Midyear Report

Business is better, but feelings are mixed about what the future

It will come as no surprise that 86.5 percent of respondents to a recent Truck Parts & Service survey indicated they finished 2010 in the black, and 80 percent expect to finish 2011 up over last year. Forty-one percent say they expect sales to be up 10 percent or more year over year. (See Figure 1.)

The reason for growth, according to one survey respondent, is because customers are purchasing more parts to keep equipment running properly and to follow new DOT regulations.

The fact that the overall age of the nation’s fleet is older than it has been for quite some time was cited by another survey respondent as the reason for his optimism about this year.

Perhaps the mood was best summed up by this survey respondent who says, “This is a solid year. It is a combined effort in all our departments to make it successful.”

For Marc Karon of Total Truck Parts, the first half of 2011 has been very good. “Customers were optimistic that the recession bottomed. Unfortunately for us, the Florida economy has continued to lag the recovery in the rest of the country.”

One sign that distributors, dealers and repair garage owners are feeling optimistic is that 51.6 percent of survey respondents indicated they have added personnel this year. (See Figure 2.)

However, adding staff has not always been easy. “We need more personnel but have not been able to find competent replacements for technicians who have retired,” laments one survey respondent.

The respite the trucking industry had from the technician shortage during the recent downturn may be over.

Inventory, Parts Availability And Pricing

Nearly half of all the respondents indicated they are carrying higher inventory levels. (See Figure 3.) Many have done so to keep up with the demand of their service operations.

“Parts levels have increased every month while maintaining or exceeding our profit goals,” says a respondent.

Some (37.8 percent) of survey respondents have increased inventory by expanding the number of product lines they carry and nearly another quarter (21.1 percent) are contemplating product-line expansion. (See Figure 4.)

There has been some concern in the market about parts supply. However 68.6 percent of survey respondents say their orders are being filled with limited or minor shortages. (See Figure 5.)

However, some distributors have encountered issues with parts availability. Inland Truck Parts’ Dave Scheer says, “Parts availability from our vendors is mixed. It is a challenge for some of them to supply enough parts. We manage it on a day-to-day basis.”

On the other hand, Allan Parrott of Tidewater Fleet Supply, says parts availability has been steady. “Most of our manufacturers continue to ship in the 90 percent range with our overall fill rate at 84 percent. There have been some component shortages due to the tsunami/earthquake in Japan,” he says.

As an example, Parrott was told that a clutch for an air conditioning compressor was manufactured in Japan and the plant was damaged in the earthquake. The compressor has been on back order for several months.

“We also have had a popular filter on back order for several months because of a short supply of one component (a gsaket),” he says.

“I don’t know if the manufacturer changed gasket suppliers or whether the raw material was in short supply. Overall, our manufacturers have been good partners.”

According to Don Purcell and Keith McLemore of Stone Truck Parts, parts availability has been good with few shortages. Increasingly inventory or adding product lines has not been without its challenges in the form of price increases.

Almost half of the survey respondents indicated they are seeing less favorable pricing this year than last. (See Figure 6.)

“It is a different story with pricing. It’s been staggering to see the number and amount of the price increases that have come through so far this year and we are just halfway through the year,” McLemore says.

Karon is not seeing problems with parts availability although he did in 2010, and he says pricing is stabilizing.

“That is a concern because the profit impact of price increases was an important profit source for 2010,” he says.

For more information on distributor-supplier relations, see Suppler Relations on page 31.

Looking To The Short-term Future

We asked survey respondents how sales were so far this year compared to the first half of last year.

More than two-thirds said they were somewhat to much higher (See Figure 7.)

We also asked survey respondents how they thought the second half of 2011 sales would compare to the first half of 2010. Nearly two-thirds said sales would be higher. (See Figure 8.)

Parrott believes fleets will continue to seek additional life from their existing equipment and if they do they will continue to need parts.

He adds, “Federal, state and municipal budgets will continue to contract, which will mean fewer dollars for new equipment.”

This could lead to more parts and service business as these entities try to keep existing equipment operational, he believes.

“We believe the second half of this year will continue to be at least somewhat strong,” Purcell says. “We experienced a lot of growth in the second half of 2010 so I’m not sure if we’ll be able to match our increase over the prior year throughout the remainder of this year.”

Parrott expects increasing sales through the end of the year. “We continue to focus on our core mission, which is to provide quality parts at fair prices in a prompt manner.

This focus has served us well throughout the economic downturn. Opportunities continue to arise and we are well positioned to capitalize on them,” he says.

However, Bill Wade of Wade & Partners is concerned because he already is seeing municipalities extend payment of receivables, in some cases to as much as 270 days.

“It is insane to think an independent business can take on that kind of extra cost,” he says.

“And the Hobson’s Choice is that if you add enough to your quote to cover the longer receivables, you won’t get the business.”

But for Karon municipal and export business has been very good and his internal shops continue to be strong profit contributors.

He has, however, already seen a slowdown in business overall despite the bright spots. “Business has slowed considerably and other indicators like collections are moving in the wrong direction,” he says.

Wade also is concerned because he does not see the general economy picking up to sustain business through the second half now that most of the vehicles that were cannibalized for parts have been restored to usable condition.

He believes that 15 to 20 percent of an average heavy-duty distributor’s business is tied to the construction market, and construction still is down in much of the country.

“Another reason that I don’t think you are going to see real strength in our business is because most of the marginal players washed out in 2009,” he says. As a result, there won’t be a lot of business to pick up from failed distributors.

Karon has a different perspective “The one saving grace for us is that many competitors are dropping due to the length of the recession. This added business has helped offset the general lull in the local economy.”

On a positive note, Wade believes the aftermarket companies that are in business today are likely to be in the market for good.

Looking out further, Purcell and McLemore are trying to be optimistic about 2012. “I’d like to say it’s going to be OK and I’d like to think we can maintain the sales levels we’re attaining this year,” McLemore says.

“But I’d feel a lot better to see the housing and unemployment numbers improve, but I don’ think we’ll see that,” he adds.

Karon believes much of what will happen next year will depend on government policies. “My guess is that we will see nothing from Washington to help us in Florida,” he says.

“It will be a soft year for us. The key once again will be to maintain a good cash position,” he adds.

Scheer echoes those feelings, “I’m uncertain as to what to rest of the year will be like or what will happen next year mostly because of the political unrest and financial issues our country faces. At this point, we are remaining conservative with our growth and expansion.”

Whether the balance of this year and next year are positive or not will depend on a variety of factors.

One survey respondent had some advice that may help regardless of outside factors: “If you’re given lemons, make lemonade or lemon pie. Be positive and most of all don’t be lazy.”

Compared to 2010, where do you expect your overall 2011 sales to finish?

41% Up 10% or greater

22% Up 5% to 9%

17% Up 1% to 4%

12% About even

3% Down 1% to 4%

2% Down 5% to 9%

3% Down 10% or more

During 2011, how have your company’s employment levels changed?

51.6% Added personnel

39.4% Made no change in personnel level

9% Reduced personnel

During 2011, how have your company’s normal parts inventory levels changed?

48.6% Increased inventory level

36.8 % Have not changed inventory level

14.6% Have reduced normal inventory level

So far during 2011, which of the following best characterizes the situation within your company regarding product lines?

37.8% We have expanded product lines

21.1% We are examining an expansion of product lines

37.2% We have not made nor are planning any changes in product lines

2.2% We have reduced product lines

1.7% We are examining a reduction in product lines

As of now, how would you assess your company’s ability to obtain parts from your supplier partners?

15.3% Our orders are filled as normal with no shortages

68.6% Our orders are filled with limited and minor shortages

16.1% Our orders are filled with significant shortages

In general, how was your relationship with your suppliers changed so far in 2011 regarding pricing?

17.8% More favorable pricing

34.2% No change in pricing

48% Less favorable pricing

How are aftermarket sales so far in 2011 compared to the first half of 2010?

15.5% Much higher

47.7% Somewhat higher

29.7% About the same

6.2% Somewhat lower

0.9% Much lower

How do you expect sales during the second half of 2011 to compare to the first half of 2010?

12.5% Much higher

50.3% Somewhat higher

31.6% About the same

5.2% Somewhat lower

0.4% Much lower

Supplier Relationships

One of the key factors to a distributor’s success is his relationship with his suppliers. We asked the readers of Truck Parts & Service a variety of questions during our recent mid-year report survey, including several on how things have changed with suppliers.

Here are their responses to some of the ancillary questions we posed.

In general, how has your relationship with suppliers changed so far in 2011 regarding your company’s business needs?

32.5% Greater attentiveness to our business needs

48.6% No change in attentiveness to our business needs

18.9% Less attentiveness to our business needs

In general, how has your relationship with suppliers changed so far in 2011 regarding your company’s training opportunities and market programs?

30% More training opportunities and market programs

57% No change in training opportunities and market programs

13% Less training opportunities and market programs

Based on current aftermarket parts demand and current levels of new truck production, what would your expectations of parts availability be for the remainder of 2011?

18.9% Suppliers will fill parts orders as needed

68.8% Suppliers will fill parts orders with limited or minor shortages

12.3% Suppliers will be unable to meet our demand for parts.

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