Quarterly Earnings Observations – Philips & WESCO

The nice thing about quarterly earnings is that they can provide insights into companies.  Recently comments from Philips and WESCO caught our eye.

• Philips – A April 23 article in the WSJ highlighted Philips’ LED business and its role in the company’s quarterly performance.  The article started by sharing a case study of a museum that Philips relamped. According to the article, Philips’ LED business grew 38% during the 3 months (yes, LEDs are going mainstream and companies are investing to retrofit their lighting, and reducing energy and maintenance costs), however, Philips had a 12% drop in profit. The article goes on to say that Philips wants to “transform” from a consumer electronics group to a “more tightly focused, specialist equipment supplier.”  While lighting profitability improved due to the drop in raw material costs, the overall revenue declined 2% and, in 2012, lighting represented 33% of company revenue but “made a small operating loss.”

A couple of thoughts:

• A couple of reasons why LEDs continue to gain traction is continued improvement in the lighting source (hence ongoing R&D costs) and the price of an LED continues to decline (hence declining revenues)
• As everyone knows, the “life” of an LED is longer than other lamp sources, hence reduced frequency of lamp changes.
• The market has an extensive array of competitors, which will continue to drive down product selling costs as each need to achieve some level of share (with Cree being probably one of the largest “new” competitors in the lighting world and companies like Samsung and Toshiba entering the field).
• So, if LEDs require continued R&D investment and selling prices decline while Philips cannibalizes future business with every improving products, achieving revenue growth requires superior salesmanship and being #1 in marketshare, by a wide margin (which we doubt Sylvania will stand back and allow).

So, will Philips’ profit picture (the article is entitled “LED Shines Bright as Philips Profit Darkens), brighten.  Are their recent sales and marketing initiatives helping you “see the light” (or see the green)?

Wesco

Wesco released their quarterly results which may reflect the overall market, and more so the industrial market, or highlight issues specific to Wesco.
A headline on Yahoo Finance states “WESCO Misses Again”.  Some key points from the article:

• Revenue up 12.6% year over year, but this includes acquisitions (EECOL in Canada being the largest one) which accounted for 16% of increased sales, hence, organic sales are down 3.4% year over year, which may not be bad considering that last winter’s weather was mild compared to this year, but it is important to “peel back the onion” as Wesco has many different business areas – datacom, safety, electronics, utility as well as contractor and industrial (and many more areas).
• They reported:

• strength in the utility market

• industrial distributors being conservative and reducing inventory levels

• a “mixed” construction market

• a decline in the institutional market (government, education, healthcare, property management, etc)

• a 117 bps decline in gross margins year over year (business being more competitive or them trying to buy business?)

• for the year, they are expecting sales up 16-18%, inclusive of acquisitions, but that they expect a flat first half and mid single digits the second half (which seems to be what we are hearing from many but no one seems to have much rationale of “why”)

And although not part of the earnings report, we’ve noticed that WESCO is focusing more on contractors with a recent announcement that it has gotten further into racing by sponsoring a driver for 6 races in the Nationwide Series. And here’s some info on their promotion helping to build the brand. Question becomes – are the positioned to support the small to mid-sized contractors who are the typical NASCAR fan (and weren’t a number of manufacturers into this and then dropped out?)

Obviously WESCO isn’t solely industrial, or solely utility or solely contractor, but, they are known for “elephant hunting” on customers and projects. Additionally, due to their commitment to Eaton (their lead line) and knowing the nature of the distribution equipment business (how much of this is Eaton specified / generated and handed to WESCO vs. WESCO generated?) the question becomes, is the 3.4% decline indicative of the industrial market? the contractor market? overall business? or are some of these areas “propping” Wesco up?

How does a decline of 3.4% compare to your Q1?

Overall, as a manufacturer or distributor, without naming names, how was your Q1? What product categories (or customer applications) are driving your performance and what is your Q2 outlook?

And perhaps we can discuss at NAED?