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 third-quarter results and distributor and manufacturer expectations for 4Q and 2015.
Expectations for moderate growth in the third quarter became reality for respondents to the quarterly MDM/Baird Distribution Survey. Excluding acquisitions, revenue growth was 4.4 percent year-over-year, up from 3.5 percent in the second quarter and 2.2 percent in the first quarter, according to the most recent survey results. Respondents expected 4.7 percent growth for the third quarter.
The 4.4 percent revenue growth marked wholesale distribution’s best performance since 3Q12, helping 2014 recover from a slow start and giving respondents confidence heading into next year. Although many expect business to cool slightly in the fourth quarter, with a projected growth of just 3.8 percent, most are cautiously optimistic for the longer term. Respondents forecast an average of 4.1 percent revenue growth in 2015.
Among the 19 product categories, datacomm posted the strongest revenue growth in the third quarter at 7.4 percent. The segment expects the strength to continue with forecasted revenue growth of 5.5 percent in the fourth quarter and 6.1 percent in 2015.
Respondents expect the cutting tools segment to be the top-performing category in the fourth quarter with forecasted growth of 5.8 percent and second best in 2015 with forecasted growth of 6.5 percent. Average revenue growth for cutting tools in the third quarter was 4.5 percent. Respondents project hoses & accessories to register an industry-best 6.9 percent growth in 2015.
No categories showed revenue declines during the third quarter, but some showed little growth. Building materials ranked last with just 1.4 percent revenue growth in the third quarter, though respondents expect that category to improve with 2.8 percent growth in both the fourth quarter and in 2015.
Thirty-nine percent of respondents reported that they increased their inventory levels – the highest percentage since 3Q11 – while 18 percent reported decreasing inventory levels.
Industrial supply companies are upbeat about the market, with one respondent saying it “continues to strengthen.” Every product category – general industrial (MRO), safety, cutting tools, fasteners, mechanical power transmission and hoses & accessories – is ahead of revenue growth from third quarter 2013, though some have seen small dips or only modest improvement throughout 2014.
Compared to the second quarter, cutting tools and fasteners saw revenue growth increase, while growth for the MRO, safety, mechanical power transmission and hoses & accessories segments experienced slowed.
National account activity is a concern for some industrial supply companies, as national players continue to “squeeze out the small guys.” One area where industrial supply companies said they don’t feel threatened, however, is AmazonSupply. One respondent said that of all the things causing lost sleep at night, the online giant isn’t one of them.
Respondents in the industrial gases category described the metal fabrication sector as healthy, but argon supply issues have surfaced and prices are increasing – something respondents said
during the 2Q survey they feared would happen – though the situation is expected to be resolved by mid- to late-November.
After two years of slight decreases in revenue growth, the gases & cylinder rental category registered 3 percent growth in the third quarter. Growth is projected to hit 3.4 percent in the fourth quarter and 4 percent in 2015. Welding hardgoods has seen more volatility in its revenue growth trajectory, improving from negative growth in 2Q13 to 3.4 percent this quarter. The forecast is positive, with projections of 3.8 percent revenue growth in fourth quarter and 4.7 percent revenue growth in 2015.
Industrial gases respondents said customers are seeking higher levels of service and also that M&A activity has hit a soft patch, with speculation that “independents are trying to improve their financial position.”
A cool summer in the Snowbelt kept pool & spa revenue growth down to just 3.2 percent in the third quarter, but that category leads the building products sector in the 2015 forecast with 6 percent revenue growth projection for next year and 3.5 percent revenue growth for the fourth quarter.
HVAC also was hit by the cool summer, with one distributor saying, “It has not been good for business, everyone is slow. Customers are keeping busy, but not at the pace we’re used to.” HVAC’s 3.5 percent revenue growth was down from the same quarter a year ago but has been stable the past two quarters. Respondents in this segment project growth of 4.3 percent in the fourth quarter and 4.2 percent in 2015.
Roofing, at 1.8 percent revenue growth for the quarter, is feeling the effects of a soft construction market. It had the lowest growth in 3Q and is projected to decline in the fourth quarter, although 2015 looks more promising for the category, with forecasted revenue growth of 4.1 percent.
Wire & cable companies posted a positive quarter, with datacomm the strongest segment in this quarter’s survey. Nonresidential construction recovery in certain markets bolstered the sector, according to respondents, one of whom said, “Nonresidential construction activity has gotten healthy through the year. Not in every market, but in most markets – especially metro areas.”
Electrical companies are focused on inventory as margins remain pressured. One respondent summed up the industry’s plight by saying: “The challenges of keeping inventory based on customer demand and the constant pressures to decrease pricing to compete … occurs daily.”
The oil and gas industry’s resurgence drove pipe, valve & fittings business during the third quarter, with industrial PVF posting 5.8 percent revenue growth and water & sewer posting 5.3 percent revenue growth. Pressure on margins and water & sewer pricing remain top of mind for distributors, and both categories forecast slower growth in the fourth quarter and 2015.