May 11, 2018

By David Gordon

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, the company reports 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
Construction up 9% organically (10% in US and Canada)
Utility up 18% (21% in US, 6% decline in Canada)
Institutional up 9% (3% in US and 5% in Canada); 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%
Operating margin was 3.7%
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%

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%.

Rexel

Rexel’s 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:

Q1, worldwide, in line with expectations with 3.9% growth.
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%
Seeing some benefits from recent US realignment and branch openings / remodels
Project business down (continued affects of GE and large projects. 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

Anixter

Anixter, through its Anixter Power Solutions group, which previously was HD Supply, serves 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 US$1 billion Q1 business) is its Network and Security Solutions and EES (29% of business, a US$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 US$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, although 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
Overall, Anixter is investing US $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.)

AD, the contractor and industrial products wholesale buying / marketing group, reported a 12% increase in Member sales, across 12 AD divisions, totaling US$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 (U.S. 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.

David Gordon is President of Channel Marketing Group. Channel Marketing Group develops market share and growth strategies for manufacturers and distributors and develops market research. CMG’s specialty is the electrical industry. He also authors an electrical industry blog, www.electricaltrends.com. He can be reached at 919-488-8635 or dgordon@channelmkt.com.