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 2015.
Disruptions that included the West Coast port slowdown, slumping oil & gas market, surging U.S. dollar and inclement weather took a toll on distributors’ sales in the first quarter, according to the most recent MDM-Baird Distribution Survey.
Excluding acquisitions, revenue growth fell short of respondents’ expectations, reaching just 2.7 percent in the first three months of 2015. That was down from 4.4 percent in the fourth quarter of 2014 and a full percentage point shy of what respondents projected for the period.
Despite an abundance of supply chain and economic headwinds, some positives emerged from the survey. The quarter saw better revenue growth than first quarter 2014, which managed only 2.2 percent, and the strong U.S. dollar bolstered growth outside North America, with international revenues exceeding all domestic geographic regions in the first quarter.
Distributors expect a slight recovery in the second quarter, with projections for 3.7 percent revenue growth. According to the survey: “2Q15 trends will set the tone for the remainder of 2015.” Distributors forecast 3.6 percent revenue growth for 2015, down considerably from the 4.9 percent growth in 2015 they expected just three months ago.
Though pricing remained somewhat steady in the first quarter, with a 0.8 percent improvement year-over-year, survey respondents noted a challenging environment due to deflationary commodity trends. And some distributors have sought supplier price concessions, which represent a potential modest offset to gross margin pressures. Pricing was fairly consistent across geographic regions; high marks in the South and internationally were offset by below-average results in the Northeast and West.
Among the 19 product sectors, rental equipment posted the strongest revenue growth in the first quarter at 8.7 percent. Survey respondents also expect rental equipment to post a strong second quarter, with projected revenue growth of 7.3 percent, but then taper the rest of the year with a 2015 forecast of just 1.7 percent.
Other sectors performing well in the first quarter include pool & spa (6.1 percent), welding hardgoods (5.5 percent) and datacomm (5.3 percent). All three have high projections for 2015, as well, with pool & spa forecasted to post the highest revenue growth of the year at 6.9 percent due to a solid start to the selling season, according to the survey. Survey respondents project welding hardgoods to post 5.2 percent revenue growth and datacomm to post 4.8 percent revenue growth in 2015.
Survey respondents expect HVAC to have a strong year with 6.1 percent revenue growth, followed by gases & cylinder rental (5.9 percent) and fasteners (5.2 percent).
Only three sectors saw negative revenue growth in the first quarter – building materials (-0.1 percent), mechanical/power transmission (-0.3 percent) and PVF – water & sewer (-1 percent). But all of them are projected to post revenue growth in 2015 (4.1 percent, 3.2 percent and 1.6 percent, respectively).
Industrial supply companies began 2015 with momentum carried over from fourth-quarter, but “industrial trends (that were) choppier than expected” and “numerous growth headwinds” sapped their strength in the first quarter and sent them after supplier concessions to offset the challenging climate.
Fasteners posted 3.2 percent revenue growth in the first quarter, with a forecast of 5.2 percent for the year. MRO – industrial and manufacturing posted 4.5 percent revenue growth last quarter, and respondents expect growth of 4.2 percent in 2015.
Respondents expect the industrial supply category’s other sectors to post modest gains in 2015, at or slightly above industry average performances in the first quarter. Cutting tools posted 3.2 percent revenue growth in the first quarter and is projected for 3.7 percent in 2015. It was followed by safety (2 percent revenue growth in 1Q and projected for 2.4 percent in 2015), mechanical/power transmission (-0.3 percent and 3.2 percent), and hoses & accessories (0.8 percent and 1 percent).
Respondents summed up the first-quarter performance with words like “soft” and “slow,” with one calling
the start to 2015 “surprisingly flat and unanticipated; we thought the economic barometers were more promising entering the year,” and another adding, “We were figuring on a repeat of last year.” More than one respondent attributed the soft numbers to declining sales in the energy sector, while others blamed weather and import issues as the main headwinds.
The industrial gases category benefited from a lack of M&A and supply chain issues, which brought some stability to its sectors and positioned it for a solid 2015. Gases & cylinder rental has one of the highest revenue growth forecasts for the year at 5.9 percent, while welding hardgoods turned in 5.5 percent revenue growth in the first quarter and expects revenue growth of 5.2 percent for 2015.
Though trends appear to be choppy, according to the survey, with some companies citing 2 to 3 percent growth and others lamenting the sluggish economy, one respondent noted, “All appears to be steady, with the exception of a busier spring/summer.”
The building products and facilities maintenance category was among the worst performing in the first quarter, but respondents project each sector to show significant revenue increases in 2015. Pool & spa is forecasted to post the highest revenue growth of the year at 6.9 percent, followed closely by HVAC at 6.1 percent. While MRO – non-manufacturing (2.1 percent), roofing (1.4 percent), plumbing (1.1 percent) and building materials (-0.1 percent) all performed below the industry average in the first quarter, each has higher expectations for 2015.
Nationals were viewed by respondents as taking share in the MRO – non-manufacturing. One respondent said, “National companies are driving down prices and margins. They have deep pockets and appear to be willing to give up profitability for market share.”
Commercial construction momentum bolstered electrical & datacomm companies in the first quarter, with datacomm at 5.3 percent revenue growth and electrical just above the industry average at 2.8 percent. The two sectors appear on different trajectories in 2015, however, with datacomm expected to dip slightly to 4.8 percent revenue growth and electrical rising to 3.5 percent.
Although construction has been solid, bidding remains competitive, and concerns have risen over lower copper prices and “lots of M&A chatter,” especially involving Sonepar. Comments included “Sonepar and the other big guys keep sucking up medium-size regional players,” and “We’re not going to compete with the Sonepars and pay that kind of multiple, especially in this kind of market.”
The oil and gas slump was especially tough on the pipe, valves & fittings category with industrial PVF – industrial & energy notching just 1.9 percent revenue growth in the first quarter, and PVF – water & sewer performing the worst of all sectors at -1 percent. The sectors’ upstream has been hit hardest by low oil prices and reduced rig counts, according to one respondent, while the midstream hasn’t been affected and the downstream has benefited.