MSC Industrial Supply kicked off the newest round of quarterly earnings reports on Wednesday while also addressing how widespread factory shutdowns across the US have impacted sales over the past month, and the company’s financial position.
The metalworking and MRO products distributor reported that sales for its 2020 second quarter, which ended Feb. 29, were down 4.5 percent year-over-year, but that was before local and statewide orders forced the temporary closure of schools, retailers and certain industrial facilities nationwide — many of which industrial distributors sell to.
MSC said during March, the first month of MSC’s fiscal third quarter, the company took a mid-year price increase "in the neighborhood of 1 to 2 percent," which was smaller than the company's 2019 mid-year price increase. In an earnings conference call with analysts, CEO Erik Gershwind described the result as “quite good. In fact, as good as anything we've seen over the past several years." As March progressed and the COVID-19 impacts increased, MSC reduced spending company-wide and took actions to further improve liquidity, including withdrawing $300 million from its revolving credit facility.
“We are monitoring our inventory levels closely, but we also intend to use inventory as a competitive differentiator,” said Greg Clark, MSC’s interim chief financial officer, in the company’s earnings release. “Should the environment weaken further, we can and will adjust inventory levels quickly. We continue to have ample liquidity to run the business and fund our dividend. Revenues would have to decline year-over-year in the range of 40 percent to 50 percent for operating cash flow to turn negative. At these levels, we would have taken additional significant cost-down actions and could sustain multiple quarters given our liquidity position.”
In the earnings call, Gershwind mentioned that roughly 20 percent of MSC customers have shut down as of Wednesday, though the data that figure is based on is constantly changing. He noted those closures are widespread, but acute in the midwest related to automotive.
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CEO Erik Gershwind added that MSC’s sales were up considerably YoY during the first three weeks of March, but then dropped off significantly over the last two weeks (which technically included the first three days of April) as customer shutdowns spread rapidly across the US. He said that as March progressed, large orders and sales of safety and janitorial products surged, particularly to government, while sales of sales of other product lines dropped significantly.
Gershwind said that a third notable trend during MSC’s March was an unusually large gap between orders/bookings and invoicing, in that while bookings for March were up in the high single-digits year-over-year, sales were down in the mid-single digits. That gap was due to a surge in safety and janitorial orders, scarcity of product, longer lead times and a larger-than-normal backlog in MSC’s warehouses.
“We anticipate the majority of these bookings will invoice during the months of April, May and June, which would provide a growth tailwind to buffer additional softness that may come,” Gershwind said.