Robert W. Baird & Co., in partnership with Modern Distribution Management, conducted a survey of more than 500 distributors and manufacturers to gauge business trends and the outlook for the distribution industry in diverse sectors. Here is a summary of fourth-quarter 2015 results and distributor and manufacturer expectations for 2016.
As demand plummeted in the fourth quarter under the weight of economic weakness and global turmoil, distributor revenues followed suit by sinking to their lowest level since the aftermath of the Great Recession, according to the most recent MDM-Baird Distribution Survey.
Excluding acquisitions, fourth-quarter revenues decreased 0.6 percent after respondents projected 0.6 percent growth for the period, marking the first dip into negative digits in years. Distributors grappled with dropping oil prices, an unfavorable currency exchange, commodity declines and reduced manufacturing production.
U.S. economic indicators steadily weakened during the last two quarters of 2015, and revenue growth narrowed to just a few end markets, most notably construction, according to the survey. Despite the lack of breadth in growth, however, the consumer economy continues to outweigh recessionary conditions in most industrial markets.
Among U.S. regions, only the West crept into the black. The Northeast was flat, while the Midwest and South saw negative revenue growth. Canada and other international regions also suffered, primarily due to China’s financial crisis and unfavorable currency exchanges.
Pricing took another tumble in the fourth quarter at -0.1 percent. Two periods of decline followed five years of pricing improvement, albeit mostly flat since fourth quarter 2013. Almost a third – 32.5 percent – of survey respondents reported seasonally lower inventory levels while 23.5 percent reported increased inventory levels in the quarter. Thirty-two percent of respondents expect to increase their inventories in the first quarter.
Distributors see a glimmer of hope in 2016, with projected revenue growth of 2.1 percent for the first quarter and 3.1 percent for the year – a “weak first half of 2016, with hopes of a stronger second half,” is how one respondent described expectations.
Among the 19 product sectors, MRO – non-manufacturing registered the strongest revenue growth at 3.8 percent, displacing pool & spa for the top spot. Strong multifamily demand helped drive the segment’s growth as 2015 came to a close, and it is forecasted for 3.4 percent revenue growth in the first quarter and 3.8 percent revenue growth for 2016, flat but above average.
Other sectors that performed well in the third quarter included building materials & lumber (3 percent), datacomm (2.9 percent), gases & cylinder rental (2.8 percent) and pool & spa (2.3 percent). All of these sectors are projected to have average first quarters but strong years with revenue growth of 4.9 percent, 4.5 percent, 4 percent and 7.3 percent, respectively, for 2016.
The 4.4 percent revenue growth forecast for datacomm in the first quarter and the 7.3 percent revenue growth forecast for pool & spa in 2016 are the highest projections among all sectors.
Five sectors recorded negative revenue growth in the fourth quarter, with three of them severely sagging
the industry average by declining 5 percent or more. Mechanical/power transmission fell 10 percent, its third-straight quarter bringing up the rear. Industrial/energy PVF (-8 percent), hoses & accessories (-5 percent), plumbing (-2.1 percent) and metalworking/cutting tools (-1.9 percent) also finished in the red during 4Q.
While numerous sectors (eight of 19) are forecasting a negative first quarter, only two expect declines for all of 2016 – water and sewer products (-1.3 percent) and industrial/energy PVF (-0.2 percent).
Industrial supply companies again performed poorly in the quarter, with an average of -2.6 percent revenue decline among the category’s six sectors: MRO – manufacturing, safety, cutting tools, fasteners, mechanical/power transmission and hoses & accessories.
While revenue growth was flat to down across the category, cutting tools (-1.9 percent) was negative for the third straight quarter and hoses & accessories (-5 percent) and mechanical/power transmission (-10 percent) were among the worst-performing sectors in the industry.
Survey respondents expect a modest rebound for the category in the first quarter, with 0.7 percent revenue growth, and a more solid 2016 at 2.8 percent revenue growth, with fasteners (4.6 percent) and metalworking/cutting tools (4.5 percent) bolstering the sector this year. Pricing, however, remains a concern for distributors in these sectors, with one respondent noting, “The significant drop in pricing of major commodities continues to hamper any significant market improvement in the short term.”
The industrial gases category (gases & cylinder rental and welding hardgoods) saw above-average revenue growth in the fourth quarter at 1.5 percent, anchored by strength in gases & cylinder rental at 2.8 percent. While the sector forecasts a drop in the first quarter to 0.6 percent, it expects to close 2016 on a high note at 3.3 percent.
Both industrial gases sectors expect to post a near or above average year, with gases & cylinder rental finishing at 4 percent revenue growth and welding hardgoods at 2.5 percent revenue growth. A lack of disruptions on the gases supply chain should prevent higher prices, as the third-quarter CO2 shortage has been resolved.
Big news hit the sector last quarter when Air Liquide announced it would acquire Airgas, prompting survey respondents to comment on how the deal might impact business. “We would expect a fair amount of turmoil, employee turnover and customers that may be unhappy with whatever comes from that deal,” said one. “Traditionally these types of deals create opportunities for independents,” said another.
The building products and facilities maintenance category again performed relatively well with four sectors – MRO – non-industrial, building materials & lumber, pool & spa and roofing – ranking near the top for revenue growth. The category averaged 1.5 percent revenue growth in the quarter. Plumbing’s -2.1 percent growth dragged down the other sectors. Respondents in this category expect to do well in first quarter at 3.2 percent and 2016 at 4.2 percent.
Mild weather in the fourth quarter negatively impacted HVAC demand, with one survey respondent
noting ”that fewer sales are “directly related to warmer weather,” and another stating, “The equipment age and issues are still there. If we get colder weather in January/February, the concern is, ‘Can we take care of it?’” Meanwhile, that same mild weather created “abnormally high demand” for roofing, according to a respondent.
Nonresidential construction again kept electrical & datacomm companies above the industry average during the fourth quarter, as distributors in this category averaged 1.9 percent revenue growth – flat sequentially but still the highest among all categories.
Datacomm was the stronger of the two sectors at 2.9 percent, but its revenue growth was “still below previous broad mid-single-digit range,” according to the survey. The sector is expected to rise in the first quarter to 4.4 percent and improve slightly for the remainder of 2016 to 4.5 percent.
Survey respondents cited some of the common industry themes, such as hope for continued strength in construction but concern over industrial softness. Comments included: “Moderate growth in nonresidential construction. We see lots of good opportunities, and backlog is growing in January”; “Commercial construction outlook consistent with 2015 levels”; and “4Q was down significantly more than 3Q. Anything that has to do with commodities (energy, metals, ag) is dramatically off.”
The oil & gas slump took an especially heavy toll on revenue growth in the pipe, valves & fittings category. With the industrial/energy PVF sector (-8 percent) weighing it down, the category saw -3.9 percent revenue growth in the fourth quarter. Respondents expect the category to worsen in the first quarter at -4.8 percent and then improve to -0.8 for 2016.
Words like “flat” and “slowdown” appeared throughout respondents’ comments – as they did elsewhere in the survey – but one sentiment in particular struck an ominous tone for the category: “First quarter will be very, very tough on the entire pipe, valve and fitting industry. We expect customer mergers, acquisitions, and some customers not making it through this next year.”