Results from the Vertical Research Partners (VRP) Q1 2022 Survey reflect the turmoil in the electrical market because of the post-pandemic hangover, inflation, outrageous lead times and the war in Ukraine. Vertical Research Partners is an independent equity research firm based in Stamford, CT, that publishes this quarterly survey with the help of Electrical Wholesaling magazine. This article offers insight into some top-line findings of the Q1 2022. To participate in the annual survey and to get a copy of the related in-depth report that can be used to benchmark your operations against other electrical companies, contact VRP’s Nick Lipinski at [email protected]
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DISTRIBUTOR SALES ARE SOLID
Q1 2022 distributor revenue grew 10.2% with a continued strong contribution from pricing. Sales growth included +5.8% volume growth and +4.4% of price. Electrical equipment sales were strongest (+15.1%), reflecting generally greater availability compared to other categories. Sales of utility equipment remained solid, +10% with roughly equal contributions from volume and price. Automation product sales continue to relatively lag on availability issues, with distributors reporting volumes slightly down and a +4.1% benefit from pricing. The Automation two-year growth stack improved to +7.9% from+ 5.1% in Q4. Sales strong even as frustration mounts & caution creeps in. Supply chain disruptions have been detailed in broad strokes in news reports, but they are truly an under-appreciated daily challenge for in-the-trench operators such as distributor branch managers. Despite record sales figures in many cases, the general tone was one of continued frustration, even bewilderment, as manufacturers continue to push price while being unable to meet delivery commitments. Many are reporting multiple price increases in a year now (four-to-five in some cases) where historically there was perhaps one annual increase. Transportation remains a challenge, with several respondents pointing to missed delivery dates even when paying for expedited freight. Distributors acknowledged that at some point the electrical market will see demand destruction with continued price increases and now interest rates on the rise, but there are still few indications the industry is there yet. Some respondents suggested that with interest rates now rising and expected to trend higher, the industry is now seeing a release of previously delayed projects, after which the outlook is cloudy. Several pointed to the Russia/Ukraine conflict and the Shanghai lockdown as likely to exacerbate conditions in the near-term.
ADAPTING TO THE NEW NORMAL
Adapting to the new normal. While lead times from suppliers and inventory levels remain divergent from pre-COVID norms, several distributors suggesting normalization. These responses mainly reflect adjustments made to the current operating environment and were generally concentrated on the electrical equipment side. Overall, the VRP lead time index remains near an all-time high and branch inventory levels continue to show a wide range as managers grapple with ongoing availability issues, most notably on the automation side, given higher electronic inputs.
Q2 2022 OUTLOOK
Looking forward, distributors are expecting +6.1% growth on average for Q2 2022. Expectations are most robust for the electrical equipment and power sectors at +6.5%, with Automation expected up +5%. Specific end-market dynamics remain less in focus given ongoing widespread supply chain constraints. Supply, not demand, remains the key issue and most markets sound like they are continuing to improve off the COVID lows. Respondents mentioned a pickup in automation orders across a broad range of industries in the Midwest including food & beverage, auto (including tire) and steel. Oil & gas activity in the Gulf of Mexico has picked up nicely in tandem with oil prices as producers look to ramp up production.
Petrochemical production is also up. General construction activity (both residential and commercial) continues to appear robust across the board, though we heard of some residential projects unable to close due to lack of basic product like windows and meter cans. Infrastructure projects in the NY metropolitan area continue, and would benefit further if government spending manifests. Several distributors spoke of the need for greater reshoring of industrial manufacturing, but as yet have seen little action or indications of intent from their OEM suppliers. The infrastructure bill sounds like an obvious tailwind, but likely will take years to manifest. Demand remains strong across product categories, and we got the sense results could have been stronger if not for some availability issues given the pace of the recovery. More basic products, including anything with a PVC resin input, continue to be challenging. VRP has previously heard some concern that lighting might be the next crunch point in the supply chain, as manufacturers had pre-purchased chip components which are now running out. This quarter, we picked up on a relatively aggressive push for price on the part of lighting manufacturers.