Review of Industrial Economy & Industrial Distribution Trends. September 16, 2014 Joe Calvello & Matthew McCann

Transcription

1 Review of Industrial Economy & Industrial Distribution Trends September 16, 2014 Joe Calvello & Matthew McCann 1

2 Agenda Overview of Current Industrial Trends Key Industrial Macro Indicators Review of Recent Results End Market Review & Initial 2015 Outlook Industrial Distribution Trends Competitive Dynamics Key Initiatives 2

3 3 Industrial Economic Overview

4 ISM Strengthening August Reading 59.0 Above 50 indicates growth, below 50 indicates decline ISM Manufacturing Purchasing Manager's Index Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan Source: ISM 5

5 ISM Leads Industrial Production by 3-6 months Reading of 55 Translates to ~4-5% Growth Manufacturing Industrial Production (ex high tech) vs ISM Composite Index 20% 80.0 % change year-over-year 15% 10% 5% 0% -5% -10% -15% Industrial Production (left axis, dark) ISM Composite Index (right axis, light) % Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan Jul Source: ISM, Census, Cleveland Research

6 Manufacturing Industrial Production: Up 4.8% in July U.S. Manufacturing Industrial Production (excluding high tech) 10% 5% July up 4.8% y/y % change year-over-year 0% -5% -10% -15% -20% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Source: Census 7

7 Industrial Composite Growth Index: Stronger Growth in 2H14 vs 1H14 30% 25% Average Revenue Growth for CRC Industrial Coverage y/y sales growth 20% 15% 10% 5% 0% -5% Source: Company reports, CRC estimates 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 8

8 Sales vs Expectations Improve from % Fluid Power Survey - Sales vs. Expectations 60% 40% 20% 0% -20% -40% -60% -80% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Cleveland Research 9

9 Sales running up 5-6% (July +7%, Aug +4%) so far in 3Q following 5% growth in 2Q 10 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Fluid Power Survey - Sales Growth (y/y % chg) Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Cleveland Research

10 End Market Trends Today vs. Year Ago Food & Beverage Power Generation Industrial Machinery Agricultural Machinery Heavy-Duty Truck Semicon Oil & Gas Automotive MRO Forestry Construction Machinery Aerospace Industrial Machinery Construction Machinery Life Sciences Marine Aerospace Government Heavy-Duty Truck Mining Food & Beverage -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Source: Cleveland Research Process Power Generation 11 Life Sciences MRO Process Oil & Gas Semicon End Market Ranking (Net % Strong - Weak) August 2013 Automotive Agricultural Machinery Forestry Marine Semicon Mining Government Source: Cleveland Research End Market Ranking (Net % Strong - Weak) August % -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

11 End Market Momentum Major End Market Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Apparel, leather and allied products Chemical products Computer and electronic products Electrical equipment, appliances, components Fabricated metal products Food, beverage and tobacco products Furniture and related products Machinery Miscellaneous manufacturing Nonmetallic mineral products Paper products Petroleum and coal products Plastics and rubber products Primary metals Printing, related support activities Textile mills Transportation equipment Wood product Statistics Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 % Better 72% 83% 61% 78% 83% 72% 61% 78% 78% 94% 94% 83% 94% 94% Unchanged 6% 11% 6% 0% 0% 6% 0% 6% 0% 0% 6% 0% 0% 0% % Worse 22% 6% 33% 22% 17% 22% 39% 17% 22% 6% 0% 17% 6% 6% Net % of Industries Improving 50% 78% 28% 56% 67% 50% 22% 61% 56% 89% 94% 67% 89% 89% PMI Source: Institute for Supply Management ISM Manufacturing End Market Momentum 12

12 Inventory Sentiment Below L-T Average 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Inventory Levels - Net % "Too High" Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul Oct 11-Jan 14-Apr 17-Jul 20-Oct 23-Jan 26-Apr 29-Jul 18-Oct 18-Jan Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 avg Source: Cleveland Research 13

13 Backlogs Steady Improvement in 2014 Net % Higher (% Higher - % lower) 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Backlog versus Prior Month vs Sales Growth Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Source: Cleveland Research 14

14 2014 Expected up 5-6%, Helped by Stronger Finish (1H up 4-5%; 2H estimated up 6-7%) 40% Fluid Power - Annual Growth Rates 30% 20% y/y growth 10% 0% -10% -20% -30% -40% 2008 Source: Company reports, CRC estimates E 15

15 16 End Market Review / 2015 Outlook

16 Construction Equipment Up 8-10% YTD; 2014 up ~10%, 70% 60% 50% Komatsu vs. CAT Retail Sales Growth - N. America % Change Y/Y (units) 40% 30% 20% 10% 0% Komatsu (red) CAT (blue) -10% -20% -30% Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Source: Company reports, Cleveland Research estimates 17

17 CE 2015 Forecast Up ~10% 60% Construction Revenue Growth: CAT vs DE 40% 20% 0% -20% -40% -60% E 2015E Source: Company reports, CRC estimates CAT DE 18

18 Steady Improvement Forecast Across Non-Res, Residential and Non-building Construction $300 Non-Residential Building Construction Starts $250 $200 $ billion $150 $ Starts decline 10% Starts decline 34% $ Starts decline 18% $ Source: MHC, Cleveland Research estimates 2014E 2016E 19

19 Steady Improvement Forecast Across Non-Res, Residential and Non-building Construction U.S. Starts Forecast (Value $mm) E 2015E 2016E 2017E Amusement, Social and Recreational Bldgs 0% -14% -4% -12% -17% 32% 11% 13% 16% 8% Dormitories 16% -5% 1% -15% 7% -13% 6% 6% 13% 12% Government Service Buildings 7% 15% -32% -14% -8% -25% 11% 6% 12% 13% Hospitals and Other Health Treatment 23% -33% 16% -7% -3% -2% 3% 8% 15% 12% Hotels and Motels -9% -64% -28% 58% 26% 33% 22% 16% 8% 0% Manufacturing Plants, Warehouses, Labs 44% 10% -5% 74% -25% 42% 34% -7% 5% 1% Miscellaneous Nonresidential Buildings 19% 16% 29% -29% -9% 2% -12% 11% 16% 12% Office and Bank Buildings -15% -28% -18% -3% 1% 20% 22% 18% 15% 10% Parking Garages and Automotive Services -21% -47% 9% 26% 23% 28% 9% 10% 9% 1% Religious Buildings -5% -7% -29% -10% -9% -7% -9% 4% 13% 16% Schools, Libraries, and Labs (nonmfg) 9% -17% -3% -11% -12% 1% 5% 11% 20% 19% Stores and Restaurants -27% -40% -5% 3% 15% 6% 7% 16% 22% 11% Warehouses (excl. manufacturer owned) -22% -58% -16% 23% 29% 40% 11% 12% 11% 5% Nonresidential Building Starts ($mm) 242, , , , , , , , , ,311 % change y/y 1% -30% -4% 2% -4% 11% 11% 10% 15% 10% Nonresidential Building Starts (sqr ft) 1, ,047 1,185 1,268 % change y/y -18% -44% -12% 4% 11% 11% 8% 12% 13% 7% Single Family Housing Starts 1, ,146 1,425 1,566 1,883 2,420 2,546 % change y/y -42% -21% 3% -7% 27% 24% 10% 20% 29% 5% Nonbuilding Starts (bridges, highways, etc, $mm) 152, , , , , , , , , ,300 % change y/y 9% -5% 2% 1% 9% -10% -12% 5% 10% 10% Source: MHC (3Q14 fcst) McGraw-Hill Construction Starts History and Forecast 20

20 Ag Equipment 2014 Down ~10% Industry HHP Tractor Sales (units) 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 Industry Tractor Sales versus Cash Receipts Cash Receipts Proxy (line, right Tractor Sales (bars, left scale) Source: AEM, USDA,Company reports, Cleveland Research estimates 2015E $150 $130 $110 $90 $70 $50 $30 $10 Value of corn, soy, and wheat production ($b) 21

21 Ag Equipment 2015 Down ~15% Ratio of rolling 5 yr builds to rolling 10 yearl builds 25% 30% 35% 40% 45% 50% 55% 60% 65% U.S. Row Crop Tractor Average Fleet Age Proxy Old Fleet Young Fleet Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan Source: AEM, Cleveland Research estimates

22 Mining 2014 Down ~25% Initial 2015 Forecast up ~5% Mining End Market Ranking (Net % Strong - Weak) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 2009 Apr Jul Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr July Oct 2014 Apr Jul Source: Cleveland Research 23

23 Mining Revenue Trends OEM vs MRO 60% JOY Mining Revenue Growth: OEM vs MRO 40% 20% 0% -20% -40% -60% E 2015E Source: Company reports, CRC estimates OEM MRO 24

24 Oil & Gas Demand Accelerates 40% Oil & Gas - End Market Ranking (Net % Strong - Weak) 30% 20% 10% 0% -10% -20% -30% 2009 Apr Jul Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr July Oct 2014 Apr Jul Source: Cleveland Research 25

25 Capital Spending Survey Snap Shot Cleveland Research Company Capital Spending Survey - Trends by Industry Sector Capex % change by sector, $bil E % of Survey* Aerospace & Defense 28% 5% 3% 1% -17% 0% 17% -5% -5% 27% 3% Home & Building Products -1% 21% -8% -13% -15% 10% 6% -2% 1% 19% 1% Transport/Logistics 12% 24% -17% -3% -31% 14% 38% 14% -14% 16% 7% Containers & Packaging 8% -7% 8% 1% -19% 47% 7% -16% 11% 16% 1% Healthcare Equipment 5% 7% 20% 9% -1% -2% 2% 6% 10% 15% 2% Printing/Publishing 28% 5% 13% -40% -50% 17% 9% -12% 7% 14% 0% Office/Commercial Equip & Services 2% 6% -5% -6% -30% 56% -11% 20% -4% 14% 1% Food & Beverage 15% 17% 10% 2% -5% 13% 8% -7% -3% 13% 8% Forest/paper products 6% -1% 5% -32% -46% 52% 37% 12% -10% 10% 2% Multi-industry/Electrical Equip. 16% 17% 7% -9% -27% 5% 22% 16% 21% 7% 8% Big Three Automotive 6% -5% -18% 3% -31% -2% 24% 23% 22% 6% 16% Chemicals 25% 14% 13% 19% -12% 7% 4% 24% -2% 6% 8% Pharmaceuticals -9% -5% 8% -3% -18% 2% 16% 7% -9% 6% 6% Mining 49% 39% 79% -10% -16% -7% 69% 19% 11% 6% 6% Machinery - Industrial & Mobile 21% 17% 18% 22% -35% 15% 69% 0% 4% 4% 7% Railroads 19% 13% 12% 10% -15% 9% 28% 9% 1% 3% 8% Specialty Vehicle 8% -6% 7% -21% -52% 45% 28% 12% 50% 2% 0% Consumer non-durables 22% 16% 8% 6% -2% 2% 8% 0% 10% 2% 4% Construction Materials 69% 5% 18% 100% -69% -12% -12% 28% 4% -3% 0% Oil & Gas - Equipment & services 33% 64% 39% 27% -26% 8% 47% 23% -17% -6% 7% Automotive Tier Suppliers 7% -4% -1% 11% -28% 59% 25% 11% -10% -9% 2% Metals 59% 29% 21% 9% -49% -21% 25% 14% 5% -16% 2% Source: Cleveland Research Company. Ranked by 2014E.*% of survey in dollars. 27

26 Capital Spending Snapback in 2014 $180 $160 $140 $120 11% P-T Decline 6 Year Up-Cycle 47% T-P Increase 30% Increase from Prior Peak CRC CAPEX Survey 24% P-T Decline 5 Year Up-Cycle 59% T-P Increase 22% Increase from Prior Peak $100 $80 $60 $40 $20 $ E Source: Company Reports; CRC Estimates 28

27 Initial 2015 Outlook ~6% Growth 40% Fluid Power - Annual Growth Rates 30% 20% y/y growth 10% 0% -10% -20% -30% -40% E 2015E Source: Company reports, CRC estimates 29

28 Industrial Cycle - Later Innings? 145 Cycle Comparison Organic Revenue Growth (Index) Multi Industries 1997 = Year Upcycle 34% Increase th Year of Upcycle 34% Increase E2015E Source: Company Reports; CRC Estimates 30

29 Summary Thoughts 2014 Industrial Demand Trends: Return of oil & gas strength following 2013 lull Mixed mobile OEM markets Snapback in capital spending 2015 Forecasting mid-single digit growth Expecting strong oil & gas activity Continued recovery for N. America construction activity Slower capital spending growth Ag markets - OE expected to be down double digits Industrial Cycle Typical cycle is 5-7 years Currently in year 5 of recovery suggests we are in later innings of industrial cycle 31

30 32 Industrial Distribution Trends

31 Industry Overview Industrial Supply Industry - Largest Distributors (2005) Remaining Independents - 76% W.W. Grainger 5% HD Supply 3% Top Ten - 18% Motion Industries 2% WinWholesale 2% Applied Industrial Technologies 1% Wilson Industries 1% Fastenal Co. MSC Industrial Direct Airgas Industrial Interline Brands 1% Next 25-6% Source: Company reports, Cleveland Research estimates 33

32 Industry Overview Industrial Supply Industry - Largest Distributors (2013) Remaining Independents - 61% W.W. Grainger 7% Top Ten - 29% Motion Industries 6% HD Supply Industrial 3% The Fastenal Company 3% McMaster-Carr 2% Wesco Industrial 2% Applied Industrial 2% MSC Industrial Supply 2% Sonepar Ind/Hagemeyer 2% Airgas Industrial 1% Source: Company reports, Cleveland Research estimates Next 25-10% 34

33 Distributor Comparison Available SKUs 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Annual Indistrial Distirbution SKU Count Graigner (Catalog SKUs) FAST MSC Amazon Supply* Source: Cleveland Research surveys, *AmazonSupply year end count, Amazon.com Industrial 36

34 Distributor Comparison 37

35 Industrial Distribution Pricing Trends Price increases and realization under pressure Subdued commodity inflation leading to more modest list price increases OEM - heavy pushback this year Price transparency - online sales making price comparisons easier Broadening MRO exposure - harder to differentiate outside of price National Account Pricing companies increasingly consolidating spend Gross margin pressure squeezing local branch operations Distributors looking for ways to offset gross margin pressure 38

36 Pricing to Sales Average price benefit to sales growth (% of sales) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Monthly Private Industrial Distributor Pricing To Sales Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Source: Cleveland Research surveys 39

37 Key Initiatives Adding Feet on the Street Targeting small/mid-sized customers with better margin opportunities Grainger TSRs at end of 2013 (adding 1-2% to sales growth), goal is to add 500 over next 3-5 years; total sellers expected to go from 2,800 in 2013 to 4,000 in 3-5 years Adding Technical Specialists Targeting higher dollar value added and stickier / technical sales Fastenal - Targeting government, metalworking (~30 sales people), safety (~30 sales people), vending MSC expanding metalworking sales capabilities Grainger bought ENR metalworking distributor with 40 mw specialists Making investments to move away from just transaction based business OEM kitting/sub assemblies helping to drive new volume and preserve price System Integration value add differentiation through system development 40

38 Key Initiatives ecommerce Investment SKU expansion, more profitable, e-commerce channel growing 2x pace of the total business, more profitable Leveraging supplier direct ship to manage new product inventory requirements ZoroTools is online only platform (low sales/service support, no discounting off list), now more than $80mm in <3 years Launched mobile apps for checking local inventory, etc. Private Label / Global Sourcing Grainger - Private Label/Global Sourcing growing from 13% to 25% of sales over several years Globally sourced product gross margins 25pts above company average Dropping stocked branded skus in favor of private label offering 41

39 Key Initiatives VMI / Vending Machines Misc Fastenal - Customers with vending growing >20% vs company average in mid teens, contributing ~7% to sales growth. Vending distribution center (T-Hub) to house vendible SKUs (4-5k of 60k vended), launched in summer 2014 Goal (modified): Add one vending machine/store/month but do not sacrifice other sales opportunities to pursue vending and identify/fix underperforming machines (37% of sales are to customers with a machine) Gross margin neutral on a like for like customer/item basis vs sold in branch SAP / Strategic Pricing AIT/Airgas TSRs lead with Keep Stock (CMI/VMI solutions) Keep stock customers growing 2x faster than other customers, $400mm in sales in 2013 On pace to have 100,000 locations in the next 3-5 years (50,000 at 2013 end) Vending distribution center (T-Hub) to house vendible SKUs (4-5k of 60k vended), launched in summer

40 Questions? Joe Calvello Matthew McCann 47