PTDA Members Forecast Slight Growth in 2007
Most member firms of the Power Transmission Distributors Association (PTDA) aren't projecting 2007 as a gangbuster year for sales growth, but most believe it still will be a good one. That's based on ...
February 1, 2007 | By MRO Magazine
Most member firms of the Power Transmission Distributors Association (PTDA) aren’t projecting 2007 as a gangbuster year for sales growth, but most believe it still will be a good one. That’s based on responses to the most recent annual member survey conducted by the association.
More than 80% of the 104 firms that responded to PTDA’s 2007 Member Forecast Survey predict sales increases for the coming year. Among all the survey respondents — 52 distributors and 52 manufacturers — only 17 (or 16.3%) believe their sales will be flat in 2007. Just two firms, both distributors, think their sales will slip slightly in the coming 12 months.
Among distribution firms, almost four-fifths (78.1%) anticipate sales growth, 17.3% expect flat sales and 3.8% expect a dip. Manufacturers’ outlooks are slightly more optimistic, with 84.6% forecasting sales growth and 15.4% flat sales.
On the surface, the 2007 survey results aren’t much different than those of 2006. Heading into last year, 92.1% of all survey respondents predicted sales growth. The remainder expected sales to remain constant.
But based on more-detailed survey numbers and interviews with PTDA member firm managers, many companies expect sales growth rates to slow slightly in the coming year. The general consensus is that 2007 sales increases will be down a few points over those of 2006.
“I look at 2007 as another very positive growth year for our organization,” said Craig Faber, president of Miller Bearings Inc., based in Orlando, Fla. “We’re forecasting to be off slightly from what we’ve been accustomed to the past three years, but we remain excited about opportunities in our marketplace.”
Steve Crain, president and CEO of Apache Hose & Belting of Cedar Rapids, Iowa, has a similar view. “We believe it will be a decent year,” he said. “We enjoyed double-digit growth the past few years, but about 8% is in line with our expectations for 2007.”
For 2007, roughly two-fifths (39.4%) of all firms project sales increases of 5.0% to 9.9% — 40.4% of manufacturers and 38.5% of distributors fall into this category.
“2007 will be another growth year for us, as were 2003, 2004, 2005 and 2006,” said Jim Putnam, vice-president of Sumitomo Machinery Corp. of America, based in Chesapeake, Va. “But growth will come in much different areas than we experienced over the past four years. It will be a challenging year for organic growth.”
Exactly a quarter of all respondents, however, expect 10-plus per cent sales growth in 2007. This compares to 36.6% of all survey participants last year (40% of manufacturers, 31.8% of distributors). In 2007, manufacturers are again slightly more upbeat than distributors, with 28.9% expecting sales increases of 10% or more. Just more than one-fifth (21.1%) of distributors are this hopeful.
Meanwhile, 19.2% of distributors and 15.4% of manufacturers predict sales increases will be under 4.9%.
Some companies still have super-optimistic outlooks, but the number of these firms is down from 2006.
Last year, 20% of manufacturers projected sales jumps of 15% or more; this year the figure is 13.5%. In 2006, 9.8% of distributors forecast a sales boost of 15% or more; for 2007, 9.6% are this hopeful.
PTDA member firms’ sales growth projections tend to correlate with their views of overall economic conditions.
More than two-thirds (69.5%) of all respondents believe the general economy remains in a growth period — 62.5% of distributors and 76.6% of manufacturers share this view. A year ago, optimism was stronger. Heading into 2006, 85.4% of all respondents (84.1% of distributors and 86.4% of manufacturers), said the economy was growing.
One way distribution firms hope to keep sales humming is by reaching out to customers whose businesses are less cyclical. For instance, Jay Shore, president of C.B.S. Equipment Ltd. of London, Ont., says his firm is expanding its focus to end users such as those in food processing and agriculture, as well as automotive and manufacturing.
“I think our sales will be down from the previous year,” Shore said. “However, being in the heartland of Canadian manufacturing, there are other opportunities out there.” (Editor’s note: Ontario-based manufacturing industries have been one of the weakest links in the Canadian economy over the past year.)
Sumitomo’s Putnam agrees that it’s a key time to prospect for new customers and apply newer technologies.
“The people who experience strong growth in 2007 will grow in areas outside their traditional segments,” he said. “People will have to get creative. For instance, we showcased our portfolio of motion control equipment at the PTDA Industry Summit and there was a lot of interest among distributors.”
Respondents to the 2007 Forecast Survey are divided as to how long economic growth will continue. The biggest single groups — 23% of distributors and 31% of manufacturers — think expansion will continue until Autumn 2007.
“We think ’07 will be better than ’06 and that growth will continue through the first half of the year,” said Phil Derrow, president of Ohio Transmission Corporation, based in Columbus. “We’ll withhold judgment on the second half of the year. Our sense is that the growth rate will get slower as the year progresses.”
Sales expectations since 2002
Sales expectations reported in PTDA’s Annual Member Forecasts generally have trended upward in recent years:
* For 2005, 91.2% of distributors and 94.6% of manufacturers projected sales increases.
* For 2004, 83.5% of all respondents predicted sales growth, while 10.7% forecast flat sales and 5.8% expected drops.
* For 2003, roughly 80% of distributors and 93% of manufacturers expected sales increases.
* In 2002, only 64% of distributors and 60% of distributors projected sales growth.
Marginal margin improvement
As has been the case for several years, stagnant gross margins and pricing pressures are expected to haunt many PTDA member firms. Exactly half of all 2007 survey respondents predict margins to remain constant in the coming years. This compares to 54.8% of all 2006 respondents.
As in 2006, more manufacturers than distributors are optimistic about margin increases heading into 2007. In total, almost half of manufacturers (48.9%) think their margins will grow, while just over a third (34.8%) of distributors believe so.
Margin management programs are working for some companies, such as Baltimore-based Power Transmission Systems.
“We’ve seen some nice gains in our margins this year,” said Mike Weil, the firm’s president. “It seems like a lot of companies in our industry let salespeople cut deals on pricing as they go along. We don’t allow that and, as a result, have seen steady margin increases.”
Among all companies hoping for margin improvement, predictions are relatively modest, however. By far, the single most-projected margin growth rate is from 2.0% to 4.9%. One-fifth (20.4%) of all survey respondents expect this rate, including 18.4% of distributors and 22.4% of manufacturers.
Increased costs of raw material and transportation remain part of the drag.
“Our use of specialty stainless steel in the production of conveyor chains has grown dramatically, and those material costs continue to be volatile,” said Jim Lamb, vice-president of marketing for Drives Incorporated, headquartered in Fulton, Ill. “I see cost increases, as well as the availability of specialized stainless steel, as a challenge for our supply team.”
Then getting product to market is pricier, said Tamara Tibor, director of sales and marketing for Posi Lock Puller Inc., based in Cooperstown, N.D.
“One of the major problems we have is with freight charges,” she said. “Fuel prices have come down, but the fuel su
rcharges remain in place.”
Another issue: Low-cost suppliers and customers who cherry-pick prices — often on the Internet — don’t understand the value distributors offer, then expect distributors to match online pricing.
“What concerns me is that some customers have completely discounted the cost of services delivered and extended hours,” said Mark Deich, president and owner of Industrial Belting & Transmission Inc. of Louisville, Ky. “They go online, see prices, then expect us to match the price for the product and include our other services.”
Some distributors, however, claim they’re just ‘saying no’ to these customer tactics.
“We aren’t interested in doing business based on price competition,” said Steve Harvey, co-owner and president of Harvey Industrial Specialties in Quebec City, Que. “We’re recognized for the service we give. We have four reps on the road who all have the ability to provide technical support.”
Added Derrow of Ohio Transmission: “There will continue to be margin pressure and opportunities for people to buy things cheaper. At the same time, there will be a market for services that customers will pay for.”
But only a handful of firms are girding for margin erosions. Five distribution companies (10% of all respondents) and three manufacturers (6.1%) think this will have an impact on them in 2007.
These figures are in line with 2006 projections, when one distributor and three manufacturers believed margins would shrink. In 2005, however, 15.6% of distributors and 13% of manufacturers forecast margin decreases.
Paid services
To help boost sales and profitability, distribution firms continued to expand their menus of paid services last year.
Among responding distributors, 36.7% said they had added paid services in 2006; in 2005, 30.0% did so. Meanwhile, 61.2% of distributors said they kept their number of paid services constant last year, as opposed to 70% in 2005. One distribution firm said it actually decreased its number of paid services in 2006.
“We’re selling services more aggressively,” said Ken Miko, vice-president of BDI, based in Cleveland, Ohio. “This includes all type of repairs and rebuilds. We don’t typically charge for standard delivery or some other basics, however.”
Meanwhile, just over half (51%) of distributor respondents said they documented value savings for their customers in 2006; 49% said they didn’t.
“We come to market with a high degree of service and solutions for customers, as well as lot of product availability,” Faber said. “All of those things allow us to bring a lot of value to our customer base.”
At the same time, customer requirements for local inventory continued to trend upward in 2006, according to distributors. Among responding firms, just over 40% said their customers increased demand for locally stocked items; just over half said the demand remained constant. Only four distribution companies said customer requirements for local inventory decreased in the past year.
Channel relationships
According to the survey, PT/MC distributors and manufacturers are relying on each other more than ever to bring products to market and meet customer demands.
Among distributors, just over half (55.1%) said they added supplier lines in 2006. That was down from 2005, when almost two-thirds (63.6%) said they added new lines.
Only two distributors (4.1%) said they reduced lines in 2006. The remainder (40.8%) kept their number of supplier lines constant.
On the flip side, 47.8% of manufacturer respondents said they had increased the number of distributor partners who carry their products in 2006. That slipped from 2005, when 58.6% of manufacturers added distributors.
Last year, 43.5% of manufacturers maintained a constant number of distributors, while four (8.7% of respondents) trimmed their overall distributor rosters.
Looking ahead, more than half (54.3%) of responding manufacturing firms hope to increase their percentage of sales through distribution in 2007. More than a third (37%) expect the percentage to remain the same and 8.7% said sales through distribution will decrease.
“Our percentage of sales through industrial distribution has grown significantly. We expect that to continue and it is one our highest priorities moving forward,” Lamb said. “There’s been a payoff for all involved and it’s been very rewarding.”
Personnel levels and paychecks
On balance, both distributor and manufacturer respondents plan to add jobs in 2007 — even if 38% of distributors and 47.9% of manufacturers plan to keep employment levels constant in the coming year.
Among distributors, more than half (52%) say they’ll add new jobs in 2007. An almost even number say their firm’s overall employment levels will grow by more than 5% (22% of respondents) or between 2.0% and 4.9% (20%).
Some 10% of distributors will nudge their employment numbers up by under 2%. The same number of distributor respondents said they would cut jobs.
The job picture is slightly better than last year, when 41.6% of distributor respondents planned to increase employment levels at their firms. The message here: Job opportunities — and some job growth — exists in PT/MC distribution. But for distributors, the challenge remains finding qualified personnel.
“Finding qualified young people is a challenge,” BDI’s Miko said. “There does not seem to be a lot of young people out there who know of industrial distribution and who have the mechanical aptitude we need.”
Miko and his firm are actively involved with the PTDA Foundation-sponsored Industrial Career Pathways (ICP) program through Cuyhoga Community College (Tri-C) in Cleveland. BDI is working with the local ICP Advisory Committee to support the ICP curriculum at Tri-C. This will help the firm — and other area industrial distributors — find new hires and provide an excellent continuing education resource for existing employees.
Among PTDA manufacturer member respondents, just over one third (35.9%) said they planned to increase employment levels in 2007. That’s down from last year, when 51.7% of manufacturers said they would add employees.
For the coming year, almost half of manufacturers (47.9%) plan to maintain steady employment levels. A handful (6.3%) expect to make cuts.
Most salary increases at both distribution and manufacturing firms will be modest in 2007. The single largest groups of both distributors (42.9%) and manufacturers (63.8%) say they’ll boost employee pay an average of 3.0% to 3.9%.
That’s roughly in line with projections made by 2006 survey participants. However, last year a slightly higher percentage of companies planned to hike salaries more generously.
Heading into 2007, 28.6% of distributors plan average salary increases of 4% or more. Last year, the figure was nearly 40%.
For the coming year, 19.1% of manufacturers will increase pay by 4% or more. One-third (33.4%) said they planned to do so in 2006.
For 2007, no respondent planned to cut salaries. However, 10.2% of distributors and 6.4% of manufacturers said average pay at their firms would remain flat.
Founded in 1960, the PTDA is a U.S.-based trade association representing the industrial power transmission/motion control (PT/MC) distribution channel. It represents 216 power transmission/motion control distributor firms with over 3,500 locations throughout North America and 13 other countries, as well as 200 manufacturers that supply the PT/MC industry. For more information, visit www.ptda.org.