Robert W. Baird & Co., in partnership with Modern Distribution Management, conducted a survey of about 500 distributors and manufacturers to gauge business trends and the outlook for the distribution industry in diverse sectors. Here is a summary of first-quarter results and distributor and manufacturer expectations for 2014.
Revenue growth in the first quarter was lower than expected for respondents to the first-quarter 2014 MDM/Baird Distribution Survey. First-quarter revenues, on average, were up 2.2 percent overall, lower than the 4.3 percent growth forecast in the fourth-quarter survey.
Respondents expect revenues to grow 4.1 percent in the second quarter of 2014 and 4.9 percent for the full year.
Harsh winter weather during the first quarter may have delayed some expected sales, according to respondents, but many view it as opportunity going forward. As one industrial distributor noted: “March is coming to life; there’s a catch-up going on.”
Excluding weather, underlying business trends for most survey respondents were stable (53 percent) or accelerating (36 percent). This result carried across sectors, with 80 percent or more of respondents in most sectors identifying trends as stable to accelerating. PVF – water & sewer was the exception with slightly fewer – 70 percent to 80 percent.
PVF – water & sewer once again posted the strongest revenue growth in the quarter, with average increases of 8.1 percent. Much of the growth in this segment was attributed to depletion of unfinished residential lots, which necessitates new investment.
Two segments reported revenue declines in the first quarter. Fasteners saw the largest decline, falling 1.1 percent in the quarter. Roofing fell 0.6 percent, but respondents in this segment are expecting a much stronger second quarter with revenue growth of 6.6 percent on average.
Across segments, gross margins were up by 60 basis points in the first quarter 2014, and pricing was up 1.1 percent.
In line with expectations from the fourth-quarter survey, 37 percent of respondents said they increased inventory levels in the first quarter. Slightly more respondents (21 percent) decreased inventory levels during the quarter than said they anticipated doing so in the prior quarter (18 percent).
In the second quarter, 39 percent of respondents expect to increase inventories, with 15 percent planning to decrease, consistent with normal seasonality and implying a normal ramp-up into the summer season.
Here is the breakdown of results:
Industrial supply companies reported mixed results compared with fourth-quarter sales growth. Cutting tools remained the weakest product category, but demonstrated a relatively stable trajectory. Safety was the strongest product category with growth of 6.9 percent. Industrial/manufacturing MRO sales growth slowed during the first quarter with average revenue gains of 2.4 percent, compared with 5.8 percent last quarter.
The end of March marked a shift in sales, as bad weather eased in many areas of the country. “March has taken off pretty strong,” one respondent noted. “The activity level has really picked up, even better than sales (results).”
While much attention has been paid to AmazonSupply’s recent moves in the industrial space, a new big-box competitor appears to be making more noise now. Respondents have seen Staples “making some noise in safety.”
“We’ve heard that Staples is trying to hire safety specialists,” one respondent said, “and they’re not being cheap either.”
Customers continue to demand more services, according to industrial supply respondents, including vending and other vendor-managed inventory services.
E-commerce remains a focus, but wariness about expanding e-commerce platforms remains. “Ready availability of (online) price comparisons is challenging,” one distributor said.
Industrial supply companies expect a mixed bag for the second quarter. Growth is forecast to accelerate in cutting tools (+3.9 percent) and industrial/manufacturing MRO (+5 percent), while the growth rate is expected to slow significantly in safety products (+1.4 percent).
For 2014, safety companies expect revenue growth of 0.9 percent, with industrial/manufacturing MRO companies forecasting an average of 5.4 percent annual growth and cutting tools companies forecasting 4.4 percent annual growth.
In industrial gases, gases sales growth outpaced hardgoods for the seventh straight quarter. Gases increased 3.7 percent, while hardgoods increased 1.9 percent.
Pricing increased 2 percent for industrial gases. Prices continue to gravitate higher, but within “normal” ranges. “We went out with a price increase and in general aren’t seeing any issues,” one respondent said.
Expectations for revenue growth in 2014 are in line with the overall average. Gases companies expect revenue to grow 4.1 percent for the year; hardgoods companies are forecasting growth of 5.6 percent. For the second quarter, gases companies expect growth of 5.3 percent, and hardgoods companies expect growth of 5.1 percent.
Ongoing issues with helium supply are showing signs of leveling off for many respondents, while others still see it as “a headache.” “We haven’t seen any movement yet,” one respondent said.
Customers appear to be investing in their businesses again, as
demand for bigger ticket items in the hardgoods category has increased.
In building products, HVAC saw strong growth in the first quarter (5.6 percent), albeit lower than the 12.8 percent seen in the fourth quarter. Roofing and pool & spa companies, on the other hand, had a relatively stagnant quarter. Roofing fell 0.6 percent, and pool & spa grew 0.5 percent. Non-manufacturing MRO fared slightly better with average sales growth of 2.9 percent.
Cold weather drove up demand for HVAC products during the quarter, even with the loss of some sales days. That same weather, however, “shut off all demand” in roofing, according to respondents.
For both segments, the outlook for 2014 is positive, with demand for roofing materials expected to “break as soon as the weather does.”
For 2014, three of the building products segments are expected to grow at a stronger pace than the overall survey results. HVAC companies are forecasting average annual growth of 5.4 percent, roofing companies are forecasting growth of 7.8 percent, and pool & spa companies expect growth of 7.2 percent. Non-manufacturing MRO is expected to remain relatively steady with average annual sales growth of 3.2 percent forecast.
Wire & cable companies reported a slowing of sales growth in the first quarter, with revenue growth for electrical companies of 1.1 percent still outpacing datacomm (0.5 percent).
While optimism about increased sales from nonresidential construction has grown, datacomm trends appear to be “stuck in neutral.” “The market isn’t all that robust,” one respondent said. Utilities also appeared to be a strong market in the first quarter.
Pricing trends for both segments were flat to slightly positive on average, but copper prices threaten to be a modest headwind going forward. The outlook for 2014 calls for 4 percent to 6 percent growth.