Distributors Continue to Mount Comebacks in 2Q

Distributors continued to recover from the impact of the pandemic with the second quarter of 2021 showing marked increases in sales and profitability. While demand continues to ramp up, distributors have a few concerns going forward, including supply chains restraints, which have led to lower inventory and available materials, and a shortage of skilled workers returning to the labor pool. 

After the pandemic-induced trough in the second quarter of last year, each subsequent quarter showed marked improvement — and even more so in the second quarter of 2021, the latest MDM-Baird quarterly survey shows. After dropping by 10% year-over-year in 2Q 2020, 2Q 2021 came in at 7.7% above Baird’s forecast and posted a two-year stacked growth of 10.5%.

Said one survey respondent,“We are seeing more and more a direction toward a return to business. Demand just seems to be growing. Every industry seems to be maxing out.”

According to Baird, June posted 16.1% year-over-year sales growth, while April (17.9%) and May (17.5%) showed marked increases over the same months a year ago. “We were starting to come out of the pandemic [sales declines] last June and we still grew this year by +13%, even as good as last June was,” said one distributor.

For two-year stacked cumulative growth, April was up 3.1% year-over-year, May 2.9% and June 9.6%. The sectors with the strongest two-year cumulative growth included:

• Pool and Supply +26%

• Landscape Supplies +18%

• HVAC +17%

• LBM +17%

• Waterworks +15%

“Last year, April and May were when things cratered for us, but June 2020 came back really strong. Overall, it’s been a great 2Q21. We’re a little surprised at how strong it still is on the demand side because we thought it would lighten a bit with people going back to work,” said one respondent. 

The strongest third quarter forecasts are across OEM Fasteners (+28%), Electrical (19%), Plumb-ing (19%), Datacomm (19%) and Industrial/PFV (17.%). 

The weakest forecasts for the third quarter are Safety (+3%), Landscape Supplies (+10%) FM Jan-San (+10%) Mechanical/PT (11%) and LBM (+12%). FM Jan-San was one of the hardest hit sectors last year. That sector’s forecast for the fourth quarter of 2020 was 8.6%. 

Additionally, Baird found that the gap in industrial versus building products growth would be roughly equal by the third quarter of this year. 

Ongoing priorities 

The roll-out of vaccines led to some customers and employees returning to their warehouses, distribution centers and office spaces, and has distributors shifting their focus in the new business cycle of 2021. Respondents were asked: “What is your top professional priority for the remainder of 2021?” The responses included the following: 

• “Attracting and retaining talent and maintaining inventory levels.” 

• “Maintaining health of employees.” 

• “Hiring.” 

• “Successfully navigate supply chain challenges (lead times, raw material shortages, port delays, rising prices, etc.).” 

• “Balancing supplier cost increases to customer price increases.” 

• “Returning the workforce back to a more normal state and continuing to grow the business.” 

• “Finding people that want to work.” 

• “Additional training for software developers and integrators.” 

• “To get sales teams on the road, being in front of the customer first.” 

• “Gain market share.”

The survey also asked if distributor customers have fully re-opened for sales rep visits, and if not, why? About 25% of respondents gave an unqualified, “yes.”

Some of the more nuanced responses included: 

• “Probably 75% of our customers are allowing us in.” 

• “Not quite — on an ‘as-needed’ basis only, still following COVID protocols.” 

• “25% have, 75% still happy with video calls.” 

• “No. Since we are operating in five countries with different COVID-related restrictions, we have not yet fully restored field activity.” 

• “The vast majority have.” 

• “Not fully reopened but starting to take meetings.” 

Sector expectations

Here’s a look at some of the key themes and distributor expectations across an array of sectors.

Industrial market

Demand has started to rebound in some of the industrial verticals that were previously lagging, according to Baird, although supply chain constraints continued to worsen in the second quarter. Pricing continues to surge across most of the categories with the exception of safety, which is down due to lower demand this year for personal protective equipment (PPE). “Healthy” backlogs amid inventory shortages will drive a solid second half of the year, according to Baird.  

Safety revenue was down 2.2% in the second quarter, while MRO posted a 21.9% increase. Selling prices for MRO increased by 4.8%, while safety decreased by 1.2% after hitting a high of more than 6% in the fourth quarter of last year. OEM fasteners revenues increased by 32% in 2Q, while selling pricing were up by 10.1%

Manufacturing customers at full capacity

Distributors in this sector report:

• “Aerospace is definitely rebounding — again not back to a peak but rebounding. Oil & gas has rebounded.” 

• “Our manufacturing/fabrication division is at full capacity and looking to outsource some jobs we get.” 

• “Very strong demand throughout all sectors.” 

Supply chain constraints 

What they are saying:

• “Supply shortages and price increases have added stress to our entire organization. The economy is recovering faster than the industry’s ability to supply the increased demand. Inflation will be here all year.” 

• “Lead times on normally in-stock/standard products are now 12 weeks or more delayed.” 

• “We are seeing increased demand seriously outpace product availability. We are communicating consistently about pricing volatility and maintaining margins with no trouble.” 

Backlogs

What they are saying: 

• “We are seeing the effect of slower deliveries, so backlogs are growing in all of our divisions. There’s still a lot of pent-up demand out there.” 

• “Supply chain interruptions have put a strain on our ability to get some products to customers who are seeing an uptick in demand. Pricing pressure is high with manufacturer increases coming more often than normal but passing increases onto customers is mostly feasible due to customer demand.” 

Pricing

Distributors in this sector report:

• “Tremendous numbers of price increases from suppliers, in every category. Seeing shortages and significant lead time expansion.” 

• “Price increases are coming fast and furious and should help top-line growth for the balance of the year and into 2022.” 

• “[On the PPE side], for the most part every product except disposable gloves has recovered to pre-COVID pricing conditions, if not lower.”

Electrical market

Prices are surging across this sector as widespread inventory shortages continued in the second quarter. Non-residential construction demand has accelerated as the COVID-19 vaccines were more widely deployed. Residential demand continued to be robust in 2Q, while industrial OEM demand is still outpacing MRO. 

Electrical revenue growth increased by 22.5 in 2Q, while selling prices increased by 8%. Datacomm revenue was up 26%, while selling prices increased by 4%.

Non-residential construction demand

What they are saying: 

• “Construction backlogs are through the roof and continuing to grow. Each month input has well outpaced sales, so we continue to add to backlog.” 

• “Mostly retail business[es] are revamping to attack customers. Return to offices are encouraging people to upgrade.” 

• “Hospital work is still strong so no slowdown there. Even hotel work has really started to pick up.” 

• “The only thing that’s not good right now is office construction but everything else is plugging right along.” 

Residential demand

What distributors are saying: 

• “Residential is really on fire, which is driving our utility business and a lot of our C&I business.” 

• “Residential construction is strong but inability to get products and pricing will eventually have an impact.” 

OEM demand vs. MRO demand 

What they are saying:

• “Four of our six largest OEMs are booked through at least the end of the year.” 

• “OEMs have outpaced MRO for the past year, but MRO is picking up steam. A large percentage [of our OEMs] are busy and we’re even hearing of backlogs into next summer, which is a good thing.” 

Inventory shortages

Distributors in this sector report:

• “Lead times for manufacturers continue to be extended. We have placed very large inventory orders 6-8 weeks ago just knowing we needed to get out ahead of this as best we could… Those orders probably won’t arrive still for another 6-8 weeks.” 

• “PVC, conduit and resi load centers and breakers are the worst right now and not improving at all.” 

Pricing increases

What distributors are saying: 

• “We’ve gotten more than two times the number of price increases we had last year. Steel has gone up so much, which impacts conduit and copper; has been crazy.”

HVAC/Plumbing market

Baird’s report said HVAC demand has remained “surprisingly strong” in the second quarter even as homeowners return to their offices and start to travel again. The surge in residential demand continued to power solid plumbing demand in 2Q, while plumbing margins expanded with “good” price realization. Price realization was strong for both HVAC manufacturers and distributors. 

HVAC’s 2Q revenue grew by 23.5%, while selling prices were up by 6.1%. Plumbing revenue increased by 22.4% and selling prices were up 5.2%. 

HVAC demand

What they are saying: 

• “Consumer is healthy and home values are good, so people are comfortable investing in their homes. You put that all together and it makes for a good setup.” 

• “Q2 had the benefit of an unfairly low comp from April last year (2020), along with price increases that took effect this year compared to last (in addition to commodity volatility e.g., copper, metal and refrigerant). In addition, higher than normal temperatures in the Southwest helped propel growth and inflate sales. But there is no question demand remains strong and sales would be even higher if supply chain could keep up with inventory.” 

Price realization for HVAC

Distributors in this sector report:

• “Distributors aren’t even blinking anymore at the price increase.” 

• “I’m OK within reason with price increases as long as the market is increasing, and definitely the market is increasing with demand just crazy right now. I don’t get a lot of pushback is what I’m saying and [the manufacturers are] not getting a lot of pushback either.” 

• “Primarily service housing construction market, which has been strong since 3Q20. We’ve experienced supply shortages and delays, and to our customers, supply has outweighed pricing competition.” 

Plumbing margins 

What they are saying:

• “Ability to pass on price increases has been great for margins.” 

• “Price increases are continuing, which makes for higher GP.” 

Building products market

The roofing sector continues to fair well due to strong demand and pricing driving growth. For roofing, distributors are selling all the material they can get their hands while pricing accelerates. For lumber and building materials, lumber inflation and housing market tailwinds powered solid growth in the second quarter. 

For pool and spa/landscaping, product shortages are driving share gains for those with inventory. Good residential demand and strong pricing were cited by survey respondents as reasons for being optimistic the rest of the year. 

Roofing revenue growth increased 15.5%, while selling prices increased 8.2%. For plumbing, revenue growth was up 22.6%, while selling prices increased by 9%. 

Roofing

What they are saying: 

• “Market demand significantly exceeds supply.” 

• “Too much demand, not enough material/labor. Serious inflation due to raw material shortages/trucking.” 

• “The shortage of material has created greater demand.” 

Lumber & building materials

Distributors in this sector report:

• “Extended leads and rocketing material costs are creating great opportunities, but we must be aware that what goes up fast generally comes down even faster.” 

• “Sales were strong, but material inflation was also very strong and there were numerous issues with availability and longer lead times. We anticipated the inflation would start to subside mid-year but have not seen it yet.” 

• “Residential has been strong (throughout the pandemic); commercial has not fully rebounded.” 

Pool & spa/landscape supplies

What they are saying: 

• “Continued high demand created in part by competitors’ inability to ship product.” 

• “Our products and services are in such high demand that good companies can command a premium if we can find the product.” 

• “We are lucky to have stockpiled our raw materials, whilst our competitors have struggled to purchase them, profits up by 400%.” 

Gases/Welding market

Gases and welding hardgoods revenues saw continued acceleration in the second quarter, while supplier increases are being passed through, according to Baird. Revenue growth for gases and cylinders increased 9%; selling prices were up by 3.6%. Revenue growth for welding hardgoods was up 13.2%, while selling prices increased 5.8%. 

What they are saying: 

• “We are seeing increasing sales to the industrial market and some increase in sales in the medical market with gross margins holding steady.” 

Supplier price increases

Distributors in this sector report: 

• “In the face of regular price increase from suppliers, we’re maintaining gross margins. One constant concern is being able to hire all types of drivers that have good work habits that we can help grow.” 

• “We have witnessed ‘shock price increases’ this year — coming with little or no advanced notice. However, end users are understanding of the challenges we face and have (for the most part) accepted price increases. The end users are dealing with these same increases in most of their raw material purchases.” 

• “As costs for gas sourcing and distribution expenses increase, distributor-delivered prices will have to increase to maintain margins. This will continue well into 2022.”

Pipe, Valves & Fitting market

After the Industrial/Energy PVF market started to see a return to normality in the first quarter,  the recovery started in earnest in 2Q, according to Baird. Commodity inflation continued to drive higher PVF pricing, while the Waterworks market benefited from project release plus price realization.

Industrial PVF’s revenue growth was 13.9% in 2Q, while selling prices were up 5.8%. Waterworks product growth increased by 17% and selling prices were up 6.8% in 2Q. 

Industrial/Energy PVF market

Distributors in this sector report:

• “Sales have outpaced forecast and budget projections, helped by inflation and some ‘panic buying.’ Material shortages and disruption have driven up price = revenue growth and gross margin, and profit dollars. Much of the bottom line profit is being given back in payroll increases, OT and lost productivity chasing down material shortages, and managing supply chain.” 

• “The biggest factor as to whether this is sustainable is the ability of the supply chain to deliver to us.” 

Higher PVF pricing

What they are saying: 

• “Steel prices (all items) have increased to all-time highs and as a very inventory heavy concern, we are benefiting from higher sales prices for materials purchased at lower costs.” 

• “Increasing price of raw materials, delays in sourcing material, delays in deliveries. If you have it, you can sell it.” 

• “We’ve implemented and realized a series of significant cost-driven price increases in 2021.” 

Waterworks market

Distributors in this sector report:

• “FY2020 projects that were put on hold have are being initiated in FY2021, along with price increases across the board, are driving revenue and margin growth.” 

• “Sales were strong, but material inflation was also very strong and there were numerous issues with availability and longer lead times. We anticipated the inflation would start to subside mid-year but have not seen it yet.” 

• “We are seeing a lot of mid-year price increases from our vendors. Lead times are long. Our unshipped order backlog is large.”