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Strategic Pricing and Technology on Distributors’ Minds

business in the first quarter.

Like many distributors, Airgas has had to implement price management initiatives throughout its business to keep up with the pace of raw materials price increases. Airgas and Praxair Distribution both announced price increases in the past month to compensate. Airgas says that move was to “stay ahead of the curve.”

In addition, the company reports tight supply conditions for some gases, including argon and helium, so in some markets is working on product sourcing strategies.

Airgas expects to make “significant acquisitions over the next several months.”

Wesco Distribution
Electrical distributor Wesco reported a 26 percent sales increase to $1.3 billion in the second quarter. Profit was up 50 percent.

Wesco reported strong activity across its primary end markets: industrial MRO and construction. The company expects an increased level of expenditures in both the industrial and commercial construction markets driven by factory utilization, occupancy rates, oil and gas activity and utility industry initiatives. Residential construction declines have had little effect on business.

Wesco saw increased quote and bid activity in large projects in many of its end markets.

The distributor has “refined processes and controls for dealing with rising and falling commodity prices.” Inventory management and Wesco’s lean initiatives have helped mitigate some of this volatility. Copper future prices, for example, were $2.50 in the start of the second quarter and rose to a high of $4.07, with an average price of $3.37.

Wesco expects the commodity and product cost pressures to continue at a moderate pace and expects to maintain or increase the sales level in these commodity product areas.

Raw materials cost increases have delayed some construction projects. But Wesco reported that despite these delays, its outlook is favorable, and it expects these delayed projects to support its future growth.

Utility spending is boosting sales. That market is driven by housing starts, which are still high, weather including the recent heat waves, natural disasters and ongoing maintenance.

Investor-owned utilities especially are spending right now on upgrading infrastructure. Public utilities have a more stable spending pattern and a longer-term view. Utilities comprise about 20 percent of Wesco’s revenues.

Wesco is “actively participating” in acquisition-shopping.

Watsco, which reported a 16 percent revenue jump for the second quarter, is also building a network of stores for contractors. In the last 12 months, the HVAC distributor has opened 23 new locations. It is also expanding its product selection for contractors and homeowners. Watsco has around 350 locations in 31 states.

About 90 percent of Watsco’s business is in the Sunbelt, from Florida to California. Population trends support that core. That’s where the useful life of an air conditioning system is shortest due to salt-water corrosion, heat and run-time. Watsco’s acquisition strategy is focused there.

Most of Watsco’s unit sales are replacements, and not related to new residential construction, so the company has felt little impact from the slowdown in housing starts. In fact, Watsco reports that replacement sales provide pricing that is 10-15 percentage points higher than new units, and therefore provide better profits.

For Watsco, rising energy prices have been a boon to business. The distributor has stepped in to take advantage of high-efficiency products, which the company can charge more for while saving consumers money on their energy bills.

About 15 percent of Watsco’s sales are in commercial refrigeration. – Lindsay Young

Related Links
Strategic Pricing: The Next Big Thing?

MDM has been listening to quarterly earnings conference calls in the past month. We found a few highlighted trends affecting sales and margins in the industrial and construction arenas. Many larger distributors are increasing focus on strategic pricing initiatives, as well as standardizing technology throughout their national networks. Following are synopses of earnings calls from Industrial Distribution Group, Wesco Distribution, Watsco and Airgas.

Industrial Distribution Group
IDG sales increased just 2.8 percent in the second quarter ended June 30, 2006. Net income was down slightly. In their conference call, IDG executives focused on the company’s efforts to implement its One Company initiative as well as strategic pricing to improve margins.

While the overall sales growth is unacceptable, we delivered significant sales growth in three of our four regions,” said CEO Charles Lingenfelter. The fourth region was the Northeast, where sales decreased.

“I’ve had concerns regarding the lack of acceptable sales growth in the past four years in this region. Further I was not satisfied with the speed with which the region is embracing the One Company philosophy, which I think will be instrumental in driving sales and margin expansion.”

To turn around sales in that region, the company is looking at freight costs and reexamining contracts that are not profitable. Lingenfelter expects sales to rebound in the next four months. The president of that region resigned in mid-July, and executives are meeting with sales executives from the Northeast to hone pricing and sales efforts.

As part of IDG’s One Company initiative, the company has established product manager positions for safety products, assembly tools and material handling equipment segments, which will benefit from the evolving U.S. assembly segment and offset loss in sales from outsourcing of component manufacturing.

Soon, that team will expand to include product managers of cutting tools and abrasives who will focus on product line consolidation and margin expansion. IDG has also added directors of strategic pricing and strategic supplier relationships.

IDG is developing and deploying an e-commerce strategy, reengineering its sales force and restructuring its purchasing process to take advantage of its new one-company approach. That approach includes converting all branches to one technology system.

The company has started implementing strategic pricing as well IDG hopes to put improved pricing models into place by the end of fourth quarter 2006. What’s important, IDG says, is not just sales growth, but profitable sales growth.

Airgas has benefited from strong industrial demand throughout the U.S., but especially in the Gulf Coast, Mountain West and Pacific Northwest. The industrial gases distributor reported sales increase of 14 percent in its first quarter 2007.

A recent report found that iron and steel products, aerospace, mining, HVAC, and nonresidential construction were in the accelerating stage of their growth cycles, Airgas reported. Traditional metal fabrication is strong and on the rebound, propelled by investment in maintaining infrastructure such as power plants and pipelines by energy companies, and exports of heavy machinery and equipment. Highways and airports, as well as rebuilding in the Gulf Coast are also positively impacting sales.

Airgas reported that the metal fabrication backlog for construction equipment, other machines, tanks and railcars is “huge.” The flattening Airgas saw in hard-line manufacturing regions seems to have ended.

Airgas has recently increased its focus on the new-construction market by opening “contractor-friendly” stores in key construction markets. It is also expanding its product lines. It reported 14 percent sales increase in its construction

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