The Toro Company Reports Record Second Quarter Results

• Company achieves record second quarter sales of $745 million, a 6 percent increase, driven by strong demand for professional segment products
• Quarterly net earnings increase 14 percent to a record $1.51 per share
• The Toro Company to celebrate the significant milestone of 100 years in business on July 10, 2014

 BLOOMINGTON, Minn.-- May 22, 2014-- The Toro Company today reported net earnings of $87.1 million, or $1.51 per share, on a net sales increase of 5.8 percent to $745 million for its fiscal 2014 second quarter ended May 2, 2014. In the comparable fiscal 2013 period, the company delivered net earnings of $78.4 million, or $1.32 per share, on net sales of $704.5 million.

“I’m proud of our team’s execution that delivered record sales and earnings for the quarter despite challenging spring weather conditions for the second straight year,” said Michael J. Hoffman, Toro’s chairman and chief executive officer. “Although retail sales of some residential products were hampered by the late spring, we experienced strong growth in our landscape maintenance business.

Contractors who benefited from the robust snow season last winter invested in more new turf equipment during the quarter, favoring our productivity-enhancing mowers. In addition, shipments of golf equipment and irrigation products increased due to channel demand for our innovative new product offerings, including the recently introduced INFINITY™ sprinklers.”

For the first six months, Toro reported net earnings of $113 million, or $1.95 per share, on a net sales increase of 3.6 percent to $1.191 billion. In the comparable fiscal 2013 period, the company posted net earnings of $109.8 million, or $1.85 per share, on net sales of $1.149 billion. Strong retail demand for snow products and landscape maintenance equipment, as well as contributions from its micro irrigation, construction and rental businesses, helped the company to surpass sales and earnings earned in the comparable fiscal 2013 period, which benefited from the Tier 4 diesel engine transition.

“As we approach our Centennial and look ahead to the end of our Destination 2014 journey, we remain encouraged about both our business and prospects for achieving our goals,” said Hoffman. “Our portfolio of innovative products has us well-positioned to drive retail sales and strengthen our market share.

We will keep a watchful eye on retail demand and field inventories across our businesses and make any necessary adjustments. In addition, we will benefit from increased pre-season snow thrower shipments, primarily in the fourth quarter, that are needed to replenish inventories diminished by strong customer demand last winter.

As we strive to achieve our operating earnings goal, we will continue to pursue productivity improvements to leverage expenses and expand margins. While focused on things within our control, we remain mindful that Mother Nature may not deliver favorable summer growing conditions again this year or economic conditions may change, either of which could create potential challenges for our businesses and customers.”

The company continues to expect revenue growth for fiscal 2014 to be about 5 to 6 percent, and net earnings per share to be about $2.90 to $2.95. For the third quarter, the company expects net earnings per share to be about $0.82.

Segment Results

Professional

Professional segment net sales for the second quarter totaled $528.6 million, up 6.5 percent from the comparable fiscal 2013 period. Sales of landscape maintenance equipment increased on strong retail demand, including for our zero turn radius mowers.

Golf equipment and irrigation product sales were up due to channel optimism and demand for new product offerings, including the INFINITY™ sprinklers and Multi Pro® advanced spraying system. Global micro irrigation sales increased with continued demand for more efficient solutions for agriculture and construction and rental equipment sales grew on channel demand for Toro® branded products.

Slightly offsetting these increases were lower sales of professional products in international markets. For the first six months, professional segment net sales were $824 million, essentially flat with the comparable fiscal 2013 period. Sales benefited from strong retail demand for landscape maintenance equipment and increased demand for micro irrigation, construction and rental products, but were offset by sales in the first quarter of last fiscal year that benefited from the Tier 4 diesel engine transition and were not repeated this year.

Professional segment earnings for the second quarter totaled $122.4 million, up 9 percent from the comparable fiscal 2013 period. For the first six months, professional segment earnings were $169.8 million, down 1.8 percent from the comparable fiscal 2013 period.

Residential

Residential segment net sales for the second quarter totaled $210.4 million, up 4.5 percent from the comparable fiscal 2013 period. Sales increased due to stronger domestic retail demand for our residential zero turn mowing products, as customers continued to transition to this mowing platform.

International demand for walk power mowers, as well as domestic demand for electric blowers and trimmers, also benefited sales for the quarter. Offsetting these increases were lower shipments of domestic walk power mowers and decreased sales in Australia due to unfavorable currency exchange and weather conditions.

For the first six months, residential segment net sales were $357.9 million, up 11 percent from the comparable fiscal 2013 period. Sales for the period increased on strong retail demand for our snow products, primarily in the first quarter, due to significant snowfall across key North American markets, as well as increased channel and retail demand for residential zero turn mowing products and international demand for walk power mowers.

Residential segment earnings for the second quarter totaled $23.8 million, down 3.5 percent from the comparable fiscal 2013 period. For the first six months, residential segment earnings were $42 million, up 13.9 percent from the comparable fiscal 2013 period.

Operating Results

Gross margin for the second quarter was 35.5 percent, a decrease of 30 basis points compared to the same fiscal 2013 period, primarily due to higher commodity costs and unfavorable currency exchange rates, somewhat offset by realized pricing. For the first six months, gross margin was 35.9 percent, a decrease of 50 basis points, primarily due to higher commodity costs, segment mix and unfavorable currency exchange rates, somewhat offset by realized pricing.

Selling, general and administrative (SG&A) expense as a percent of sales for the second quarter was 17.9 percent, a decrease of 120 basis points compared to the same fiscal 2013 period. For the first six months, SG&A expense as a percent of sales was 21.5 percent, a decrease of 60 basis points. For both periods, the decrease primarily was due to lower administrative expense, including health care costs, somewhat offset by higher incentive expense.

Second quarter operating earnings as a percent of sales improved 90 basis points to 17.6 percent compared to the same fiscal 2013 period. For the first six months, operating earnings as a percentage of sales improved 10 basis points to 14.4 percent.

The effective tax rate for the second quarter was 32.6 percent, which is the same as the effective tax rate for the comparable fiscal 2013 period. For the first six months, the effective tax rate increased to 32.7 percent from 31.3 percent in the comparable fiscal 2013 period when the company benefited from the retroactive reinstatement of the Federal Research and Engineering Tax Credit in the first quarter.

Accounts receivable at the end of the second quarter totaled $313.5 million, up 1.9 percent from the same fiscal 2013 period. Net inventories were $302.5 million, down 2.4 percent from the same period last year. Trade payables were $236 million, up 15.8 percent compared to the same fiscal 2013 period, primarily due to recent component and commodity purchases in anticipation of product demand in the second half of our fiscal year.

About The Toro Company

The Toro Company (NYSE: TTC) is a leading worldwide provider of innovative turf, landscape, rental and construction equipment, and irrigation and outdoor lighting solutions. With sales of more than $2 billion in fiscal 2013, Toro’s global presence extends to more than 90 countries through strong relationships built on integrity and trust, constant innovation and a commitment to helping customers enrich the beauty, productivity and sustainability of the land. Since 1914, the company has built a tradition of excellence around a number of strong brands to help customers care for golf courses, sports fields, public green spaces, commercial and residential properties and agricultural fields.

After Decades of Exodus, Companies Returning Production to the U.S. (Generac)

May 13 -- In 2001, Generac Power Systems joined the wave of American companies shifting production to China. The move wiped out 400 jobs in southeast Wisconsin, but few could argue with management's logic: Chinese companies were offering to make a key component for $100 per unit less than the cost of producing it in the U.S.

Now, however, Generac has brought manufacturing of that component back to its Whitewater plant — creating about 80 jobs in this town of about ‎14,500 people.

The move is part of a sea change in American manufacturing: After three decades of an exodus of production to China and other low-wage countries, companies have sharply curtailed moves abroad. Some, like Generac, have begun to return manufacturing to U.S. shores.

Although no one keeps precise statistics, the retreat from offshoring is clear from various sources, including federal data on assistance to workers hurt by overseas moves.

U.S. factory payrolls have grown for four straight years, with gains totaling about 650,000 jobs. That's a small fraction of the 6 million lost in the previous decade, but it still marks the biggest and longest stretch of manufacturing increases in a quarter century.

Harry Moser, an MIT-trained engineer who tracks the inflow of jobs, estimates that last year marked the first time since the offshoring trend began that factory jobs returning to the U.S. matched the number lost, at about 40,000 each.

"Offshoring and 're-shoring' were roughly in balance — I call that victory," said Moser, who traces his interest in manufacturing to his parents' work at the long-closed Singer Sewing Machine plant in New Jersey. (He once worked there too.)

He now runs the Reshoring Initiative, a Chicago nonprofit that works with companies to bring manufacturing jobs back to the U.S.

Several factors lie behind the change.

Over the last decade, Chinese labor and transportation costs have jumped while U.S. wages have stagnated. The average hourly pay for non-supervisory manufacturing workers in the U.S. has barely kept up with inflation, rising on average just 2.3% over the last 10 years and by only half that since 2010, according to Labor Department figures.

Factoring in the rise in value of its currency, China's base wage, measured in dollars, has risen 17% a year, according to an April report by Boston Consulting Group.

Manufacturing also has become more automated, further reducing labor's weight in the cost equation.

The boom in natural gas production in the U.S., largely driven by fracking and other new drilling techniques, has led to a 25% decrease in gas prices in the U.S., contrasted with a 138% increase in China, Boston Consulting found.

And the rise of online commerce has made local control of supply chains more important, especially because many U.S. manufacturers report growing problems with quality control of goods made in China.

"We got to the point where everything we were bringing in had to be inspected," says Lonnie Kane, president of Los Angeles apparel maker Karen Kane, noting that his company used to check just 10% of goods from China.

"Now prices are escalating, quality is dropping and deliveries are being delayed," he says. In the last three years, Kane has shifted 80% of his production from China back home.

Expansion in the domestic apparel industry remains unusual because the labor-intensive work can be done in many low-wage countries. But in other industries, a growing number of domestic and foreign companies — including General Electric, Caterpillar, Toyota and Siemens — are opting to build or expand their facilities in the U.S., particularly in the Southeast, where labor costs are relatively low.

The main reason companies relocate out of California to places like Texas is the average home price in Dallas is $192,000 versus the average home price in Los Angeles which is over $500,000. The difference in taxes in minor compared to a corporations ability to hire the same worker in Texas who...

For the first time, some small contract manufacturers in the U.S. are beating bigger rivals in Asia, the center of global industrial production.

At Zentech Manufacturing in Baltimore, the company's president, Matt Turpin, recalls his skepticism when salesmen told him two years ago about their efforts to land a contract making 5,000 to 10,000 wireless printers. He was sure an overseas competitor would get the work.

"I don't know why you're wasting your time chasing that business," he says he told the sales force.

Zentech ultimately won the contract, and Turpin says the company added at least five full-time employees to his shop, where the front office window is draped with a large American flag.

William Davidson, a test technician at Zentech, now earns $17.50 an hour working on those printers and other company products. Before getting hired at Zentech three years ago, Davidson, 62, had been unemployed for 18 months. His previous employer, a Delaware repairer of cable boxes, had moved its operations to Mexico.

"The worst part of it was we had to help them pack things up for the move," he says.

Here in Wisconsin, a similar story has played out with Generac.

Aaron Jagdfeld, the company's chief executive, was the comptroller at the time of the offshoring. Jagdfeld, now 42, had grown up in the region and graduated from the University of Wisconsin at Whitewater with an accounting degree.

The offshoring "didn't feel right" because of the families affected by layoffs, he said, but the company needed to make the move to remain competitive.

Generac grew rapidly over most of the rest of the decade. Its sales rose to $1.5 billion last year, and it now has about 3,300 workers, including 720 in Whitewater, its largest plant. But the last decade also saw costs surge in China while they increased little in the U.S.

What began as a $100 gap in the cost of producing an alternator narrowed as the Chinese yuan jumped in value and Chinese wages and other costs soared.

The tipping point came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant. The company can now produce an alternator with one worker in the time it took four workers in China.

Although a small price gap remains, Jagdfeld figured that having greater control over delivery would make up the difference.

More frequent power outages —from Hurricane Katrina and Superstorm Sandy, not to mention this past winter's ice storm in the South — have brought bursts of orders for portable generators, challenging the company's inventory and delivery capabilities.

"We were constantly fighting a battle for what product was needed, and we were always guessing wrong," Jagdfeld said. "We kept saying, 'If we could just control the alternator, we'd have a better opportunity to respond more effectively.'"

Those sorts of calculations lead experts who have studied reshoring to see potential — particularly for makers of appliances, transportation equipment, electronics and machinery — to return jobs to the U.S.

Led by these industries, 21% of large manufacturers in the U.S. said they were already returning production or would do so over the next two years, according to a survey Boston Consulting conducted last summer.

"In 2012, companies told me 'you're crazy,'" said Hal Sirkin, a senior partner at the consulting group's office in Chicago. "Now they're doing it — maybe not all the way, but they're testing the waters."

www.latimes.com/business        Don Lee

Blount Announces First Quarter 2014 Results

• First quarter 2014 sales of $232.0 million, flat compared to 2013
• First quarter 2014 Adjusted EBITDA increased 8 percent to $34.6 million
• LTM Adjusted EBITDA of $126.0 million
• 2014 full-year sales and profit guidance maintained

PORTLAND, Ore., May 9, 2014 -- Blount International, Inc. today announced results for the first quarter ended March 31, 2014.

Results for the Quarter Ended March 31, 2014

Sales in the first quarter were $232.0 million, which were consistent with the first quarter of 2013. Operating income for the first quarter of 2014, which includes $1.5 million facility closure and restructuring expense, was $20.8 million compared to $19.1 million in the prior year. First quarter net income was $10.6 million, or $0.21 per diluted share, compared to $9.3 million, or $0.19 per diluted share, in the first quarter of 2013.

"We performed well during the first quarter, and we are pleased with our results. Market demand was generally flat to last year, but the profit improvement initiatives we have implemented over the past year are taking hold," stated Josh Collins, Blount's Chairman and CEO. "We remain cautiously optimistic about the remainder of 2014."

Mr. Collins continued, "Our margins improved significantly as a result of our continuous improvement program and our restructuring efforts in 2013. We are committed to further enhancing our operations through our Operational Excellence program and other targeted cost-reduction initiatives. We remain focused on managing for the long-term while balancing our business and investments with current market conditions."

Segment Results

Blount operates primarily in two business segments -- the Forestry, Lawn, and Garden ("FLAG") segment and the Farm, Ranch, and Agriculture ("FRAG") segment. The Company reports separate results for the FLAG and FRAG segments. Blount's Concrete Cutting and Finishing ("CCF") business is included in "Corporate and Other."

Forestry, Lawn, and Garden

The FLAG segment reported first quarter 2014 sales of $165.2 million, which was slightly higher than the first quarter of 2013. When excluding the impact of foreign exchange rate changes, first quarter 2014 sales increased nearly one percent. Sales volume increases were offset by the impact of currency and a reduction in average prices due to targeted promotions.

First quarter 2014 sales increased approximately five percent in Europe and Russia while North American sales were approximately four percent lower than first quarter 2013.

Segment backlog was $156.8 million at March 31, 2014, a decrease of nearly four percent from $162.8 million on March 31, 2013. The reduction in backlog relates primarily to the timing of customer order intake at the end of the first quarter.

Segment contribution to operating income and Earnings Before Interest, Taxes, Depreciation, Amortization and certain charges ("Adjusted EBITDA") was $28.1 million and $34.6 million (after $7.2 million of allocated shared services expenses), respectively, for the first quarter of 2014.

Segment contribution to operating income and Adjusted EBITDA improved by 14.3 percent and 9.5 percent, respectively, for the first quarter of 2014 versus 2013.

Higher sales volumes, an improved cost profile, and the favorable impact of foreign exchange increased the segment's contribution to operating income and Adjusted EBITDA. Targeted sales promotions partially offset these positive factors.

The segment's cost profile improved partially due to the closure of the higher cost FLAG manufacturing plant in Portland, Oregon announced in mid-2013 along with higher plant utilization rates of 88 percent in the first quarter of 2014 compared to 85 percent in the first quarter of 2013.

Farm, Ranch, and Agriculture

The FRAG segment reported first quarter 2014 sales of $59.9 million, a decrease of $0.4 million from the first quarter of 2013 mainly due to reduced sales volumes, partially offset by stronger average pricing. Sales volumes were negatively impacted primarily by reduced volume of agricultural blade sales in Europe.

Segment backlog was $22.9 million at March 31, 2014, compared to $16.6 million at March 31, 2013. The increased backlog reflects improved demand for log splitters and tractor attachments in the segment.

The FRAG segment had $3.1 million of Adjusted EBITDA in the first quarter of 2014. FRAG segment contribution to operating income was negative $0.9 million after $1.2 million of depreciation expense, $2.7 million of non-cash amortization of acquired intangible assets, and $2.0 million of allocated shared services expenses.

Average selling prices improved in the first quarter of 2014 compared to the first quarter of 2013 as a result of a routine annual price increases implemented over the last twelve months. However, the price improvement was more than offset by increased steel costs and higher component and conversion costs.

Conversion costs were unfavorable compared to the first quarter of 2013 as a result of temporary equipment outages and marginally higher labor costs as increased production volumes drove overtime and training expense for new personnel.

Corporate and Other

Corporate and Other generated net expense of $6.4 million in the first quarter of 2014 compared to net expense of $4.3 million in the first quarter of 2013. First quarter 2014 Corporate and Other net expense increased primarily due to $1.5 million of facility closure costs, which is related to the closure of the Company's Querétaro, Mexico blade plant that was announced on February 10, 2014 and wrapping up the closure of our Milwaukie, Oregon forestry plant.

Additionally, the remainder of the increase in corporate and other net expense is attributable to slightly lower sales volumes in the CCF business and acquisition accounting expense recorded in the first quarter of 2014.

Net Income

First quarter 2014 net income increased due to higher overall operating income in the first quarter of 2014 compared to 2013. The positive impact of higher operating income was partially offset by higher interest expense in the first quarter of 2014 versus the first quarter of 2013. Net interest expense increased $0.2 million to $4.5 million in the first quarter of 2014 as a result of higher average interest rates on borrowings. Other income declined as a result of foreign exchange impacts on non-operating assets.

Cash Flow and Debt

As of March 31, 2014, the Company had net debt of $403.2 million, an increase of $8.0 million from December 31, 2013 and a decrease of $76.8 million compared to March 31, 2013. The increase in net debt since the end of the fourth quarter of 2013 was primarily the result of free cash use of $5.6 million combined with the impact of acquiring the Pentruder(R) distribution business in the first quarter of 2014.

The free cash use in the first quarter of 2014 was due to an increase in working capital partially offset by improved operating results. Capital spending was approximately flat from year to year. Working capital increased due to an increase in accounts receivable partially offset by reduced inventory and increased short-term operating liabilities.

The Company defines free cash flow as cash flows from operating activities less net capital spending. The ratio of net debt to last-twelve-months ("LTM") Adjusted EBITDA was 3.3x as of March 31, 2014, which is consistent with December 31, 2013.

2014 Financial Outlook

The Company's fiscal year 2014 outlook remains unchanged. Sales are expected to range between $925 million and $950 million, Adjusted EBITDA between $130 million and $135 million, and operating income to range between $75 million and $80 million.

Our expectation for sales continues to assume growth in FLAG segment sales of between two and four percent and growth in FRAG segment sales of between six and eight percent, both compared to estimated full year 2013 levels.

In 2014, operating income is expected to experience benefit from foreign currency exchange rates of between $2 million and $3 million, and steel costs are expected to have a $2 million to $3 million unfavorable impact for the year compared to 2013.

The 2014 operating income outlook includes non-cash charges of approximately $12 million related to acquisition accounting. Free cash flow in 2014 is expected to range between $32 million and $38 million, after approximately $40 million to $45 million of capital expenditures.

Net interest expense is expected to be between $17 million and $18 million in 2014, and the effective income tax rate for continuing operations is expected to be between 35 percent and 38 percent in 2014.

Blount is a global manufacturer and marketer of replacement parts, equipment, and accessories for consumers and professionals operating primarily in two market segments: Forestry, Lawn, and Garden ("FLAG"); and Farm, Ranch, and Agriculture ("FRAG"). 

Blount also sells products in the construction markets and is the market leader in manufacturing saw chain and guide bars for chain saws. Blount has a global manufacturing and distribution footprint and sells its products in more than 115 countries around the world. Blount markets its products primarily under the OREGON(R) , Carlton(R) , Woods(R) , TISCO, SpeeCo(R) , ICS(R) and Pentruder(R) brands.

FedEx Says Size Matters As All Ground Packages Will Now Be Priced According to Size

May 8 -- FedEx Corp.  is changing the way it charges to ship bulky packages, jolting e-commerce companies with price increases for delivering items as diverse as diapers, shoes and paper towels.

Instead of charging by weight alone, all ground packages will now be priced according to size. In effect, that will mean a price increase on more than a third of its U.S. ground shipments.

The big question now is whether United Parcel Service Inc.  will follow the pricing move. Many analysts think it will. The two companies have historically matched price increases rather than seize the chance for a competitive advantage.

If so, that would likely greatly affect bulky but lighter-weight items like toilet paper and diapers, which many people have delivered on a regular basis, as well as Zappos.com shoes, which ship for free, including free returns. Indeed, shoe shoppers are encouraged to buy multiple pairs, keep what fits and return the rest. Avid Web shoppers do the same with sweaters, dresses, and jackets at retailers like J. Crew, Banana Republic, and Macy's.

Last Friday evening, at the bottom of a FedEx announcement mostly about higher fuel surcharges, the company added—in a little-noticed coda—that it planned to apply "dimensional weight pricing" to all ground shipments starting in January. Prior to this, only the biggest ground packages—measuring three cubic feet or more—were priced this way, with customers charged the higher amount by either volume or weight. All air express packages are already priced by size plus weight.

"The joy ride is over," said Satish Jindel, president of ShipMatrix Inc., a developer of shipment-tracking and analysis software.

Under the new rate system, the price of shipping an eight-pound, 32-pack of toilet paper between 601 and 1,000 miles would increase 37% to $13.81.

The change in pricing could dramatically affect either online shoppers or retailers or both. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.

Shipping is already one of the biggest and most rapidly increasing costs for big online retailers, a factor cited in Amazon.com, AMZN +0.41% Inc.'s recent testing of its own delivery service.

UPS said it reviews pricing on an annual basis. "We continually evaluate our policies to remain competitive in the industry. Our focus is on being fairly compensated for the value we provide to our customers," a spokesman said.

Retailers would likely hesitate to increase what they charge for shipping.

Surveys show that shoppers abandon their online purchases at checkout when they see a big shipping fee. Instead, retailers may charge more for the merchandise.

Hardest hit by the change would be shipments of some of the often-replenished items increasingly bought online—sometimes by subscription—to avoid a trip to the store.

FedEx declined to estimate how many packages might be affected or by how much.

"The primary concern for us is that we want to make sure we're getting an appropriate price for the value of service we're providing," said spokesman Jess Bunn.

Both Zappos and Diapers.com are owned by Amazon, which generally uses UPS's ground service, among other delivery companies. Amazon's popular Subscribe & Save program sends customers regularly depleted household items like paper towels, dog food and cereal, with free shipping.

Amazon and Zappos didn't respond to requests for comment.

For the delivery companies, it comes down to efficiency. Lightweight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don't always match the box size to what is inside.

The biggest companies, like Wal-Mart Stores Inc.,  Walgreen Co. and Saks Fifth Avenue, will likely attempt to grandfather in current pricing rules when they renegotiate contracts.

Wal-Mart, a large FedEx Ground customer, declined to share the terms of its specific agreement and said it has "a long-term, collaborative relationship with Fedex." Wal-Mart's global internet sales grew even faster than Amazon's in 2013, rising 30% to $10 billion.

Smaller retailers will have less room for negotiation and so will be more likely to have to pass along the price increase in some way to customers.

Bill Ashton, vice president of operations for Modnique.com, which sells apparel, shoes and handbags online, estimates that the shift to dimensional pricing will work out to a 30% increase on many items shipped by smaller retailers.

Retailers currently have more incentive to stuff as many items into a box as possible because they receive price breaks on weight. While a four-pound box costs more than a two pound box, it doesn't cost twice as much.

Companies like Zappos use elaborate algorithms to determine exactly how many items should ship in a box to minimize the cost.

Higher shipping costs may not deter online retailers from selling diapers and toilet paper in bulk because those recurring purchases keep shoppers coming back to their websites, increasing the chances they will buy other things, too.

UPS will follow suit within a few months, analysts believe.

"It's almost a foregone conclusion," said Rob Martinez, president of Shipware, a shipping strategy consultant and auditor.

"They have a history of hitting each other like prize fighters back and forth."

Laura Stevens       www.online.wsj.com/news

Amazon's $8 Trillion B2B Bet

May 26 -- Forget the delivery drones and TV deals. Jeff Bezos’ stealthy foray into the unsexy world of B2B distribution is likely his most disruptive move yet — and it has an $8 trillion swath of the economy running scared.

In recent months global Internet retail behemoth Amazon.com has green-lit six new original TV shows, announced an online streaming deal with HBO and tested same-day grocery delivery on the West Coast.

Up next? Possibly a smartphone. And, if billionaire CEO Jeff Bezos has his way, packages dropped off by unmanned drone.

But there’s one thing Bezos hasn’t been talking about: AmazonSupply, an e-commerce site targeting the unsexy but hugely lucrative wholesale and distribution market. His silence is especially surprising as the site has the potential to turn into the most important development in the company’s history since it started selling books. Yet Bezos has uttered only 28 words in public–ever–about AmazonSupply, describing it in passing as “an incredible category” during the company’s 2012 annual meeting.

“You can get industrial motors, flanges, valves, fasteners, materials, janitorial supplies,” he said. And that was it, before moving on to proudly tell shareholders that the world’s largest gummy bear, a 72-ounce sugary beast, was for sale on Amazon.com. Whether the lack of hype is a deliberate part of a stealthy rollout or Bezos just thinks selling rubber gloves to dentists lacks p.r. value, wholesalers are taking the threat seriously, and it’s easy to see why.

While U.S. retailers took in more than $4 trillion in revenues according to the most recent U.S. Census, wholesalers brought in $7.2 trillion selling everything from Bunsen burners to toner cartridges. Even better for Amazon: Of America’s 35,000 distributors, almost all are regional, family-run companies pulling in annual revenues of $50 million or less, and only 160 have more than $1 billion in sales annually. “The industry is largely ignored,” says Dirk Van Dongen, president of the National Association of Wholesaler-Distributors. “You can go your whole life without having a single thought about it.”

Amazon, meanwhile, booked more than $74 billion in revenues last year, selling everything from beds to server time with a virus-like strategy that values opportunity and disruption above short-term profitability. Almost identical to the company’s flagship website, albeit without ads for its ubiquitous Kindle e-readers, AmazonSupply.com launched quietly in April 2012 with 500,000 items for sale.

Two years later, with the site still officially in beta, that list of products has grown to more than 2.2 million–covering 17 product categories from tools and home improvement to janitorial supplies, stocking everything from 12-packs of Hawaiian Punch to schedule-40 stainless steel pipe. If 2.2 million products doesn’t sound like a staggering figure on its own, consider that the average wholesaler sells closer to 50,000 products online.

“The question is not whether AmazonSupply will be a threat,” says Richard Balaban, who has studied the site for management consulting firm Oliver Wyman. “Rather it is which customers, purchase occasions and categories will be attacked first.”

***

AmazonSupply’s genesis was in 2005, with Amazon’s acquisition of SmallParts.com, an online emporium that billed itself as “the hardware store for research & development.” The purchase price was never disclosed. “It was an opportunity for us to learn more about our business customers,” says Vice President of B2B and AmazonSupply Prentis Wilson. “As we evolved our selection, we launched AmazonSupply.”

He won’t say what Amazon is spending–and likely losing–on the venture, but overall the company, despite all those billions in revenue, estimates an operating loss of up to $455 million next quarter. This aversion to profits may be starting to turn off investors (the stock is down 9% since the announcement in April, though the market capitalization remains a staggering $142 billion), but it’s helped build a 125,000-employee logistics and data powerhouse that was able to process orders on 36.8 million items during peak Cyber Monday shopping last Christmas season–a staggering 426 items per second to 185 countries.

As impressive: The company earned the top score among 230 of America’s biggest companies in the University of Michigan’s annual customer service satisfaction index and has placed in the top ten for years. “We are comfortable planting seeds and waiting for them to grow into trees,” Bezos told FORBES for a 2012 cover story. “We don’t focus on the optics of the next quarter; we focus on what is going to be good for customers.”

The development of Amazon Web Services, which Bezos launched in 2006, says a lot about Amazon’s likely ambitions for AmazonSupply. Having developed the computer infrastructure needed to run Amazon.com, Bezos set up a B2B division that allowed other companies to use Amazon’s excess computing power. Web Services now dominates the cloud computing industry, hosting customers from NASA to Pfizer and ringing up an estimated $3.2 billion in revenue last year, thanks to an even faster growth rate than Amazon’s main storefront.

“If you think about where they’re making their money right now, it’s not in shipping you and me Crest toothpaste,” says Bruce Cohen, a senior partner at management consultancy Kurt Salmon. “It’s in cloud computing. It’s these vast servers. They’re not making money on the sexy part of the business–streaming video or delivering us boxes of cool stuff.”

Wilson is Bezos’ wholesale czar. The chiseled, dark-haired 43-year-old joined Amazon in 2011 from Cisco Systems, where he was responsible for sourcing materials and overseeing suppliers at the networking and data center powerhouse. Now based in Seattle, Wilson oversees industrial and scientific supplies across the whole of Amazon, as well as this new business. He wouldn’t disclose how many Amazon employees are currently working solely for AmazonSupply, but scan the division’s recruiting website and you’ll see how lofty the e-tailer’s ambitions are for its wholesale business. Under the heading “Our goal is to supply everything needed to rebuild civilization,” some 40 jobs are listed, including software-development engineers and “brand specialists” who’ll be expected to become experts on the tools of the trade for one particular manufacturer, be it a maker of plumbing or office supplies.

It’s definitely on its way. Most of the scientific and industrial equipment AmazonSupply lists for sale, for instance–items like centrifuges, micrometers and air cylinders–would otherwise be available only from specialist distributors. But few can compete with its vast inventory, not to mention the easy-to-navigate website and 24-hour delivery, all longstanding hallmarks of Amazon’s appeal. “If you have a lab scientist, someone with a Ph.D., trying to find the next cancer drug in a capital-intensive lab, any time they spend trying to find a new product is expensive,” Wilson says.

Nor can small fry compete with AmazonSupply’s infrastructure and deep cache of consumer data. The company won’t disclose any details, saying only that AmazonSupply “utilizes all of Amazon’s fulfillment and logistics capabilities.” In the U.S. that’s a network of 40 U.S. fulfillment centers–and growing. And while retailers like Home Depot and Lowes (and Amazon in its earlier days) are loath to stock products that don’t sell quickly, to gain competitive advantage AmazonSupply, with its vast financial resources, has been more likely to take on inventory that won’t necessarily fly out the door. Industry experts estimate the company stocks more than 50% of what it offers on the site at any given time. “I encourage my clients to become third-party fulfillers to AmazonSupply,” says Dick Friedman, a consultant who helps traditional distributors develop strategies to compete with AmazonSupply. “Why not? The only trouble is if it sells well enough, AmazonSupply will stock it and cut the little guy out of the picture.”

“The challenge of distribution is to have orders big enough to make money,” says Scott Benfield, a B2B consultant who’s been following the wholesale and distribution game for 20 years. “It’s a very thin-margin business: 2% to 4% for traditional businesses in this sector.” Amazon’s scale is ideally suited to compete in this kind of high-volume, low-margin operation. A Boston Consulting Group study found AmazonSupply’s prices to be about 25% lower than the rest of the industry on common items.

To woo manufacturers the company has also built in the ability to show off products in Web videos, post downloadable CAD drawings and draw from user reviews. Buyers, from 3-D printing specialists to auto mechanics, avoid the human interactions–which can either be pesky or irreplaceable, depending on the rep–that remain a feature of most wholesale and distribution deals.

“It’s a very consistent message, versus 500 different sales reps,” says Wilson. He added that manufacturers have reported an uptick in sales of products that were not quite as popular before. “Just getting the product available on Amazon, people know it exists,” he says. “We aren’t afraid to put inventory on an item. That has a lot of value. It builds confidence.”

***

If there’s one company standing in Amazon’s way, it’s Chicago-based industrial supplies giant W.W. Grainger. With $9.4 billion in revenues it’s definitely the business to beat, controlling an estimated 6% of the entire B2B market. With a robust e-commerce operation dating back to 1995, its site is slick and user-friendly; it offers 24-hour delivery on most items, user reviews and suggestions based on your previous purchases and searches.

Grainger has been selling tools for maintenance and repair since 1927; since then business has grown to more than 700 regional sales branches and 33 distribution centers. It still makes much of its money offline. In 2013 its e-commerce sales surpassed $3 billion, representing 33% of the company’s total revenues.

Grainger and some of its specialty competitors – Cardinal Health, for example, in the area of medical supply–are well-established in the back offices of corporations and hospitals, where the business is deeply rooted in their processes. At the Nebraska Medical Center, for example, Cardinal picked up the initial tab for $4.5 million in inventory, freeing up financial resources for the hospital. Then it took over the center’s entire supply chain, from loading-dock workers and the accounts-payable department to administering all contracts with suppliers and tracking distribution from the truck to the bedside. Cardinal bills the hospital based on usage. “Companies have written over processes to them,” says Cohen. “Just as some organizations outsource their entire IT departments.”

But just a couple years into the game, AmazonSupply has already beaten Grainger in sheer volume of online inventory, with its 2.2 million products for sale dwarfing the latter’s 1.2 million. AmazonSupply may cut into Grainger’s high-volume, low-margin business if it hasn’t already. It’ll sell truckloads of beakers, for example, or copy paper. These are what the industry calls “replenishment items,” and they’re the lowest hanging fruit for Amazon. A pound of Gorilla Glue high-strength superglue costs $159 on AmazonSupply. On Grainger’s site the same bottle is priced at $173.25.

Grainger’s take on AmazonSupply?  CEO Jim Ryan declined requests for an interview, but a spokesperson says: “While we don’t comment specifically on other companies, it’s important to note that Grainger’s multichannel business model and our target customers differ significantly from how online-only retailers serve the market.”

Not everyone buys Grainger’s nonchalance. “They’re planning, and they don’t want Amazon to know what they’re thinking,” says Barry Lawrence, program director of industrial distribution at Texas A&M University. He expects the company to make it easier to do business with Grainger through technology like mobile apps for purchasing managers and stronger loyalty programs–just like United Airlines uses frequent-flier programs to discourage you from using Expedia. “Grainger’s going to build some firewalls up against Amazon,” he says.

***

But that’s Grainger. For the rest of the 34,000-plus wholesalers and distributors with revenues and infrastructures who deal in millions, not billions of dollars in sales each year, the future competing with a fast-growing AmazonSupply could be bleak. Providing high-touch, value-added services to customers–the kinds of things humans attuned to their field excel at–is one defense.

And industry insiders seem to take some hope from the idea that Amazon can’t–and indeed won’t want to–tackle every customer’s needs in a complex, highly segmented part of the economy. Last year management consultancy firm Oliver Wyman studied Amazon’s encroachment into wholesale. Interviewing 25 CEOs of billion-dollar distribution businesses over the course of a few months, Wyman’s Balaban found that a third were skeptical that e-commerce competition will hurt their business in part “because their product is too difficult for a new entrant like Amazon to warehouse and ship.”

For instance, will Amazon want to handle industrial gases like carbon dioxide for pubs and bars and McDonald’s soda pumps? Amazon can sell gloves and goggles, but it’s much more expensive to deliver big, ugly tanks of acetylene or 55-gallon drums of acetate.

“Businesses with products that are dangerous, exotic or require specialist handling will be slower to be vulnerable to Amazon,” says Balaban, who co-wrote the Oliver Wyman report. “Amazon won’t take business away for drills or dentists’ chairs. But dentists also have drawers full of mouthwash, dental floss, paper towels, latex gloves and those bibs that go around your neck.”

To fight back some companies are adding services they hope AmazonSupply can’t–or won’t–duplicate. Take Valin Corp., a 40-year-old San Jose, Calif. distributor that once specialized in selling computer chips. Since 2010 the company has focused on the fast-growing oil and gas sector, handling and measuring output at surface oil wells among other relatively new assembly and manufacturing revenue streams. “Amazon is never going to get into servicing oilfields,” says Benfield, the B2B consultant. “They’re not sending out engineers.”

So are they right? Like everything else about AmazonSupply, Wilson is cagey about what services it’ll leave to the competition and which ones it may attempt to provide. Would it start selling tanks of oxygen? Or transport lumber to construction sites? “We would explore any item to ensure that we’re able to fulfill it,” is all Wilson will say.

Besides, you don’t need to do everything to carve out a hell of a big business in a sector of the economy as large as wholesale. Rivals, Balaban says, should expect the worst. “If your business does not yet have a credible plan to survive and thrive in the new ecosystem,” he says, “there may be less time than you think.” Just ask your local bookstore.

Claire O’Connor       www.forbes.com  

Schiller Grounds Care and Sound Manufacturing Enter Into Exclusive Manufacturing Agreement

SOUTHAMPTON, Pa. – May 6 -- Schiller Grounds Care, parent company of Little Wonder, BOB-CAT, Classen, Mantis, Ryan and Steiner brand outdoor power equipment, has announced that the company has entered into a supply agreement with Sound Manufacturing, manufacturer of Monster brand truck loaders and collection dump systems. Under the agreement, Sound Manufacturing, a sheet metal fabrication company located in Old Saybrook, Conn., will manufacture these product lines exclusively for Little Wonder.

Little Wonder is a long standing brand within the green industry. Established in the early 1900’s as the leader in the commercial hedge trimmer market, today Little Wonder is an industry leading brand of landscaping and debris management equipment with a broad product line that includes hedge trimmers, bed shapers, brush cutters, edgers, wheeled blowers, leaf and debris vacuums and its own line of compact through mid-size truck loaders.

The agreement is a win/win for both companies. The strength of the Little Wonder brand’s domestic and international distribution network will increase production at the Sound Manufacturing facility. For the Little Wonder brand, the addition of large higher horsepower truck loaders expands the brand’s current line offerings and opens up a new product line in dump collection systems to the landscaping, janitorial and industrial markets.

Pat Cappucci, president and COO of Schiller Grounds Care, stated that as a result of this new relationship with Sound Manufacturing, “We will effectively combine the strength of Little Wonder as a leader in debris management products with Monster Power Equipment, who has acquired the expertise of key talent from the original Giant Vac company, a long-standing expert in truck loaders and large debris loaders.”

“Essentially, they get to focus on their expertise, while we focus on ours, which is bringing the industry the best products possible in debris management for landscape, asphalt and grounds care professionals. We are fully committed to the success of our customers, and are confident that the combination of Monster with Little Wonder will give them a line-up unmatched anywhere in the industry," said Cappucci.

Kelli Vallieres, President and CEO of Sound Manufacturing, agrees, “the Monster Power Equipment team is excited to be combining the strengths of our truck loader line-up together with the strong successful history of Little Wonder products. Through this strategic relationship, leaf and debris customers will be provided with quality products backed by industry leading customer service,” she stated.

www.lawnandlandscape.com     

Generac Expands, Set to Hire 100 Additional People

May 5 -- Generac Power Systems, maker of backup power generators, is expanding and will hire 100 employees for its southeastern Wisconsin, Berlin and Oshkosh locations, said Art Aiello, a Generac spokesman.

The company, based in rural Waukesha County, will host a job fair May 8 at its Oshkosh facility at 3815 Oregon St.

Some of the hiring is due in part to the company acquiring Baldor Electric in November. The Oshkosh facility makes larger industrial generators that are up to two megawatts. Generac also acquired Magnum Products LLC — which makes light towers, mobile generators and pumps — in Berlin in 2011. Both companies have been folded into Generac, Aiello said.

"The reason we're having the job fair in Oshkosh is because Generac is not well known in the Fox Valley," Aiello said. "All of this hiring is due to growth."

Areas of growth have come from Hurricane Sandy and the large power outages from the winter season as well as on the industrial side from expanding into new markets.

"We're also seeing growth internationally," Aiello said. "So the positions we're hiring for are intended to fuel that growth."

Generac will hire engineering, technical and some production workers. To find out specifics on the jobs or the job fair, please visit www.generac.com/careers.

Denise Lockwood    www.bizjournals.com/milwaukee

New Products Key to Techtronic's Future

In the 1,500 square foot showroom at Techtronic Industries’ headquarters in Tsuen Wan, Stephan Pudwill plays with the latest men’s toys – cordless power tools such as hedge trimmers, mowers and chainsaws – and cleans the carpet with arguably the world’s lightest vacuum cleaner.

President of strategic planning at the family business his father, Horst, co-founded 29 years ago, Pudwill, flanked by the firm’s finance chief and public relations people throughout the interview, repeatedly mentioned “new products” like a mantra.

Having amassed a portfolio of brands in the late 1990s and created new models and products in the 2000s, the power tool manufacturer is now betting its future on advancing the technology, pumping out new products and raising the level of automation so as to survive the changes in the industrial landscape in the Pearl River Delta (PRD), Pudwill said.

He said the firm spends about 2-2.5 per cent of its revenue annually, or about US$107 million last year, on research and development, with a focus on making its products cordless and increasing the performance of lithium-ion batteries.

“New products account for one-third of our revenue annually,” he said. “We keep investing in our brands. It is critical to keep on the forefront of technology.”

About US$1.4 billion of last year’s US$4.3 billion revenue was derived from new products of various brands, including industrial power tool label Milwaukee, AEG, outdoor power equipment brand Ryobi, and floor care labels Hoover and Dirt Devil.

The products are widely sold by retail giant Home Depot in the United States.

Net profit at Techtronic, one of the largest power tool makers in Dongguan, an industrial hub in Guangdong province, leaped 24.5 per cent last year from 2012 to US$250 million.

Revenue jumped 11.6 per cent from a year earlier, while gross profit margin rose 0.7 percentage point to 34.2 per cent.

The firm is one of the few surviving players in the PRD (Pearl River Delta), the reputation of which as the factory of the world shows signs of rust amid protracted labour shortages, constantly rising wages, shifting industrial policy and an exodus of exporters from the mainland to lower-cost Southeast Asian countries.

The PRD is striving to move higher up the value chain with enhanced technology and more environment-friendly products.

For Techtronic, this means a greater use of automation at its production base, which employs about 8,000 migrant workers, down from about 11,000 in 2011.

“We are not a big fan of workers,” Pudwill said.

“We constantly automate areas that can add value.”

Despite relying largely on growth from innovation in its existing business, Techtronic is open to expanding via mergers and acquisitions, he said.

A case in point was the purchase last year of Oreck, a US-based manufacturer of vacuum cleaners, primarily for the hotel industry. Pudwill declined to reveal the acquisition price.

“We don’t need to do M&A’s in order to expand the company, but it does not mean that we are not looking at any opportunities,” he said.

Analysts at HSBC estimated Oreck would generate about US$80 million in revenue this year, compared with about US$30 million last year.

HSBC recently upgraded its net profit forecast for Techtronic to US$309 million this year from US$308 million and to US$369 million next year from US$366 million previously.

Identifying business opportunities that will complement the group’s operations is a key responsibility of Pudwill, who stands to take over the torch from his father.

Pudwill, 37, joined the group 10 years ago and became an executive director in 2006. He had previously worked in product marketing and strategic planning at Mercedes-Benz in Germany.

At Techtronic, Pudwill said, “I work closely with [chief executive Joseph Galli and my father and am actively involved in all areas.”

He does not think his father, who is 69, will retire in the near future.

“Sometimes, I have different opinions with my father, which is healthy,” Pudwill said. “It’s important to have different opinions and think differently.”

www.scmp.com     South China Morning Post