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 second-quarter results and distributor and manufacturer expectations for 2015.
Hindered earlier in the year by temporary disruptions such as the West Coast port slowdown and inclement weather, distributors in the second quarter faced much fiercer headwinds as the oil & gas slump lingered and the strong U.S. dollar continued to curtail exports.
The broadening industrial weakness stymied sales growth for distributors across sectors and geographies during the period. Excluding acquisitions, revenue growth was just 1.8 percent from April to June, according to the most recent MDM-Baird Distribution Survey. That’s down from 3.5 percent in the second quarter of 2014 and down from 2.7 percent the previous quarter.
While an improving commercial construction climate partially offset the tepid results, the 1.8 percent revenue growth marked the second straight period of decline and a two-year low for distributors.
Pricing also continued a slow downward trajectory in the second quarter with 0.5 percent improvement year-over-year, as compared to 0.8 percent in the first quarter of 2015. Survey respondents said margin pressures were driven by several headwinds, including lower commodity prices, soft industrial demand and efforts by national distributors to gain market share. Pricing was slightly above average in the Northeast and South, while international markets saw slight price deflation.
The lackluster quarter portends more dismal days for distributors. According to the last Baird survey: “2Q15 trends will set the tone for the remainder of 2015.” That forecast appears to be holding true, as distributors now project 2.9 percent growth in the third quarter and just 2.2 percent growth for the year, down from the 3.6 percent growth they projected for 2015 just a few months ago.
Among the 19 product sectors, pool & spa registered the strongest revenue growth for the quarter at 5.3 percent. Survey respondents forecast the sector to cool with projected revenue growth of 3.9 percent for the third quarter and 3 percent for the full year.
Other sectors that performed well in the second quarter included plumbing (5 percent), datacomm (4.6 percent) and building materials (4.3 percent). Survey respondents forecast plumbing and datacomm to see slight changes in the third quarter before settling at 3.9 percent each for 2015. Building materials, which saw improvement after a flat first quarter, is projected to dip to 2 percent in the third quarter before improving to 3.9 percent for the year, the third-highest forecast among sectors.
Survey respondents project HVAC as the top-performing sector in the third quarter at 5.4 percent due to increased residential replacement demand. Rental equipment has the highest projection for 2015 at 4.6 percent.
Two subsectors recorded negative revenue growth during the second quarter – mechanical/power transmission (-3.8 percent) and cutting tools (-1 percent). Hoses & accessories (0.7 percent) and MRO – manufacturing (0.8 percent) also performed poorly. Mechanical/power transmission is the only sector forecasted for a negative third quarter (-1.1 percent) and negative 2015 (-0.5 percent).
Industrial supply companies fared the worst in the second quarter, with an average growth of 0.3 percent among the category’s six sectors: MRO – manufacturing, safety, cutting tools, fasteners, mechanical/power transmission and hoses & accessories.
“We have seen a marked slowdown across virtually all industrial segments,” said one survey respondent in industrial supply. “Oil & gas is obvious, but the slowdown has been more widespread in the last 45-60 days.”
Other than general softness, key themes in industrial supply included
persistent pricing pressure and the “return of hesitancy.” As one respondent noted: “Companies are still nervous from 2009 and are being very cautious.” That caution has led to some destocking, with “large distributors working to reduce inventories and improve turns,” a respondent said.
Hesitancy across the category was reflected in revenue growth projections for the third quarter and 2015. Mechanical/power transmission, which saw similarly negative readings in mid-2013, was the only sector forecasted for negative growth in the next quarter and for the year. Only safety and fasteners came in above the 2 percent threshold at 2.7 percent and 2.3 percent, respectively. Forecasts for 2015 for the other industrial supply categories are: hoses & accessories (1.7 percent), MRO – manufacturing (1 percent) and cutting tools (0.3 percent).
The industrial gases category saw more stability than the other categories in second quarter due to a slower M&A climate and fewer supply chain snags, although weak equipment demand could dampen growth moving forward. Gases & cylinder rental registered an above-average 3.1 percent revenue growth in the second quarter and is forecasted to grow throughout the rest of the year, with a projected 3.7 percent growth in 3Q and 4 percent growth in 2015.
Welding hardgoods saw 3.2 percent revenue growth in the second quarter; it is expected to stay flat in the third quarter and improve to 3.8 percent for the year. Pricing remains positive, but heightened competitive pressure concerns many distributors.
After a bleak start to the year, the building products and facilities maintenance category scored a comeback in the second quarter. Its sectors combined to average 4 percent revenue growth, more than double the industry average. Pool & spa, plumbing and building materials sectors did well – scoring three of the top four spots in the second quarter – but so did roofing (3.6 percent), HVAC (3.4 percent) and MRO – non-manufacturing (2.5 percent).
The upward trajectory from first quarter to second quarter isn’t expected to last, however, as projections have most sectors flat or down for the remainder of 2015. One issue at the root of that forecasted decline is the dwindling labor pool, with one survey respondent noting: “The only thing that’s holding us back is that contractors downsized during the downturn; they don’t have the folks to do the work.”
Modest commercial construction again boosted electrical & datacomm companies in the second quarter, with datacomm performing especially well at 4.6 percent revenue growth and electrical solidly above the industry average at 3 percent. Datacomm expects to see a brief improvement in the third quarter to 4.8 percent before dropping to 3.7 percent for the year, while electrical should see a more marked rise in the third quarter, to 4.7 percent, before settling back to 3 percent growth in 2015.
Although the industrial market’s weakness has taken a toll, construction remains steady and is driving growth across the sectors.
The oil & gas slump again hurt the pipe, valves & fittings category, especially in regard to shrinking capex, although industrial PVF – industrial & energy (3.1 percent) and PVF – water and sewer (2.7 percent) outperformed many other sectors during the second quarter.
PVF – industrial & energy is expected to drop in the third quarter to 1.2 percent before settling in at 2.2 percent for 2015, while PVF – water and sewer is projected to rise steadily as the year progresses to 3.2 percent in 3Q and 3.5 percent for the year. “The market is soft and may get softer as major projects in the works are depleted and no new projects get started,” is how one respondent summed up the biggest problem facing those with oil & gas exposure.