Distributor Quarterly Performance – WESCO, Rexel, Anixter, Grainger, AD

It’s quarterly review time again and an opportunity to review publicly traded distributors’ 2018 Q1 performance – Rexel, WESCO, Anixter, AD, Grainger and Fastenal – to see if we can identify trends.

WESCO

From the earnings slides and  earnings call

• 11% organic growth (company-wide) with expanding backlog
  • Overall 10% in US and Canada, 24% internationally
  • Industrial up 10% … 9% in US, 17% in Canada
    • 37% of business
  • Construction up 9% organically (10% in US and Canada)
    • 33% of business
    • Backlog up 14% YoY, up 4% sequentially
  • Utility up 18% (21% in US, 6% decline in Canada)
    • 16% of business
  • Institutional up 9% (3% in US and 5% in Canada)
    • 14% of business
    • Seeing increasing interest in LED retrofits and datacom initiatives
• Increased sales guidance to 5-8% for the year, (which is inline with industry projections … the low-end for contractor markets, the high-end for industrial markets.)
• Gross margin was 19.1%
  • GM contracted 60 basis points year-over-year with over half of the decline attributable to international capital projects and reclassification of labor costs.  WESCO acknowledged that utility also has lower margins which, due to mix, would reduce overall margins.  (so, gross margin drops by about .3-.4 points. Is WESCO buying business? more competitive on projects? is it’s product mix changing to more commodity? are national contracts being won through pricing?  The continuing challenge for distributors essentially becomes a “race to the bottom” with customers playing one off vs the other and “services” being valued, financially, minimally as customers are not paying for them…an industry issue and a sales / sales management / training issue.)
• Operating margin was 3.7%
  • Interesting that WESCO’s tax rate decreased from an expected 22% to 19.6% due to the new tax law.
• Customer trends across businesses
  • High expectations for supply chain process improvement, cost reductions and “supplier consolidation”
  • Technical expertise
• Outlook for Q2
  • Projecting sales growth of 7-10% and operating margin of 4.2-4.5%
    • Industrial – mid single digits growth
    • Construction – mid single digit growth
    • Utility – low to mid-single digit growth
    • CIG (Institutional) – low to middle single digit growth
    • US, overall, mid single digit.
  • Overall, originally WESCO was targeting 3-6% growth, now it is targeting 5-8% growth with end-markets being 3-6% and market out-performance, taking share, being 1-2%.
• Analyst questions / answers
  • WESCO benefiting from industrial recovery
  • Global accounts grew their revenue (and these accounts are typically industrial accounts and MRO business … so minimal, if any, impact from Amazon Business and reportedly WESCO’s eCommerce business, not EDI generated business, is minimal.)
  • Increased CapEx due to tax cuts haven’t materialized yet … expect for later in 2018 and 2019. (as also projected by DISC in the latest issue of Electrical Wholesaling magazine.)
    • Seeing a little from tech companies which would be office space … commercial construction.
  • Regarding questions on margins, WESCO commented that it is starting to be more successful in pushing through price increases (this is the time that the electrical industry typically pushes through price increases. WESCO may have had / is having a little challenge due to national account contracts, which is not unusual.  We’ve also heard of WESCO trying to “negotiate” improved terms from manufacturers to improve WESCO margins but with essentially no benefits / commitments to the manufacturers.)
  • Expectation that a 2% price increase, at a minimum, will be able to be pushed through the channel, to customers.  (Combination of manufacturer price increases, increased awareness of inflation concerns and tariffs.  The question will be marketplace competitiveness in bidding for business.)
  • Continued focus on cost management and investment prioritization to try to improve gross and operating margin. (Highlights challenge in selling for a higher margin and having service / differentiation valued by the customer.  May be especially true for the prototypical WESCO electrical customers … large industrials and large contractors who expect to leverage volume for preferential pricing whereas the small to mid-sized market, which isn’t a significant percent of WESCO’s business, typically have higher gross margin percentages for distributors.)
  • Seeing nice growth in a renewables / solar, although dollars are small.  What is interesting to note is that much of this is through the construction-side of their business, not utility (although utility scale projects would typically go through the utility group.)

Overall a good quarter …

• Much focus on good top line and WESCO’s margin (which differs significantly from Grainger, Fastenal, etal which highlights the differences in the business models.)
  • And no comments on Q1 weather as a results inhibitor / delayer
• Strong industrial
• Strong contractor, probably large contractor
• No mention of eCommerce or Amazon
• No mention of small to mid-sized customer growth
• No mention of lighting / LED

Rexel

Rexel’s US business model is different than WESCO’s so shares a different side of the market. While they serve some large industrials and contractors, the business model is more focused on the small to mid-sized customer base.

The following is from their call and slides, only touches on corporate and is more US focused:

• Q1, worldwide, in line with expectations with 3.9% growth.
  • Copper contribution was .8% worldwide, .9% in US
  • Digital sales 15.6% of worldwide revenue (no breakdown of EDI vs web.  This is an area of focus for Rexel.)
• Gross margin, worldwide, of 25.1% and EBITDA of 4%, down 32 basis points
• Investing more in IT (eCommerce / digital)
• North America, 34% of sales, was up 3.5%
  • US sales up 3.2% (lags Q1 projections but inline with conversations we’ve had with many construction / contractor-oriented distributors who serve the small to mid-sized market.  These types of distributors are also comparing vs PY that had higher sales increases on their wire / cable … up 26% LY, up only 4-6% this quarter.)
    • Stronger growth in Pacific Northwest and Mountain Plains; weaker in Northeast (weather).  Surprising no comment on South / Southwest for hurricane benefits and new openings
    • Overall, US sales were $842.6M in Q1
  • Seeing some benefits from recent US realignment and branch openings / remodels
    • “Gained” 9000+ new customers (definition of “new customers” can be suspect as, while technically, a 1 time customer is a new customer, it is not a repetitive customer generating “reasonable” sales and GM dollars.  CMG classifies a “small” customer as $25,000 annually and a minimum of 10 invoices generated.  Rexel has some work to do in penetrating these accounts to earn market share.)
    • New openings generated 1.3% of sales (which, given that they are at 3.2% overall, means the remainder are having minimal growth.)
  • Residential up double digits (obviously a small percent of sales if overall is only up 3.2%)
  • Commercial up mid-single digits (depending upon the % of the overall business, this is probably closer to 4%)
  • Industrials not mentioned except some oil and gas (so this segment is small or was down.)
  • Project business down (continued affects of GE and large projects – wind, etal.  GE Industrial also probably impacting their commercial contractor business and GE impacts sales, as a customer, by being down 1.6%!.)
  • Gross margin in North America was up to 22.8% (significant difference from WESCO … difference, at a minimum, is customer focus…large industrial / contractor vs small / mid-sized customers.)
  • Analyst questions / answers
    • Digital is fundamental to strategy in the future … worldwide
    • Gexpro is more “challenging” than the Rexel banner in US for sales
    • Patrick Berard, CEO, “more confident” in recent management / directional changes and ability to execute
    • Feels GE Industrial performing better than previous
    • LED lighting volume not increasing much due to deflationary pricing.  Sales discussions evolving to more system discussions … topics of connected lighting but feel industry / customer base isn’t there yet.
    • See continued strong demand for their US construction customers and mentioned that some have labor issues.

Overall,

• Tone is conversational vs “matter of fact”
• Results are consistent with what we’ve heard in the small to mid-sized contractor market
• Gaining customers (but are they repeat buyers to take share? Whom taking business from?)
• Good gross margin

Anixter

Anixter, through its Anixter Power Solutions group, which previously was HD Supply, does serve the electrical and utility segments.  Below are some points relative to this segment of their business from its earnings call and slides:

• Anixter reports three parts to its business.  NSS (51% of business, a $1 billion Q1 business) is its Network and Security Solutions and EES (29% of business, a $568M Q1 business) is Electrical and Electronic Services and UPS (20% of business) is its utility group.
• The EES portion had a sales increase of 3.7%, consistent with expectations.
  • Expect accelerated Q2 and second half sales growth.
  • North America sales were $443M, up 3.6% organically with strong OEM sales in Canada and “strong recovery on the industrial side.”
    • Sluggish US commercial construction
  • Anixter wants to grow in the electrical product segment (While they want to grow it’s questionable, from reading the report, if they are investing to grow, if manufacturers are putting them into the business as they “don’t want to miss out” or if customers are asking for Anixter to serve them as these customers are seeking an additional / alternative supplier.)
• This division is adding industrial automation to its US offering (to better pursue this faster growing segment of the industrial business, thereby creating more competition for electrical distributors.)
• Intends to cross-sell security and low voltage electrical products across the legacy Anixter wire & cable business, hence leveraging its salesforce, relationships and broadening its benefit to manufacturers (will also require significant training and/or they’ll compete on price and drop industry margins.  Anixter, historically, positions itself as a services / value differentiator business.  If successful, could target WESCO business due to commonality in platforms … wire, industrial, low voltage, datacom. For many suppliers,)
• EES EBITDA is 6.1% due to “strong expense leverage against increased sales volume combined with higher copper prices (so, theoretically, they can afford to invest if they want to proactively pursue the electrical business.)
• Overall, Anixter is investing $60-70M in CapEx with much of the investment going into systems and technology.
• Made acquisitions of three small security firms (if Anixter wants to increase its involvement in the electrical industry, contractor or industrial segments, it will become interesting to see if they pursue electrical distribution acquisitions to quicken this cross-selling opportunity.  To date we have not heard their name mentioned as an aggressive player in the electrical segment.)
• From analyst questions / answers
  • An analyst mentioned that construction companies are seeing a 15% increase in freight costs
    • Anixter is seeing “mid-teens” rate increases.
  • Company has strong share in the data center business (which could be the area of interest for many electrical manufacturers … which then begs the question of “which other electrical distributors are bidding for this business and whose share Anixter could take?”)
  • Making investment in digital strategy

Overall …

• Forthcoming on the business
• Seeking to increase in the industrial space and cross sell / increase electrical sales
• Challenged in the commercial construction market

AD

According to an AD press release,

AD, the contractor and industrial products wholesale buying / marketing group, reported a 12% increase in Member sales, across 12 AD divisions, totaling $9.7 Billion. Purchases from AD Suppliers grew by 12% in Q1 YTD and distributions to Members were also up 12%.

On a Same Store basis, by industry, Q1 YTD PHCP sales were up 12%; Industrial / PT sales were up 11%; Electrical sales were up 10%; and Building Materials was up 4%.  By country, Same Store sales in the U.S. grew 10%; Canada was up 9% and Mexico grew 10%.

The interesting parts are that:

• AD Electrical was up 10%, which is above industry trends overall and on a par with WESCO and Grainger performance, which may infer stronger industrial growth.
• AD’s Industrial / PT sales up 11% lend further credence to growth in the industrial customer segment (hence transfers to the electrical business also.)

So, what do we learn:

• Industrial market is outperforming construction
• Large contractors have work but have labor issues and the market is very price competitive
• Small to mid-sized contractor market is “sluggish”
• Rexel and Anixter are investing in technology / digital strategies
• Rexel and Anixter tones are relatively informative whereas WESCO “stuck to the numbers”

And if we think about Grainger (call, US sales up 9%, further growth 30%!) in small to mid-sized accounts … and distributors can learn from their pricing “challenge” from last year and how price effectiveness can drive sales and GM$ increases) and Fastenal (call, 66% of sales to industrial and overall company sales up 13%) we’re seeing growth in industrial, penetration into mid-sized accounts, investments in digital and services.