MSC Industrial CEO Optimistic About Market Conditions

Despite sales and profit declines in its Q2 earnings report issued Wednesday and further declines predicted for Q3, MSC CEO Erik Gershwind spoke about some positive market trends that may bode well for the industrial economy.

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On Wednesday, MSC Industrial was the first of Industrial Distribution's Big 50 List companies (No. 14) to share its fiscal earnings for its most recent completed quarter. That was 2016 Q2 for MSC, and the results weren't surprising.

Citing continued challenging industrial economy conditions that have led to low demand across the market, MSC's Q2 sales were down 3.2 percent year-over-year and down 3.3 percent from Q1. Profit was down 4 percent from last year and down 11 percent from Q1. Overall, the size of the year-over-year sales and profit declines were nearly identical to those in Q1.

Following its earnings report, MSC held an investor conference call in which CEO Erik Gershwind and CFO Rustom Jilla discussed the company's Q2 performance and the factors that led to it.

The industrial recession has been in place for more than a year now, so statements about challenging conditions aren't anything new. But what was new out of the investor call was a sense of optimism about the market conditions, provided by Gershwind. Most of the post-earnings conference calls ID has followed over the past year are pessimistic in nature about the outlook for the rest of 2016 and beyond.

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

Gershwind acknowledged a significant slowdown in manufacturing and U.S. factory activity, but touched on several macro indicators that have shown improvement since its Q1 report on Jan. 6. He mentioned two manufacturing indicators, ISM and MBI, both showed slight improvements in February, and continued improvement in March as a sign of manufacturing expansion.

ISM's latest report showed a PMI reading of 51.8 percent, up 2.3 percent from February. That indicates manufacturing growth for the first time since a reading of 51 percent in August 2015. Anything above 50 percent indicates expansion.

"So demand remains quite weak. But there is a sense that the industrial economy may be stabilizing albeit at low levels," Gershwind said in the Wednesday call. "This can be seen in the March MBI reading, which if sustained would indicate a leveling in metal working in the months and quarters to come.

"I don’t want to leave you with the impression that we're hearing things are going to explode, but certainly from relative to where we've been that would be an improved condition and we would expect improved performance in the quarters to come."

Gershwind said MSC recently completed a customer survey about their future business prospects, with the results saying most customers feel business will stay the same and possibly approve in the months aheaad.

"Should the uptick in the MBI sustain and confirm what we are hearing from our customers, this would bode well for future quarters," Gershwind said.

E-commerce

Gershwind also touched on another slight rise in the portion of MSC Industrial's total sales that came from e-commerce.

During Q2, e-commerce was responsible for 57.8 percent of revenue, up from 57.0 percent in Q1 and up from 55.4 percent in Q2 2015.

Gershwind said sales to vending customers contributed 20 percent of the e-commerce growth rate, while the company added approximately 5,000 SKUs to its online offering in Q2 and is on track to add roughly 150,000 SKUs for fiscal 2016.

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