2018 distribution industry outlook - mdm.com · pdf filein partnership with modern...

2018 DistributionIndustry Outlook

Featuring:David Manthey, Baird

Ranga Bodla, Oracle+ NetSuiteTom Gale, Modern Distribution ManagementIan Heller, Modern Distribution Management

Jan. 17, 2018

Sponsored by:

• Economic & End-Market Outlook

• Baird-MDM Quarterly Survey

• MDM 2018 Industry Outlook Survey

• Key Trends for Distribution

– Inflection point: 2018

– Call to action

Agenda

David MantheySenior research analyst,Baird

Speakers

Tom GaleCEO & PublisherMDM

Ranga BodlaHead of industry marketing,NetSuite

Ian HellerCOO & President,MDM

Copyright © 2017, Oracle and/or its affiliates. All rights reserved.1

WHO IS NETSUITE?

• The first cloud company

• 5,500+ employees globally

• 40,000+ organizations and subsidiaries globally

• $1 billion revenue run rate 2016

• Offices in 13 countries

• Acquired for $9.3 billion on 11/7/16

• Now a Global Business Unit of Oracle

1


PHILOSOPHY

NETSUITE

SUITECLOUD PLATFORM

FUNCTIONALITY

ONEWORLD

INDUSTRY

Built for Wholesale Distribution

Multi-bookMulti-languageMulti-currencyMulti-country tax compliance

Point & Click CustomizationBuilt-in PlatformMulti-tenantBuilt on Oracle StackUnified Data ModelEveryone on Same Release

Omnichannel Commerce ERPFinancialsSRPSCMCRMHCM

2

Built for the CloudBuilt to Run a Business


NetSuite Stairway:Wholesale Distribution

•B2C and B2B Commerce (B2X)

•Supplier-Customer Experience

•Work Orders & Assemblies

ENHANCE •Supply Chain Automation (SCM)

•Bar Coding

INNOVATE • Warehouse Mgmt(WMS)

• Field Service

EXPAND • Business Intelligence• Marketing Automation• Price and Margin Mgmt

TRANSFORM

• Financial (FMS)• Order Management• Inventory• CRM• Operational BI

REMEDIATE

Industrial Research January 17, 2018

Industrial Distribution Webcast In partnership with Modern Distribution Management

Please refer to Appendix:

Important Disclosures and Analyst Certification

David J. Manthey, CFA Senior Research Analyst [email protected] 813.288.8503

Luke L. Junk, CFA Senior Research Associate [email protected] 414.298.5084

Quinn T. Fredrickson Research Analyst [email protected] 414.765.3640

Overview

Macroeconomic Commentary _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 2_ Source: FactSet, US Federal Reserve

Interest Rates Rising Upward market momentum continues

Unemployment at Cyclical Lows GDP Growth Ticking Up

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

Mar-

08

Sep-0

8

Mar-

09

Sep-0

9

Mar-

10

Sep-1

0

Mar-

11

Sep-1

1

Mar-

12

Sep-1

2

Mar-

13

Sep-1

3

Mar-

14

Sep-1

4

Mar-

15

Sep-1

5

Mar-

16

Sep-1

6

Mar-

17

Sep-1

7

S&P 500

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Jan-0

5

Aug-0

5

Mar-

06

Oct-

06

May-0

7

Dec-0

7

Jul-08

Feb-0

9

Sep-0

9

Apr-

10

Nov-1

0

Jun-1

1

Jan-1

2

Aug-1

2

Mar-

13

Oct-

13

May-1

4

Dec-1

4

Jul-15

Feb-1

6

Sep-1

6

Apr-

17

Nov-1

7

Federal Funds Rate

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Jan-0

5

Aug-0

5

Mar-

06

Oct-

06

May-0

7

Dec-0

7

Jul-08

Feb-0

9

Sep-0

9

Apr-

10

Nov-1

0

Jun-1

1

Jan-1

2

Aug-1

2

Mar-

13

Oct-

13

May-1

4

Dec-1

4

Jul-15

Feb-1

6

Sep-1

6

Apr-

17

Nov-1

7

U.S. Unemployment Rate

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1Q

90

1Q

91

1Q

92

1Q

93

1Q

94

1Q

95

1Q

96

1Q

97

1Q

98

1Q

99

1Q

00

1Q

01

1Q

02

1Q

03

1Q

04

1Q

05

1Q

06

1Q

07

1Q

08

1Q

09

1Q

10

1Q

11

1Q

12

1Q

13

1Q

14

1Q

15

1Q

16

1Q

17

Real GDP Growth (TTM Annualized Rate)

Overview

Industrial Economy – Synchronized Global Recovery _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 3_ Source: FactSet, US Federal Reserve

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Jan-0

3Ju

l-03

Jan-0

4Ju

l-04

Jan-0

5Ju

l-05

Jan-0

6Ju

l-06

Jan-0

7Ju

l-07

Jan-0

8Ju

l-08

Jan-0

9Ju

l-09

Jan-1

0Ju

l-10

Jan-1

1Ju

l-11

Jan-1

2Ju

l-12

Jan-1

3Ju

l-13

Jan-1

4Ju

l-14

Jan-1

5Ju

l-15

Jan-1

6Ju

l-16

Jan-1

7Ju

l-17

Jan-1

8

High Grade Copper ($/lb)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jan-9

1

Feb-9

2

Mar-

93

Apr-

94

May-9

5

Jun-9

6

Jul-97

Aug-9

8

Sep-9

9

Oct-

00

Nov-0

1

Dec-0

2

Jan-0

4

Feb-0

5

Mar-

06

Apr-

07

May-0

8

Jun-0

9

Jul-10

Aug-1

1

Sep-1

2

Oct-

13

Nov-1

4

Dec-1

5

Jan-1

7

PPI (y/y change)

$0

$20

$40

$60

$80

$100

$120

$140

$160

Mar-

08

Sep-0

8

Mar-

09

Sep-0

9

Mar-

10

Sep-1

0

Mar-

11

Sep-1

1

Mar-

12

Sep-1

2

Mar-

13

Sep-1

3

Mar-

14

Sep-1

4

Mar-

15

Sep-1

5

Mar-

16

Sep-1

6

Mar-

17

Sep-1

7

Brent Crude ($/bbl)

60

70

80

90

100

110

120

130

Jan-9

1

Feb-9

2

Mar-

93

Apr-

94

May-9

5

Jun-9

6

Jul-97

Aug-9

8

Sep-9

9

Oct-

00

Nov-0

1

Dec-0

2

Jan-0

4

Feb-0

5

Mar-

06

Apr-

07

May-0

8

Jun-0

9

Jul-10

Aug-1

1

Sep-1

2

Oct-

13

Nov-1

4

Dec-1

5

Jan-1

7

U.S. Dollar Index

Overview

Manufacturing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 4_ Source: Institute for Supply Mgmt, US Federal Reserve, Company reports

ISM Continues Marching Up Manufacturing IP Picking Up

Distributors Seeing Solid Growth Manufacturers Return to Growth

-5.0%

-2.5%

0.0%

2.5%

5.0%

Jul-

11

Oct-

11

Jan-1

2

Apr-

12

Jul-

12

Oct-

12

Jan-1

3

Apr-

13

Jul-

13

Oct-

13

Jan-1

4

Apr-

14

Jul-

14

Oct-

14

Jan-1

5

Apr-

15

Jul-

15

Oct-

15

Jan-1

6

Apr-

16

Jul-

16

Oct-

16

Jan-1

7

Apr-

17

Jul-

17

Oct-

17

Industrial Production (Mfg.)

-10%

0%

10%

20%

30%

40%

45

50

55

60

65

70

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

ISM FAST GWW MSM

40

45

50

55

60

65

Jul-

11

Oct-

11

Jan-1

2

Apr-

12

Jul-

12

Oct-

12

Jan-1

3

Apr-

13

Jul-

13

Oct-

13

Jan-1

4

Apr-

14

Jul-

14

Oct-

14

Jan-1

5

Apr-

15

Jul-

15

Oct-

15

Jan-1

6

Apr-

16

Jul-

16

Oct-

16

Jan-1

7

Apr-

17

Jul-

17

Oct-

17

ISM

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-1

0Apr-

10

Jul-10

Oct-

10

Jan-1

1Apr-

11

Jul-11

Oct-

11

Jan-1

2Apr-

12

Jul-12

Oct-

12

Jan-1

3Apr-

13

Jul-13

Oct-

13

Jan-1

4Apr-

14

Jul-14

Oct-

14

Jan-1

5Apr-

15

Jul-15

Oct-

15

Jan-1

6Apr-

16

Jul-16

Oct-

16

Jan-1

7Apr-

17

Jul-17

Oct-

17

CAT EMR

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

Private Non-Residential Construction Spending

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

Dodge Contracts (LTM)

30

40

50

60

70

80

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

CRE Loan Demand

Construction Spending Flattening Out

Overview

Non-Residential Construction _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 5_ Source: AIA, US Census Bureau, McGraw Hill

Dodge Contracts Solidly Positive

35.0

40.0

45.0

50.0

55.0

60.0

65.0

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

ABI

CRE Loan Demand Moderating

ABI Index Healthy

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

95

100

105

110

115

120

125

130

135

140

2009 2010 2011 2012 2013 2014 2015 2016

Squares Y/Y Change

-20%

-10%

0%

10%

20%

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

AHRI Shipments (TTM basis)

300

400

500

600

700

800

900

1000

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

Single-Family Starts

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Sep-1

3

Jan-1

4

May-1

4

Sep-1

4

Jan-1

5

May-1

5

Sep-1

5

Jan-1

6

May-1

6

Sep-1

6

Jan-1

7

May-1

7

Sep-1

7

Existing Home Sales

Overview

Residential Construction/Repair _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 6_ Source: US Census Bureau, NAR, AHRI, ARMA

SF Housing Recovery Remains on Track Existing Home Sales Mostly Positive

AHRI Shipment Growth Strong Shingle Growth Picking Up

Macroeconomic Conclusions

Baird/MDM Industrial Distribution Survey │ 7_ Source: US Census Bureau, NAR, AHRI, ARMA

• 2016 = “World awash in too much everything.” • 2017 = “Hope for pro-growth environment.” • 2018 = “Synchronized global growth.”

Punchlines _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Risks _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

• “Everything is awesome” (and everyone agrees) • Few assets are cheap • Cycle maturing • Interest rates rising

Assume 2018 will be another year of growth, fueled by tax reform, lower regulation, and possible greater investment, likely with a higher degree of volatility than recent years due to risks.

Conclusion _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird Industrial Distribution Survey

Overview _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 8_ Source: Baird Analysis

Distributor

Manufacturer

Other

0% 10% 20% 30% 40%

<$10 mm

$10-$25 mm

$26-$50 mm

$51-$100 mm

$101-$250 mm

$251-$500 mm

>$500 mm

Percent of Respondents

• 500+ respondents

• $100+ billion in aggregate annual revenue


Overview _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Industrial Supply • General Industrial/MRO, Fasteners, Cutting Tools, Safety

Industrial Gases • Gases, Hardgoods

Building Products & Facilities Maintenance • Roofing, HVAC, Pool & Spa, Facilities MRO, Plumbing, Wallboard/Gypsum,

Landscape Supplies

Electrical & Datacomm • Electrical, Datacomm


Overall Results _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 10_

Source: Baird Analysis

-4%

-2%

0%

2%

4%

6%

8%

4Q16 1Q17 2Q17 3Q17 4Q17 1Q18E 1Q18E 2Q18E 3Q18E 4Q18E

Y/Y

Change

-1%

0%

1%

2%

3%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

-2%

0%

2%

4%

6%

8%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

4Q17 Revenues +4.9% 4Q17 Pricing +1.3%

1Q18/2018 Revenue Outlook +4.1%/+4.5%

Sub-Industry Themes

Industrial Supply / General Industrial – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


6.7%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Metalworking/Cutting Tools

6.0%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

General Industrial (MRO)

3.4%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Safety

• Sustained strength across sub-sector following five straight quarters of acceleration, remains +5.5%

• General MRO, Metal-working and Mechanical/ Power Transmission all equal 2012 high water marks

• Updated 2018 forecast calls for +4.5% growth, revised +50bps and in line with the overall survey

Sub-Industry Themes

Industrial Supply / General Industrial – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


0.9%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Safety

4.1%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Metalworking/Cutting Tools

1.5%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

General Industrial (MRO)

• Average pricing accelerated sequentially, reaching +2%

• All six product categories registered gains of +1% or better, with +2% or better pricing seen in Metalworking, OEM Fasteners and General Industrial

• Widespread supplier price increases being seen, and most participants expressed optimism re: the potential for improved price attainment this year

Sub-Industry Themes

Industrial Supply / General Industrial – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Key theme: Momentum seen building into 2018 • “As the year went on, the enthusiasm got stronger and stronger.” • “Markets continued to be ‘open for business’ at an increased rate.” • “General optimistic views seem to be evident in marketplace; this is

especially true at larger regional and national customers.”

• Key theme: Increased inflationary pressures apparent • “Price increases are coming fast and furious. It’s been a long time

since that happened.” • “While some customers try to push back, everybody’s in the same boat

– there’s not necessarily an option to go somewhere else.”

• Key theme: “Amazon effect” hitting smaller distributors • “Our biggest investments are in technology. We need to keep up with

what’s happening in the consumer market – package tracking, status updates, etc. We’re not there yet.”

• Competitive Dynamics: Fastenal seen on the offensive • “We are running up against Fastenal more often.” • “Fastenal is the competitor’s name we hear the most”

Sub-Industry Themes

Industrial Supply / General Industrial – Word Cloud: Metalworking _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Sub-Industry Themes

Industrial Gases – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


6.6%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Gases

5.8%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Hardgoods

• Aggregated growth improved 100bps q/q, reflecting acceleration across both gases and hardgoods

• Underlying volumes were +4% in gases and approximately +5% in hardgoods

• Updated 2018 expectations are for +4.5% growth, up 150bps q/q and in line with the overall survey

Sub-Industry Themes

Industrial Gases – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


1.0%

-1%

0%

1%

2%

3%

4%

5%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Hardgoods

2.3%

-1%

0%

1%

2%

3%

4%

5%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Gases• Gases pricing was slightly above the +1-2% range seen over the past two years-plus

• 4Q Hardgoods pricing was up 100bps y/y and 20bps q/q

• Commentary re: pricing suggests a significant push from suppliers to realize price increases in 2018, and customers are seen as generally willing to accept such increases

Sub-Industry Themes

Industrial Gases – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Key theme: Demand feedback still positive overall • “Business since the election has been very good to us. The weather has

put a damper on things momentarily, but we expect business to stay robust.”

• “We are seeing more interest and orders for capital equipment than in recent times.”

• “We are moving quickly!”

• Key theme: Strong pricing environment • “Big push from suppliers to increase pricing in 1Q 2018.” • “Pricing seems stable.” • “Pricing increases seemed to be widely expected and accepted.”

• Outlook: Solid demand expected through 2018 • “I look for growth full speed ahead in 2018, in particular bulk nitrogen

and argon. We’ve seen and expect to continue to see customers move ahead with expansion plans.”

• “We are cautiously optimistic about 2018 but are not convinced that the projected growth will come to fruition.”

Sub-Industry Themes

Industrial Gases – Word Cloud _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Sub-Industry Themes

Building Products – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


6.9%

-5%

0%

5%

10%

15%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Pool & Spa

3.2%

-5%

0%

5%

10%

15%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Roofing

0.0%

-5%

0%

5%

10%

15%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

HVAC• Average growth of +4% was slightly below the overall survey, but accelerated +50bps q/q

• Weather impacts were mostly favorable during the quarter, except in HVAC where mild weather failed to spur replacement demand

• Pool & Spa was the fastest growing product in the overall survey this quarter, followed by Lumber & Building Materials

• Updated 2018 expectations call for +5% growth, above the overall survey and revised +50bps higher vs. the initial view last quarter

Sub-Industry Themes

Building Products – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


1.3%

-2%

-1%

0%

1%

2%

3%

4%

5%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Pool & Spa

0.4%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Roofing

1.3%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

HVAC

• Overall pricing again nicely positive (+1%)

• Roofing pricing again slightly higher, while HVAC pricing moved higher sequentially ahead of anticipated early 2018 increases

• Continuing a recent theme, Facilities Maintenance pricing remains under pressure, coming in at -1% this quarter

Sub-Industry Themes

Building Products – HVAC & Roofing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• HVAC Demand: In like a lamb, out like a lion?

• “When it got mild in the Gulf things really died down there, and we didn’t have enough cold weather in our branches further north to offset that.”

• “With the deep freeze we’ve had late December into January, things have been pretty active.”

• HVAC Pricing: Industry confidence running high

• “There’s definitely a much stronger, more widespread push for price increases.”

• Roofing demand: Favorable re-roofing trends continue

• Res: “Demand is still relatively strong on re-roofing side.”

• Non-Res: “While demand is different by region, overall it is solid and steady with certain markets busier due to low inventory positions, M&A, other.”

• Roofing Pricing: Commentary remains similar for now

• Res: “Manufacturers are attempting an increase in March...we’ll see if the market supports it.”

• Non-Res: “Commercial roofing will have a small increase, if any.”

Sub-Industry Themes

Building Products – Word Cloud: Roofing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Sub-Industry Themes

Building Products – Other ____________________________________________________________________________________________________________________________________________________________________________________________


• Pool & Spa/Landscape Supplies: Sustained strength • “As the broader economic market continues to be positive, it is

expected to impact the pool & spa sector positively.” • “Major pool markets were affected by hurricanes. They will have to

rebuild in 2018.” • “Wealthy clients increasingly comfortable spending on larger projects

as it appeared Washington would pass tax reform and other economic indicators were consistently bullish.”

• Lumber & Building Materials: Lumber dynamics normalizing • “Commodities ran up dramatically in early part of year which

compressed margins. We can not go up as fast as the market. 4Q saw some settling of cost so we are trying to not follow as fast to recover some lost margin.”

• Facilities Maintenance: Continued pricing chatter • “Pricing pressure remains strong. Competition is pushing commodity

product pricing lower.” • “Gross margin has been pressured as market pricing has become

more competitive.” • Wallboard: Volumes solid but pricing uncertain

• “Remains to be seen if I can pass the gypsum increase along.”

Sub-Industry Themes

Electrical & Datacomm – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


0.4%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Datacomm

3.7%

-10%

-5%

0%

5%

10%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Electrical• Electrical growth was relatively similar sequentially, while Datacomm slipped closer to flat amid continued mix trends

• While Electrical growth is edging towards 2014 levels, gains still remain shy of those levels, contrary to Industrial Supply trends

• Updated 2018 outlook is for +3% growth (Electrical > Datacomm), again below the overall survey average

Sub-Industry Themes

Electrical & Datacomm – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


-0.8%-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Datacomm

0.7%

-2%

-1%

0%

1%

2%

3%

4%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

Y/Y

Change

Electrical• Pricing was flat-to-lower sequentially, with Electrical pricing mostly steady the past three quarters, while Datacomm pricing retreated yet again

• This is despite the fact that copper currently sits at a three-year high, highlighting continued competitive challenges in this channel – and again largely counter to the trends observed in Industrial Supply

Sub-Industry Themes

Electrical & Datacomm – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Key theme: Capex on the upswing? • “Industrial market picking up steam.” • “End user customers are very optimistic, they’re talking about

spending capital: maintenance that’s been put off + capital projects.”

• Key theme: Continued res/non-res growth, labor shortages • “Backlog is up 7-8% vs. last year, so like where we are at this point.” • “Commercial market shows nominal growth, single family residential is

very strong with multifamily trailing off.” • “We expect the slow growth trend to continue due to labor limitations.

Most contractors we speak with don’t have qualified labor available to expand or take on more projects.”

• Key theme: Favorable utility outlook, hurricanes non-factor • “Utility strong and looks favorable for 2018. Hurricanes insignificant.”

• Key theme: Datacomm feedback mixed • “Weakness attributable to a lack of larger project activity.” • “We saw enterprise bounce back after 2Q/3Q were pretty weak. It’s

not back to where we want it but it’s going in the right direction.”

Sub-Industry Themes

Electrical & Datacomm – Word Cloud _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________



Conclusion - Overall Results _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │28_ Source: Baird Analysis

4Q17

Revenue 4Q17 1Q18 2018

Growth Pricing Forecast Forecast

Overall 4.9% 1.3% 4.1% 4.5%

Industrial/Energy PVF 7.7% 0.5% 6.1% 4.9%

Hoses & Accessories 7.7% 2.1% 5.2% 5.8%

Mechanical/Power Transmission 7.5% 1.5% 3.1% 4.6%

Facilities Maintenance/Jan-San (MRO) 7.1% 0.0% 4.6% 3.7%

Pool & Spa 6.9% 1.3% 3.9% 6.9%

Metalworking/Cutting Tools 6.7% 4.1% 3.9% 4.9%

Gases & Cylinder Rental 6.6% 2.3% 6.0% 7.0%

Welding Hardgoods 5.8% 1.0% 4.1% 5.3%

General Industrial (MRO) 5.8% 1.5% 4.0% 3.8%

Lumber & Building Materials 4.4% 1.6% 3.8% 5.4%

Safety 3.8% 0.7% 4.1% 3.5%

Ceilings 3.8% 2.3% 3.0% 3.8%

Electrical 3.7% 0.7% 4.2% 4.4%

Roofing 3.2% 0.4% 1.6% 4.9%

Plumbing 3.0% 0.4% 4.6% 4.6%

OEM Fasteners 2.9% 2.7% 2.4% 4.0%

Waterworks Products 2.8% 3.0% 3.1% 3.4%

Wallboard/Gypsum 2.3% -0.3% 1.2% 2.3%

Landscape Supplies 1.4% 1.2% 1.2% 4.2%

Datacomm 0.4% -0.8% 3.2% 2.8%

HVAC 0.0% 1.3% 5.4% 5.6%

Conclusion


Stock Market

- Distribution stocks – 2017 Outperformance seen in building products consolidation while pricing fears hurt industrial-focused suppliers

- SITE +121%, BECN +39%

- FAST +17%, WSO +14%, MSM +5%, WCC +1%, GWW +1%

Macroeconomics

- Optimism widespread… with a few risks. US economic indicators seemingly point to current trends as sustainable, driven by a favorable backdrop for industrial and resi-related markets and a potential uptick in capex post tax reform that could benefit many markets. Most notable risks are potential lower-than-expected growth or price realization, and higher interest rates, which could upend current strength. But we assume 2018 will be another year of growth, fueled by tax reform, lower regulation, and possible greater investment, likely with a higher degree of volatility than recent years due to risks.

Industrial Distribution – Conclusions on four major sectors…

- General Industrial. Sustained strength for five straight quarters, price inflation

- Industrial Gas/Welding. Solid demand, with signs of capital equipment investment

- Building Products. Steady with good construction AND repair & remodel trends

- Electrical/Datacomm. Continued favorable construction dynamics, datacomm more mixed

Baird/MDM Industrial Distribution Survey │ 29

Conclusion – Optimism prevalent amid later-cycle acceleration, risks remain _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Question & Answer

__________________________________________________________________________________________________

Source: Baird Analysis Baird/MDM Industrial Distribution Survey │ 30_

To Participate in The Baird/MDM Quarterly Industrial

Distribution Survey, Contact:

David J. Manthey, CFA Senior Research Analyst

[email protected] 813.288.8503

Luke L. Junk, CFA

Senior Research Associate [email protected]

414.298.5084

Quinn T. Fredrickson Research Analyst

[email protected] 414.765.3640

Appendix



Representative Quotes from Recent Surveys _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Industrial Supply/General Industrial (4Q16)

• Demand modestly better overall…“Some positive trends in 4Q against a bad quarter last year.”

• Cautious optimism, but still wait and see…“Cautiously optimistic that upward trend late 4Q will carry into 2017.”

• Pricing increases on the rise, but not a slam dunk…“Definitely more increases. OEM story is they are going both up/down.”

• Suppliers reacting to Amazon Business?…“Some suppliers are saying we are not allowed to market products in the Amazon marketplace.”

Industrial Supply/General Industrial (4Q17)

• Momentum seen building into 2018… “As the year went on, the enthusiasm got stronger and stronger.”

• Increased inflationary pressures apparent… “Price increases are coming fast and furious. It’s been a long time since that happened.”

• “Amazon effect” hitting smaller distributors… “Our biggest investments are in technology. We need to keep up with what’s happening in the consumer market – package tracking, status updates, etc. We’re not there yet.”

• Fastenal seen on the offensive… “We are running up against Fastenal more often.”

Appendix




Industrial Gases (4Q16)

• Demand feedback skews noticeably positive…“We feel confidence being demonstrated by our customers – across the board.”

• Capex on the rise, positive leading indicator…“Customers freeing up capital and making equipment investments.”

• Optimism on the rise…“Pricing and margin momentum building for 2017.”

Industrial Gases (4Q17)

• Demand feedback still positive overall…“We are seeing more interest and orders for capital equipment than in recent times.”

• Strong pricing environment… “Pricing increases seemed to be widely expected and accepted.”

• Solid demand expected through 2018… “I look for growth full speed ahead in 2018, in particular bulk nitrogen and argon. We’ve seen and expect to continue to see customers move ahead with expansion plans.”

Appendix




Building Products & Facilities Maintenance – HVAC & Roofing (4Q16)

• HVAC: 4Q demand ends on high note as cold arrives…“The unseasonable warmth slowed the start of the furnace season, but orders began to pick up in December as the cold weather started.”

• HVAC: Widespread price increases on tap…“All of the major equipment OEMs are raising price 2-5%.”

• Roofing: 4Q flattish overall vs. tough comps…“4Q was a little softer, but we’re still comparing well against pretty strong numbers – everything is healthy, no cause for concern.”

• Roofing: Commentary remains similar for now…“Manufacturers will try for an increase, but I don't expect they'll get much of an increase, if any.”

Building Products & Facilities Maintenance- HVAC & Roofing (4Q17)

• HVAC Demand: In like a lamb, out like a lion?... ““When it got mild in the Gulf things really died down there, and we didn’t have enough cold weather…to offset that.”

• “With the deep freeze we’ve had late December into January, things have been pretty active.”

• HVAC Pricing: Industry confidence running high…“There’s definitely a much stronger, more widespread push for price increases.”

• Roofing Demand: Favorable re-roofing trends continue… “Demand is still relatively strong on re-roofing side.”

• Roofing Pricing: Commentary remains similar… “Manufacturers are attempting an increase in March...we’ll see if the market supports it.”

Appendix




Building Products & Facilities Maintenance – Others (4Q16)

• Pool & Spa: Trends uniformly positive…“Best finish to the year in over five years.”

• Facilities MRO: Positive demand bias…”We are optimistic for improvement in the economy for 1H17.“

• Landscape & Supply: Positive industry outlook for 2017…“Continued strength in construction spending portends continued growth for landscape-related businesses.”

• Lumber & Building Materials: Mild weather/lumber in focus…“Some slowdown ahead of the election but 4Q was mostly strong with favorable weather.”

• Wallboard: Mixed feedback on price increases…“Does distribution get price? That is the billion dollar question.”

Building Products & Facilities Maintenance- Others (4Q17)

• Pool & Spa/Landscape Supplies: Sustained strength… “As the broader economic market continues to be positive, it is expected to impact the pool & spa sector positively.”

• Lumber & Building Materials: Lumber dynamics normalizing… “Commodities ran up dramatically in early part of year which compressed margins. We can not go up as fast as the market. 4Q saw some settling of cost so we are trying to not follow as fast to recover some lost margin.”

• Facilities Maintenance: Continued pricing chatter… “Pricing pressure remains strong. Competition is pushing commodity product pricing lower.”

• Wallboard: Volumes solid but pricing uncertain… “Remains to be seen if I can pass the gypsum increase along.”

Appendix




Electrical & Datacomm (4Q16)

• 4Q trends take a step down…“4Q experienced slower growth than 3Q with construction sales still outpacing industrial.”

• Non-res lull persists, but outlook brighter…“It seemed like the foot came off the accelerator in July and never came back down.”

Electrical & Datacomm (4Q17)

• Capex on the upswing?... ““End user customers are very optimistic, they’re talking about spending capital: maintenance that’s been put off + capital projects.”

• Continued res/non-res growth (ex. Multi-family)… “Commercial market shows nominal growth, single family residential is very strong with multifamily trailing off.”

• Favorable utility outlook, hurricanes a non-factor… “Utility strong and looks favorable for 2018. Hurricanes insignificant.”

• Datacomm feedback mixed… “We saw enterprise bounce back after 2Q/3Q were pretty weak. It’s not back to where we want it but it’s going in the right direction.”

Appendix




PVF (4Q16)

• Industrial/Energy PVF trends remain lower y/y, but sentiment improving…“After the election, the industrial mood has changed to the more positive. We have seen an uptick in quotation activity; however, has not translated to new bookings as yet.”

• Waterworks commentary largely skews positive, weather hits December…“Business was strong in October and November, but slowed dramatically in December.”

• Cautious optimism heading into 2017…“4Q was down a little, but are expecting better things in 2017.”

PVF (4Q17)

• Industrial/Energy PVF growth accelerates… “Oil- and gas-related products are leading the recovery.”

• Waterworks trends steady, weather hits December… “Overall, our market is very busy. The deep freeze shut most everything down on our end.”

• Industrial/Energy PVF expected to continue recovery… “Oil- and gas-related sales… should continue increasingly meaningfully as they did in the second half of 2017.”



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Distributor#1#2 #3

#4#5

DistributorsuseSEOandhigh-qualitycontenttowinorders

TheNewestSolution:One-StepVoiceOrdering

SEO/Content• Images• Specifications• SDS• Applicationinfo• Reviews• Availability

Distributor#1#2 #3

#4#5

AmazonBusinessuniquelyequippedtowinbusiness

AmazonBusinesseProcurement1.0

• Currentlypositionedasa“bolton”toinstalledeProcurementsystems.

AmazonBusinesseProcurement2.0

• WebelieveAmazonBusinesshasbiggerplans

What’sNext?• “InternetofThings”- IoT– Sensorsthroughoutcustomerlocationsgenerateordersasneeded

– Officemachines– Productionmachinery– Vendingmachines– Binsystems

Technologyinfluencewillgrowasrelationshipinfluencedeclines

Calltoaction#1:Protectthecore– Vending– Specialization– Customertraining– Services&repair– Localbranchrelationship

– Rentals/leasing– Specializeddelivery– Deepcustomerinsights

– Privatelabel– Assembly/fabrication

Build“hard-to-digitize”capabilitiesandintegrateintocustomerprocesses

Calltoaction#2:Buildthefuture• Talent– generational,analytics,strategy• Digital– Omnichannel,enterprise• Analytics– Tablestakes• M&A/Consolidation

Go-forwardstrategyrequiresmoreadaptivemodel

2019Alexaknowsyourcustomers’needs,buyingpatternsandpricingsensitivitybetterthanyoursalespeople.

Questions?

2018 DistributionIndustry Outlook

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Jan. 17, 2018

2018 distribution industry outlook - mdm.com · pdf filein partnership with modern...

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