To gauge near-term trends for the quarter that ended in Dec. 2012, we have once again conducted our proprietary KeyBanc Capital Markets Electrical Distributor survey in association with Electrical Wholesaling magazine. This is our tenth quarterly survey of North American electrical distributors in partnership with the magazine. Following are our key takeaways from the survey.
In 4Q12, sequential demand trends are roughly In line with historic seasonal patterns. Based on the conditions cited in our survey, end-user demand rose a modest 3% sequentially in 4Q12 with growth cited across all markets, with particular strength in industrial MRO and institutional construction (Fig. 1). The overall sequential performance is above the “normal” sequential increase (1%) noted by participants this quarter, but isn't unlike the sequential trend cited in our survey from 4Q11 (Fig. 2).While it appears stable demand is potentially attributable to a recovery in the residential construction market and some level of a recovery in non-residential construction, we think December could have been impacted by the uncertainty around the fiscal cliff, as 71% of our contacts cited at least some level of negative impact. This could have been partially offset by some demand from industrial MRO and construction related to recovery efforts from Hurricane Sandy. Overall, approximately 69% of respondents saw flat or sequential improvement in revenues in 4Q12, up from 63% in 3Q12, but down substantially from 76% in 1Q12 and 83% in 2Q12 (seasonality does have some impact).
Inventory levels point to seasonal growth and are supportive of stable pricing. Approximately 81% of respondents surveyed noted they expect to either maintain or slightly build inventory levels for 1Q13 versus the 4Q12, which is in line with historical sequential inventory build-up before the seasonally higher 1Q (Fig. 3). Looking back on inventory trends, we believe any build in distributor inventories during the first two quarters of 2011 was worked down by the 4Q11 with healthy industrial activity, and there was slight restocking in 2Q12 to account for seasonality, but not to a level that exceeded demand.
Pricing latitude is strongest in industrials and non-residential construction, while pricing concessions were strongest in construction. Primary input costs for goods that distributors sell, such as copper, aluminum and resin, increased modestly in 4Q12 versus 3Q12, which we think likely had minimal impact. However, the recent appreciation in raw materials at the end of 4Q12, in conjunction with lean inventory levels addressed previously, could have enabled distributors and manufacturers to more successfully pass along higher cost inventory and augment volume leverage toward the end of the quarter. Results show that the highest amount of pricing latitude was in the industrial and construction end markets. On average, results from our survey indicated products sold into the voice-data-video and industrial MRO markets were able to withstand pricing concessions the most in order to sell goods during the quarter. Results also indicate that pricing pressure is inconsistent as pricing strength was indicated in the non-residential construction market, but was also a source of a pricing headwind (33% of responses versus 30% in 2Q12 and 32% in 3Q12) for some respondents. This may be an indication of inconsistency among markets in the Unites States and continued competitiveness in the construction markets. It underscores our belief that the construction markets recovery remains inconsistent and slow.
Hiring was stable in 4Q12 and was supportive of a cautiously optimistic 2013 outlook by distributors and contractors. The employment situation appears to indicate a stable and cautiously optimistic employment market since last quarter, with the majority of respondents (69%) noting their customers have largely retained existing levels of employment, added hours to existing employee workload or hired new employees due to high capacity.
These results are a slight increase from the 3Q12 (61% of respondents). Looking at distributors themselves, the employment situation has improved on a sequential basis as approximately 82% retained employees, added employee hours or hired new associates versus 79% of respondents in 3Q12. This is down from 91% in 2Q12 and 87% in 1Q12, although the percentage of new hires has remained approximately flat on a sequential basis (22% versus 22% in 3Q12). Looking at forward sentiment, we find it encouraging that respondents believed their customers' outlooks for the first three months of 2013 (60% optimistic) and remained in-line with the outlook established during the 1Q12 (62% optimistic), which likely benefitted from a warmer than normal start to the year.
We also asked if the U.S. fiscal cliff is having any impact on business and 72% of respondents indicated the uncertainty around this event was having at least some negative impact, with about 33% saying that impact was “significant.”
The author is an analyst for KeyBanc Capital Markets Inc. in Cleveland and can be reached at [email protected].