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Detailed outlook shows pessimism lifting in power transmission industry: PTDA survey

Chicago, Ill. -- March 5, 2002 --The Power Transmission Distributors Association (PTDA) Member Forecast Survey repo...


Chicago, Ill. — March 5, 2002 –The Power Transmission Distributors Association (PTDA) Member Forecast Survey reports “cautious optimism” for PTDA distributor and manufacturer members awaiting relief from 2001.

“It was a difficult end of the year,” said Kevin McCloskey, vice-president of Dodge-Newark Supply Co. Inc. of Fairfield, N.J. and PTDA’s immediate past president. “You almost felt you were without purpose. You’d go to see customers and they would shrug their shoulders.

“But in January, customer behaviour was markedly different than it was in October or November,” he added. “We don’t know if we’re dealing with new customer budgets, but we’re working on a significant number of projects. It ‘s very encouraging.”

Dodge-Newark’s experience has been mirrored across much of the PT/MC industry. As a result, nearly two-thirds (64%) of the 53 distribution firms that responded to PTDA’s Annual Member Forecast Survey project sales increases in 2002.

Among distributors, 13% believe 2002 sales will increase by more than 10%. But for the most part, sales growth is more conservatively forecast in the 2%-8% range. Meanwhile, 15% of the distributors expect sales will remain constant in 2002; 21% think sales will slip.

In January 2001, by contrast, 80% of the survey’s distributor respondents looked forward to sales gains; 35% of them thought growth would exceed 10%.

That was before the extent of the economic slowdown — especially in manufacturing — was fully realized and a recession proclaimed in the U.S. The shock and jitters resulting from the terror attacks in the United States on Sept. 11 also hit hard.

“I think a lot of people have been holding back since Sept. 11,” said Frank Nosko, president of Mechanical Drives Co. of Los Angeles. “But with the coming of the new year, things are starting to let loose. Compared to last year, we definitely see growth. Barring any unforeseen disasters, we hope to get back to where we were in 2000.”

Patrick Frater, president of Northwest Power Products, Inc. and current PTDA president, reported activity is ramping up at his firm as well. “2001 was an extremely difficult year for us,” Frater said. “Certain industries were stronger than others, but small machine building was abysmal and we’re an OEM distributor. We were caught in the crosshairs more than someone with a more diverse customer base.

“But in January, our call volume went up substantially,” he added. “People who haven’t called us for several months are on the horn asking questions. Now we’re specifying product, which is the leading edge of sales.”

For many distribution firms, the slowdown began prior to 2001. For instance, Jeff Bahnsen, vice-president and general manager of Foremost Industrial Technologies of East Peoria, Ill., said his firm began to slip into “the doldrums” beginning in December 1999.

“Our customer base has largely been in a recession or depressed state since then,” Bahnsen explained. “Still, we had a very modest increase in sales, but had invested in aggressive expansion with overhead such as added sales staff.

“The increases in sales weren’t high enough to offset it,” he added. “But now we’re seeing things pick up. We had a terrible December, but beginning in January we started seeing a lot of activity and quotes.”

Pinch felt in Canada too
Robert S. Galarneau, general manager of RG Speed Control Devices Ltd. of Concord, Ont., said his firm started to feel the pinch in 2000. “A year before Sept. 11, automotive in Ontario started to cut out and downshift,” he said. “They’re expecting to pick up in the second half of 2002. We’ve got a positive feeling, but we’ve scrambled and serviced all different industries.”

Besides diversifying its customers base, RG Speed Control Devices also began shifting its sales from heavy reliance on product sales to income from value added services, Galarneau said.

Not every PT/MC distribution firm suffered in 2001. Although Las Vegas was hard hit by the drop in tourism after Sept. 11, Bearing Belt Chain Co., Inc., which is based there, had a record year, according to its president, Stephen Philpott.

“It was amazing,” Philpott said. “We captured some smaller market share after the competition pulled their horns in. We were ‘Johnny-on-the-spot’ to pick up some pieces.”

Offering value-added technical support helped drive Bearing Belt Chain Co.’s success in 2001 and should again in 2002, Philpott explained. “Many of our customers have cut their staff to the bone,” Philpott said. “They really appreciate a supplier who provides solutions because they no longer have engineers or people with technical experience.

“A lot of customers we deal with are lucky to have a part number, let alone understand how a machine operates. We know more about the machinery than the companies’ own mechanics.”

More than three-fourths of distributor survey respondents believe the current period of overall economic decline will end no later than summer 2002. Most of the remainder expect the recession in the U.S. to be over by the end of fall.

Manufacturers’ outlook
Slightly more than 60% of the 34 manufacturer respondents to the member forecast survey expect sales gains in 2002. More than half of these firms believe the growth will be 5% or less, but nearly 18% project sales to increase more than 10%.

Meanwhile, some 18% of the manufacturer respondents think sales will remain flat in 2002. Roughly 20% forecast sales decreases; of this group, three-fourths believe the declines will be under 5%.

By contrast, nearly three-fourths (73.7%) of manufacturers projected sales increases in 2001; 10% of them had forecast sales gains of 10% of more and 35% had planned sales gains of more between 5% and 10%.

For most manufacturers, however, the actual 2001 numbers were icier. And in 2002, many expect sales to warm up a few months later than distributors do. Most of the manufacturers (80%), however, expect the U.S. recession to be over sometime in autumn.

“The best thing about 2002 is that 2001 is over,” said William A. Childers, vice-president sales of Danaher Motion Components Division, headquartered in Simsbury, Conn. “2001 was a down year for the motion control business. We haven’t seen any tremendous change from the fourth quarter of 2001 yet, but we’ve got to stay optimistic.”

“We were running slow right from the beginning of 2001,” said Rick White, executive vice-president of Flexible Steel Lacing, Co. of Downers Grove, Ill. “We don’t feel we lost any business to competition, it was all economics. We’re focused on getting back to where we were in 2000 and regaining the volume we lost in 2001.”

But as with distributors, a handful of manufacturers prospered in 2001. According to Cliff Bannon, director of sales and marketing for Transom Inc. of Burnsville, Minn., the oil seal maker enjoyed a robust year.

“In all the markets we track, including OEM and aftermarket, we were up across the board,” Bannon said. “This year, we’re on a record breaking pace again.”

Pressure on margins persists
Many distributor and manufacturer firms continued to see their gross margins erode in 2001, a trend that has dogged the PT/MC industry for a decade. For 2002, only about a third of distributor survey respondents expect to improve profit margins. Among this group, nearly all estimate the growth at under 5%.

Meanwhile, 44% of the distributors expect margins to remain flat. Almost one-fourth expect margins to slip, mostly by less than 5%.

“In my 36 years in the business, I’ve never seen the pricing levels so competitive,” said Sam Mangone of Munnell & Sherrill, Inc., based in Portland, Ore. “We’ve been able to hold our margins though sales of performance products and service. But if you want to sell roller chain, you almost have to give it away, then install it.”

Manufacturers’ profitability e
xpectations are roughly the same. Some 35% project margin gains; almost all under 5%. One-third see margins remaining constant, while nearly another third predict margin slippages of 5% or less.

“We had a rough year in 2001 like just about everyone else,” said Robert Callahan, senior vice-president of sales and distribution services of U.S. Tsubaki, Inc. “We eked out a profit, but in order to do that we had some layoffs.”

For the most part, both distributor and manufacturer respondents expect 2002 employment levels to remain relatively constant.

Some 55% of distributors expect their employee numbers to stay the same in 2002, but nearly a quarter expect to add workers in the coming year. Among this group, however, most expect employment growth to be under 5%. Meanwhile, about 20% of distributors expect to cut jobs.

Among manufacturers, 42% say job level will remain the same. About one-third expect to add employees, but job growth generally is expected to be under 5%. Almost a quarter of manufacturers will trim positions, mostly under 2%.

Distributor-manufacturer relationships
Among distributors, slightly more than half expect their number of supplier lines to remain constant in 2002. Almost 37% plan to add lines in the coming year, while less than 12% plan to cut their product rosters.

Half of the manufacturer respondents hope to increase their sales through distribution in 2002. In line with that, 35% of them plan to increase the number of distribution firms that carry their products.

At the same time, just over 40% of manufacturers plan to maintain the same number of distributors in the coming year. Just under a quarter expect to trim their distribution roster.

“If anything, I think the tough economic conditions have made manufacturers’ relationships with distributors stronger,” Callahan said. “I find the working environment, the mutual planning and the camaraderie is better. People are more inclined to sit down and discuss matters, rather than move or rush.”

The 2002 member forecast survey also revealed:

— Just over 30% of distributor respondents have sole supplier relationships with customers. Customer demands on distributors to maintain local inventory of products is on the rise. Among survey respondents, 43% said customers increasingly are making this a requirement.

— Among manufacturers, 35% expect distributor sales to remain the same in 2002. About 15% expect distribution sales to slip.

— In the slow fourth quarter of 2001, almost 35% of distributors gained new customers. Meanwhile, 56% gained and lost accounts; 4% said they only lost customers.

For more details about the PTDA 2001 Member Forecast, visit www.ptda.org.