Pentair (Hoffman / ERICO) and Hubbell Echo Market

Continuing with our quarterly reviews, let’s look at Hubbell and Pentair, the parent to Hoffman and ERICO.

Hubbell

• “Solid results. In line with expectations.”
• Sales up, company-wide, 3%
  • Organic growth of 2% (but foreign currency exchange of -2%!)
• Completed 2 acquisitions
• At recent Investor Day noted that they have a 10% annual growth objective for lighting (Compared to someone like Acuity, this appears low but part could be breadth of offering and/or declining LED prices.  Also, as a distributor, is your Hubbell Lighting business growing at this rate, or close to it? Perhaps something to discuss with your Hubbell rep and reinforce it should be coming from demand creation, not line conversion.)
• Harsh and Hazardous division to move into adjacent markets and consider acquisitions.
• Hubbell is focused on investing in its people and “next generation” as had 125 attendees at recent Executive Summit. It was emphasized that these types of meetings contribute to collaboration to achieve their One Hubbell objective.
• Hubbell’s feedback from distributors “they see the market in a similar way. They are optimistic about growth, but realistic about a market that’s likely to be choppy and sloppy and certainly very positive about the way they see Hubbell, our emphasis on One Hubbell where it makes sense and can make their lives easier and their businesses more successful and the energy and attitude they see from our new organization” (also of note appears to be Hubbell’s understanding that “leveraging” a distributor to buy all lines is not necessarily the right decision for the distributor and could backfire on them.)
  • Not seeing enough “day to day” ordering consistency to say “market is improving” for longer-term
• Some restructuring activities … streamline processes, trying to make lighting division more efficient / cost-effective and ensuring “proper sizing” in the Harsh and Hazardous group given the oil / gas market and the recent acquisition in this segment.
• On lighting side of the business investing in agent business as well as “big box distribution” (not wonderful for electrical distributors)
• Market Strengths
  • Non-residential and commercial construction
  • Lighting – renovation, relighting in non-residential
  • Natural gas
  • Residential – multi-family with a little single family
• Market Weaknesses
  • Heavy industrial, especially steel mills
  • Oil
• Electrical segment up 2% (1% organic growth)
• Power segment up 5% (4% organic)
• Lighting was up 10% for the quarter
  • C&I up high single digits
    • Particular strength in office market
    • Education and healthcare are very strong markets (which begs the question to distributors – are you focusing your lighting efforts? If not, look for our recent Healthcare Market posting. Remember, go where the money is … even if your contractors are not there!)
  • Resi up double digit % growth.

You can find a transcript of the analyst call here

Overall, the growth in the commercial market seems to be helping elements of Hubbell albeit the mix is pulling down the gross margin a little. And it appears they are doing some things to improve lighting’s profitability (perhaps addressing some legacy issues).

What are you seeing from Hubbell? How are they performing in the field and what is differentiating them.

Pentair

Pentair, the parent of Hoffman and ERICO, reported last week.  We’ll focus on their Technical Products group (which is where Hoffman and ERICO are reported). Below are comments from the analyst call.  Click here for the accompanying PPT presentation.

• Integration of ERICO meeting expectations, expecting a minimum of $10 million in synergies
• Saw some stabilization in its Industrial business.
• Pentair’s Technical Serices group is the “home” for three electrical businesses.
• Pentair’s Residential and Commercial business (divisions may sell into multiple end-user markets) experienced strong growth, which is comparable to what we’ve heard from construction-oriented distributors.  Hoffman and ERICO, as many know, have products that sell into the commercial market (and some resi)
  • This segment saw double-digit growth.
• Energy represents just over 20% of sales, but continues to be down in Q1 2016.
• ERICO contributed “strong underlying performance and synergies”.
• Technical Services division had 33% growth although this was only 5% core sales growth which was added by 30% growth due to the ERICO acquisition and a -2% from foreign exchange (note: 5% core growth, given Hoffman’s traditional alignment with Rockwell, which was down 7% overall in Q1, gives an indication of either Hoffman’s growth in the commercial sector and/or diversification from oil / gas markets.)
  • Core sales on Enclosures was -5% (less than Rockwell’s decline as well as the decline for many industrial distributors, potentially indicating “stabilization” in revenues due to commercial sector success?)
• 75% of ERICO sales are in the commercial end market.
• Pentair’s Valves & Controls business is heavy oil / gas focused and some of the comments related to this sector, which may be important for those in this sector:
  • “We’ve believed for some time that the downturn in energy is more than cyclical”
  • “we expect revenue to recover to be a couple of years away”
  • “customers continue to defer maintenance not just in oil and gas but also in power and mining”
  • “CapEx budgets being cut across the board”
  • “Quoting funnerl slowly improving in LNG and petrochem but not expecting a big increase in orders.”
• For Q2 expect Technical Services to be -3% due to two projects for Thermal Management being completed (so, probably closer to flat to down a little) and overall Technical Services is projecting -2% for the year (very comparable to what DISC is projecting for the electrical industry in total.)
• Regarding pricing, there was mention about some pricing “pressure” in Enclosures.  Hoffman has gotten more “aggressive” in “modified standard product” and is seeing some price erosion. They also mentioned that there isn’t much commodity inflation so not an opportunity to pass on pricing and they are not assuming they will get a 1-2% price increase

Pentair, and Hoffman in particular especially when coupled with the Valves comments, appears to be a good proxy on the market, especially with the oil / gas comments.  The ERICO acquisition is designed to balance the business and provide an additional growth engine.  How Hoffman / ERICO decide to parlay these two divisions within a distributor to obtain incremental business will be interesting.

What are you seeing from Hoffman and ERICO?