WESCO, Rexel, Grainger Share Q2 Results

Last week the electrical industry’s major, publicly held, distributors shared their Q2 performance. Reading their quarterly reports highlights that there continue to be industrial challenges, they are responding differently to the MRO and construction markets.  So let’s look at WESCO and Rexel (US only) and touch on Grainger (especially their eCommerce numbers)

WESCO

First, from their webcast slide presentation, some observations:

• Overall revenue was $1.91 billion, down .5% year over year (but a little above analyst expectations).
• Q2 organic sales, overall (all business segments and global, were down 3%.  Organic sales were also down 3% in the US with April sales down 5% “adjusting for the Easter holiday” but that “July organic sales down mid-single digits month-to-date” and “oil & gas sales down about 25%”. (interestingly, these percent declines lag numbers we’ve heard from many, even in the oil & gas geographic areas.  The 3% US decline is greater than what DISC has projected. The issue could be WESCO’s concentration in the industrial sector.  We’re also hearing of them being “challenged” in their core constituency … industrial national (they call it “global”) accounts.  And speaking of days ,,, there were 64 workdays in Q2 2015 and 2016, 62 in Q1 in 2015 vs 64 in Q1 in 2016.)
• They have had 5 consecutive quarterly declines, although the current quarter was less of a decline than the prior two quarters.  This is either a case of comparing about “worse” comparables or a slight improvement in the business.
• Industrial end-user market in US is down 9% (greater than the market).  Their sixth (6th) consecutive quarterly decline.  Reported being “awarded a multi-year agreement for an automotive company but cannot tell if they won the business from someone else or if they retained the business (and at better or worse margins).
• Construction sales in US were up 2% organically. Backlog is up only 4%. This segment returned to growth after being down for four consecutive quarters. Perhaps their trip is helping them win business? Perhaps it is winning some lighting project business? Perhaps …
• Utility in the US is up 1% organically as is their CIG group.
• In reviewing WESCO’s product profile, and in light of their recent decision to convert from Philips Lighting to Current by GE, it is interesting to note that 12% of WESCO’s 2016 sales are in the Lighting & Sustainability segment.  Moving forward, and especially in the short-term, it would be reasonable to ask what WESCO will be doing to retain this business while it goes through the transition and what is its expectations going forward on what percent of sales this product category should represent.

Industrial Distribution magazine headlined their coverage of WESCO as “WESCO Industrial Market Slides Further in Q2; Total Sales Flat.”

Additional input from their earnings call included:

• Industrial “took another step down in the quarter”. (indicates a challenge in seeking non-industrial opportunities in many markets as well as diversifying into other prospects. Infers a heavy concentration in existing accounts and probably a continued decline in volume and gross margin dollars in these accounts as they reduce their CapEx as well as OpEx.) The company’s concentration in oil / gas, mining / minerals and OEM is hindering its ability to grow. While it will start facing easier financial comps, this is essentially smoke and mirrors.  Diversification and/or a concentrated sales and marketing repositioning is needed to broaden the customer base and become more nimble in pursuing accounts that have growth potential and may value WESCO’s OneWESCO strategy.)
• WESCO provided significant justification on why the industrial / manufacturing sector is down. (However, this has been said many times and unfortunately, from a macro-economic viewpoint, this doesn’t appear to be changing in the near future.)
• Surprisingly, no mention about eCommerce, especially given this is mentioned extensively in the industry publications, in competitor quarterly reports and by end-users.
• Gaining construction growth from recent acquisitions. (Perhaps a precursor of more to come?)
• SG&A, excluding acquisitions, were down $10M. Have reduced 600 positions in 1 1/2 years. Have also heard of some continued pruning (to be expected) but also travel restrictions as and some benefits restrictions / reductions.  They’ve also closed / consolidated 30 branches in the 1 1/2 years.
  • Looking to take / considering “additional cost-reduction actions in the second half.” Which is to be expected as companies will not be increasing their CapEx at the end of their financial year and the recent decline in oil & gas.
• Pricing environment has been challenging although margins remained steady at 19.9%. The challenge will be increasing it as 1) customers have negotiated lower margins on contracts, 2) the competitive environment.  The only hope may be a strategic pricing initiative rather than a myriad of solutions and increased commodity pricing (copper, metals, etc).
• Seeing some construction growth in the healthcare, education and commercial segments. Their acquisitions in Boston, Atlanta and Texas (Austin, San Antonio, Dallas) are generating construction growth.
• There was mention of helping to improve margins through “supply chain initiatives”.  Given the market headwinds, the role of rebates becomes more important. The question becomes, “are the rebates the price for continuing to do business with WESCO or will “successful” suppliers get something for their investment?

Lot’s going on at WESCO but, the inevitable bottom line is that until the industrial market turns around, and especially its core segments, cost-reductions will continue and performance will lag. It may take too long, and be unrealistic, for the business to become more diversified (unless they make some acquisitions or Current by GE helps provide business to WESCO.)

What are you seeing from WESCO in the marketplace?

Rexel

• Worldwide up .1% organically, gross margin up 26 basis points
  • North America is 34% of Rexel.  Overall was -4.2% in Q2 (constant and same store).  Oil & Gas continued to hamper results.
    • US is 78% of North America, sales down 3.4% for Q
      • 24% drop in oil / gas
      • 2% decline due to cable (copper)
      • 1.1% due to “branch network optimization”
• “Broadly stable in North America”
• Slight increase in profitability due to increase in gross margin and continuing effects of cost reductions in North America.
• Uncertainty regarding industrial activity levels in North America
• North America gross margin is 22.2%
• Still expecting end of year, globally, to be -3 to 1% and expect easier comps, easier comps for oil / gas and easier comps for copper / commodities.

So, in looking forward:

• Industrial continues to be a challenge
• Both companies are hoping for better results through easier comps
• No one mentions eCommerce
• Little comment regarding the construction markets … which is where others are seeing some growth.

Grainger

Grainger released it’s 10-Q last week.  Some interesting tidbits that may help explain some segments of the market and provide ideas for forecasting MRO in your market / customer segment (or in setting your strategy):

• Given Grainger’s large number of customers and the diverse industries it serves, several economic factors and industry trends tend to shape Grainger’s business environment. The overall economy and leading economic indicators provide general insight into projecting Grainger’s growth. (translation – there is safety in numbers and being diversified)
• In the United States, Business Investment and Exports are two major indicators of MRO spending. Business Investment is forecast to remain weak into 2017 primarily due to four factors: declines in oil and gas drilling, excess global capacity, a stronger U.S. dollar and slower growth in export markets. Capital spending should begin to have moderate growth in 2017 and 2018 as domestic demand strengthens and oil prices recover. Export growth is expected to to be less than 1% for 2016, which is lower than the performance experienced in 2015. Export growth is expected to grow slightly over the remainder of the year as the global economy stabilizes and the uncertainty of the Brexit vote fades. As a result of the strong U.S. dollar and slower growth abroad, U.S. economic growth , as measured by GDP, is forecast to remain below 2.0% for the year. (translation – don’t expect growth coming from the MRO market.  Any growth is going to need to be earned!)
• eCommerce sales for the United States business were $916 million for the quarter, an increase of 11% over the prior year and represented 46% of total sales. The increase was primarily driven by an increase in sales via EDI and electronic purchasing platforms. (Translation – don’t be fooled by the numbers.  eCommerce is not driven by clicking on a website.  Punchouts and EDI drive eCommerce.  Product content data that is used for websites is also used for EDI and punchouts.  If you don’t know what punchouts your customers use, you are missing an opportunity!)

So …

• If you’re a distributor in industrial you need to focus on account penetration, product mix and new customer development. Consider where there are lighting opportunities in your accounts.  And if you can, diversify your customer base (industrial salespeople can sell to institutions, but not to contractors!)
• If your in the construction space, be grateful! While copper pricing isn’t helping, its better than being in the industrial space.
• If you are a manufacturer, determine if you have products that generate demand or are you in a product offering where growth only comes from taking share.  If that is the case, the first thing to focus on is “being easy to do business with.”  It’s about the only reason why distributors may switch to you.

How was your Q2? What’s your outlook for Q3 and consider how WESCO, Rexel and Grainger’s experience can shed light on what you should consider doing (or not doing)?