Q1 Revenue Dichotomy? Distributor vs Manufacturer Performance

Two of the three electrical distributors that publicly share quarterly performance shared good Q1 growth whereas three manufacturers have also reported – announcing flat / negative Q1 performance. It reveals a dichotomy and begs the question, which is today’s market?

Distributors

Last week, Rexel shared that their US business was up 8.7%. Graybar, earlier this week, reported their Q1 was up 12.2% … significantly more on a larger US sales base.

Rexel gave credit to the industrial business and, in looking at their regional performance, there is a correlation to the oil / gas / mining segments (Gulf Central and Mountain Plains regions.) Plus, the company benefits from its Rockwell businesses and their recent acquisitions of Horizon Solutions and Buckles-Smith.

Graybar, however, is different. It’s business is historically about 55% focused on the commercial construction market. The company does also have a significant datacom / networking business that could also be participating in the data center and industrial automation (Industry 4.0) segment.

Two different businesses. Both with good performance

And in a market that reportedly is slowing as forecasted by DISC and projected in our Q1 Pulse of Lighting report which projected a low to mid-single digit industry performance for the lighting segment (which is historically 20-25% of industry sales.)

Manufacturers

Now we come to the manufacturers with Q1 reports from ABB, Encore Wire and Hubbell. Rather than digging into all of the data, let’s focus on the US (in ABB’s case) and the companies’ electrical businesses.

ABB

Key highlights, and US info, from ABB’s Q1 earnings release:

• Overall, revenues were up 13% to $7.859 billion with orders up 1to $9.45 billion.
• US specific focus:
  • US market represents 24% of ABB’s total sales (all divisions)
  • 85% of ABB’s US sales are produced locally
  • Orders in “The Americas” were up 3% with revenues up 22%
    • The US decline by 4%
  • Electrification group – US has a 6% drop in orders
    • Overall, for the Electrification group globally it was up 11% supported by “solid market demand and execution of the order backlog.”
  • Motion group had a US increase of 2%
  • Process Automation group had a US decline of 9%

And ABB differentiates between “orders” and revenue in its press release. They also differentiate between reporting in US$ and Comparable (which involves currency issues.)

While the industry is well aware of the switchgear challenges, and a portion of the revenues are generated from delivering backlogged orders, the order activity shows slowing … or at least a divergence from distributor performance (as defined as Rexel and Graybar sales activity.)

Encore Wire

An Encore Wire Q1 earnings report press release shared:

• Reported net sales of $660.5 million vs $723.1 million in 2022. Perhaps more importantly, from an industry insights viewpoint, is that pounds of copper were flat (the sales decline is a result of a decline in the price of copper.)
• The price of wire per copper pound decreased 11.8% 2023 vs 2022 and the average cost of copper per pound declined 8.2%, hence why Encore’s gross profit percentage declined.
• Daniel Jones, Chairman, President and CEO, commented “stable demand in the quarter, coupled with continued domestic and global uncertainties …” and the company is “well positioned to capture market share in the current economic environment.”
• And while the headline on SeekingAlpha stated “Encore Wire GAAP EPS of $6.50 beats by $0.75, revenue of $660.5M misses by $23.51M”, knowledgeable industry followers know that, in the wire business, Encore could have dropped its price to meet the revenue objective if they were solely sales driven, however, the company is very principled and focuses on profitability and quality service.

The key takeaway … “pounds of copper were flat.”

Hubbell

Hubbell too shared its Q1 performance. Key highlights included:

• “off to a strong start” according to Gerben Bakker, Chairman, President and CEO, driven by “grid modernization and electrification.”
• Utility Solutions orders are strong
  • Sales up 20% with organic net sales (excluding acquisitions) up 19%
• Electrical Solutions
  • Industrial end markets and “strategic growth verticals” (hence, they are being ‘intentional’ with their efforts) highlighted by renewables were strong. Commercial markets were more “modest” and residential is soft.
  • Sales were flat
    • Organic net sales were -2.5% and acquisitions added 3%
  • Expects full year organic sales of 7-9% for the company … so, with Utility significantly outperforming Electrical Solutions it can be inferred that this will continue (no divisional breakout was provided, perhaps more insight on their conference call.)

Again, a divergence from the distributors.

Why?

A commonality among the manufacturers … the commercial construction market has slowed and resi is very soft. Industrial is the bright spot.

But … why are Rexel and Graybar up almost 9-12% and manufacturers are essentially flat?

• Are distributors working down inventory (hence selling from stock and not re-ordering or delaying orders?)
• Is this the result of distributors shipping their backlog?
• Is the reporting possibly an anomaly and solely that these 3 manufacturers just happened to share their Q1 performance on the same day? Is three a trend or a coincidence?

Thoughts?

And is this a precursor for the year?