MSC Industrial CEO Talks "Belt Tightening" Among Distributors, Suppliers

Some industrial distributors and suppliers and pointed to signs of apparent industrial economy recovery as of late, but MSC Industrial CEO Erik Gershwind says that notion has given way to conservation and decreased optimism among its the company's customers.

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Earlier this year, MSC Industrial Supply said it had expected economic conditions to possibly stabilize in its fiscal third quarter. Instead the company’s latest quarterly earnings statement shows that industrial business actually weakened, particularly in the metalworking sector.

"Overall, the sense that the industrial economy may have been stabilizing has given way to more belt tightening and less optimism among our customers," said MSC chief executive Erik Gershwind in an earnings call with analysts July 5. "We are hearing more talk about furloughs, time off, and even some layoffs. And while our visibility remains very limited, we are beginning to hear about distributors laying off sales people, which we have not heard much of until very recently."

Gershwind pointed out that metalworking indexes indicated there had been a "significant contraction in manufacturing activity levels," according to a transcript of the call as provided by seekingalpha. He said that customers are describing short backlogs, soft incoming orders and low visibility. 

Erik Gershwind, MSC Industrial President & CEOErik Gershwind, MSC Industrial President & CEO

"It’s also consistent with what we are hearing from suppliers who were seeing very much the same thing," Gershwind added. "The root causes for this prolonged downturn remain the same — the ongoing effects of low oil prices and the strong U.S. dollar. The uncertainty around the impact of Brexit could serve to create further headwinds on U.S. manufacturing exports, given the stronger dollar as well as the potential slowing of underlying European demand."

MSC’s sales to vending customers were flat in its fiscal second quarter. The company also enhanced its web offerings by adding approximately 65,000 SKUs net of removals.

The company also said it entered into an agreement July 1 to purchase its Atlanta distribution center for $33.7 million.

MSC, No. 14 on Industrial Distribution’s 2015 Big 50 List, reported sales of $727.5 million, a decline of  2.4 percent year-over-year and up 6.4 percent from Q2. Profit in Q3, meanwhile, rose 2.3 percent year-over-year to $64.8 million. It was MSC's first yearly profit increase since Q2 2015 and a considerable recovery from bottoming out at a 6.8 percent decrease in Q4 2015.

MSC expects net sales for Q4 to be between $730 million and $742 million. At the midpoint, average daily sales are expected to decline approximately 5 percent. 

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