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INDUSTRIAL DISTRIBUTION TRENDS & ACTIVITY

A B O U T U S

TA B L E O F C O N T E N T SANDREW K. PETRYKMANAGING DIRECTOR & GROUP [email protected]

KEVIN H. [email protected]

INDUSTRIALDISTRIBUTION

INSIDER

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INDUSTRIAL DISTRIBUTION

2 I N D U S T R I A L D I S T R I B U T I O N

The COVID-19 pandemic, which has disrupted domestic manufacturing activity, has been felt across the industrial distribution supply chain. While demand deterioration is end market and geography dependent, select industrial distribution markets have demonstrated resilience and some are seeing a surge in demand through the crisis. Agile companies with diversified portfolios and strong balance sheets have sustained business performance through the market dislocation.

While key indicators are exhibiting signs of strengthening, economists forecast 2021 as the likely timing of a recovery in the U.S. economy. Manufacturing could see a more rapid “V-shaped” recovery, a positive for industrial distributors.

Said Kevin Sargent, Head of Industrial Distribution at BGL, “Based on market intelligence gained from active client engagements and buyer/investor feedback, we have observed a marked increase in manufacturing orders through June and July. Certain end markets are projecting continued strong momentum through year-end. While these are short-term positive trends, we are more optimistic than even a month ago about improving business conditions. We are actively monitoring volume trends to assess levels of new demand growth.

Competitive pressures will continue to drive industrial distributor consolidation. We anticipate an uptick in M&A activity during the balance of 2020 and through 2021 with a focus on add-on transactions in the current environment. While appetite for deal flow in the private equity and lending communities is strong and growing, size may lean toward smaller transactions given financing requirements and greater asset selectivity.

Private equity sponsors and strategics remain committed to the sector.”

OVERVIEW

3

U.S. ECONOMIC RECOVERY


Manufacturing output increased 3.4 percent in July, following a 7.2 percent gain in June, with most major industries posting increases. Motor vehicles and parts registered the largest gain at 28.3 percent.

• U.S. unemployment has steadily declined, down from an April high of 14.7 percent to 10.2 percent in July. Manufacturing has added 623,000 jobs over the last three months, including 356,000 new jobs in June. Motor vehicles and parts has comprised a significant portion of the gains.

• Construction spending of $1,355.2 billion* in June 2020 was 0.1 percent above the June 2019 estimate of $1,354.1 billion. Spending during the first half of 2020 of $667.9 billion was up 5.0 percent from the same period a year ago.

• *Seasonally adjusted annual rate

• According to the Institute for Supply Management, the U.S. manufacturing sector grew in July with a PMI reading of 54.2 percent−up 1.6 percentage points from 52.6 percent in June—registering three consecutive months of growth. The July reading marks a 12-month high in the PMI index and is 5.6 percent above the 12-month average of 48.7. July report findings also highlighted index gains in New Orders, Production, Backlog of Orders, and Employment.

• The Federal Reserve reported a 3.0 percent increase in industrial production in July, following a 5.7 percent increase in June. The reopening of many factories are contributing to the gains. Total industrial production remains below (8.4 percent) its pre-pandemic level in February.

• According to the Second Quarter 2020 Survey of Professional Forecasters, the U.S. economy is projected to contract 5.6 percent in 2020. Economic growth will be sharply lower in Q2 2020 (-32.2 percent), followed by recovery over each of the next four quarters. Real GDP is expected to recover and grow at an annual rate of between 2.2 percent to 4.1 percent over each of the following three years.

Macroeconomic indicators are showing signs of strengthening and point to improving market conditions.

INDUSTRIAL DISTRIBUTION RECOVERY


In its 2020 Mid-Year Economic Update, Modern Distribution Management (MDM) shared predictions of a “swoosh-shaped” recovery in the overall economy, defined as a steep decline in Q2 2020 followed by a more gradual recovery. Economist and panel participant Brian Lewandowski shared projections for the broader Wholesale Distribution market.

• The base case scenario forecasts a 9.0 percent contraction in 2020 and the market recovering in 2021 with 6.4 growth. The quarterly breakdown shows the decline in sales persisting through Q1 2021 with a return to growth beginning in Q2 2021.

• The optimistic case forecasts a 7.1 percent contraction in 2020 and 10.4 percent growth in 2021.

• In the pessimistic scenario, the industry contracts in 2020 and 2021.

• The Automotive (22.5 percent), Oil and Gas (21.7 percent), and General Industrial (11.4 percent) distribution end markets are forecasted to see the largest rebounds in 2021.

• Manufacturing could see more of a “V-shaped” recovery, a positive for industrial distributors.

A majority of participants in the quarterly MDM-Baird Distribution Survey are forecasting sales declines in Q2 2020, with only safety products projecting growth (+2.9 percent). Survey findings revealed single-digit declines for waterworks (-5.2 percent) and Jan-San (-7.6 percent), with other end markets expected to average -11.3 percent or an even greater decline.

11QQ2200 22QQ2200 22002200SSaalleess CChhaannggee SSaalleess FFoorreeccaasstt SSaalleess FFoorreeccaasstt

OOvveerraallll --00..66%% --1111..33%% --66..00%%

Plumbing -2.0% -18.5% -10.6%Gases & Cylinder Rental 1.9% -6.8% -4.3%Hoses & Accessories -4.6% -14.0% -10.2%HVAC -1.3% -13.6% -6.7%Mechanical/Power Transmission -5.8% -13.1% -4.9%OEM Fasteners -2.6% -21.1% -9.7%Pool & Spa 1.5% -11.8% -7.8%Safety 7.6% 2.9% 2.2%Industrial/Energy PVF -3.0% -10.6% -6.5%Electrical 0.1% -11.8% -8.2%General Industrial (MRO) 2.2% -13.0% -7.1%Waterworks Products 2.2% -5.2% -2.6%Facilities Maintenance/Jan-San (MRO) 1.1% -7.6% -4.9%Metalworking/Cutting Tools -6.7% -20.0% -11.0%Datacomm 2.6% -11.5% -4.9%Welding Hardgoods -1.4% -11.3% -7.5%Roofing 1.9% -12.8% -7.8%Wallboard/Gypsum -4.9% -20.6% -15.9%Building Materials/Lumber 1.2% -16.7% -7.4%Landscape Supplies 2.4% -19.7% -12.4%

Source: MDM Baird Distribution Survey

CCUURRRREENNTT AANNDD EEXXPPEECCTTEEDD RREEVVEENNUUEE BBYY SSEECCTTOORR

(Largest to Smallest Sector Revenue) 22001199 22002200 22002211

AAccttuuaall RReevveennuueess FFoorreeccaasstt FFoorreeccaasstt

OOvveerraallll 00..55%% --99..00%% 66..44%%

Oil and Gas Products -2.0% -32.6% 21.7%

Electrical and Electronics -4.9% -10.1% 0.0%

Motor Vehicles and Motor Vehicle Parts 2.1% -14.1% 22.5%

Industrial 1.3% -27.9% 11.4%

Computer Equipment and Software 1.1% -9.3% 8.6%

Commercial Equipment and Supplies 6.0% -5.7% -0.9%

Miscellaneous Durable Goods -4.7% -5.0% 5.9%

Agricultural Products -1.6% 7.4% 1.5%

Metal Service Centers -3.8% -28.0% -3.0%

Hardware, Plumbing, and Heating Equipment 3.4% -4.1% -4.3%

Building Material and Construction 1.1% -10.4% -0.9%

Chemicals and Plastics -1.0% -7.4% 7.0%

Office Products and Paper -5.3% 1.1% 3.4%

Source: MDM

WWHHOOLLEESSAALLEE DDIISSTTRRIIBBUUTTIIOONN:: EEXXPPEECCTTAATTIIOONNSS BBYY SSEECCTTOORR

The optimistic case forecasts a 7.1 percent contraction in 2020 and 10.4 percent growth in 2021.

COVID-19 PULSE


• Second quarter 2020 sales were up 10.3%

• Fastener daily sales declined 22.5% in April, 15.3% in May, and 11.4% in June.

• Demand in traditional business still 10% to 15% below first quarter levels. Some flattening in those trends in the last few weeks.

• Surge in demand for certain products that were critical to governments, health care providers, and certain businesses in handling the pandemic. We estimate the surge sales of PPE, sanitizer, and other products contributed…roughly 25 percentage points of growth in the quarter. These volumes, which drove 116% growth in our safety products and 260% growth in our government and healthcare business, more than offset weak underlying conditions in our traditional business.

• Continuing surge in large safety and janitorial orders, citing scarcity of product and longer lead times.

• Bookings increasing at a double-digit pace over prior year. Pre-COVID, safety and Jan-San products accounted for 10 to 15 percent of sales. Dramatic sales growth in May (150 percent or higher) doubled contribution as a percent of sales.

• Non-safety and non-janitorial product lines saw significant year-over-year declines in March and April (down 25 to 30 percent in core base business) due to the impact of prolonged customer shutdowns and efforts to control COVID-19. May was also down in the mid-20 percent range.

• Most manufacturing end markets are quite soft, and fundamentals are weak. We’re seeing sustained and acute weakness across certain metalworking-centric markets, such as automotive, aerospace, and oil and gas.. Customers are cautious about spending

FQ3 2020 Earnings CallMay 30, 2020

• Sales down 2.9% in Q2 2020 from the year-ago period driven by lower demand due to the COVID-19 pandemic.

• Sales improved sequentially through the quarter on a same workday basis, with April down 13%, followed by increases of 9% and 5% in May and June.

• Seeing continued growth in utility business (U.S. sales up 6% and 8% from Q1 2019 and Q1 2020). Commercial, institutional, and government (CIG) sales seeing positive momentum with U.S. sales up 13% from Q1 2020.

• Reported “all-time record backlog for the legacy WESCO business”

• “Excellent progress” on Anixter integration; generated more than half of Year 1 target of $68 million of run rate synergies

FQ2 2020 Earnings CallJune 30, 2020

Q2 2020 Earnings CallJune 30, 2020

“Having an asset-light, highly variable cost structure is very helpful.”

“In the wake of the mid-March lockdown, we worked with our management teams to

develop specific action plans for a range of scenarios. For those companies that experienced

a downturn in customer demand, management implemented its action plans to generate

meaningful cost reductions and have been able to maintain, and in some cases, grow EBITDA.”

“Overall, our industrial distribution portfolio has shown resiliency through the crisis. The impact

to demand varied depending on the end market, some even seeing outperformance.”

S o u r c e s : S & P C a p i t a l I Q , C o m p a n y f i l i n g s , p u b l i c d a t a , B G L .

COVID-19 PULSE (CONT.)


The COVID downturn is born out in Q2 2020 financial performance with April showing the steepest declines, private equity sponsors said. June and July exhibited signs of a reversal of negative trends with sales beginning to rebound. Agile distribution companies with broad portfolios, diversified end markets, favorable working capital, and strong balance sheets have sustained business performance through the market dislocation.

Performance is highly end market dependent. Select distribution markets are demonstrating resilience, others are seeing a surge in demand, and those tied solely to heavily impacted end markets remain depressed through the crisis.

• General Industrial markets are feeling more of the impact from the overall slowdown in the economy.

• Packaging and Supplies have grown.

• Building Products, particularly residential remodel/replacement, bounced back impressively in June and July. Geographic performance has been mixed with some regions faring better than others, but demand is now more broad-based.

• Businesses servicing the Power Grid have shown strength.

• Growth was reported in Defense, and signs of improvement are surfacing in the Commercial Aerospace market.

“Overall, our industrial distribution portfolio has shown resiliency through the crisis,” offered John Morley, a partner at Incline Equity Partners. “The impact to demand varied depending on the end market, some even seeing outperformance.”

The supply chain is coming to the forefront as sponsors think about diligence. Having a reliable supply chain is essential for distribution with outsourced manufacturing, and that means diversification across suppliers and geographies.

A big challenge for many companies has been making sure they have enough inventory, particularly with some of the supply chain issues arising from COVID. Industry players underscore displacement with China and uncertainty around tariffs, which have presented supply chain challenges. “Having a business model that is able to get product quickly to customers is incredibly important,” said Gregg Taber, a managing partner at Provariant Equity Partners.

Uncertainty around the labor market is raising concerns, particularly as it relates to rising wage rates and being able to attract and retain talent in jobs that fewer people are willing to take on, combined with automation technology that continues to get both better and cheaper, Morley indicated.

COVID has introduced the opportunity to reexamine cost structures and revisit strategic initiatives to weather the storm and enhance future portfolio company performance.

Doug Knoch, a managing director at Shorehill Capital, commented, “When customer activity is down, it is critically important to focus on operating best practices and lean techniques to produce efficiencies on the manufacturing or distribution floor and improve capital efficiency to maintain profitability and operating cash flow.”

Cost management action steps were implemented in the face of potential revenue declines. “When COVID hit, all of our companies developed downside scenarios for resource planning, including phased cost cutting plans,” offered Morley. “Interestingly, some companies found this to be a healthy exercise in determining what they actually did need versus what was kind of “a nice to have.” Knoch said, “In the wake of the mid-March lockdown, we worked with our management teams to develop specific action plans for a range of scenarios. For those companies that experienced a downturn in customer demand, management implemented its action plans to generate meaningful cost reductions and have been able to maintain, and in some cases, grow EBITDA.”

“Having an asset-light, highly variable cost structure is very helpful,” remarked Taber.

“Any time there is a market disruption, those companies best positioned to ‘deliver’ for the customer are going to maintain or increase market share. We encourage management to enhance customer interaction and communication and how we will leverage our capital and resources to address their current and future needs,” Knoch added.

THE NEW NORMAL


The Industrial Distribution market is undergoing a transformation, accelerated by the COVID-19 crisis. In a recent webinar, Modern Distribution Management (MDM) and NetSuite discussed the state of the market and resonating themes in a post-COVID-19 world.

Industry participants speak of a nimbler distribution model that is developing. “A story line is emerging in terms of building a more agile distribution offering model from a much more networked organization,” observed Tom Gale, chief executive officer of MDM. Remote working is an additive component and is redefining the new model. “We are entering into a whole redefinition of what work looks like in wholesale distribution. Key shifts in terms of how customers want to engage are now are driving the change.”

Visibility. Distributors are focused on visibility of their business at a very detailed level, escalating the need for real-time data analytics. Additionally, they are closely examining areas for increased and decreased investment to build sustainable value creation. Agility and transparency are paramount, as distributors look to rebuild sales with existing customers.

Remote workforce. The workforce is shifting to a “hybrid remote” solution over the medium- to longer-term facilitated by technology integration. Remote solutions that enabled access to systems pre-COVID have not been able to scale to meet organizational demand, underscoring the need for increased investment.

Balance sheet strength. Distributors are shoring up balance sheets to weather the storm and invest in growth, particularly in technology and digital capabilities.

Supply chain resiliency. The COVID-19 pandemic has disrupted supply chains globally, evidenced by material shortages and labor constraints, underscoring the need to build supply chain resiliency. Technology is predicted to be a major driver with distributors increasing investment in robotics and automation and warehouse management systems to improve efficiency and reduce labor. Local sourcing is taking on increasing importance as customers reexamine supply chain flows.

“Supply chain integrity…I see that increasing dramatically,” said WESCO CEO John Engel in the company’s FQ1 2020 earnings call. Amid the COVID-19 crisis, the industrial distribution supply chain is “…scrambling for the critical products and supplies that are needed to keep…customers and operations running at this part of the cycle.” Engel highlighted pandemic-driven supply chain and demand disruptions, which are accelerating “…a very comprehensive view of the global supply chain,” calling it a “…more of a risk management matter.”

While demand disruption varies by market vertical, Engel said: “There are some distributors that I think are facing some significantly challenging times and are more distressed than others. I think it comes down to is where are they geographically located and the position of their balance sheets entering the cycle.”

Diversification into adjacent markets. Distributors increasingly are moving from a product-centric to a customer-centric selling strategy and seeking channel adjacencies to increase share of customer wallet. “Channel drift is everywhere” reports MDM, with market expansion

strategic and intentional, underscored by the WESCO/Anixter transaction, a combination that strengthens WESCO’s reach in key utility, electrical distribution, and datacomm markets, and provides a platform for growth in industrial and safety products.

B2B eCommerce. Companies have been forced to accelerate the adoption of digital strategies as sales growth outperforms traditional channels. According to Forrester Research, U.S. B2B eCommerce is projected to grow at a five-year CAGR of 10 percent to reach $1.8 trillion by 2023, accounting for 17 percent of all B2B sales. Amazon Business is continuing its dominance in the industrial B2B eCommerce market with industry analysts predicting sales to exceed $31 billion by 2023, reported DigitalCommerce360. Net revenue increased from $6 billion in 2018 to an estimated $10 billion in 2019—a 67 percent gain.

“In the current environment, there is a clear differentiation

between companies that are struggling and those that have

pivoted and are starting to rebuild the value proposition

with customers and suppliers.”

Tom Gale, CEO

Modern Distribution Management

S o u r c e s : M o d e r n D i s t r i b u t i o n M a n a g e m e n t , N e t S u i t e , D i g i t a l C o m m e r c e 3 6 0 , I n d u s t r y We e k , E q u i t y R e s e a r c h , C o m p a n y f i l i n g s , p u b l i c d a t a .

CONSOLIDATION & M&A


Distributors anticipate competitive pressures to rise dramatically according to the MDM-Baird Distribution Survey, with the big expected to get bigger, driving continued consolidation. Product, end market, and geographic market diversification remain essential to acquisitive growth. Technology is continuing to disrupt traditional distribution models and is predicted to be a driver of M&A as participants look to build digital capabilities.

Headlining industrial distribution activity is the WESCO/Anixter transaction, which is expected to materially impact multiple distribution end markets and is likely to accelerate M&A activity.

WESCO International’s (NYSE:WCC) $5.0 billion purchase of Anixter International valued the business at a 9.3x multiple of EBITDA. The acquisition brings together the No. 2 (Anixter) and No. 3 (WESCO) players, according to MDM’s 2020 Top Electrical Distributors Market Leaders ranking, creating the largest electrical distributor in North America with more than $17 billion of proforma revenue. WESCO surpasses Sonepar USA, with revenue of $11.4 billion, based on 2019 MDM estimates.

Industry participants in a recent MDM Live panel called the deal “market-shifting,” predicting that channel impact will be far-reaching, extending beyond electrical across all distribution channels. MDM expects the utility, electrical distribution, and datacomm channels to be the most impacted by the combination, with the new WESCO the clear market leader in each. “It’s the biggest move I’ve seen in the industry — and most of my career has been in electrical distribution —

and I think these are two really strong players who are getting it together. It’s not just going to affect the electrical channel, but the total channel,” observed panel participant John Gunderson of MDM Analytics. Panel experts highlighted WESCO’s proven track record in channel expansion, predicting the company will look to increase penetration in additional categories such as safety and industrial.

Private equity continues to be active, attracted to the sector’s fragmentation, resilience, and the high free cash flow conversion of business models. Pre-COVID, sponsors continued to actively pursue acquisitions, illustrated by a steady flow of platform and strategic add-on activity. Transactions such as the recently announced White Cap acquisition from HD Supply Holdings (NasdaqGS:HDS) and carve-outs from Genuine Parts Company (NYSE:GPC) illustrate strong investor demand in the current environment.

Harbour Group (Stainless Hose Fittings in 2020), Audax Group (EIS in 2019), and Genstar Capital (OTP Industrial Solutions in 2019) are among other new platform investments to be announced. Rob Rutledge, Managing Director at Genstar, commented on its investment in OTC: “OTC operates at a pivotal point in the manufacturing sector, benefiting suppliers looking to partner with distributors with broader product and service capabilities and customers who are increasingly relying on distributors with strong technical resources.” OTC has already completed a number of add-ons with Laron in January 2020, which followed five acquisitions in 2019, including Keller Electrical in December.

• Serial acquirer SRS Distribution (Building Materials) has completed 13 acquisitions with the backing of Leonard Green & Partners (April 2018 investment), including A.L.L. Roofing Materials in July and Gannon Wholesale in February.

• Jan San distributor Imperial Dade (Bain Capital Private Equity, June 2019 investment) has been active in 2020 with the acquisitions of American Paper and Provisions and Wagner Supply Company, both in January.

• The Cook & Boardman Group (Building Materials), backed by Littlejohn & Co. since October 2018, has completed seven add-ons since the acquisition, including three in 2020: Building Specialties in July, HC Quality Doors in March, and Botzum Bros Hardware in January.

• In Industrial Supply, Blackhawk Industrial Distribution (Snow Phipps Group, September 2018 investment) announced two add-ons in 2020, including J&S Tool in February and Machine Tools Supply in January.

• In Fasteners, Endries International, a portfolio company of MSD Private Capital since December 2018, has announced buys in 2020 including All-West Components & Fasteners in June and Fastener Service Corporation in January.

In August 2020, HD Supply Holdings Inc. (NasdaqGS:HDS) announced an agreement to sell its Construction & Industrial – White Cap business to Clayton, Dubilier & Rice (CD&R) in a transaction valued at $2.9 billion. CDR is acquiring the White Cap, Home Improvement Solutions, and Brafasco businesses in the transaction.

S o u r c e s : M o d e r n D i s t r i b u t i o n M a n a g e m e n t , S & P C a p i t a l I Q , P i t c h B o o k , C o m p a n y f i l i n g s , p u b l i c d a t a .

CONSOLIDATION & M&A (CONT.)


The C&I business reported revenue and EBITDA of $3.0 billion and $327 million for the twelve months ended February 2, 2020. HD Supply stated plans to focus on its Facilities Maintenance business.

CD&R is combining the White Cap business with Construction Supply Group (CSG), a portfolio company of The Sterling Group, which will create a leading North American distributor of concrete accessories and specialty construction and safety products with more than $4.0 billion in revenue. The combined transaction is valued at approximately $4.0 billion. CD&R and The Sterling Group will retain 65 percent and 35 percent equity interests, respectively, post-transaction.

“The CSG platform has collected 16 different regional brands from leading companies such as Border Construction Specialties, Hub Construction Supplies, Stetson Building Products, and Brock White Construction Materials to position themselves as a leading player in their space,” commented John Gunderson, MDM VP Analytics. “CSG has kept their 16 local brand names active, and these two companies will be a combination of the two largest companies in the Concrete, Masonry, and Specialty Contractor supply channel.”

In June 2020, Genuine Parts Company (NYSE: GPC) completed the sale of S.P. Richards Company in two separate transactions. S.P. Richards’ core U.S. operations was sold to an undisclosed investor group. The business distributes general office products, technology products and accessories, office furniture, and JanSan and safety supplies.

Yancey Jones, the chairman of The Supply Room, an investor in the transaction, commented on the investment: “Our group comprises several industry leaders who envision a new, industry-changing alignment and partnership among manufacturers, wholesalers, and resellers. This represents a shift in the traditional industry supply chain that will eliminate redundant costs and help all partners become more competitive.”

S.P. Richards’ Supply Source Enterprises (The Safety Zone and Impact Products) was sold to H.I.G. Capital. The business supplies personal protective equipment and janitorial, safety, hygiene, and sanitation products to janitorial and sanitation supply distributors, safety products resellers, foodservice and food processing distributors, and retailers. H.I.G. stated plans to invest in customer, product line, and service expansion.

Industrial distribution is gaining favor in today’s market. Asset-light business models with flexible cost structures and working capital, combined with market fragmentation, are continuing to drive investor interest.

“Historically, in our experience, investing in distribution was often viewed as less favorable versus manufacturing. That premise has evolved,” said Dan DeSantis, a partner at Provariant Equity Partners. “First, investors appreciate the asset-light structure of a distribution business. Also, distributors can offer differentiated, high value products, and typically to a diverse customer base who require the distributor’s service capabilities. These distributors can have very attractive margins.”

“Having a dependable supply chain, strong lead generation, and high service capability are key value drivers,” added Gregg Taber at Provariant Equity Partners.

“We seek to invest in distribution companies where there is a technical or consultative sale, fragmented customer and vendor bases, and an opportunity deliver a customized solution to customers,” offered Doug Knoch at Shorehill Capital. Knoch added, “Capital preservation is our #1 criteria for new investment opportunities. We believe many distribution businesses are particularly well-positioned to manage operating cash flow and preserving capital during periods of uncertainty or declining demand.”

“I would say on balance we are just as excited about industrial distribution if not a little bit more, with the caveat that we are going to be more focused on end markets. COVID has introduced a new risk environment or scenario which we had not considered previously,” said John Morley at Incline Equity Partners, “If a company serves many different types of customers in terms of end markets, we are going to be even more enthusiastic.”

Sponsors echo a buying opportunity in the current environment. “We think the current environment provides potentially attractive acquisition investment opportunities, particularly with greater uncertainty, and valuation multiples are likely to be more reasonable than they were previously,” observed Knoch.

“There are large pockets of the industrial economy, that while they are “back in business,” they are not at full speed,” cited one sponsor, indicating that the next 6 to 12 months could present a favorable window for investment opportunities.

S o u r c e s : S & P C a p i t a l I Q , P i t c h B o o k , C o m p a n y f i l i n g s , p u b l i c d a t a , B G L .

CONSOLIDATION & M&A (CONT.)

1 0 I N D U S T R I A L D I S T R I B U T I O N

The current dislocation might provide some relief from what buyers call a frothy and overheated M&A market. Sponsors point to recent valuation trends of “top EBITDA” with aggressive addbacks combined with very high purchase price multiples, which some believe may ease. The COVID impact will affect valuation considerations, sponsors said, which may present movement off headline multiples which have been characterized as elevated in recent years.

The M&A pipeline is building, but the lending market may be a wildcard in getting deals financed, according to one sponsor who said, “Nobody knows what the lenders are thinking right now.” “We are hearing that a ton of quality companies are sitting on the sidelines waiting to come to market because the owners of those businesses are waiting for the leverage market to figure out what it’s doing,” said the sponsor.

We anticipate an uptick in M&A activity during the balance of 2020 and through 2021 with a focus on add-on transactions in the current environment. While appetite for deal flow in the private equity and lending communities is strong and growing, size will lean toward smaller transactions given financing requirements and greater asset selectivity.

“At the outset of the COVID-19 crisis, private equity groups turned inward to assess the impact on their existing portfolio companies. Now with more clarity and company-specific strategies in place, most sponsors have returned to the market and are looking in earnest for new investments,” said Kevin Sargent. In high demand are companies that have performed through the dislocation and are positioned to thrive in a COVID-19-adjusted world. Examples include businesses providing essential services, eCommerce, automation solutions, and supply chain management, among others. “Sponsors recognize these companies will attract significant attention and command healthy valuations.”

Financial sponsors with operational resources are also seeking companies that need to restructure their business models to adjust for the lasting impacts of COVID-19. “These businesses can expect more rigorous due diligence focusing on the operational and financial impacts of COVID-19 and how the companies have responded. Also, we expect significant time spent understanding proforma EBITDA adjustments,” Sargent said.

“The most risk averse sponsors will likely shy away from acquiring new platforms and instead focus on finding smaller add-ons for their existing platforms. It will be an interesting time to say the least.”

THE AMAZON IMPACT


The Amazon impact is being felt in the industrial distribution marketplace, industry participants say. While Walmart concentration was the focus 10 to 15 years ago, today attention has shifted to Amazon, said one private equity sponsor. “Amazon continues to expand and is an obvious consideration for many industrial distribution businesses. Other large portals are responding to Amazon and improving their eCommerce capabilities too. Smaller, industrial distributors need a clear strategy to work with, (or compete against), these large portals, as competition for the end customer is only going to get more intense,” offered Dan DeSantis at Provariant Equity Partners. “If a distribution business competes directly with Amazon or other large industrial distributors, then we are likely to pass on the investment opportunity. That business will not win on price or availability against those competitors. We seek to invest in distribution businesses that provide a customized, consultative sale,” commented Doug Knoch at Shorehill Capital.

Industrial distributors are following suit and investing resources to increase share in this fast-growing channel.

Revenue of W.W. Grainger’s (NYSE:GWW) eCommerce platforms Zoro and MonotaRO grew by 19 percent to $1.9 billion in 2019, which compares to total company sales growth of 2.4 percent to $11.5 billion. Zoro and MonotaRO supply MRO products to small- and mid-sized businesses. Grainger added some 1.5 million SKUs to the Zoro offering in 2019, increasing the total SKU count to about 3.5 million products, with the goal to have 10 million within the next three to five years, said CEO Donald Macpherson. MonotaRO has 20 million SKUs.

Industrial and construction supplies distributor Fastenal (NasdaqGS:FAST) reported a 27 percent increase in eCommerce sales in Q1 2020, and in March, eCommerce exceeded 10 percent of company sales for the first time. Adding other internet-based sales such as vending machines brings Fastenal’s online sales to 35 percent of total sales.

“Over time, I see [eCommerce] being 60 percent, 70 percent, and 80 percent of our business, simply because it’s a more efficient means to procure,” Fastenal chief financial officer Holden Lewis, told analysts in the company’s Q1 2020 earnings call. “I believe we’re positioned really well for that.”

The COVID-19 pandemic did not drive a material shift in Fastenal’s eCommerce sales in the first quarter, indicated Fastenal CEO Daniel Florness. “I expect [eCommerce] to grow faster; I don’t know if COVID-19 accelerates that or not,” commented Lewis.

B2B eCommerce in 2019 grew 9 times faster than the growth in all U.S. manufacturing and distributor/wholesaler sales.

$1.3 trillion18.2%

B2B E-C OMMERC E

In 2019, the online sales that took place on B2B eCommerce sites, log-in portals, and marketplaces increased by 18.2 percent to $1.3 trillion.

Source: DigitalCommerce360

S o u r c e s : D i g i t a l C o m m e r c e 3 6 0 , S & P C a p i t a l I Q , P i t c h B o o k , C o m p a n y f i l i n g s , p u b l i c d a t a , B G L .

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Enterprise Value (EV): $340M

Enterprise Value (EV): $1.27BEV/Revenue: .60xEV/EBITDA: 15.6x

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S o u r c e s : S & P C a p i t a l I Q , P i t c h B o o k , E q u i t y R e s e a r c h , p u b l i c d a t a .N o t e s : 1 E V d e f i n e d a s E n t e r p r i s e Va l u e .

D E A LM E T R I C S 1

SELECT RECENT M&A ACTIVITY IN INDUSTRIAL DISTRIBUTION


Acquisition creates ~$17 billion leader in electrical and data communications distribution and supply chain services. The combination achieves significantly increased scale and geographic footprint, positioning the organization to accelerate digitization strategies and provide a platform for growth in emerging markets.

J u n - 2 0

J u n - 2 0 Acquisition expands product offerings and geographic footprint in the Pacific Northwest.

A p r - 2 0 Acquisition expands local presence in Kentucky with stated goal to grow footprint into Indiana and Ohio.

Acquisition strengthens product offering and geographic reach, adding two locations in central Virginia. May Supply is a wholesale and retail distributor of plumbing and water system materials, and kitchen and bath design and fixtures.

A p r - 2 0

M a r - 2 0Acquisition grows presence in the California market where Core & Main has been underrepresented. Core & Main completed five acquisition in 2019, including Erosion Resources & Supply and J&J Municipal Supply in November.

R&B Company

Fe b - 2 0 Acquisition extends custom product capability into the threading space, a new offering for GWS.

M a r - 2 0Acquisition expands presence in the Southwest Pennsylvania market. HC Quality Doors supplies commercial doors and hardware, aluminum store fronts, and installation and maintenance services. HC Quality represents C&B’s seventh add-on since its acquisition by Littlejohn in October 2018.

Certain Assets

M a r - 2 0Acquisition is the culmination of a 12-year collaboration to develop a vending delivery platform serving the industrial and commercial marketplace. In 2019, the platform deployed 105,000 vending devices and generated more than $1.1 billion in sales.


Acquisition establishes growth platform in industrial distribution. Supply Source supplies branded and private label personal protective equipment and janitorial, safety, hygiene, and sanitation products.

J u n - 2 0

J u n - 2 0Investor group acquired business, which distributes general office products, technology products and accessories, office furniture, and JanSan and safety supplies nationally from 44 locations.

UndisclosedInvestors

Core U.S. Operations

Supply Source Enterprises

J u l - 2 0Acquisition grows direct consumer marketing and footprint in West Texas. Battery Joe supplies retail batteries for motorcycles, ATVs, iet skis/wave runners, boats and other marine equipment, lawn & garden equipment, golf carts, RVs, and medical equipment.

Fe b - 2 0Acquisition establishes platform in horticulture and lawn & garden products distribution. Incline Equity Partners stated plans to support growth through strategic add-on acquisitions.

M a y - 2 0 CenterOak formed SurfacePrep in May 2020 as a growth platform in surface enhancement solutions.

TempleAssociates

A p r - 2 0Growth platform acquisition of tech-enabled specialty distributor of outdoor products for home and professional uses. MWE supplies branded and private label aftermarket replacement tracks and tires used on utility machines and compact construction equipment.

Pe n d i n gAcquisition of the Construction & Industrial Business, including the White Cap, Home Improvement Solutions, and Brafasco businesses. The C&I business distributes specialty concrete and construction products.

Construction & Industrial Business

Enterprise Value (EV): $2.9B

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Fe b - 2 0Acquisition broadens BlackHawk’s distribution and manufacturing footprint in the St. Louis and Southern Illinois markets. J&S is a distributor, manufacturer, and reconditioner of cutting tools for industrial manufacturers.


J a n - 2 0 Carbro supplies solid carbide rotary tools, extending Fullerton’s reach into the aerospace market.

J a n - 2 0 Acquisition expands market presence in California. APP is a distributor of food service and janitorial products.

J a n - 2 0 Acquisition grows Midwest footprint and product portfolio with supplier of fasteners and Class C commodities to the OEM market.

J a n - 2 0 Acquisition expands market presence in Texas with the addition of three locations. Wagner distributes janitorial and industrial products.

J a n - 2 0Acquisition expands FBM’s footprint in Louisville, Kentucky. Associated is an independent distributor of drywall, metal framing, and suspended ceiling systems.

AssociatedDrywall Suppliers

J a n - 2 0Acquisition grows Winsupply’s footprint in western Washington adding six locations serving the Greater Puget Sound region. Rosen is a plumbing and heating wholesale distributor.

D e c - 1 9Acquisition expands OTC’s regional footprint into the southwestern United States. Keller Electrical is a provider of industrial electrical services, equipment, components, and supplies.

J a n - 2 0Acquisition significantly expands Midwest footprint adding 21 locations across Minnesota and Wisconsin.

Fe b - 2 0Acquisition diversifies Linc’s portfolio across customers and end markets, growing its combined footprint to 30 states. Illinois-based R.V. Evans distributes fastening and packaging products.

Fe b - 2 0Platform acquisition in industrial distribution. SHF is a distributor of stainless adaptors, fluid power fittings, instrumentation fittings, and valves serving the marine, industrial, chemical, and oil and gas markets.

Fe b - 2 0 Acquisition of plumbing wholesale distributor adds seven locations serving the central and northern Florida markets.

Fe b - 2 0Acquisition adds 16 locations across Illinois, Wisconsin, Minnesota, Michigan, and Indiana. CP specializes in PVF, commercial mechanical, commercial plumbing, industrial, valve automation, engineered products, and hydronics. The company reported revenue of $220 million in 2019.

J a n - 2 0Laron provides mechanical and electric motor repair and engineering services, furthering OTC’s expansion into the Southwest. Capabilities include large-scale machining, fabrication, and repair.

Acquisition extends BlackHawk’s service capabilities across seven facilities in three U.S. states, the UK, and the Philippines. MTS, previously a subsidiary of DNOW, is a value-added distributor in the cutting tool space.

Fe b - 2 0

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D e c - 1 9IEP is a value-added supplier of heavy industrial pumps to customers in the pulp, paper, and ethanol industries. The Minnesota-based company services five surrounding states of the Upper Midwest, including Minnesota, Iowa, North and South Dakota, and Wisconsin.

O c t - 1 9Acquisition extends reach into key end markets, including recreational marine, solar, and general manufacturing, while increasing Wurth’s presence in North America. In the transaction announcement, Wurth highlighted acquisitions as a key driver to achieve its strong growth targets.

O c t - 1 9EIS distributes process materials, production supplies, specialty cable, connectivity, automation, and value-added fabricated parts to the electrical OEM, apparatus repair, and various assembly markets. The company operates 38 branches and four fabrication facilities located in North America.

O c t - 1 9Acquisitions gain entry into the Colorado Springs market, extending footprint in the Pacific Northwest. The Supply Guy distributes tools, fasteners, and other related products. Joe’s Wallboard Supply distributes drywall and accessories, steel framing, insulation, and tools and fasteners.

S e p - 1 9Acquisition adds locations in Tennessee (Chattanooga, Knoxville, and Nashville), Kentucky, and Georgia. IDG is a full-service distributor of Quincy Compressor products and repair services.

S e p - 1 9 Acquisition of MRO distributor serving the Houston metro-area multifamily industry.

S e p - 1 9Acquisition of Southern California-based distributor grows regional presence with the addition of six branches expanding footprint to 23 locations. Reece Limited (ASX:REH) acquired MORSCO in 2018 as a growth platform to consolidate the fragmented plumbing market.

Enterprise Value (EV): $160MEV/EBITDA: 9.76x

O c t - 1 9 Acquisition grows Utah footprint with six locations. Roofers Supply distributes residential and commercial roofing products and accessories.

O c t - 1 9 Acquisition expands product range adding distributor of automotive batteries.

N o v - 1 9Foundational aquisition establishes growth platform in fluid power products distribution.

O c t - 1 9Acquisition broadens product range and footprint in foodservice equipment distribution.

INDUSTRY METRICS


PUBLIC INDUSTRIAL DISTRIBUTION COMPANY OPERATING METRICS

DIVERSIFIEDINDUSTRIALSDISTRIBUTION

BUILDING PRODUCTSDISTRIBUTION

ELECTRICAL &ELECTRONICSDISTRIBUTION

GASESDISTRIBUTION

CHEMICALSDISTRIBUTION

BGL Industrial Distribution indices de�ned on Page 16.SOURCE: S&P Capital IQ.

Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

EBITDA 11.8x 12.2x 11.8x 11.4x 10.3x 10.3x 9.2x 8.9x 10.8x 10.6x 12.1x 12.7x 13.4x 12.0x 12.3x 12.4x 13.1x 13.6x 13.2x 11.2x 11.7x 10.0x 10.0x 9.6x 7.3x 9.7x

Revenue 1.2x 1.1x 1.0x 1.0x 0.9x 0.8x 0.8x 0.8x 0.9x 1.0x 1.0x 1.0x 1.0x 1.0x 1.1x 1.1x 1.1x 1.3x 1.2x 1.0x 1.0x 1.1x 1.0x 1.0x 0.9x 1.1x

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INDUSTRY METRICS


PUBLIC INDUSTRIAL DISTRIBUTION COMPANY OPERATING METRICS

NOTE: (1) As of 8/14/2020.(2) Market Capitalization is the aggregate value of a �rm's outstanding common stock.(3) Enterprise Value is the total value of a �rm (including all debt and equity).Source: S&P Capital IQ.

($ in millions, except per share data) CCuurrrreenntt %% ooff MMaarrkkeett EEnntteerrpprriissee TToottaall DDeebbtt// TTTTMMCCoommppaannyy NNaammee CCoouunnttrryy TTiicckkeerr SSttoocckk PPrriiccee ((11)) 5522WW HHiigghh CCaappiittaalliizzaattiioonn ((22)) VVaalluuee ((33)) RReevveennuuee EEBBIITTDDAA EEBBIITTDDAA RReevveennuuee GGrroossss EEBBIITTDDAAGGEENNEERRAALL IINNDDUUSSTTRRIIAALL

Fastenal Company United States FAST $47.99 98.8% $27,528 $27,987 5.1x 19.7x 0.5x $5,532 46.2% 22.8%

W.W. Grainger, Inc. United States GWW $351.38 98.1% 18,824 20,781 1.8x 14.6x 2.3x 11,632 37.1% 12.3%

Genuine Parts Company United States GPC $94.56 87.1% 13,642 16,653 0.9x 10.1x 2.4x 18,591 32.9% 7.1%

HD Supply Holdings, Inc. United States HDS $41.92 96.7% 6,791 9,247 1.5x 9.9x 2.8x 6,048 39.2% 13.0%

MSC Industrial Direct Co., Inc. United States MSM $67.85 85.0% 3,771 4,459 1.4x 8.9x 2.1x 3,287 42.2% 14.4%

Applied Industrial Technologies, Inc. United States AIT $63.29 89.6% 2,450 3,115 1.0x 10.7x 3.2x 3,246 29.0% 9.0%

Kaman Corporation United States KAMN $47.99 70.3% 1,328 1,491 1.9x 11.7x 3.1x 806 32.3% 15.8%

NOW Inc. United States DNOW $9.01 69.8% 986 786 0.3x 14.2x 1.2x 2,364 19.5% 0.6%

MRC Global Inc. United States MRC $6.11 39.5% 501 1,501 0.5x 11.6x 5.1x 3,104 17.1% 2.9%

DXP Enterprises, Inc. United States DXPE $20.46 46.6% 364 569 0.5x 5.9x 2.9x 1,175 27.6% 6.0%

MMeeddiiaann $$4477..9999 8866..00%% $$33,,111100 $$33,,778877 11..22xx 1111..22xx 22..66xx $$33,,226666 3322..66%% 1100..66%%

MMeeaann $$7755..0066 7788..11%% $$77,,661188 $$88,,665599 11..55xx 1111..77xx 22..66xx $$55,,557788 3322..33%% 1100..44%%

BBUUIILLDDIINNGG PPRROODDUUCCTTSS

Ferguson plc United Kingdom LSE:FERG $93.04 92.3% $20,801 $24,181 1.1x 12.6x 2.2x $22,129 29.4% 8.2%

Watsco, Inc. United States WSO $238.17 98.8% 8,395 8,877 1.8x 19.1x 0.6x 4,831 24.1% 7.6%

HD Supply Holdings, Inc. United States HDS $41.92 96.7% 6,791 9,247 1.5x 9.9x 2.8x 6,048 39.2% 13.0%

Builders FirstSource, Inc. United States BLDR $30.27 94.7% 3,533 5,041 0.7x 8.3x 3.1x 7,477 26.8% 6.8%

BMC Stock Holdings, Inc. United States BMCH $33.83 99.9% 2,269 2,517 0.7x 8.5x 1.7x 3,756 26.1% 6.8%

Beacon Roofing Supply, Inc. United States BECN $31.45 85.5% 2,166 5,358 0.8x 9.7x 6.9x 6,956 24.1% 6.0%

GMS Inc. United States GMS $26.62 82.1% 1,134 2,176 0.7x 6.4x 3.7x 3,241 32.8% 8.8%

Foundation Building Materials, Inc. United States FBM $15.96 72.1% 690 1,280 0.6x 6.4x 3.1x 2,090 30.6% 7.8%

BlueLinx Holdings Inc. United States BXC $18.76 53.0% 177 869 0.3x 11.3x 9.1x $2,653 14.0% 2.5%


MMeeaann $$5588..8899 8866..11%% $$55,,110066 $$66,,661166 00..99xx 1100..22xx 33..77xx $$66,,557766 2277..44%% 77..55%%

EELLEECCTTRRIICCAALL && EELLEECCTTRROONNIICCSS

Arrow Electronics, Inc. United States ARW $75.82 88.4% $5,886 $8,081 0.3x 8.4x 2.4x $27,404 11.3% 3.5%

Rexel S.A. France ENXTPA:RXL $12.81 80.7% 3,878 7,075 0.5x 7.6x 4.1x 14,617 24.8% 4.6%

Avnet, Inc. United States AVT $28.37 62.7% 2,801 4,056 0.2x 8.1x 3.5x 17,634 11.7% 2.3%

WESCO International, Inc. United States WCC $47.36 77.2% 2,369 7,200 0.9x 18.4x 13.0x 8,303 18.8% 4.7%

Archer Materials Limited Australia AXE $0.33 56.4% 74 72 NM NM 0.0x 0 59.5% NA


MMeeaann $$3322..9944 7733..11%% $$33,,000022 $$55,,229977 00..55xx 1100..66xx 44..66xx $$1133,,559922 2255..22%% 33..88%%

GGAASSEESS

Linde plc United Kingdom NYSE:LIN $248.50 98.9% $130,526 $145,465 5.3x 17.4x 2.1x $27,196 42.2% 30.3%

L'Air Liquide S.A. France ENXTPA:AI $165.58 97.4% 78,078 95,746 3.8x 14.2x 2.8x 23,904 64.4% 25.7%

Air Products and Chemicals, Inc. United States APD $289.82 96.7% 64,020 66,502 7.5x 17.7x 2.4x 8,819 34.4% 38.9%


MMeeaann $$223344..6633 9977..66%% $$9900,,887755 $$110022,,557711 55..66xx 1166..44xx 22..55xx $$1199,,997733 4477..00%% 2200..66%%

CCHHEEMMIICCAALLSS

Brenntag AG Germany XTRA:BNR $62.47 94.8% $9,652 $12,052 0.8x 10.2x 2.6x $13,964 22.4% 7.2%

Univar Solutions Inc. United States UNVR $17.70 71.5% 2,992 5,592 0.6x 8.4x 4.7x 8,763 24.0% 6.6%


MMeeaann $$4400..0099 8833..11%% $$66,,332222 $$88,,882222 00..77xx 99..33xx 33..66xx $$1111,,336633 2233..22%% 66..99%%

TTTTMM MMaarrggiinnssEEnntteerrpprriissee VVaalluuee // TTTTMM

INDUSTRIALS

1 7 I N D U S T R I A L S | A B O U T U S

The information contained in this publication was derived from proprietary research conducted by a division or owned or affiliated entity of Brown Gibbons Lang & Company LLC. Any projections, estimates or other forward-looking statements contained in this publication involve numerous and significant subjective assumptions and are subject to risks, contingencies, and uncertainties that are outside of our control, which could and likely will cause actual results to differ materially. We do not expect to, and assume no obligation to update or otherwise revise this publication or any information contained herein. Neither Brown Gibbons Lang & Company LLC, nor any of its officers, directors, employees, affiliates, agents or representatives makes any representation or warranty, expressed or implied, as to the accuracy, completeness or fitness of any information contained in this publication, and no legal liability is assumed or is to be implied against any of the aforementioned with respect thereto. This publication does not constitute the giving of investment advice, nor a part of any advice on investment decisions and nothing in this publication is intended to be a recommendation of a specific security or company, nor is any of the information contained herein intended to constitute an analysis of any company or security reasonably sufficient to form the basis for any investment decision. Brown Gibbons Lang & Company LLC, its affiliates and their officers, directors, employees or affiliates, or members of their families, may have a beneficial interest in the securities of a specific company mentioned in this publication and may purchase or sell such securities in the open market or otherwise. Nothing contained in this publication constitutes an offer to buy or sell or the solicitation of an offer to buy or sell any security.

For questions about content and circulation, please contact editor, Rebecca Dickenscheidt, at [email protected] or 312-513-7476.

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• Building Products

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DIVERSIFIED INDUSTRIALS ENGINEERED EQUIPMENT

• Industrial Equipment & Systems

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AUTOMOTIVE & AFTERMARKET

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INDUSTRIALS


DEDICATED LEADERSHIP

One Magnif icent Mile 980 N. Michigan Avenue Suite 1880 Chicago, IL 60611p. 312.658.1600

One Cleveland Center1375 East 9th StreetSuite 2500 Cleveland, OH 44114p. 216.920.6613

C H I C A G O C L E V E L A N D

One Liberty Place 1650 Market StreetSuite 3600 Philadelphia , PA 19103p. 610.941.2765

P H I L A D E L P H I A

A N D R E W P E T R Y KManaging DirectorGroup Head

• Leads BGL’s Diversified Industrials practice

• Over 25 years of investment banking and corporate finance experience

• Ernst & Young Entrepreneurial Services Group

• Formerly with the Structured Finance Group at KeyBanc Capital Markets

• Prior experience in private equity, corporate finance, and institutional sales

• Non-practicing Certified Public Accountant

• Former President of the ACG Cleveland Chapter

• B.S., Miami University

• M.B.A., Weatherhead School of Management at Case Western Reserve University

PROFESSIONAL EXPERIENCE EDUCATIONEDUCATION

K E V I N S A R G E N TDirector

EDUCATIONEDUCATION

• Over 20 years of M&A and corporate finance experience

• Former investment banker at KeyBanc Capital Markets and research analyst for the Federal Reserve Bank of Cleveland

PROFESSIONAL EXPERIENCE

• B.S., Miami University

INDUSTRIALS


One Magnif icent Mile 980 N. Michigan Avenue Suite 1880 Chicago, IL 60611p. 312.658.1600

One Cleveland Center1375 East 9th StreetSuite 2500 Cleveland, OH 44114p. 216.920.6613

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One Liberty Place 1650 Market StreetSuite 3600 Philadelphia , PA 19103p. 610.941.2765

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