Graybar, Grainger, LEDs, Residential Leads and Vending Machines

We've been quiet for a couple of weeks, unfortunately, as have been busy with client activity and extensive travel, but this week we'll share our observations from the NAED Annual, talk about a new phenom (new branch openings) and a few other things.

But, in the interim, thought we'd share some recent Reading Round-ups:

• Graybar
• Graybar reported their Q1 sales, which were up .2%, but net profit was down 51% possibly due to increased branch investments or possibly due to increased price competition.  Not as good as Rexel, surprisingly, but better than WESCO (actually in between the two).  AD's members had the best growth in Q1 (4%).  Could be that independents are taking share or are they positioned better (and stronger) in the markets that are growing, or could it be that customer diversity (size and market focus) is the difference?
• While the federal government supposedly is reducing its expenses (or at least high profile ones like FAA controllers, White House tours and Blue Angel air shows), Graybar has a tool, in addition to its GSA contract, to pursue municipality business, which should strengthen as local economies improve and sales tax revenue increases.  Click here for an overview of the program.
• Grainger
• Sales were up 8%, however, 3% was volume and 2% was price.  Which begs a couple of questions:
• Given the sales increases from Rexel, Graybar and AD or the decrease from WESCO, how much of the increase was helped by price increases or how much worse would WESCO's decrease have been?
• Many industrially-oriented distributors comment about Grainger being "a competitor" within their accounts, however, from conversations, no one seems to understand what percentage of the business Grainger gains, and hence the overall 8% increase, comes from their electrical business.  Are they as much of a competitor as their aura projects? Should distributor salespeople ask additional questions to better understand their competition?
• LEDs
• Think electrical distributors are losing sales.  Consider signing up for this LED seminar from Professional Builder magazine.  CEU credits are being offered and is going to discuss how LEDs can help "aging eyes, health and behavior."  And one of the sponsors is Kichler Lighting as well as some other lighting companies we haven't heard of.  Wonder who Professional Builder's audience is ... the home channel (DIY's), the building wholesale industry and more of a residential, light commercial and institutional audience. In other words, electrical distributors' competition.
• Residential Market
• We've all heard how the residential market is growing, which is great for the country and can have some spillover for electrical distributors and more so for selected manufacturers (not too many distributors pursue this market anymore as it is geographically fragmented). But it helps to know whom the players are.  Here's a list of the top 100 builders in the country.
• Vending Machines
• Industrially-oriented distributors have been talking about vending machines lately. A topic that has revisited the industry as Fastenal uses vending machines as a way to gain share within customers.  Recently AD conducted a webinar for its affiliates overviewing their options.  Here's a link to a press release from a company called AutoCrib highlighting their Premier Distributors ... of which at least one is an electrical distributor (Border States).
• The question regarding vending machines is "what is the business case?" This comes from "who pays for the equipment", "what inventory to load it with", "what type of machine to recommend", "the refilling schedule", "how many turns to expect per 'slot'", and more.  A trend to be watched (and that could be extended to contractors in on-site trailers, or if there were smaller, mobile machines that could go into vans, or possibly in contractor locations ... or consider in an institutional facility ... But how does it make financial sense or is part of the rationale a sales decision (offensive or defensive approach) or a marketing expense?

Thoughts? What are you seeing in the market?

Rexel Improves, AD Tops

As Q1 results roll in, we're able to get a better perspective of the overall market, even if sometimes the numbers are surprising!

Rexel
There's was a tv series called "The Venture Bros" and one of the episodes was entitled "What Goes Down Must Go Up" (and I confess, I've never seen it and was Googling something else) but it may be the perfect phrase for Rexel's U.S. performance.  Rexel released Q1 results (click here) but given our readership, we'd prefer to focus on the U.S. results which, according to others in the industry, were surprising:

• Sales were up 2.8% on a "constant, same day basis" and would have been up 4.5% if their "wind" business had held up.  The growth is credited to the residential market and Rexel does not see much growth coming from the commercial market.  This tells us 1) they had a good amount of wind business that is no longer available due to lack of government subsidies (and we understood that much of this business was Gexpro) and 2) Rexel is residentially, and hence small to mid-sized contractor oriented.  This "growth" is inclusive of their Platt and Munro acquisitions.  Presumably they captured prior year from both companies, otherwise wouldn't be able to compare apples to apples.
• The US gross margin is 21.9%, up 30 basis points and their EBITDA is 3.9% - good numbers for others to consider as a benchmark.
• The company reduced its headcount by 6, however, closed 9 branches over the past 12 months (March-March).  We knew they had closed a good number as manufacturers comment on this regularly.
• North American sales make up 34% of Rexel corporate.

The good news is that they didn't continue to go lower, they had a positive number, reduced the headcount (total number of people) bleeding and improved profitability.  The bad news is that it is residentially-driven according to the report.  But it's progress that they can build upon.

AD
AD recently shared their affiliates' Q1 performance.  Overall, the electrical division's members grew their business 4% on a same store basis to $2.9B (as an aside, think of how the $2.9B compares to other national chains ... annualized, this is $12-14B taking into account seasonality ... larger than any of the chains!)   Given the geographic dispersion of the membership, this indicates that the membership, in aggregate, may have taken some share given that this growth number exceeds both Rexel and WESCO's reported quarterly performances (and we haven't seen any numbers yet from Graybar, Sonepar or Crescent ... and CED does not share.)

How do these numbers compare to your's?

Flir Joins NAED, Attending National

Over the years we've attended many NAED meetings, nationals and regionals, and have seen NAED attempt to bring in a number of new manufacturers ... typically focused on the "fad / niche" of the day (datacom, wind, solar, other renewables) with varying levels of success.  The challenge is most of these companies either register late or are poorly promoted as new companies that distributors should consider.  And in fairness, many distributors book their schedules months in advance, already knowing whom they will meet with.  New manufacturers look at the NAED meetings as a way to meet distributors but, from conversations we've had with many, many walk away disappointed as they can't arrange many meetings.

At the upcoming NAED National there are, once again, a few new companies attending (and the National is the toughest industry meeting to meet a wide array of the industry due to the types of attendees) but we did notice one company who we recognized (from their advertising in various end-user publications) - FLIR.  They are a test and measurement manufacturer focused on the industrial segment of the electrical industry. And they are not a small company in a questionable electrical niche - they happen to be a $1.4B company! And it appears they are committed to growing their electrical business as they are providing data to IDEA and Trade Service and are a Rockwell Encompass Partner.

We're not endorsing them (and quite frankly only know 1 person there, who comes from the electrical industry) but we'd encourage attendees to at least stop in say "hi". Perhaps there isn't an opportunity, perhaps there is, but if, as an industry, we want companies to consider the electrical channel as a potential distribution channel, we need to open the doors to others and consider the possibilities.

If you'll recall, last month we had a posting about why companies consider alternative channels, if we don't want to create outside competitors, we may want to consider companies that seek us.

Charging into Sustainability

The question for some electrical distributors is "How do I get a Charging Station sale?"

The short answer is you have to crack into the corporate infrastructure. Do what? What are you talking about? As a distributor, I am not in the electric car business.

As a distributor, you may have attempted to sell a retrofit package in an existing residence or even to an apartment complex. You might have sold some charging stations to small retail shopping strips or even some commercial office buildings. Most will say that they have a hard time getting the numbers, and thus the sale, to work. But most of these sales have been to people that own some type of hybrid/electric vehicle.

Aside from having a hard time getting the numbers to work, many are on the side lines waiting for a big surge in electric auto sales.

Tapping into Sustainability
We've had some serious conversations with distributors about have they view their approach to the sustainability market. Many lump the sustainability sales issue into these general categories:

• New Building construction (both commercial and residential)
• New Infrastructure 
• Retrofit and a combination of energy audits and rebates and some type of specialty sales person

And that's about as far as it goes. When asked about some of the headlines that deal with Corporate Responsibility, just about all do not view it as an opportunity for them mainly because they don't completely understand the issues.

So, when a press release came in from Corporate Responsibility Magazine that Texas Instruments, Intel, ATT,  Campbell's, Merck, Half Price Books corporate and Game Stop had either been added or moved up the list of the Top 2013 top 100 American  corporations who are buying into "Corporate Responsibility" or Corporate Citizenship, it caused me to take a look at how they are judged and then rated. It turns out that a fairly large number of the companies offer one or more of these perks (in the background) for their employees.

• Discounted bus fares
• Discounted train fares
• Car Pool services
• And just recently added:  Electric Automobile Charging Station, some at discounted charging prices.

So why do they offer these charging stations? As a C-level manager at Texas Instruments says: "As the infrastructure changes we want to be able to offer it to our employees". "Why wouldn't we offer it to our employees when it costs us as a company, absolutely nothing." 

Many of the above mentioned companies are offering these charging stations through Blink Network.  Blink has shown a steady growth that seems to mirror electric or hybrid car sales.  Coincidentally, a large number of the electric car sales are through leasing companies that allows the lessee the opportunity to change vehicles as technology advances.

So has your company taken advantage of the charging station market? If not what holds your company back?

Quarterly Earnings Observations - Philips & WESCO

The nice thing about quarterly earnings is that they can provide insights into companies.  Recently comments from Philips and WESCO caught our eye.

• Philips - A April 23 article in the WSJ highlighted Philips' LED business and its role in the company's quarterly performance.  The article started by sharing a case study of a museum that Philips relamped. According to the article, Philips' LED business grew 38% during the 3 months (yes, LEDs are going mainstream and companies are investing to retrofit their lighting, and reducing energy and maintenance costs), however, Philips had a 12% drop in profit. The article goes on to say that Philips wants to "transform" from a consumer electronics group to a "more tightly focused, specialist equipment supplier."  While lighting profitability improved due to the drop in raw material costs, the overall revenue declined 2% and, in 2012, lighting represented 33% of company revenue but "made a small operating loss."

A couple of thoughts:

• A couple of reasons why LEDs continue to gain traction is continued improvement in the lighting source (hence ongoing R&D costs) and the price of an LED continues to decline (hence declining revenues)
• As everyone knows, the "life" of an LED is longer than other lamp sources, hence reduced frequency of lamp changes.
• The market has an extensive array of competitors, which will continue to drive down product selling costs as each need to achieve some level of share (with Cree being probably one of the largest "new" competitors in the lighting world and companies like Samsung and Toshiba entering the field).
• So, if LEDs require continued R&D investment and selling prices decline while Philips cannibalizes future business with every improving products, achieving revenue growth requires superior salesmanship and being #1 in marketshare, by a wide margin (which we doubt Sylvania will stand back and allow).

So, will Philips' profit picture (the article is entitled "LED Shines Bright as Philips Profit Darkens), brighten.  Are their recent sales and marketing initiatives helping you "see the light" (or see the green)?

Wesco

Wesco released their quarterly results which may reflect the overall market, and more so the industrial market, or highlight issues specific to Wesco.
A headline on Yahoo Finance states "WESCO Misses Again".  Some key points from the article:

• Revenue up 12.6% year over year, but this includes acquisitions (EECOL in Canada being the largest one) which accounted for 16% of increased sales, hence, organic sales are down 3.4% year over year, which may not be bad considering that last winter's weather was mild compared to this year, but it is important to "peel back the onion" as Wesco has many different business areas - datacom, safety, electronics, utility as well as contractor and industrial (and many more areas).
• They reported:

• strength in the utility market

• industrial distributors being conservative and reducing inventory levels

• a "mixed" construction market

• a decline in the institutional market (government, education, healthcare, property management, etc)

• a 117 bps decline in gross margins year over year (business being more competitive or them trying to buy business?)

• for the year, they are expecting sales up 16-18%, inclusive of acquisitions, but that they expect a flat first half and mid single digits the second half (which seems to be what we are hearing from many but no one seems to have much rationale of "why")

And although not part of the earnings report, we've noticed that WESCO is focusing more on contractors with a recent announcement that it has gotten further into racing by sponsoring a driver for 6 races in the Nationwide Series. And here's some info on their promotion helping to build the brand. Question becomes - are the positioned to support the small to mid-sized contractors who are the typical NASCAR fan (and weren't a number of manufacturers into this and then dropped out?)

Obviously WESCO isn't solely industrial, or solely utility or solely contractor, but, they are known for "elephant hunting" on customers and projects. Additionally, due to their commitment to Eaton (their lead line) and knowing the nature of the distribution equipment business (how much of this is Eaton specified / generated and handed to WESCO vs. WESCO generated?) the question becomes, is the 3.4% decline indicative of the industrial market? the contractor market? overall business? or are some of these areas "propping" Wesco up?

How does a decline of 3.4% compare to your Q1?

Overall, as a manufacturer or distributor, without naming names, how was your Q1? What product categories (or customer applications) are driving your performance and what is your Q2 outlook?

And perhaps we can discuss at NAED?