Publicly Held Electrical Distributor Q1 Reports

Anixter, Rexel and WESCO make up the electrical industry’s publicly held distributors.  Here’s what they said on their recent analyst calls / press releases (and, as usual, we’ll focus on their electrical reports):

Anixter

• From an article in the Daily Herald, “In our EES (Electrical & Electronic Solutions) and UPS (Utility Power Solutions) segments, the combined effects of the weaker industrial economy and lower commodity prices on a year-over-year basis continue to be headwinds. While the industrial landscape shows signs of stabilizing, we maintain our cautious outlook for near term improvement in market conditions and consequently will continue to focus on margin improvement, ongoing expense discipline and working capital efficiencies.”
• Excluding the impact of the following items (i.e. copper pricing), organic sales were flat year-over-year. (remember, they acquired HD Power Solutions – electrical and utility businesses – late last year)
• From their earnings call, and here’s the link to the PPT presentation:
  • EES declined by 7% organicly. This group was negatively impacted by currency, copper and acquisition charges for low voltage sales by 6%)
  • After adjustments for Power Solutions (old HD business) and the above, sales were $405M, down 5% in North America.
    • Have a growing backlog, but industrial market is driving decline.
    • Small decline in OEM business.
  • UPS is ex HD Supply’s utility division
    • Organic sales up 1%, excluding copper and currency changes
    • Business impacted by oil / gas companies’ deferring investments
    • Expect to see growth later in the year
  • 2016 annual outlook +/-2%
  • Mentioned that copper pricing dropped 21% YTD over YoY with an average copper price of $2.11 per pound vs $2.67 a year ago.
  • Have undergone some “restructuring” (personnel changes, especially with Power Solutions)
  • Saw average daily sales improve throughout the quarter, which is a positive sign for growth.
  • Margins were essentially flat (and we’ve heard that they have initiatives to support “upselling, cross-selling and margin optimization, inclusive of incenting staff)
  • Sales focus is to drive specifications with their “electrical engineer experts” across broad product sets.
    • Are now able to address the small to medium-sized project market due to broadening of their product offering (an area where they currently have low share.) (and probably low / no relationships)
  • We’re hearing from more suppliers about Anixer’s interest in entering / expanding their low voltage / electrical business. While they are seeking to pay own debt due to recent acquisitions, it would not surprise us to see them in the acquisition space once they get to a comfortable number.  Additionally, while they have reduced their inventory levels over the past year to align appropriately with revenues, it would not surprise us to see them be willing to invest to broaden opportunities in markets / cross-sell to customers. They could become a much more significant player in the electrical distribution space.

Rexel

From their press release:

• Experienced “sequential” growth in all geographies (i.e. North America)
• They mention “resumption in growth in organic same-day sales” and mention a number of regions … but NOT the U.S. or North America.
  • Mention continued North American decline due to oil / gas and related industrial segments
• Reduction in operating expenses in the US
• North America is 34% of company and was down 4.4% on a constant and same-day basis.  This is “up” from -6.5% in Q4 2015.
  • Oil / Gas in region down 36% YoY!
  • Decline also driven by reduced copper pricing (down 20% YoY)
  • US is 78% of North America region.
    • Sales down 3.6%
      • 42% drop in oil / gas sales (which accounted for 4.1% of drop
      • 2.2 percentage points of drop due to cable sales
      • 1.6 percentage points due to “branch optimization” (closures)
    • Excluding the above, sales were up 4.3% (represents the construction market) (which we’ve been told is 75-80% of Rexel US’ business.  This approximates an average of what we’re seeing for this market across the country.)
  • There was a reduction of about $10-12M in distribution and administrative expenses in the US (in USD) in Q1.  (There were some personnel changes, the aforementioned branch optimization and possibly synergies with their new distribution network.)
  • They reaffirmed their annual worldwide guidance of -3 to 1%.

To use the latest Wall Street word of “stabilization”, it appears that Rexel, aside from the oil / gas market, is achieving it in the US with the growth that they are seeing in the construction market.

WESCO

WESCO had an interesting report and was the only electrical distribution company that pulled out the “retailer excuse” saying that an early Easter affected it’s Q1 sales.

An article headline from The Motley Fool was “Wesco International Still Waiting for Stabilization” and emphasized:

• “…did the results from the latest (quarter) justify the optimism?”
• “The first quarter was never going to be a pretty one for Wesco International”
• Overall organic growth declined 6.7% in the quarter, a result only slightly better than the 7.6% decline in the fourth quarter of 2015. It looks like small potatoes, but recall that investors are looking for signs of stabilization.
• Segment growth
• “Oil and gas, while only 7% of the business, was down 25%”
• “Wesco needs to see some stabilization in its heavy-industry end markets, and growth in the nonresidential construction market, before its numbers will get tangibly better.”

But let’s get to what WESCO said on its analyst call. Click here for the transcript and here for the presentation slides.

• Results in line with outlook provided in late January
• Continue to face industrial challenges, both to industrial end-users and contractors (as they mention that most of their contractor business is from industrial contractors and that they are not participating much in the commercial contractor space, which is a little surprising given their trip program is focused on contractors and may say something about sales diversification efforts and why their past three acquisitions are all small to mid-sized construction contractors distributors)
• Reported sales down 2%, organic sales down 7% or “down approximately 6% after adjusting for the timing of the Easter holiday (no comment)
• Now reporting “organic sales growth” vs “core sales growth” as “organic excludes the impact of foreign currency” and hence is a better barometer of performance.
• Continue to tightly managed costs and streamline organization. Laid off approximately 100 people in Q1 (the people number was mentioned and SG&A, excluding acquisitions, was down $6M, with acquisitions was up $10M … a $16M swing)
• Overall expected quarter to be -1 to -4%, came in -7%
  • Acquisitions ADDED 4%
  • Additional work days ADDED 3%
  • Core backlog increased from Q4 by 7% but down vs 2015 Q1
  • And, although not mentioned, we should mention that copper would have had a negative affect on the business since pricing was down about 20% but we don’t know what percent of WESCO’s business (in US and Canada) is wire / cable.
• Overall, by segment:
  • industrial declined 14% driven by oil, gas, metals, mining and OEM (14% for US, Canada down 21%)
    • Oil / gas declined 25%, which was an accelerated decline from Q4’s 2015. (all market loss or some customer lose for the accelerated decline?)
    • WESCO feels that the decline means customers are looking for supply chain process improvements, cost reductions and supplier consolidation … all trends that would benefit them (we’ve actually heard some of the opposite … contracts being put out to bid, push for price reductions, spreading the business and that all distributors are being very aggressive in this segment.)
  • Construction sales declined 4%.  US down 4%, Canada down 6%
    • Decline driven by industrial-oriented contractors
    • Sales to commercial contractors up low single digits
    • Modestly positive outlook for non-resi construction market for WESCO
  • Utility up 1% (in line with Anixter’s utility performance)
    • US up 1%, Canada down 5%
  • CIG (Commercial, Institutional, Government) was flat
    • US up 2%, Canada down 10%
• Outlook
  • Q2 expected to be -1 to -3%
  • Affirmed 2016 annual outlook of 0 to -5% (for a company that says it wants to outperform the market, in general, it should redefine the definition of market as the market, according to other manufacturers and the industry data benchmark, DISC, is down, overall 1.5-2%. Although attempting to diversify the US through acquisition, WESCO is still an industrially-oriented electrical distributor.)
• Analysts asked about building backlog, the commercial construction market and the lighting market which begs the question, what is WESCO’s close rate on projects? In the report John Engel mentions “bid activity level is high” but bidding and winning are two different things. The winning part is crucial when, in response to LED business, the response was very circumspect.  Perhaps analysts should ask about a project quotations close rate? This is something that all distributors should track to ascertain their effectiveness.
• Margins up sequentially but down a bit YoY, QoQ, but only around 20% (some pricing challenges mentioned and we know that MRO agreements have experienced pressure)
• Plan to make more headcount changes and branch consolidations / closures per Ken Parks in response to an analyst question. (so, pain isn’t done and if they are planning a significant number of headcount reductions it infers the business was way over staffed or the decline in business is expected to be longer / deeper)
• Easter, according to John Engel, was “about a 1/2 day of sales benefit in April … and it’s probably a couple of points to our numbers” (really?, so it’s a 1/2 day, why mention it? Wouldn’t a day being closed due to weather have a similar impact?)
• Global (national) accounts bidding is up (but what is close ratio? Why are customers bidding their agreements … are they at their term ends? Are they opting out to seek better pricing? Are they aggregating sales and hence this could be discretionary dollar wins?)
• Acquisitions
  • Hill Country (San Antonio market) is up high single digits
  • Needham Electric is up doubt digits (could be due to retail national account wins, not necessarily the New England market as NESCO plays in the small to mid-sized market in New England)
  • Atlanta Electrical Distributors (AED) up more than NESCO.
• They mention that their lighting business was a down a bit and point to Philips and that the lamp business is down whereas for other distributors this is a growth segment due to increased fixture / renovation sales. They “recently” launched an initiative … may be late to the party or perhaps a challenge with people / strategy? Part of the issue is lighting is more of a construction play whereas WESCO is an industrial play that aligns with selected lighting suppliers.

So, a tale of three companies!

How is your performance vs these three companies?