2016 Distribution Industry Outlook - MDM...2016 Distribution Industry Outlook Featuring: David Manthey, Baird Ranga Bodla, NetSuite Tom Gale, Modern Distribution Management Jenel Stelton-

2016 DistributionIndustry Outlook

Featuring:David Manthey, Baird

Ranga Bodla, NetSuiteTom Gale, Modern Distribution Management

Jenel Stelton-Holtmeier, Modern Distribution Management

January 21, 2016

Sponsored by:

Speakers

Tom Gale PublisherModern Distribution Management

David MantheySenior Research AnalystBaird

Jenel Stelton-HoltmeierEditor Modern Distribution Management

Ranga BodlaWholesale Distribution Industry LeadNetSuite

• Intro• Economic & End-Market Outlook • The 2016 Distribution Remodel• Q&A

Agenda

Industrial Research January 21, 2015

Industrial Distribution Webcast In partnership with Modern Distribution Management

Please refer to Appendix:

Important Disclosures and Analyst Certification

David J. Manthey, CFA [email protected] 813.288.8503

Luke L. Junk, CFA [email protected] 414.298.5084

Ryan A. Lee-Young [email protected] 414.765.3640

Overview

Macroeconomic Commentary _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 2_ Source: Baird Analysis

Interest Rates Remain Low Volatility Has Entered the Market

Economy Reaching Full Employment? GDP Growth Somewhat Tepid

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

U.S. Unemployment Rate

NOTE: These charts can be found in General Economic Data file!

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

Federal Funds Rate

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Mar-

08

Aug-0

8

Jan-0

9

Jun-0

9

Nov-0

9

Apr-

10

Sep-1

0

Feb-1

1

Jul-

11

Dec-1

1

May-1

2

Oct-

12

Mar-

13

Aug-1

3

Jan-1

4

Jun-1

4

Nov-1

4

Apr-

15

Sep-1

5

S&P 500

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

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

Real GDP Growth (TTM Annualized Rate)

Overview

Industrial Economy – “World Awash in Too Much of Nearly Everything” _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Oil Copper USD PPI Pricing Manufacturing data file

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Jan-0

3

Jul-

03

Jan-0

4

Jul-

04

Jan-0

5

Jul-

05

Jan-0

6

Jul-

06

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

Jan-1

4

Jul-

14

Jan-1

5

Jul-

15

High Grade Copper ($/lb)

$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

Brent Crude ($/bbl)

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

Jan-9

0

Mar-

91

May-9

2

Jul-

93

Sep-9

4

Nov-9

5

Jan-9

7

Mar-

98

May-9

9

Jul-

00

Sep-0

1

Nov-0

2

Jan-0

4

Mar-

05

May-0

6

Jul-

07

Sep-0

8

Nov-0

9

Jan-1

1

Mar-

12

May-1

3

Jul-

14

Sep-1

5

U.S. Dollar Index

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan-9

0

Feb-9

1

Mar-

92

Apr-

93

May-9

4

Jun-9

5

Jul-

96

Aug-9

7

Sep-9

8

Oct-

99

Nov-0

0

Dec-0

1

Jan-0

3

Feb-0

4

Mar-

05

Apr-

06

May-0

7

Jun-0

8

Jul-

09

Aug-1

0

Sep-1

1

Oct-

12

Nov-1

3

Dec-1

4

Jan-1

6

PPI (y/y change)

Overview

Manufacturing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


45

50

55

60

65

70

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

ISM

-5%

0%

5%

10%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

Industrial Production (Mfg.)

-60%

-40%

-20%

0%

20%

40%

60%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

CAT EMR KMT

ISM Steadily Falling Manufacturing IP Stable at a Low Level

Distributors Decelerating Manufacturers Decidedly Weaker

-10%

0%

10%

20%

30%

40%

45

50

55

60

65

70

Jan-1

0

Apr-

10

Jul-

10

Oct-

10

Jan-1

1

Apr-

11

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

ISM FAST GWW MSM

Overview

Non-Residential Construction _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


35

40

45

50

55

60

65

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

ABI

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

Private Non-Residential Construction Spending

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

CRE Loan Demand

-30%

-20%

-10%

0%

10%

20%

30%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

Dodge Contracts (LTM)

ABI Index Choppy of Late Construction Spending Solidly Positive

Dodge Contracts Decelerating Sharply CRE Loan Demand Solid, but Weakening

Overview

Residential Construction/Repair _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


300

400

500

600

700

800

900

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

Single-Family Starts

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

Existing Home Sales

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

95

100

105

110

115

120

125

2009 2010 2011 2012 2013 2014

Total Shingle Squares (mm) Y/Y Change

-20%

-10%

0%

10%

20%

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

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

AHRI Shipments (TTM Basis)

SF Housing Recovery Remains on Track Existing Home Sales Inflect Negatively

AHRI Shipment Growth Decelerating Shingle Growth Stubbornly Lackluster

Baird Industrial Distribution Survey

Overview _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Distributor

Manufacturer

Other

0% 10% 20% 30%

<$10 mm

$10-$25 mm

$26-$50 mm

$51-$100 mm

$101-$250 mm

$251-$500 mm

>$500 mm

Percent of Respondents

• 671 mostly independent distributors

• $129 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

Electrical & Datacomm • Electrical, Datacomm


Overall Results _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Overall3.1%

-2%

0%

2%

4%

6%

8%

4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E 2Q16E 3Q16E 4Q16E

Y/Y

Change

0%

20%

40%

60%

80%

100%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E

Decreased About the Same Increased

-1%

0%

1%

2%

3%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

-2%

0%

2%

4%

6%

8%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

4Q15 Revenues -0.6%

More 4Q Inventory Destocking Y/Y

4Q15 Pricing -10bps

1Q16/2016 Revenue Outlook +2.1%/+3.1%

Sub-Industry Themes

Industrial Supply / General Industrial – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


-1.9%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15Y/Y

Change

Metalworking/Cutting Tools

0.1%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

General Industrial (MRO)

0.0%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Safety

• Growth flat to down across the sub-sector

• Cutting Tools (-1.9%) was negative for the third straight quarter, while Safety decelerated to flat

• Even more acute weakness was seen in Hoses (-5.0%) and Mechanical/Power Transmission (-10.0%)

• Updated 2016 expectations call for +3% aggregate growth, in line with the overall survey

Sub-Industry Themes

Industrial Supply / General Industrial – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


-0.2%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Safety

1.1%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15Y/Y

Change

Metalworking/Cutting Tools

0.3%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

General Industrial (MRO)• Average pricing remains relatively flattish, reflecting the challenging backdrop and continued competitive pressures

• On the low end, modest declines were seen in Mechanical/Power Transmission (-10bps), Safety (-20bps), and Hoses (-50bps)

• With 2016 list prices largely unchanged, we expect little in the way of near-term pricing relief

Sub-Industry Themes

Industrial Supply / General Industrial – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Demand: Déjà vu, all over again

• “CAT, DE, [and] energy all down a lot. Auto and Aerospace up a lot.”

• “Oil & Gas, commodities, and the price of the US dollar all had a negative impact on our business.”

• Pricing: Flat is the new up

• “[This was the] first time we got letters from vendors saying they won’t be having a price increase in 2016.”

• “We just launched a new price list – everything was flat to down.”

• Outlook: No signs of stability yet

• “I haven’t heard too many positives when talking so some of our largest suppliers like 3M and Honeywell, they’re not very optimistic.”

• “The significant drop in pricing of major commodities continues to hamper any significant market improvement in the short term.”

• “Weak first half of 2016, with hopes of stronger second half.”

Sub-Industry Themes

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


Sub-Industry Themes

Industrial Gases – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


2.8%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Gases

0.2%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Hardgoods

• Aggregate growth decelerated slightly q/q, driven by lower Hardgoods growth

• Excluding price, underlying volumes were +2% in Gases and Flat in Hardgoods

• Updated 2016 expectations are for +3% growth, essentially unchanged q/q and in line with the overall survey

Sub-Industry Themes

Industrial Gases – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


0.2%

0%

1%

2%

3%

4%

5%

6%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Hardgoods

0.9%

0%

1%

2%

3%

4%

5%

6%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Gases

• Gases pricing gains stepped down ~1% q/q, as fears that weak demand would impair pricing power appear to be coming to fruition

• 4Q Hardgoods pricing was also roughly flat, down vs. the +1% YTD gains

• As it relates to the Gases supply chain, we currently see no disruptions that would point to higher prices (3Q CO2 shortage has been resolved)

Sub-Industry Themes

Industrial Gases – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Demand: Catalysts lacking, or worse

• “Slow, if any growth. Need to increase market share for growth.”

• “We're looking to a flat business model for 2016.”

• “It feels like the manufacturing sector is preparing for a storm.”

• Pricing: Pricing feedback skews more negative

• “Customers aggressively fighting off price increases. 2016 will be a challenging year to hit our targets.”

• “We have a modest increase going through, but with many exceptions carved out.”

• “We can get price in small increments, plus with good service levels.”

• Airgas/Air Liquide: Independents see potential opportunity

• “We would expect a fair amount of turmoil, employee turnover, and customers that may be unhappy with whatever comes from that deal.”

• “Traditionally these types of deals create opportunities for independents.”

Sub-Industry Themes

Industrial Gases – Word Cloud _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Sub-Industry Themes

Building Products – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


2.3%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Pool & Spa

• 4Q trends (especially December) were influenced by mild weather across the board

• We believe the net impact was positive on “outdoor sports” (i.e. Lumber & Building Materials/Roofing), neutral on Pool & Spa, and negative for HVAC demand

• Within Roofing, we note residential outperformed non-residential by 2.5%

• Updated 2016 expectations nicely above the overall survey, +4% on average

1.6%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15Y/Y

Change

Roofing

0.1%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

HVAC

Sub-Industry Themes

Building Products – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


1.5%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Pool & Spa

-1.3%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15Y/Y

Change

Roofing

0.9%

-2%

-1%

0%

1%

2%

3%

4%

5%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

HVAC• Overall pricing remains slightly positive (+1%) ex-Roofing

• Pricing gains were led by Pool & Spa and Facilities Maintenance, while HVAC continues to benefit from positive price/mix

• While roofing prices remain under pressure, the situation doesn’t appear to be getting worse and another limited winter pre-buy should help going forward

Sub-Industry Themes

Building Products – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• HVAC demand: Temporary 4Q lull due to mild weather

• “Less sales activities directly related to warmer weather.”

• “The equipment age and issues are still there. If we get colder weather in January/February, the concern is can we take care of it?”

• HVAC pricing: List prices up, 14-SEER premium holding

• “We think there’s room for a 2-3% type of increase; Price up on mix shift to 14 SEER.”

• Roofing demand: Mild weather boosts trends

• “Abnormally high [demand] due to mild winter.”

• “Market demand was steady due to mild weather.”

• Roofing pricing: Feedback as expected

• “We are assuming the shingle pre-buy will be the same as last year.”

• “Pricing is stable albeit at a lower index.”

• “We are surprised there hasn’t been more commercial slippage.”

Sub-Industry Themes

Building Products – Word Cloud: Roofing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Sub-Industry Themes

Electrical & Datacomm – Revenue Growth _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


2.9%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Datacomm

0.9%

-5%

0%

5%

10%

15%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Electrical

• Electrical and Datacomm growth flattened out sequentially, following decelerating trends through most of 2015

• Electrical growth positive on balance, but individual company results heavily dependent on end market mix and geographic exposure

• Updated 2016 outlook unexpectedly re-rated higher, now stands at +4% (vs. initial +1% survey view)

Sub-Industry Themes

Electrical & Datacomm – Pricing _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


-1.0%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Datacomm

0.6%

-2%

-1%

0%

1%

2%

3%

4%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Y/Y

Change

Electrical

• Electrical pricing surprisingly stable, Datacomm below overall survey

• Should current copper levels hold, headwinds would diminish through 2016, although industry participants are wary of further declines (we agree)

• Mix is another key consideration, as industrial sales typically carry higher margins than construction sales

Sub-Industry Themes

Electrical & Datacomm – Key Themes _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


• Demand: Non-res solid, but industrials weaken further

• “Moderate growth in non-residential construction. We see lots of good opportunities, and backlog is growing in January.”

• “Commercial construction outlook consistent with 2015 levels.”

• “4Q was down significantly more than 3Q. Anything that has to do with commodities (energy, metals, ag) is dramatically off.”

• “Concerned with industrial recession trends.”

• Pricing: Pressure continues as copper makes new lows

• “Customers continue to pressure distributors to lower prices.”

• “Commodity pricing (copper) hurt gross margins.”

• Landscape: Spike in chatter about National chains

• “One of Anixter’s biggest utility customers [is moving to a competitor]”

• “We’ve seen some significant management turnover at WESCO.”

• “We have heard Houston Wire is hiring independent sales agents, and not hiring to their outside team.”

Sub-Industry Themes

Electrical & Datacomm – Word Cloud _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


4Q15

Revenue 4Q15 1Q16 2016 Robert W. Baird & Co.

Growth Pricing Forecast Forecast Commentary

Facilities Maintenance/Jan San (MRO) 3.8% 1.5% 3.4% 3.8% Second straight quarter of +4% growth, multi-family remains strong

Lumber & Building Materials 3.0% 0.1% 2.9% 4.9% Mild weather helped to offset continued labor shortages

Datacomm 2.9% -1.0% 4.4% 4.5% Growth up q/q, but still below previous broad mid-single-digit range

Gases & Cylinder Rental 2.8% 0.9% 3.3% 4.0% Price +0.9% vs. +2.2% two-year average

Other 2.7% 0.7% 3.3% 5.4%

Pool & Spa 2.3% 1.5% 4.3% 7.3% Highest 2016 outlook in the survey, and similar to initial outlook

Roofing 1.6% -1.3% 2.1% 3.7% 2016 winter shingle pre-buy expected to again be subdued

OEM Fasteners 1.4% 0.1% 1.8% 4.6% Continued China weakening negative for imported fastener prices

Electrical 0.9% 0.6% 2.3% 3.3% Solid non-res construction trends expected to continue into 2016

Waterworks Products 0.3% -1.3% 0.9% -1.3% Stage remains set for potential Waterworks investment cycle

Welding Hardgoods 0.2% 0.2% 2.5% 2.5% Outlook implies return to mid-2015 +2-3% growth range

General Industrial (MRO) 0.1% 0.3% 1.9% 3.6% Headwinds from weak commodities and strong USD yet to cease

HVAC 0.1% 0.9% 3.6% 3.2% Temporary lull in replacement demand due to mild 4Q weather

Safety 0.0% -0.2% 0.1% 2.2% Competitive pressure from Nationals on incumbent players continues

Overall -0.6% -0.1% 2.1% 3.1%

Metalworking/Cutting Tools -1.9% 1.1% 1.5% 4.5% Survey consistent with recent Metwalworking Business Index readings

Plumbing -2.1% -0.2% 2.9% 2.1% Revenue swings to a loss on slowing housing completion rates

Hoses & Accessories -5.0% -0.5% -2.2% 0.5% Second straight quarter of mid-single-digit revenue declines

Industrial/Energy PVF -8.0% -8.2% -0.5% -0.2% Pricing remains under intense pressure amid continued Energy slump

Mechanical/Power Transmission -10.0% -0.1% 0.8% 1.4% Weakest underlying volume growth in survey for third straight quarter


Conclusion - Overall Results _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Baird/MDM Industrial Distribution Survey │ 26_

Source: Baird Analysis

Conclusion

Industrial weakness spreading, bottom still appears elusive _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________


Stock Market

- Volatility surges, recession fear spreading. The confluence of emerging market weakness, a strong US dollar, and broad commodity declines are various factors driving increased volatility to begin 2016.

Macroeconomics

- End market growth increasingly divergent in later-cycle environment. US economic indicators have steadily weakened, particularly in the last few quarters, with growth narrowing to just a few end markets, most notably construction. Despite the lack of breadth in growth, the consumer economy continues to outweigh recessionary conditions in most industrial markets.

Industrial Distribution

- General Industrial. Conditions now broadly negative, flat pricing a solid outcome

- Industrial Gas / Welding. Market-specific growth dynamics, pricing gains weaken

- Building Products. Relative strength across most products/markets, despite weather

- Electrical / Datacomm. Non-res offsetting industrial/oil & gas/commodities, for now

- Industrial PVF. Crude oil, rig count falls to new lows; Water & Sewer relatively better


Question & Answer

__________________________________________________________________________________________________

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

To Participate in the Baird/MDM Quarterly Industrial

Distribution Survey, Contact:

David J. Manthey, CFA [email protected]

813.288.8503

Luke L. Junk, CFA [email protected]

414.298.5084

Ryan A. Lee-Young [email protected]

414.765.3640

Appendix



Representative Quotes From Recent Surveys _____________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________

Industrial Supply / General Industrial (3Q15)

• Commodity- and FX-related headwinds intensify…“Impact of oil & gas slow down impacted our business much greater than expected.”

• Widespread pricing pressure cited, especially from larger customers…“Extreme price pressure, especially from larger customers. Competitive actions driving margins lower with little thought of long term implications.”

• Customer also increasingly pushing to reduce their working capital levels…“Most of the industrials are trying to throw their inventory management on us. Some are taking it so far as to take inventory on a consignment basis. If we don’t do it they will find someone else who will do it.”

• Little optimism going forward…“Our expectation is a continuation of very slow growth, no pricing increases, customer and distributor inventories to decline somewhat.”

Industrial Supply / General Industrial (4Q15)

• Déjà vu, all over again…“Oil & Gas, commodities, and the price of the US dollar all had a negative impact on our business.”

• Flat pricing is the new up…“[This was the] first time we got letters from vendors saying they won’t be having a price increase in 2016.”

• No signs of stability yet…“The significant drop in pricing of major commodities continues to hamper any significant market improvement in the short term.”

• Customer demands rise amid challenging environment…“We have established a system of adding inventory to meet the ongoing needs of our customers…to provide the best possible customer service through product availability from our shelf.”

Appendix




Industrial Gases (3Q15)

• Overall market conditions mostly characterized as flattish…“It's a very flat period of business. We aren't growing but we aren't going backwards either.”

• More acute weakness seen at customers with commodity/FX exposure…“We seem to be in a fairly stable environment. I do see some geographic softness due to Deere and Caterpillar being slower, [however].”

• Gases prices holding for now, but increasing margin pressure cited…“Prices holding ground will be difficult as volumes drop.”

• Evidence of some optimism, but more independents seem cautious heading into 2016…“Oil prices have shut down all jobs in the area. Workers have left and layoffs at our customer sites are imminent. Growth will have to come from other sectors.”

Industrial Gases (4Q15)

• Non-res construction solid overall but regional trends continue to vary…“We see good things in the bigger cities, but not seeing a lot in our local market.”

• Pricing feedback skews more negative…“We have a modest increase going through, but with many exceptions carved out.”

• Potential opportunity seen stemming from proposed Airgas/Air Liquide deal…“We would expect a fair amount of turmoil, employee turnover, and customers that may be unhappy with whatever comes from that deal.”

• Outlook a mix of expectations for flattish conditions and nervousness…“Slow, if any growth. Need to increase market share for growth.”

Appendix




Building Products & Facilities Maintenance (3Q15)

• HVAC: Demand feedback consistently positive; 14-SEER regional transition smooth…“Replacement market finally breaking loose this year, pent up demand theory finally happening (after 5 years of predictions)?”

• Roofing: Demand mixed; shingle pricing pressures persist; BECN/RSG feedback positive…“Overall [residential] demand flat. No storm driven demand. New construction up a little.”

• Pool & Spa: Favorable trends persist…“Renovation market growing, new construction stable, above ground pool sales improving.”

• Facilities MRO: Multi-family feedback again positive…“Private work is dominating. Apartment building and medium commercial leading the way.”

Building Products & Facilities Maintenance (4Q15)

• HVAC: Temporary 4Q lull due to mild weather; pricing gains moderate, lower commodities a factor…“4Q was our only down quarter, weather had a major effect.”

• Roofing: Mild weather boosts demand; pricing fairly stable, winter pre-buy again expected to be muted…“Fourth quarter demand was strong but overall the year was flat after a very poor first and second quarter.”

• Pool & Spa: Market remains healthy, though wage/regulatory factors more noticeable of late…”Mandated minimum wage increases are putting pressures on productivity and results,” “New regulations driving sales increases in California.”

• Facilities MRO: Continued favorable market opportunity…”Our 4Q increased due to some new geographic markets [and we] continued to be aggressive in our private brand offerings.”

Appendix




Electrical & Datacomm (3Q15)

• Industrial trends weaken further; commodity- and FX-related headwinds to blame…“We continue to see weakness in the Steel, Oil, and Mining segments, which make up over 1/3 of our revenue.”

• Non-residential construction growth expected to continue in 2016…“Expecting commercial construction to remain positive for the next 18 months.”

• Lower copper causing headaches…“The biggest issues has been the decline in the copper market. We move the same amount of material for far less profit dollars.”

Electrical & Datacomm (4Q15)

• Commercial construction activity remains solid overall…“Commercial construction market is doing well, should support another strong year for us.”

• …While industrial/oil & gas trends remain very challenging…“Strong dollar (currency), metals pricing drop and energy (oil, coal) continue to be headwinds.”

• Pricing pressure steady to intensifying; no bottom in sight for copper (yet)…“Every large customer is making sure that their business is out on the street as they see ‘blood in the water’ among the supplier community.”

• 2016 outlook buoyed by non-residential construction, outlook elsewhere downbeat…“We see lots of good [non-res construction] opportunities, and backlog is growing in January.”

Appendix




PVF (3Q15)

• Energy market headwinds linger/intensify…“Upstream market will worsen in light of depressed energy prices. Midstream expected to be strong as will Downstream refining and chemicals. Price pressure will be tremendous as will reductions in inventory levels.”

• Commercial/government projects relatively better…“We expect strong growth in the commercial/government projects.”

• Pricing remains under pressure, both due to competition and lower commodities…“We must work harder to find areas where we can increase margins, as pricing from the conglomerates remains tough to compete with.”

PVF (4Q15)

• Liquidity becoming a more serious concern…“First quarter will be very, very tough on the entire pipe, valve, and fitting industry. We expect customer mergers, acquisitions, and some customers not making it through this next year.”

• Inventories remain elevated, driving pricing dynamics…“Due to excess PVF inventories throughout the market, prices declined roughly 25% in 2015. [Price decreases] expected to cease in 2016 and probably rise under 5%.”

• Optimism tempered heading into 2016…“Oil and gas market decrease hurting many parts of the economy. Don’t see a recovery in 2016.”

Distribution Remodel 2016


• Disruptive cycles are not new

• What’s new: capability to create value as meaning shifts faster, more disruptively


• Customer, customer, customer

• Adapt to leverage industry change

• Culture as most important differentiator

• Invest when it hurts

Market leader cycle themes


Balance

• Too much time on the foundation = stagnate

• Add new floors without foundation = crumble

Refocusadapt

Talentcultivate

Technologyinvest


DATA

Refocusadapt

Talentcultivate

Technologyinvest



Value

DATA

Refocusadapt

Talentcultivate

Technologyinvest


Refocusadapt

Foundational

• Transactions• Product• Inventory• Logistics• Price

• Incremental optimization

Remodel

• Service• Alternate technologies• Productivity• Process gain• Portfolio expansion• Cost reduction

• Smarter, faster, cheaper


Refocusadapt

Foundational

• Relationships

Remodel

• Workflow & process• Resolution, not

reactive• Consultative,

embedded• Services• Clicks + mortar


Refocusadapt

Foundational

• Focus on the business

Remodel

• Focus on markets• What do we do best? • Core values


Foundational

• Recruiting –“unicorn” employee

Remodel

• Think outside box• New skill sets• Culture vs.

qualifications

Talentcultivate


Foundational

• Training –product focus

Remodel

• Communication• Leadership

development• Cross-training, cross-

gen• Emotional intelligence• Culture core

Talentcultivate


Foundational

• Succession planning

Remodel

• Strategic planning• Next-gen leadership• Value enhancement• Stakeholder dev

Talentcultivate


Foundational

• Transactional ERP, inventory, finance

• Cost center

Remodel

• Analytics• Forecasting• E-commerce• Plug ‘n’ play

• Strategic tool to create competitive advantage

Technologyinvest


Foundational

• Basic business skills

Remodel

• Digital literacy• Predictive analytics• Forecasting

Technologyinvest


Foundational

• Infrastructure

• IT Department

Remodel

• New technologies –cloud, tablets, mobile

• Competitive advantage

• Strategic team

Technologyinvest



Q&A

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Results as Measured in Comprehensive Study of NetSuite Customers Conducted By:

The 2016 DistributionIndustry Outlook

Thank you!

January 21, 2016

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Documents

2016 Distribution Industry Outlook - MDM...2016 Distribution Industry Outlook Featuring: David Manthey, Baird Ranga Bodla, NetSuite Tom Gale, Modern Distribution Management Jenel Stelton-