Distributors Optimistic about Strength of Post-COVID Recovery

After a difficult 2020 due to the COVID-19 pandemic, the recovery in the distribution market continued to blossom in the first quarter of 2021. During MDM webcasts and virtual events that have taken place so far this year, panelists and industry experts alike have expressed a collective optimism for 2021 being a recovery year. This is borne out in the most recent quarterly MDM-Baird Distribution Survey that covers the first quarter of this year.

After the pandemic-induced trough in the second quarter of last year, each subsequent quarter showed marked improvement and even more so in the first quarter of 2021. After dropping by 10% year-over-year in Q2 of 2020, the fourth quarter was 1.5% below forecast, but was up 5% overall in Q1.

The top performers in Q1 included:

• HVAC +8.6%
• Landscape Suppliers +8.3%
• LBM +8%
• Pool and Spa +7.8%
• Safety +7.7%
• Roofing +6.9%
• Plumbing +6.2%
• Wallboard +4.5%
• OEM Fasteners +4.3%

The recovery started to build in earnest in the first three months of 2021. January was up by a mere 0.4% while improving to 1.3% in February and 5.4% in March.

The top-performing product categories in March include:

1)   HVAC +10.2%

2)   LBM +9.9%

3)   OEM Fasteners +9.2%

4)   Pool and Spa +8.9%

5)   Plumbing + 8%

“March was very strong. Part was the continued improvement in furnace availability and February cold weather, but nice March weather meant contractors could get out to do maintenance checks,” said one survey respondent.

The strongest second quarter forecasts are across OEM Fasteners (+23%), Mechanical/PT (19%), HVAC (+16%), Plumbing (+15%), and Electrical (+15%).

On the flip side, the weakest forecasts for the second quarter are FM/Jan-San (+1%), Safety (+5%), Industrial/Energy PVF (+7), General Ind. MRO (+9%), and Datacomm (+10%).

With shelter-in-place, work-from-home and quarantine policies in place, Jan-San was one of the hardest hit sectors last year. That sector’s forecast for the fourth quarter was -8.6%. Along the same lines, Industrial/Energy PVF’s fourth quarter forecast was -1.2%.

“I think we’ll be up 10% for the balance of this year. Our quoting activity is strong and we’re hearing from customers we haven’t heard from in a while,” said a survey respondent.

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

Industrial Market

The strong finish in the fourth quarter rolled into the first quarter of this year, as momentum continues to build on manufacturing plant floors and in machine shops. On the other hand, supply chain constraints are leading to extended lead times and building backlogs.

The survey predicts double-digit growth in the second quarter for most product categories against year-over-year comparisons amid good quoting activity. The survey notes that supplier price increases are coming “fast and furious.”

What they are saying:

• “More rapid recovery in March as more manufacturing moved back to full personnel.”
• “Some of our larger customers that went dormant on us last year their new orders came in very, very slow until around Oct/Nov when orders picked up. I’m looking at orders continuing to hold.”
• “Manufacturing is still down some because we’re finding getting supply is a struggle here.”
• “Demand is ramping up well. Our biggest challenge over the next year will be keeping up with demand and maintaining margins as input costs increase.”
• “Price increases continue to be implemented by suppliers, some justifiable due to material costs, others opportunistic due to supply chain pressures. Expect margins to continue to improve as long as inflation remains sub 2% and operating expenses do not creep back in as the economy improves.”

Electrical Market

Optimism abounds as construction demand continues to power solid electrical trends for the rest of 2021. Inventory shortages are putting a strain on growth while OEM demand is outpacing MRO. Also, electrical pricing is surging amid higher copper pricing and supplier increases.

What they are saying:

• “Construction is certainly a standout. New data centers being built are supporting backlog. Also a good bit of warehousing in our backlog, schools, hospitals and industrial construction.”
• “MRO is healthy but it’s not extraordinarily robust — some tailwind but nowhere near the tailwind that construction is.”
• “PVC, conduit, breakers and panels are some of the biggest problems in sourcing products right now.”
• “Everybody and their mother is trying to pass through price increases. Certainly on the cable side with copper well over $4 now.”
• “We are seeing increased demand and significant lagging supply. Most of our suppliers are not keeping up with demand, allowing the stocking distributor to improve margins following the old adage, ‘He who stocks, gets’.”
• “Cautiously optimistic. January was the same as COVID year, February bookings went up, and March has been the busiest/most profitable/highest revenue in the history of the company.”

HVAC/Plumbing Market

To date, the HVAC price increases have been holding and a second increase could be on tap. The colder first two months of the year sparked an increase in furnace demand while robust residential demand powered the plumbing sector, according to the survey. The survey says increases were reported to be bordering on demand destruction in plumbing.

What they are saying:

• “January’s price increase and a colder winter than 2019 were market drivers early. Buyers also were restocking towards the end of the quarter versus 2020 when COVID fear led to inventory caution.”
• “We’ve had very little challenge in pushing manufacturers’ price increases out. We’ve had very little pushback and it’s sticking very well. My concern is that we could have another one mid-year with the way the commodities are going up.”
• “2021 seems to be continuing strong for our company largely because the construction side in residential housing market is experiencing high demand and inventory shortages.”
• “Inflation seems on the precipice of leading to demand destruction and product availability is a bigger problem than inflation.”

Pipe, Valves & Fitting Market

The Industrial/Energy PVF market is seeing signs of a return to normality, according to the survey results. Also, the Waterworks market saw continued residential strength plus indications of a possible infrastructure tailwind.

What they are saying:

• “Signs of stability returning. Smaller customer inventories are depleted, so many are now reordering and restocking. Larger customers are still over stocked, but projects are starting to be let and deliveries are tight due to pent up work.”
• “The business is returning to normal. As COVID impacts were felt from Mid-March 2020 to about mid- June of that year, there is going to be a very favorable YoY trend, but leaving this period aside, we are finding we have returned to slow and steady organic growth of 3%.”
• “Starting in the fall we saw a number of price increases in finished steel for use in our fabrication operations. Since December, all raw materials and scrap metals have increased pricing substantially and the potential for supply disruption exists.”
• “With springtime coming, infrastructure projects will start back again. With governments financial grants and investments, revenue should pick up and might exceed our forecasts. We don’t expect significant margin variation.”
• “January and February 2021, we experienced more normal winter conditions for the Northeast, which resulted in sales and margin well below 2020. January and February of 2020 were both abnormally warmer and dry. A very busy March of 2021 picked up the slack.”

Building Products

The roofing sector continues to fair well due to strong demand and pricing driving growth. For lumber and building materials, there’s a robust housing market but also lumber inflation headwinds. For pool and spa/landscaping, expect surging inflation amid material shortages. Good residential demand and strong pricing were cited by survey respondents as reasons for being optimistic this year.

What they are saying:

• “Very strong demand in both the reroof and new construction. Both look to continue through this fall.”
• “Demand in housing (new and R&R) continues to be strong and should all year. Demand is far outsized compared to supply so pricing and margins are increasing.”
• “Pool and Spa industry is by all accounts at an all-time high as far as demand for new and renovated residential. That said, there is a sanitizer shortage (chlorine rationing) driving higher demand for alternative sanitizers (Salt and AOP). Complicating this is the Texas freeze, which broke most residential pools- literally. PVC is scarce as is equipment. It’s a perfect storm.“
• “Demand is high as we fight product availability, more so on accessory and steel items vs. drywall at the moment. It’s almost impossible to keep up with the never-ending barrage of increase letters. It’s turning into a, ‘I don’t care about the price; just do you have the product at the moment?’”
• “Demand for housing is strong, with an influx of buyers from markets with excess equity from prior home sales.”
• “Housing market has exploded.”

Gases/Welding Market

Rapid inflation and supply chain issues are seen as potential risks in 2021, according to survey respondents, but expect sequential recovery in both gases and welding hardwoods.

Distributors in this sector report:

• “Capex items are back on the table again. We are selling more and seeing more inquires.”
• “Supply issues are impacting sales.”
• “Due to COVID and the unsure economy, we are fearful of the lack of finished products from our suppliers. We expect Supply Chain holdups that will affect our business greatly.”
• “Rapid change of steel and other metals costs affecting many sectors. Maintaining margins, revising prices, effective quotes difficult to keep up with properly. Takes time away from other projects.”

Since 2010, Robert W. Baird & Co., in partnership with Modern Distribution Management, has conducted quarterly surveys of distributors and manufacturers to gauge business trends and the outlook for the industry. The Baird-MDM quarterly survey is the deepest financial performance benchmarking analysis for industrial wholesale distribution sectors, representing more than $100 billion in aggregate annual revenue across six distribution categories. Survey participants receive a complete readout of the quarterly results. For questions or to participate, contact info@mdm.com, or Baird Research Associate Quinn Fredrickson (qfredrickson@rwbaird.com).