Q3 Distributor Insights: AD, Graybar, Rexel and WESCO

Electrical distributors have few ways to benchmark their performance versus competition other than talking to peers.  AD’s increased transparency provides some insight into the performance of a group of independent distributors, Graybar shares some high level insights that sometimes can guide to some questions and the industry’s two public companies, Rexel and WESCO, can provide different views of the market.

Recently all shared information:

AD

From their recent press release:

AD Reports Record Breaking Member Sales of $10.2 Billion in Q3

AD, the contractor and industrial products wholesale buying / marketing group, reported sales for all AD members, across twelve AD Divisions and three countries hit a new record during the third quarter of 2017 of $10.2 Billion. 

Through the first nine months of the year, Member sales grew by 11% to $28 Billion.  Purchases from AD Suppliers grew by 16%.  Distributions to Members were up 13%. 

On a Same Store basis, by industry, Electrical sales were up 13% through nine months; PHCP was up 13%; Industrial / PT were up 10%; and Building Materials was up 16%.  By country, Same Store sales in the U.S. grew 10%; Canada was up 11% and Mexico grew 12%.

 Bill Weisberg, AD’s Chairman and CEO comments on the results, “The record breaking numbers of the last nine months exceeded expectations and reflect the strong, smart and unwavering dedication of AD Independents to outperform the market.  Growth in Q3 accelerated over our strong first half.  Highlights of the third quarter include the creation of our twelfth division, AD Decorative Brands, which supports the ever growing showroom industry, and the launch of the AD Disaster Relief Foundation (www.ADFoundation.com) to get relief to the hard working people at AD Member and Supplier companies surviving disasters like Hurricane Harvey, Maria and the California Wildfires.”

Some thoughts / observations:

• With AD Electrical up 13% and AD’s US Electrical group the major revenue element in this division, it’s safe to assume that the US group is up high single digits if not low double digits. (AD also includes Canada and Mexico, which, depending upon performance, could tweak the US number up or down a little given that those markets are 5-10% of the US market, individually, generally.  We did ask AD if they would share same store growth for US electrical only.
• The growth may indicate growth in the industrial segment as a vast majority of Rockwell distributors belong to AD. As seen in some manufacturer reports, there appeared to be some accelerated growth in industrial segments, inclusive of oil / gas.
• While copper price increases would “enhance” the growth, it has the same impact for all distributors, so can still be a “fair” barometer for distributors.  From a manufacturer viewpoint, manufacturers may want to ask about performance in the following product category groups:
  • Lighting
  • Wire / Cable
  • Switchgear (maybe, since there are only two in the group)
  • Infrastructure products (or maybe rough-in vs finish)

Or perhaps construction vs industrial.

• Interesting to note that AD has launched a Decorative Brands group.  Historically this “category” has been important in the plumbing industry (many distributors have showrooms).  We’ve asked if this division also relates to residential / lighting showrooms for either electrical distributors or if plumbing only, can electrical manufacturers join as many plumbing houses also sell electrical material.

Graybar

Graybar shared it’s Q3 performance via a press release, saying:

Thoughts:

• Interesting how low their growth was vs AD, Grainger, Rexel and WESCO…the lowest of all.
• The low growth is essentially negated given the increase in copper.  This may indicate a decline in segments of the business.  Datacom / Electronic? Not retaining lighting share? Not earning enough flow business from contractors to replace large contracts? Or perhaps they have a large backlog that isn’t ready for delivery / billing and it’s a timing issue?
• The accelerated net income may be related to improved pricing, cost reduction or COGS reduction … or a combination.
• And with as much conversation as there is in the industry regarding eCommerce, Graybar is conspicuously silent and staying below the radar.

Rexel

According to an article in MDM, Rexel’s Q3 performance was:

• €3.2 billion (US$3.7 billion), up 1.4 percent for Q3 from the same period a year ago.
• On a constant, same-day basis, sales were up 5.2 percent
• The company reported a profit of €67.1 million (US$77.7 million), up from €37.6 million (US$43.5 million) a year ago.
• Organic growth was up 4.1 percent.
• In Europe (54 percent of group sales), third-quarter sales were up 4.9 percent to €1.8 billion (US$2.1 billion).
  • Sales also increased in Germany (3.9 percent), the United Kingdom (4 percent), Scandinavia (7.6 percent) and France (7.3 percent).
• Third-quarter sales in North America (36 percent of group sales) increased 2.8 percent to €1.2 billion (US$1.4 billion).
  • U.S. sales grew 4.3 percent
  • Canadian sales fell 1.9 percent.
• Asia-Pacific (10 percent of group sales) sales increased 4.4 percent.

• For the first nine months, total group sales were up 2.1 percent to €9.9 billion (US$11.5 billion). On a constant, same-day basis, sales were up 2.8 percent. The company reported a profit of €163.6 million, up from a profit of €133.4 million (US$154.5 million) the same period a year ago.

Additionally, from their earnings call, and focused on the US:

• North America sales accelerated on a sequential basis by 3.3% (continued growth QoQ)
• US non-resi business was up 3% and they see a positive trend
• Corporate wide, EBITA is 4.2%.  Gross margin is 22.8%.  76 basis point improvement YoY in US & Canada
  • Benefits of flow business, supplier concentration and pricing strategy (more distributors are starting to review supplier concentration (perhaps different than supplier consolidation) and price improvement)
• They acknowledge that cable pricing / copper contributed to their performance. (Distributors, in general, recognize this and in thinking about “organic growth”, this needs to be factored in.  In planning for 2018, it is difficult to evaluate what copper pricing will be as much is always dependent on China, mines / labor issues and strength of the dollar.  Distributors may want to ask their banks, if they are working with larger banks or investment companies, what their 2018 outlook is for copper.)
• Highlighted improvements and investments that are taking place in their US operation as it relates to branch expansion (California, Texas, Florida, perhaps other places) and in their logistics organization (more regionalized inventory, perhaps buying, perhaps professionalism.)
  • Opened 11 new US branches YTD in US plus 15 “counters” in Gexpro branches
    • New locations contributed 0.7% to Q3 sales
  • Expect 17 branches and 20 “counters at Gexpro” by year-end.
  • Openly promoting that the model is to replicate Platt (which begs the question of, “will what works in the Pacific Northwest work everywhere?” As well as “can they recruit enough quality people?”)
    • Interesting that they mention Platt was resi and “proximity business” which is their definition for local branches.
  • Goal is for new locations to be breakeven in 15-18 months and with “average regional profitability” in 24-30 months (the breakeven goal is pretty standard among distributors. If they can get to 4-5% net, that would indicate some price discipline which would make competitors happy and/or operational benefits.)
• Had a -1.2% impact in US due to Irma and Harvey (so their Q3 sales in US would have exceeded 5%).
  • Seeing high single digit growth in Platt (west coast) and Rexel C&I
    • Oil and gas up 30%
  • Indicates lower growth in the Gexpro group as referenced by a non-renewal in a wind contract. A “negative” impact of GE was mentioned in the analyst questions for the Gexpro business as “supplier disruption.”  They hope ABB will rectify this. (Perhaps focusing on “niches” isn’t having the desired payoff? WIll also be interesting to see what the longer-term impact of ABB’s acquisition of GE Industrial could have re Gexpo as GE Industrial is a significant supplier to Gexpro.)
• Canada was down 0.4%

WESCO

WESCO’s Q3 performance shared what The Motley Fool called “a mixed set of earnings” and that after a “difficult first half” they “finally” reported revenue growth “commensurate with a strengthening industrial economy” (hence our comments regarding AD and from findings from manufacturers)

From The Motley Fool’s article:

• Sales up 7.8%
• Operating margin of 4.5%, down from 5% prior year Q3
• Expect Q4 sales to be up 5-8% with operating margin of 3.9-4.3% (interesting that they expect a decline in operating margin. Is this increasing expenses and, if so, where? The article also references increased tax rate.  If they are investing into the business via people, will it be a challenge hiring industry / experienced people given the company’s performance over the past couple of years? And if operating margin is declining, what does this say about their gross margin optimization strategy and their supplier COGS / rebate / price negotiation strategy?)
• 37% of sales is industrial, 33% is construction, 15% utility and 15% CIG
  • Industrial was up about 12%
  • Construction up about 6%
  • Utility up 9% organically,  and CIG 9%
    • Hurricanes contributed 4%

So now let’s look at highlights in their analyst call:

• “Better sales execution” (Shows in sales increase but is this higher close rate? New accounts? Or sales ‘accepting’ orders?  Strange to infer that prior was less than appropriate ‘sales execution’ (and this is after senior sales management change).)
• Strengthening end-markets (Positive indicator for industrially-oriented distributors and manufacturers.)
• Good backlog
• Organic sales were up 9% (so performance, overall, comparable to AD)
  • Industrial up 11% organically but, interestingly only 5% in US
    • 20% increase in Canada in local currency
  • Construction increase in US was 5%, 6% in Canada
  • CIG was up 5% in US, 30% in Canada
  • Seeing growth in LED lighting business
• Gross margin was 19.3%, down 40 basis points due to higher international sales
• SG&A increased $280M (and part of the expense was for temp labor, which is understandable, but no mention of split between US and Canada given Canadian growth was double digits, eventhough a smaller % of the business.)
• Expecting to see supplier price increases in the 2-5% range.
• Added 50 people throughout Q3 with more in revenue generating roles for industrial, OEM and lighting.
• Lighting is 11-12% of total WESCO sales (distributors should be cautious about using this as a metric as this is % of total WESCO and hence the number would be further skewed due to utility, CIG and possibly international business.  Additionally, industrial distributors typically have a lower % of sales being lighting than construction-oriented distributors.)
  • Renovation / retrofit segment growing at double-digit rate

Sorry a little long but thought it made sense to all of the distributors together to look for trends.  Some key takeaways:

• Industrial is growing
• Be cautious in benchmarking due to the impact of copper pricing
• Look for 2018 price increases of 2-5%
• Gross margin pressure to continue
• Independents continue to outgrow chains, in general
• And it’s interesting that none of these companies, or the analysts, are asking about eCommerce and Amazon

What are you seeing in your market? What are you seeing from these companies?