Manufacturer Q2 Performance Updates – Littelfuse, Encore, Schneider Electric, Pentair

Last week we reviewed the Q2 performance updates of publicly held electrical distributors as well as other national organizations that share their performance. This week we’ll review some of the Q2 manufacturer performance reports (and the list of companies is somewhat random, arbitrary and is in no particular order (and will occur over a few postings) and if you’d like others added for the future, let us know.)

Littelfuse

Some highlights from their earnings call:

• Overall, record sales (up 15% with overall organic growth up 11%) and earnings led by electronics segment
• Solid organic growth in industrial segment (which is where the “electrical channel” aspect of their business resides)
• Seeing growth in electric vehicle battery market, data centers / cloud computing. (Interestingly the company can benefit through LEDs as they have a “temperature-protected varistor and surge protection module that can be sold to OEMs through their electronics group.)
• The industrial segment was up 5% organically (about in line with what we hear from other manufacturers)
• They increased their dividend by 12% (which indicates that their BOD feels the growth is sustainable and that there will be the long-term cash flow to fund the increased dividend.)

This is a company that is very focused on the electronics segment as well as niche markets / applications and OEM opportunities.  Potentially Littelfuse distributors could also benefit from MRO demand generated from the OEM opportunities.  Appears to be a company where end-user target marketing by distributors could be beneficial.

Encore – and the state of copper

From Encore Wire:

• Unit volume up 8% (which can be an indication of the construction market)
• Average selling price up 14.4% which helped increase net sales dollars by 22% (impact of the cost of copper, which continued to rise during the quarter, hence helping construction-oriented distributors increase their sales YoY and QoQ)
• Copper pricing (raw materials) was up 19.2%  (the only caution is, “what goes up eventually goes down”.  The incremental profit for distributors is good, albeit inventory costs rise.)
• “Good outlook for construction projects for the next year” as “see building cranes across the country”

From their earnings call:

• Average selling price of wire per copper pound sold increased 15.6% YTD
• Aluminum represents 8.7% of Encore sales.  This is “down” from prior but due to the increase in copper sales.  Aluminum sales volume was up 12.7% but pricing was down 3% (hence aluminum grew at a slower rate than copper, hence falling as a % of overall business.)
• Seeing increased “product breadth / mix” on orders, especially larger orders
  • Average order size increased “a couple of thousand pounds”
• Completed some capacity expansion for armored cable.

So, at least from a copper perspective, the construction market looks good with unit volume increasing high single digits and manufacturers and distributors benefiting from price appreciation.

Schneider Electric – Growing Globally, Positive for US Construction Markets

From their earnings report

• Saw top line increases of around 4%, globally, during the first half of the year.
  • Organic growth, globally, was 2.7%.  Without Infrastructure would have been 4.1%
  • North America growth was 2%
    • US good in construction, resi and non-resi construction
      • See continued momentum in resi for H2
      • Expect the US resi / non-resi construction market to continue to grow at 2-4% for themselves
    • 5% increase in US for Industry Automation group
• Four priorities for sales
  • Accelerate cross-selling and have an integrated sales model at the customer level (much of this relates to multiple “technologies” in the same package or building such as low voltage and medium voltage opportunities, or software with automation, not solely different “brands”)
  • Increase product development / offering
  • Grow services and software (which was up 4%)
  • Push digitization
• Data center business, globally, is growing at double digits; low voltage is growing at mid-single digits.
• Projects, globally, represent 40% of the business
• Low voltage is company’s biggest business and was up 4% globally with strength in data center market.
• Up 5.7% globally in Industry Automation – discrete automation.
• Company is investing much in “services” and digital

And here is a link to their slide deck presentation.  

Some interesting points:

• Their recategorization of their businesses to align key technologies highlights that their “Buildings” business is low voltage and focuses on the resi / non-resi buildings whereas “Industry” is industrial automation.  These are the core segments for electric distributors. Of next importance is “IT” which is “secure power” and focused on data centers and networks.
• Low voltage is a 7.2B EU business; Automation is 4.9B EU
• Investing in mobility for customer engagement.  Have 400,000 “channel partners” on digital portal.  (Definition of “channel partner” expands significantly beyond “distributor”)
• Reported strong growth in “Final Distribution & Wiring Devices” with 6% organic growth, worldwide (and interestingly no mainstream offering in the US, if any. Perhaps a future growth area / acquisition opportunity?)
• In their Low Voltage group they want to “accelerate sales through partners”

Globally, Schneider is growing.  Within the US, 2% is on the low end of what we’re hearing from other but indications of success in the resi / non-resi construction market reinforces what many are seeing and, within the US, it should be remembered that Schneider isn’t the strongest … or even #2.

Pentair – insights into two segments

Pentair appears to be a company in transition.  It sold its valves business and has stated that they want to spinoff their electrical business (Hoffman / Erico) albeit there are some who feel this will be sold before the spinoff.  So, what will Pentair late 2018 look like? Don’t know, but let’s see what they are saying about Q2 and their outlook for the second half of 2017 and with a focus on the electrical group.

From their earnings call

• Company-wide, adjusted core sales were down 1% for the quarter but up 1% YTD
  • Pentair does much in various water industries and, post spin-off, appears it will be a water-oriented company unless proceeds are reinvested into another segment for diversification.
• Electrical core sales for Q2 increased 1%, up 2% YTD
  • Enclosures declined 1%
    • Industrial grew mid single digits and Pentair feels there is continued momentum for the second half
      • Hoffman doing better
    • Continued softness in telecom business (business was “negative”)
  • Electrical & Fastening Solutions (the old Erico) declined following a 7% growth in Q1 reportedly from “smaller infrastructure related business”.  Down 3% for quarter, up 1% YTD
    • In a follow-up question Pentair mention that this is rail related as there was an expectation of some spending on roads, bridges and railroads (i.e. infrastructure)
    • Sounds like it benefited in Q1 but wasn’t repeatable but, if the Administration’s infrastructure bill gets passed (2018?) could benefit this division of Pentair.
  • Pentair expects the Commercial business to grow in the second half of the yea.
  • Expects low single digit core growth in Q3 for Industrial segment (4% expected in Q3)
  • Expect Electrical to be up about 3% for the year

And here is a link to their slides.

From Pentair we see that the industrial electrical market is flat to slight growth, which is representative of other findings, with growth coming from the non-resi side of the business.  Additionally, if you read their earnings call transcript you’ll see much commentary on their water business. An element is pools, which is residential in nature. From this you can infer resi market growth opportunities … and they are getting into home automation in this segment also.

Overall observation from these four companies:

• Pentair commented that while they are seeing raw material (i.e. steel) price increases, “most of the channels that we participate are fighting on price and therefore asking us to absorb and become more productive.”  This comment is reflected in other manufacturer quarterly reports and is why inflation is being held down and, to a degree, is hampering industry sales growth (which would be inflated due to these price increases.)  Perhaps manufacturers do not have the pricing power / leverage that they used to have? Is it competitive pressures? The result of increased price transparency and ease in finding competitive prices to use in negotiating?  Currently sales growth is masking this, but it is inhibiting profitability for many.
• Overall, a picture of growth and positive outlooks for the construction markets given the insights from Encore, Schneider and Pentair.  Littelfuse’s growth is more niche / segment oriented.
• Combining Littelfuse and Schneider inputs it is evident that the data center and “electrification” segments of the market, especially globally, represent opportunities.

So, in looking at Littelfuse, Encore Wire, Schneider Electric and Pentair we start to see some end-user segment trends.  Relatively flat / slow growth in industrial, greater opportunities in resi and non-resi construction, focusing on niches, pricing challenges.

What are you seeing from these four companies? How are they supporting you? Are they maintaining their share? Supporting you well?