we think that more than just oil and gas, the softening of the export environment being the other factor that's weighing things down right now.

You guys have been historically very good at kind of drawing inferences and correlations with PMIs, and, the ISM has sort been, this debate about its disconnect with what companies have been seeing over the past two years, I guess they have changed the methodology but one thing that does strike, so considering the way you -- [in fact] have been able to successful do that. One thing that does strike somewhat unusually is the significant drop in the Chicago PMI now for two months which seems to be beyond any sort of impact of a port strike, are you seeing kind of in that regional Midwest area you sort of seeing trend that would kind of correlate with that which kind of dovetails with the comments you just made there possibly?

John I would say in general if you look at what's happened with the indices, the sentiment indices, I mean they've been trending down. So the drop you're referencing in Chicago, the ISM in general what's happened with the MBI I think is indicative of what's happening on a broader base, less about one area like Chicago more about what's happening across the board is -- look, in one quarter this thing moved pretty quickly where you can tell our tone on this call is quite different from just a quarter ago we see that as pretty broad based and not specific to our region.

Okay. And then just lastly you guys have a very pristine balance sheet and so in theory, I just want to get your thoughts toward possibly raising some financial leverage down the road that given interest rates where they are. Secondly I don't remember Jeff what you said why is cash flow so negative normally? When company see softening sales they are able to extract cash from the business but you guys had a fairly big use of working capital, by cash negative in a slowing sales environment again. Thank you.

Yes, John, starting with the cash flow, during the fiscal first half we did have the bills in inventory and that was associated with the stocking at the [Columbus] CFC and the anticipated sales growth. So if you go to the cash flow statement you will see almost all the difference versus the prior year is associated with that. We anticipate the inventory level to stabilize and as we look at the back half of the year by the end of the year we expect to have a total year of cash flow conversion ratio consistent with our history which is in the 90% plus range.

Great. Thank you.

The other one was on? John what's --

On the balance sheet -- your thoughts around raising financial leverage for some perhaps strategic use or I know you've been talking of M&A a little bit and maybe the environment presents more opportunity, just something like that.

Yes, John as you know we made decisions in the past year or so to be slightly more aggressive but still remain conservative and flexible in our capital allocation. We've done a series of things including larger than historical share repurchases, the special dividend, not too long ago and acquisition we've been investing organically we are operating now about a one to one leverage we're very comfortable there we're willing flats up and down depending on the opportunities out there.

The next question comes from Flavio Campos from Credit Suisse. Please go ahead.

Good morning. Thank you for taking my questions. I just wanted to if you guys could give a little bit more detail on the slowdown of manufacturing side, a lot of your competitors have started bundling that manufacturing exposure and giving a little bit more detail towards the markets like heavy machinery which tends to be double hit by the oil and gas and the lower exports impact, can you guys give anymore color on if any of the sub markets are performing worse than others.

Yes, Flavio, it's Erik I think you hit on the key theme which would be consistent here, manufacturing is a very broad umbrella. We have seen over the past quarter so the slowdown has been broad based on the factors we describe. If there is an area that we call out it would be heavy manufacturing, heavy durables. As you could imagine given our strong metal working position and but that's a significant percentage of our total company sale, heavy manufacturing has a big influence on our growth rates and you are right, there has been a double whammy in heavy manufacturing because of oil and gas and then being particularly hit hard by the change in the export environment. So within manufacturing that's the one I call out and certainly is a relative one for us.

Perfect, that's helpful. And on the non-manufacturing exposure, I know you've talked about it slowing down slightly from the mid-teens it seems a little high to begin with, but it seems that once you've consolidated CCSG on the operating statistics you've got a little bit bigger non-manufacturing exposure and at the same time that's slow down on acceleration on the first two fiscal quarters. Is there a correlation there? Is the non-manufacturing basis of CCSG growing fast or is just two things that happened at the same time?

Yes, it's more coincidence Flavio, so you are correct to point out that the reason on the offset you saw there was one quarter as a quarter ago where you saw relatively decent size jump up in non-manufacturing as a percentage of total. You are correct that was the influence of CCSG. We've shared the recent -- the most recent growth rate for CCSG being roughly flat, roughly two thirds of their business is non-manufacturing. So that's not the factor that was driving the non-manufacturing growth rates. The bigger factor would be our government business which certainly we've talked about the last couple of quarters being a strong performer for us and then a couple of other segments within non-manufacturing where we get we happen to be doing well with international accounts program, those are the bigger drivers.

Perfect. That's very helpful. And if I can just sneak in one real quick, your CapEx guidance seems to imply that it's certainly an acceleration in the second half. Can you give some color on what are the main uses here?

It's probably a bit of the pick-up not too much second half over the first half but CapEx includes a variety of things such as normal updated infrastructure investments, IT and vending spending, those are the three drivers.

The next question comes from Adam Uhlman from Cleveland Research. Please go ahead.

I think there was a clarification I think at the end of your prepared remarks you had mentioned that you thought that the EBIT margin would be the lower less quadrant for the year but then you might have said like the lower end of that. So are you seeing the 13.4% are below the 13% for the year?

Adam, I'd say I'm glad you asked me to clarify. I think you got it right. Remember, so the lower left quadrant with the moderate demand soft pricing quadrant. And I'll start with environment and then move to what it means soft margin. I would say the way we characterize the environment is it would lower less quadrant at best, certainly soft pricing demand environment. Honestly we are not sure if we still call it moderate or low when I think we want a couple of more months of experience before we make that call. What we wanted to get across though was regardless right now we see us for the year falling within that lower left quadrant so we are in the range the range was 13.4 plus or minus 50 and you are correct with what we see right now it would the lower -- towards the lower end of that range. So if you said plus or minus 50 basis points, minus 50 would bring it to 12.9, somewhere between 12.9 and 13.4 would be where we see it right now.

Okay, got you. Thank you. And then you guys have talked about the inventory investments that's happened in inventory expansion I am assuming that you're taking on some inventory to earn some next rebates in addition to the Columbus distribution center and I'm curious if you are nervous at all that you might be adding inventory at a time when -- where you would expect the prices should be starting to fall from suppliers, where we might be -- you're paying too much for from this inventory build and I'm wondering how you're thinking through that process and if you are having any success in getting any price concessions from suppliers.

So Adam let me start with inventory. To answer the question, there are no concerns. Few things on the inventory, number one is that, the build is in fast moving inventories that we can turn quickly. We've shown -- I have complete confidence in our team that it's been really changed, we can bring inventory levels down quickly. The other thing I'd say is, in times of -- if this becomes some sort of sustained softness having inventory on the shelves customers are not going to want keep inventory what will distributors are going to be forced to bleed down inventory levels. This becomes a really big advantage for us and I talked in the prepared remarks about this. Times like this of dislocation being an opportunity for us to accelerate share gains having product in stock and getting it next day is absolutely critical. So I feel very good about our inventory investment. And the other question that you asked was around the supply side. Yes, I would say certainly it's been an area of focus for us, it's been a healthy part of our gross margin counter measures, you know given what's happened with commodities and currency to reach back to our supplier community. I think we've done it in a win-win way where we're having success and it's been where we're having success its success for suppliers who are looking to invest in MSC and then I think they would tell you that they're getting that back in terms of incremental investment from MSC in growing their brands. So I would say so far so good, I anticipate it still being an ongoing initiative.

The next question comes from Scott Graham from Jeffries, please go ahead.

I was wondering if we might look at this the other way, for a moment, we've been drowning in the negatives of a slower sales akin to the factors that you guys have talked about but you know considering that the consumer is still more than 60% of the pull on GDP and that pull obviously ultimately impacts industrial markets, demand pull there as well, with oil down, there is an effective tax cut that's taking place right now for the consumer, so have you talked to your customers about sort of the back half of the calendar year or what could potentially take place for demand for volumes in the second half of the year as that sort of tax cut makes its way through.

Yes Scott, I think you're hitting on something that we tried to get across in the remarks that longer term whether it's the back half of '15 or not or it's '16 we don't know, but longer term we think that what's happening with energy prices actually bodes quite well for manufacturing in the US. Number one it makes us more competitive and then number two you're right that lower oil prices that are going to put more dollars in consumers' pockets and that's more money, more disposable income to spend. So we feel really well positioned in manufacturing. What's happened so far is the extreme drop has created a dislocation and right now the way that's netting out is negative but over time we see this as something that will ultimately be a good thing. It's tough for us to say when, I would say in speaking to customers I don't think they have a sense as to when either but I think they would agree big picture it's a good thing.

Sure, I guess what I was more trying to get at Erik was in fact if your customers were actually saying that to you that they're potentially expecting a, I wouldn't go anywhere near, the words coiled spring but is it possible that we could see the demand destruction that we saw in your sales numbers and other distributor sales numbers in the last two quarters, I am sorry last quarter, really essentially flip around let's say two quarters out, are your customers may be thinking that, are they saying anything like that to you.

I see, so Scott, I would say the answer is right now no, we are not hearing that, I think we're hearing more caution than we are excitement for the near term. That said I give a caveat that if I went back a quarter, a quarter and a half ago our customers also weren't talking about what was coming with oil and gas. So certainly who knows, it's possible but right now we're not hearing a lot about a coiled spring for the back half of the calendar year.

Understood, last question. Jeff, you indicated that you guys were expecting free cash conversion to be in the 90% plus range for fiscal '15 I believe I heard you say, so require a fairly substantial sourcing of cash from working capital to the tune of let's say $50 million, is that -- is my math right there?

Yes Scott, you will see as we head into the second half of the year with our earnings coupled with inventories remaining relatively stable as well as our receivables that if you do the calculation you'll see that the cash flow conversion ratio for the second half of the year will be well over a 100% and we've done the calculation and that should get us in the 90% range which is quite normal for the year.

The next question comes from Sam Darkatsh from Raymond James, please go ahead.

Good morning, Erik, Jeff, John how are you. Most of my questions have been asked and answered, a couple of follow ups or piggy backs on prior questions. Erik, did you have a sense of your manufacturing customers that do in fact export, any sense of what your specific mix customer mix is to that segment?

Offhand, no Sam. I am going to take a look and do some thinking, but offhand no. I mean other than to say that as we called out we do think heavy manufacturing, so durables are being hit particularly hard on export, that's the only color I'd offer.

Okay, second question, your Midwest geographic segment was up 5% in the quarter which it might be a little bit lower than company average but not dramatically, certainly not to the extent that a true major oil and gas derivative impact might have suggested which implies that there are other aspects of the Mid-Western exposure that are more than also offsetting that negative hit, where are you seeing strength specifically vertical wise in the Mid-West that might help to offset oil and gas exposure?

Sam, so one thing I would say is when you're looking at our numbers remember you're looking at a quarterly average so you would probably see by month, you'd see regionally you would see a more pronounced effect I think in general a couple of things I point out. There is certainly are pockets of strength they probably be I don't think I'd be giving any great revelations to say aerospace and automotive being more applicable to the Mid-West not so much aerospace being strong pockets for us, and look despite the softness we also feel like we are taking share and I think that's part of what you're seeing and why the drop wasn't greater.

Last question if I could, Jeff the cash flow percentage to net income in fiscal '16 would you expect a performance better than 90% based on some other comparative mass?

That's a little bit far to look in advance and depending on a lot of factors but historically we've been in that 90% plus range and I don't see anything that would lead me to think it would be otherwise for '16.

Okay. The second half of fiscal '15 should normalize the working capital to the extent that you should not expect outsized free cash flow -- operating cash flow all else equal next year?

That's a fair assumption.

Next question comes from Kwame Webb from Morningstar. Please go ahead.

I am good. I just wanted to follow up on a couple of things that Erik said, the first one for me was, there was some commentary about some accounts are pulling work end that they had previously subcontracted out, are you just referring to things that they are doing outside of their procurement efforts with you, are you actually seeing them insourcing some of the procurement work that you might have handled for them.

Kwame so to be clear, that was more about their output, their work product and not atypical this would happen when things get a little bit soft, one of the first steps larger company so if they have components of their finished product that they would outsource to other contract manufacturers that's what they're pulling in not the procurement.

Okay, great. And then I just wanted one sort of like a tactical hypothetical value. I mean clearly investors have been a little bit surprised by the margin compression related for the investment cycle you guys have been in, clearly what you're been doing is you’ve been trying to build out the platform for future growth but I just want to get an idea of what room you have to manage expenses. So let say we were to have sort of a 10% organic sales decline, what levers do you have to sort of protect your margins protect your margins, protect your returns, protect your free cash flow or do you guys sort of take the view that we don't really throttle back any resources because we then go after increased market share, just kind of help to think about how guys would react to that sort of environment?

Kwame it's a good question, one think I would say, at this point from our standpoint way premature to go there, if you talk about minus 10% growth levels but as a hypothetical what I would tell you is that first of all what I'd say is I think you can see from the numbers we've been doing a pretty good job despite the step up in infrastructure and investments that -- so what's happened here is a step up in investment coincident with [indiscernible] demand environment and soft pricing environment and that's produced the picture that you see but I think we've been managing expenses well, certainly there are other levers that we could probe in terms of managing expenses. You've seen us historically through other periods more severe dislocations than this take out the measures so there are other measures we could take, but those measures will be proportional to the environment and certainly we're nowhere near that now. The other thing I'd say is depending upon how severe something got we actually view times like that dislocation and opportunities to put the foot on the accelerator, to really juice share gains coming out of it, and you've seen us do this through periods. So there is a chance that while we would certainly take cost down measures that we could actually step up growth investment. Now let me be clear about that our goal is to grow operating margins from where they are today and to do it overtime. So if we were going to take that approach the opportunity would have to be really compelling and it would has to be one where like historical where we would see the types of returns coming out of the downturn that made it such that it became a great investment. So that's how we look at it. I think it's really going to depend upon the environment. We would certainly do have other levers on the cost side and then on the investment side I would say the investments could go down and they could go up depending upon what we saw in front of us.

So maybe just to paraphrase, it sounds like if things were to incrementally slow down, yes expect to definitely do your best to defend margins and as you saw opportunities later on maybe then expect you to sort of reinvest in growth initiatives then.

Yes, I think that's reasonable, and honestly they could be happening at the same time, meaning if things got bad we could pull some more levers on expense management certainly, at the same time say we're going to choose to throttle up investment because if the opportunity were that compelling.

The next question comes from Eli Lesgarden from Longbow Securities, please go ahead.

Good morning everyone. Sort of like in the range of follow up, there's two pieces of data that you put out surprisingly a little bit, one was a slight decline in average transaction size and the one that surprised me more was the decline sequentially in e-commerce sales which I probably haven't seen in quite a while. Is that just a [fluke of] days or something or whether it's something, do you have any explanation for what's going on just for those things to happen?

Eli, I think both are supportive of what we've seen which is the change in the demand environment and you know so first of all, the second quarter is not atypical for sales, I believe to be down from first quarter but certainly sales were lower than we expected them to be because of the demand environment. I think that's where you're seeing in the average transaction size, its reflective of the softness. In terms of e-commerce, it's just the water level coming down, because actually e-commerce as a percentage of sales went up, exactly up sequentially from the first quarter.

And the other follow up piece I am looking at is, one of the things I think is going on and I'm hearing is why would demand, we talk about demand slowing, is that there is probably an inventory liquidation cycle going on out there that may continue for another quarter or two, the impact of the big decline in the oil side and you talked about effects to oil manufacturing, I mean the first thing anybody involved is going to do is take inventory down and probably take it down sharply. When you're talking about at least 20 or 30% decline in upstream spending. Can you characterize any of this demand decline as inventory liquidation more than just demand softening, have you looked into that at all.

Yes. Eli, it's something we're keeping our eye on, our VMI business and actually our CCSG business this year will give us a good pulse, I would say it's a little early to tell. It's hard for us to sort out, given all the noise in the past quarter there was so much, in addition to these macro changes there were weather related disruptions and there were weather related disruption in the comps. It was really tough to tell so I would say a little soon to call, I think it's a reasonable hypothesis, and I think in another quarter we're going to have a better feel in particularly with the CCSG business that'll give us a sense.

And you didn't see any of that in March or [indiscernible], weather but [indiscernible] March had a construction March had a rebound, you couldn't pick up anything other than the change in demand in March and the holiday effect.

That's right, I think the bigger story with March is the fact that growth rates did not bounce back which I think is more supportive of the case that the Q2 factors were a lot deeper than just weather but beyond that tough to read it too much into it.

And one final question, you said you made a small pricing adjustment in January, how big of an invest was that was that in the half to one percent kind of range.

So it was -- we typically, we'll break out and publish, share publically our catalogue increase the August-September increase, we generally don't on the midyear, the way I characterize it was small, think small, think at or below the lower end of what we would typically do in a catalogue increase. So if you look at the range of catalogue increases, at the bottom of that range.

And our last question comes from Charles Redding of BB&T, please go ahead.

I realize your Canadian exposure you said, could you quantify the impact of currency on the quarter.

Typically foreign exchange is a minimal factor for us, on our growth rate it amounted for about 30 basis points negative.

That's on the consolidated level.

On the consolidated level, obviously had a bigger impact on the CCSG probably under 40 basis points or so.

Yes, I think that's a fair point, so CCSG would have been slightly positive growth in the quarter but for the currency exchange.

Got it, okay, then, I know you talked a lot about the majority of MRO consumption being focused really among larger customers, you [indiscernible] some of the added challenges here in terms of large customer integrations and is there any reason to think that this dynamic change is going in the current commodity and manufacturing headwinds that we're seeing.

Yes, I think what you're seeing Charles on the large accounts front is the early stages of the industry consolidation playing out where the large well capitalized national distributors such as MSC just huge opportunities there as these companies implement all kinds of buying technology and look to consolidate their supply base, so I think what you're seeing is strong value proposition and early stage consolidation driving the growth rates well above company average. I think if things softened certainly you know we've seen at that the absolute growth rate comes down, but I would say if anything it actually should widen the share gain delta for MSC for large distributors over local distributors in the large accounts arena. And the reason being -- like every other business they will be more and more pressured for productivity and solutions like inventory management, vending, our class CVMI, our technical expertise et cetera, et cetera, really play well when customers restart the productivity.

This concludes our question and answer session. I would like to turn the conference back over to John Chironna for any closing remarks.

So our next earning date is set for July 08, and we certainly look forward to speaking with you over the coming months. I'd like to thank everyone for joining us today and for your continued interest in MSC. Have a great day.

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.