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 results and distributor and manufacturer expectations for 2013.
Even with uncertainty and a disruptive mid-week holiday schedule, respondents to the fourth-quarter 2012 MDM/Baird Distribution Survey passed the revenue expectations they had in the third-quarter survey. Fourth-quarter revenues were up a modest 3 percent overall for respondents, slightly higher than the forecast 2.4 percent growth. All segments represented in the survey reported positive growth in the quarter.
Respondents expect revenues to grow 3.4 percent in first quarter 2013 and raised full-year expectations to 4.4 percent. In the third-quarter survey, respondents expected 3.6 percent growth for 2013.
Rental equipment once again reported the highest rate of revenue growth with an 8.2 percent increase on average. Cutting tools saw revenue growth of 8.1 percent, and plumbing reported 6 percent growth in the fourth quarter. All three segments reported positive signs, with activity “ticking up.”
PVF-water & sewer and mechanical/power transmission reported the lowest growth rates. While respondents in the PVF-water & sewer segment reported “meaningful deceleration,” tough comparisons were partly to blame for slower revenue growth in the mechanical/power transmission segment.
Across segments, gross margins were up by 50 basis points in the fourth quarter 2012, and pricing up by 1 percent.
About a third of respondents (32 percent) decreased inventory levels in the fourth quarter 2012, while 28 percent increased inventory. The increase in inventory is mostly consistent with seasonal trends, according to the survey, but does indicate some lingering caution.
In the first quarter 2013, 28 percent expect to increase inventories, with 22 percent planning to decrease, also in line with seasonal patterns. However, continued uncertainty about the economic environment has led to more respondents expecting to maintain current inventory levels for the near future.
Here is the breakdown of results:
Industrial supply companies reported mixed results. Cutting tools recovered from its slowdown in the third quarter, but growth is still slower than reported during the first half of the year. General industrial (MRO) and safety were up 1.8 percent and 1.7 percent respectively – significantly lower than in the prior quarter.
“The pace of decline was most severe in 2Q/3Q,” wrote one respondent. “Things leveled off more in 4Q.”
Pricing remained a positive for this segment, increasing 2 percent on average. First-quarter expectations for industrial supply companies are for mid-single digit growth, with an improved outlook for the year overall.
“We expect 2013 to rebound as more certainty and confidence return to the commercial markets,” says one respondent. That said, other respondents indicated they would be keeping a “tight rein on inventory and expenses” because of the lingering uncertainty around the economy and political environment.
In gases and hardgoods, gases sales continued to outpace hardgoods for the second consecutive quarter. Both product groups however saw year-over-year growth slightly above the distribution industry average. Gases sales were up less than companies in this segment expected during the quarter, while hardgoods revenues came in higher than forecast.
Pricing was on par with trends in the overall survey, increasing 1 percent to 2 percent on average. First-quarter expectations are for above-average growth in both groups. The “rumor mills are alive and well” about merger and acquisition activity in this segment, according to one respondent.
In building products, fourth quarter 2012 revenues were mixed versus third-quarter levels. Building materials saw the best relative trend, with growth significantly outpacing expectations from the prior survey. Building materials revenues grew 5.2 percent on average, compared with 0.4 percent forecast in the third-quarter survey. HVAC results were up 2.7 percent. Roofing was up 1.6 percent from the previous year, and pool & spa was up 3.2 percent.
For the first quarter 2013, expectations for this segment are mixed, as well. Building materials and roofing respondents expect slightly higher than average revenue growth, while others are forecasting growth slightly below average.
The lingering impact of regulations on the HVAC segment related to dry-shipped R-22 units has diminished, according to respondents. “It’s still a factor, but a smaller factor,” wrote one.
Wire & cable companies reported growth in the third quarter, with electrical respondents up 4.5 percent and datacomm up 2.7 percent from the prior-year period. The growth trajectory for both groups continues to drift lower, according to the survey, but appears to be leveling off. Datacomm business continues to be sluggish, according to respondents.
The utility market is a bright spot, boosted somewhat by the aftermath of Hurricane Sandy. In addition, volatile copper prices appear to be flattening out. “Copper is kind of a non-issue, which is a good thing,” says one respondent. “With flat copper we can usually push margins up or at least maintain them.”
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