Leaders and Laggards – Graybar, AD, Grainger and WESCO Q3 Reports

Over the past week we’ve been able to gain a sense of the distribution market with major distribution “networks” reporting quarterly performance.  Last week we shared Rexel’s North American (and US) performance. Now we have insight from Graybar, AD and WESCO.  Combined the four give a sense of the construction and industrial market as well as their relative performance.

And, like in any good race, there are those who come in first, second, third, fourth, fifth, etc…

Leaders and Laggards

Graybar – Up 6.7% for the quarter

Graybar reported a 6.7% sales increase to $1.7 billion for Q3 with a 6.4 percent increase in net income.  Year to date the company is up 5.2% in sales and 7.5% in net income.  While the quarter may have nominally have been improved due to the Cape Electric acquisition in July, knowing that Graybar is strong in the construction / contractor market and especially with larger projects, it can be assumed that this helped the growth. Additionally, the datacom market may be benefiting from the Internet of Things.  They’ve also been promoting their website, have an aggressive eTraining marketing strategy for customers and have launched some customer services to improve customer productivity.

AD – Flat for the Quarter

AD’s Electrical Division, as many know, is a diversified network of 140 independent electrical distributors. While historically the group’s membership was more weighted towards the industrial market (as most independent Rockwell distributors are AD members), over the years these industrial distributors have diversified their businesses into the construction market.  While we don’t know the exact mix, it is more than fair to say it is probably close to 60/40 industrial.

Given this, AD’s Electrical Division, the only group that releases quarterly performance information, is flat for the quarter.  Given the challenges of some members who are either heavily focused in the industrial space and those who are in the oil  gas industry, this suggests that the decline in those segments have been more than made up for by growth in the construction market (lighting included) inspite of the pricing challenges in the wire (copper) market.

Grainger – Down 1% in US

• Closed some branches and reduced headcount in both the US and Canada in Q3
• Overall down 3% due to acquisitions, foreign exchange, etc but organically flat globally, as well as in the US
• Operating earnings down 5% which also provides and indication of challenges with margins as well as expense management.
  • Gross margins declined to 40.1%, down 180 basis points due to customer mix, “negative price-cost mix” and pricing issues in Canada.
• US is 74% of the business
  • Down 1%
    • 1% decline from volume, 1% decline from price, 1% gain on intercompany sales
  • Government / Retail up mid single digits
  • Light manufacturing up low single digits
  • Commercial – flat
  • Heavy Manufacturing and contractor down mid-single digits
  • Reseller down low double-digitis
  • Natural Resources down mid-teens (oil / gas / mining)
• Canada is 7% of sales and was down 16%.  All end-markets were down.
• Sales of Zoro U.S., an online business, was up.
• Seeing continued slowdown in October from September.
• Still experiencing some challenges due to SAP (unfortunately not unusual for a company that goes through this type of conversion.)
• For 2016 expecting growth of 1.5-2.5%

Grainger’s 2016 Factbook shows sales by product category.  For the electrical industry this would be:

• Electrical – 5%
• Lighting   – 5%
• Power Tools – 3%
• Motors    – 1%
• So, this is 14% plus hand tools (7%, but not all electrical), “Other” at 7%

WESCO is known as principally focused in the industrial market, however, about 35-40% of their business is contractor, they are over $1 billion in the utility market, have a significant datacom business, are in the safety business and some other segments.  Historically they have been strong in the national accounts market (they call it global accounts.)

Let’s look at their report:

• For the quarter, down 3.6% reportedly driven by construction which was down 5.5% with US down 6% and Canada down 4%.
  • The down 3.6% is with Needham Electric and Atlanta Electrical Distributors adding 3% … hence would have been down 6.6%!
  • According to the Dodge Construction Outlook, Dodge mentioned that there were a number of large, “marquee”, projects coming to an end. Commercial contractors for WESCO “partially offset declines with industrial-oriented contractors”. Perhaps their trip program is attracting commercial contractor business?
  • Conversations with other distributors, and the Graybar report, signal that others are succeeding in the commercial construction market. Perhaps WESCO’s contractor market is very industrially oriented?  The performance also indicates that WESCO may not be as successful as others in the lighting segment.
• Another “significant step down in the oil / gas segment”
• Industrial organic decline of 10% driven by oil / gas, metals, mining and OEM. with US sales down 7% and Canada down 20% (both more than Grainger’s decline)
• “We’ve been helping industrial customers respond to these challenges with supply chain process improvements (a positive), cost reductions (usually means margin concessions), and supplier consolidation (usually means price concessions, lower costs and a resulting decrease in supplier rebate income … but able to retain the business.)
• Global accounts pipeline (quotation activity) is strong (and we’re hearing that SupplyForce is being very successful in this segment.)
• Utility overall down 2%, with 2% down in US and up 5% in Canada
• Commercial, institutional and Government business down 2% with US down 2% and Canada up 9%.  US performance is on par with Grainger.
• Seeing growth in the datacom market.
• Core backlog increased 2% from end of 2015
• Gross margin down to 19.7% (down 10 basis points)
• Turns have declined a little but WESCO is committed to “appropriate inventory levels to support our customer service and satisfaction levels.
• Eliminated “more than 250 positions” during the quarter.  We have heard that they had two reductions this quarter and that the second reduction “they didn’t want to share the overall number.”  According to this website, the reduction was about 300 people.  And we’ve heard that they may not be done for the year, “some that we’re concluding here in the fourth quarter”. (an interesting question would be how many of the 850 over the past 6 quarters have been in customer-facing / sales / monetization roles?)
  • We also heard that Crescent had a significant layoff in the quarter.
• For 2016 expect sales decline of 2-3% (in contrast to Grainger being up 1.5-2.5% and Graybar’s performance.)
• For Q4 expecting a sales decrease of 1-4%
  • WESCO doesn’t think the oil / gas segment has “seen the bottom yet” (Which, it is only 5% of the business now shouldn’t be as impactful if the company can pivot, it’s had some time, to get more into the commercial contractor space and also in the lighting space.)
  • We’re also hearing that WESCO’s lack of growth is inhibiting rep / manufacturer support as reps may be directing business where they have more confidence in the distributor “winning the business”.
• Pipeline / quotations is strong. (Question then becomes are these funded projects and what is WESCO’s close ratio?)

So, as you can see there are leaders and laggards and it appears to be the segment of the market you play in, perhaps your culture (given the performance of the AD membership having an industrial / contractor business mix and performing better than the other two industrially-oriented distributors, maybe growth coming from the lighting business and perhaps the ability to adapt.

What are you seeing in your market? Which of these organizations are most representative, performance-wise, of your business?  And do you see a light at the end of the tunnel on the industrial side of the business?