Q1 Pulse of Lighting … Continued Change, Nominal Growth and Acuity
The first quarter of 2019 has been an interesting ride in the lighting space. There has been:
- The threat of increased tariffs and then the extensive of the existing tariffs.
- Some manufacturers raising prices to compensate for tariff increases, others absorbing the tariff amounts (or negotiating them away with their suppliers) and others in-between.
- Some lighting companies closing and another (Simkar) declaring bankruptcy.
- Weather related impact in many parts of the country.
- Cree’s sale to IDEAL
- Eaton spinning off the lighting business via a planned IPO
- Current by GE’s acquisition by a private equity firm completed
And, by the way, business was conducted as evidenced by the feedback received in our 2019 Q1 Pulse of Lighting Report and Acuity’s quarterly earnings report.
Pulse of Lighting Report
Almost 250 distributors, manufacturers, reps and lighting agents responded to our Q1 Pulse of Lighting report conducted with Electrical Wholesaling for William Blair. Highlights included:
- Market growth, through distribution of a little
more than 4%
- What was most interesting is that 50% of the manufacturers reported flat to negative sales whereas 20% of manufacturers reported more than 16% growth. So, a case of “halves and have nots”.
- 28% of distributors had more than 10% growth and 28% had flat to negative performance.
- Takeaway … small / mid-sized manufacturers continue to grow at a faster rate. Different offering? Better pricing? Easier to do business with? More distribution focused? Different / more aligned sales organizations?
- Lighting controls are being quoted much more than this time last year, however, there are some distributors very focused in promoting controls whereas others rarely quote.
- The market share for the “top 7” lines … Acuity, Eaton, Hubbell, Philips, Cree, Rab and Current by GE declined by 2 points to 55%
- While large manufacturers continue to “hope” for the large new project market to come back to life, respondents shared that 60-63% of their business is focused on the renovation / retrofit market and that the growth segments are the small, medium and industrial segments.
- Price competition is as fierce as ever with no end in sight. It’s a combination of lots of manufacturers competing for the same spend, commoditization of products, customers (especially contractors) more focused on price and challenged to see product differentiation and continued importation from China (which will always be there). There is little, if any, brand preference for much of the buying audience … and the selling audience (defined as distributors).
- Respondents shared product quality issues, albeit with all tiers of manufacturers suffering.
The report has more detail and verbatim feedback from distributors, manufacturers and sales agents (reps and lighting agents). The complete report is available for $19 in the Research Reports section.
The Revenue Leader, Acuity, Record Sales, Below Market Growth
Acuity finished its fiscal second quarter with record sales (after all, any growth is sequentially a record) but, their C&I channel (electrical / lighting distributors) grew about 3%
Observations from their quarterly performance call:
- Topline grew almost 3% to a record $854 million (which means the number starts with a 2, which is less than reported in our Pulse of Lighting report but consistent with other conglomerates selling through distribution.)
- Believe growth constrained by orders pulled into prior quarter (probably true, but if hadn’t then their Q1 would have had a lower sales increase. Unfortunately, can’t have it both ways.)
- Implemented actions to address cost issues including price increases and productivity improvements (although haven’t heard much about others following and many small to mid-sized companies haven’t followed. Productivity improvements sound like “employment control” but could be very targeted.)
- Improved adjusted operating profit margins by 50 basis points to 15.2% (makes analysts happy)
- Feel continue to gain overall market share (the question becomes, whom are they taking it from given the growth rate of many others. Could be versus other “conglomerates”? It then begs the question of “what is Acuity doing right to take share?” … or where are others falling behind?)
- Net sales through C&I (distribution) for quarter declined reportedly due to pull-forward sales somewhat offset by price increases … but still down! (but distributors reported a 4+% increase in our Q1 Pulse of Lighting Report.)
- The lower performance was mitigated by “greater shipments of certain high volume, more basic, lesser featured LED fixtures for applications on smaller, mid-sized projects and benefits from the price increases (code for “C&I would have been done more without these”.)
- Reported growth in Distech which focuses on controls for building management.
- 10% sales growth vs last year for corporate accounts channel which sells Atrius systems to the retail vertical.
- Adjusted gross profit margin was down 1 point to 39.2%, reportedly much due to product mix at a retail account (also means that they sold more of the “lesser featured” items.)
- Tier 3 and 4 solutions were up 30%.
- Company is focused on the retail space and trying to expand into other areas. (Hopefully aligned with retail customers that are growing as that space continues to have capital / reinvestment challenges due to changing consumer behaviors.)
- Again, mentioned Chinese lighting companies. (Challenge with this mantra is, it isn’t going to change.) Have continued to expand Contractor Select portfolio.
- Increasing focus on lighting controls to the commercial market.
- From their 10-Q
- Independent sales channel 66.9%
- Direct sales network 10.2%
- Retail sales 8.6%
- Corporate accounts 8.8%
- Other 5.9%
- Working capital increased 30% (16 days) due to the increase in inventory to support their Contractor Select offering. Seeking to increase turns (which means will be actively pushing these SKUs are distributors and maybe retail. Question becomes, will pricing promotions come next to get turns before the end of next quarter / when the product becomes obsoleted with the next generation?)
- Still holding out hope for the large project / new construction market to be able to accelerate sales.
- Feel lighting market will lag the overall construction growth rate due to product substitution, possible impact on lighting consumption due to impact of tariffs and construction labor constraints.
- Expect to continue to outperform the North American lighting market.
- Keys to future success is capturing price increases (this will be interesting if / when tariffs are reduced or eliminated) and growth in technology-enabled lighting solutions for larger commercial projects (this will need to be new construction to get the capabilities, and brand, specified for the project.)
- From analyst questions:
- 2/3rds of business is “bid business” … project
- Price increases put in for other 1/3rd of business.
- Freight plus commission in the retail channel is 11-12% of sales.
- Regarding Cree:
- Considered them a “bit” player (surprising term as they did have significant revenue, albeit had declined in past few years)
- “didn’t make right investments and miss-stepped” and then emphasized that Acuity has invested in controls / IoT (however, doesn’t seem that it has grown at the initially conceived rate … and, in fairness, Cree had developed offerings here also and helped increase the visibility of LEDs through its LED lamps and overall brand awareness campaigns.)
- Regarding Eaton spinning off its lighting group:
- Portfolio decision
- Acuity exceeds the performance expectations that Eaton’s management has set out for Eaton’s lighting group.
- 12-18 months from being about to “sell solutions to verticals” that can leverage Tier 4 embedded technology … hopefully
Continuous Change
Lighting is a market of change, especially 2019’s first quarter. The questions then become:
- Will the remainder of the year be as “exciting” with more closures, acquisitions and pricing changes?
- Will / Can conglomerates grow their business or are they subject to minimal / nominal growth?
- When will revenues from IoT be realized?
- With Cree sold and Eaton being spun off, what’s next?
- Given that imports are not going away and, in Acuity terms “lesser featured items” are here to stay (and many are not “lesser featured”), is it feasible for conglomerates to effectively succeed in the renovation market (or will they need to leverage distributors to “earn” this business?)