Q2 Manufacturer Updates … GE, Emerson, ABB, Eaton, Hubbell

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Earnings UpdateOn Monday we shared manufacturer Q2 performance and rest of year outlook from Littelfuse, Encore Wire, Schneider Electric and Pentair.  Today we’re going to review the quarterly reports from GE, Eaton, Emerson, ABB and Hubbell  (with the focus solely on electrical and US).  You’ll notice some trends regarding end-user markets which drives some companies’ performance as well as raw material cost increases which are driving margin pressures.

GE

From their report

  • Overall their “Industrial” segment represents $28B in Q2 revenue, which was up 2%.  This includes GE Industrial, GE Lighting and Current by GE (but as all know, GE Industrial and GE Lighting are up for sale. An announcement regarding GE Industrial was expected in June or July but …)
  • Highlighted some Industrial deals.  Of interest
    • Current, Powered by GE
      • Announced second phase of JPMorgan Chase collaboration across 4500 branches (wonder if any distributors are involved in the material movement aspect or if it is direct or via an ESCO?)
      • Signed an LED retrofit deal in the UK
  • Revenues for Energy Connections and Lighting was $3.2B, down from $4.4 billion in 2016 … a 27% decline.  YTD the decline is 31%.

Note, “Beginning in the third quarter of 2016, the former Energy Connections and Appliances & Lighting segments are presented as one reporting segment called Energy Connections & Lighting. This segment includes the historical results of the Appliances business prior to its sale in June 2016.” (Which means that there is some Appliance sales in the 2016 first half which needs to be taken into consideration when evaluating these numbers.  Perhaps GE could share for a better comparable?)

And from their call:

  • On track to “close Industrial Solutions” by year end” but “may push to early 2018 but plan is to do .25 cents / share of restructuring this year.”
  • Regarding sales that the electrical industry is interested in …
    • Energy Connection was $2.6B, down 7% overall (grid / utility sales and overseas) but Industrial Solutions was up 1%
    • Current Powered by GE sales were $380M
      • Overall lighting revenues were down 9% with Current down 2% and legacy (the part up for sale) down 17%. (Interesting that Current is down 2% given Acuity reported an 8% increase and other lighting companies report some increase … if not extensive.  Could be the type of projects Current pursues? What are distributors seeing? Which of their publicly traded fixture manufacturers are top performers?)
      • Overall lighting profitability was $13M vs a loss last year.
Emerson – Insights into MRO and Oil

From their Q3 (they are on a fiscal year) earnings call and focused on their electrical group which is primarily the Appleton Group which is within Emerson Automation (Appleton was not mentioned during the call):

  • The company is segmented as Emerson Automation and Emerson Commercial and Residential
    • Overall
      • Both sides of the business grew 4% globally with US up 6%
    • Emerson Automation
      • North America up double digit percent
      • Seeing growth in life sciences and chemical markets with focus on MRO and optimization projects (productivity / capacity improvement)
      • Had growth in Canada due to “unconventional oil / gas” market
      • For fiscal year expecting 4-5% net sales growth
    • Emerson Commercial & Residential
      • North America up 6% driven by residential air conditioning, refrigeration, professional tools. and DIY market.
        • Brands here include RIGID, InSinkErator, Copeland
  • Overall seeing growth / momentum in the oil and gas sector and their funnel is growing.
  • Feel MRO spend will increase later in the year (which may not impact their fiscal year but their 2018)
  • Seeing some material inflation, in steel, which is a challenge to pass on in price increases.

And here is a link to their slides.

ABB

For ABB we’ll focus on ABB Electrification which includes Thomas & Betts, ABB Low Voltage and other “traditional” lines that go to market through electrical distributors.

From their call:

  •  Overall, globally, the business was up 3%
  • Electrification Products, globally, was up 1% but had fewer business & trading days in the quarter (don’t know why it differed for this division vs others? Perhaps ABB corporate could clarify?)
    • With making adjustments to ensure comparable, orders were up 1% and revenues up 2%.
  • Seem to being impacted by raw material costs as stated “EBITDA … was dampened by commodity prices and over capacity” (so a mix of raw materials and capacity / coming restructuring?) and couldn’t recoup through price increases to customers. (this appears to be a trend among a number of manufacturers)
    • It was commented that this especially affected the EP (Electrification) group and that the process will be “improved” for the future (so expect to see price increases.  Maybe EP will be the leader of increases? Maybe others will follow? Maybe they won’t (and depending upon the product categories this may generate opportunities for others)
  • Emphasized growth in robotics and mentioned ABB Ability. In the analyst Q&A it was pointed out that “Robotics” included Motors and Drives.  (could also infer seeing growth in the IIoT arena, which is something industrially-oriented distributors may consider an opportunity based upon their marketplace dynamics and technical expertise.)
  • Becoming even more “technical”
    • Acquired B&R – machine and factory automation
    • NUB3D – 3D visual software and solutions for Robotics
    • KEYMILE communication network for digital grid
    • Relationship with IBM for artificial intelligence
    • ABB Ability

(the reason for commenting on this is the potential for distributors who have access to multiple lines … and yes, that can be a challenge … to market the broader message within their marketplace that ABB can be a platform for businesses and then targeting specific verticals.  Could facilitate a distributor staking out a vertical value proposition and branding message.)

  • Medium voltage drives is driven by process industries and large projects.  For Motors, profitability was impacted by copper costs.

And here is a link to their presentation:

  • Overall orders in the US were up 7%, all divisons, and “base order growth” was 1%
  • Electrification Products sales were $2.5B, up 2%
    • Americas represented 28% of EP revenues and 27% of quarterly orders
  • Some interesting slides in presentation regarding vision and ABB Ability positioning
Hubbell 

Hubbell shared its Q2 performance and its outlook last week during its analyst call:

  • Strong corporate top-line growth based upon increased demand across the platform.
  • Q2 up 4% organically plus another 2% due to acquisitions and currency headwinds
  • Material cost “headwinds” in all groups (again, an indication of the challenge of increasing raw material costs and an inability, or timing issue, of passing on the costs. In some instances this is due to contractual issues, other times competitive issues)
  • “Customers” continue to be upbeat (don’t know if they were referring to distributors or end-users)
  • Talked about new products from all divisions
  • Seeing some growth and positive outlook on oil and gas markets
  • Electrical segment was up 2% organically
    • Oil in the mid single digit growth
    • Wiring up 3%growth was “closer to double digits” whereas C&I “down just a little”
      • Resi
    • Lighting had 3% unit growth resulting in 1% sales growth with focus on resi lighting (difference is pricing)  Hubbell is “challenged by the lighting business” and is seeking ways to improve the business.
  • YTD up 3%
    • Electrical up 2% YTD
    • Resi up 1%
    • Power up 7%
  • Slight raise in full year outlook to 2.5-3% end market growth plus 2% from acquisitions
    • Resi up 4-6%
    • Non-resi at 2-4%
    • Industrial 2-4%
      • Oil and gas – 2-4% (includes harsh and hazardous)
    • Power up 1-3%
  • Continuing to seek acquisitions as well as develop new products
  • Lighting service metrics have improved.
  • There was an insightful question regarding the Power / Utility / T&D business that related to the influence of distributed forms of power generation and storage on the longer term T&D business.  The answer … “we’re thinking about it and think that is where the industry is heading. Considering where need to add to product portfolio (acquisitions? new products?)

Again, the recurring manufacturer theme of improving end-user markets and raw material price increases that are not necessarily passed on. Hubbell is having challenges in the commercial lighting space but a little success in the resi lighting but much of that business is retail / big box or through builders and perhaps lower margin.

Eaton

Eaton covers a broad product swath and can be a good barometer to benchmark against.  First a review of their analyst call:

  • Overall, company-wide, organic growth of 2% impacted by currency thereby resulting in 1%
  • Mentioned about commodity cost impact (increasing raw materials costs that can’t be passed on.  This is a trend among manufacturers and if they can’t pass these costs on then they are having “productivity improvement” or “restructuring” initiatives.)
  • Electrical Products segment up 2% organically … orders up 3% in Americas
  • Electrical Systems and Services segment down 1% with organic sales flat
    • Industrial activity “remains” weak with mixed activity across the remainder of non-resi construction (interesting that other manufacturers didn’t call out these areas as weakness and saw some growth and had a somewhat favorable outlook.)
      • Although seeing some signs of large industrial projects in North America
    • Commercial office growth up double digit but slower than Q1.  See commercial growth rates slowing (based upon macro economic indicators)
  • End-user markets
    • Utility a little bit better than flat / up slightly but within expectations
    • Resi construction doing well
    • Industrial controls slightly up with some momentum in Q2
    • “Light end of commercial” up mid single digit; a little strength in North America for larger projects
    • Lighting weaker than Q1 but “flat” for the quarter but think longer-term can be a mid single digit growth. (not surprising given Hubbell numbers but Hubbell has had issues. Seems to be lagging Acuity performance as well as Rab and smaller, renovation-oriented lighting companies.)
  • Overall, for Q3 expecting 2.5-3.5% sales growth driven by Hydraulics and easier comps (not a good way to grow and not positive regarding their US electrical business.)
  • Repurchased $465M in stock, (which helps increase EPS) and plan to purchase another $285M through the end of the year
  • Expect US oil and gas to pick up
  • A common thread through many Eaton businesses, Electrical, Hydraulics, Vehicle, Aerospace, is industrial and with industrial production over the years around 2%, this “mutes” Eaton’s growth.
  • Doesn’t feel that Amazon will be a significant threat in the electrical space due to much of what do is safety driven and highly specified.  Also talked about distributors making eCommerce investments and Eaton is making digitization investments in products, especially lighting, and in services, some of which can be offered to distributors.

And here is a link to their presentation slides

  • No change in their 2017 outlook for the Electrical Products or Electrical Systems and Services segments.
    • Electrical Products is 2-4%
    • Electrical Systems and Services is -2 to 0%

and these goals are globally

Observations

For most of the companies you can see a trend in market performance as well as pricing challenges which are compressing margins and necessitating cost-saving initiatives until raw material costs can be passed on within contractual limitations. There are a few companies that appear to be “challenged” and perhaps lagging the market a little.

So, some questions:

  • Distributors, how are these manufacturers performing for you? How is your sales growth with these companies?
  • Manufacturers, what are you seeing regarding your competition? About end-user markets?
  • And for both, what is your outlook for the remainder of the year? What is needed for you to exceed / meet your goals?
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