Hubbell and Pentair: Slow Growth Led by Industrial; Hubbell shares 2018

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Earnings UpdateHubbell and Pentair (Hoffman / Erico) released their Q3 earnings reports this week.  Overall they show slow growth with most of that growth non-resi and leaning towards industrial.  Hubbell’s performance appears to be somewhat constrained due to Hubbell Lighting whereas Pentair’s electrical group’s strength is Hoffman.

Hubbell

First up is Hubbell and their Q3 2017 earnings call (slide presentation is available here.)  Overall, for Hubbell, very strong results.

  • Sales up 5% with organic sales up 4%
    • Power up 9% (8% organic of which 3% is benefits from recent storms)
      • Revenue was $297M
    • Electrical up 3% (2% organic) to $654M for quarter
      • Growth coming from non-resi and oil / gas (while Hubbell doesn’t break down the business into the electrical segments – i.e. historically devices, then Raco / Killark, etc and then Lighting, from the comments it can be inferred that Lighting has had challenges; perhaps Raco / Killark / et al is “quiet” and some growth in the Burndy and device groups)
      • Up 2% YTD
        • Oil and gas up mid-single digits
        • Lighting up 1% on volume but down 2 points on price (net was -1%)
          • Experiencing more challenges on the residential side of lighting and inventory issues (distributors, sound familiar!)
          • Growth “greater” in resi than C&I
          • No comments on the performance of their “Trade Select” (contractor value) line.  Distributors, what, if anything, are you seeing?
          • Lighting control vision doesn’t, at this time, extend to building management control … more of a “Tier 3” solution.
    • Harsh and Hazardous business is up double-digits aided by traditional markets and expansion into new markets, such as pharma (which infers growth in the oil / gas segment and benefiting distributors in those regions)
      • H&H is coordinating with Hubbell Lighting
  • Operating margins up on both electrical and power sides of the business while continuing to invest into the business from an R&D perspective.
  • Lighting “challenges” have been stabilized (distributors, are you seeing this?  Improvement in Hubbell Lighting performance could be very positive for the overall Hubbell platform financially so it is not a ‘drain’. While “leadership / share” in lighting is viewed very geographically, recent discussions with distributors position Hubbell Lighting as #3 or 4 within a market … battling with Philips.)
  • Some discussion re iDevices as a home automation solution. Commented that a leading home builder made it their exclusive solution. iDevices is a solution that supports Amazon, Apple and Google platforms. (It appears that iDevices will be a major R&D focus for Hubbell as a residential platform, possibly integrating with other Hubbell offerings.)
  • Highlighting some product innovation areas and appear to be trying to get some cross-segment pollination among divisions.(Hopefully they are communicating these new initiatives to distributors rather than “one-offs”.  Distributors should be asking about iDevices for resi, institutional and other applications, new products from Burndy, hazardous lighting from Harsh & Hazardous with Hubbell Lighting,)
  • 2017 End of Year Outlool
    • Overall a 2.5-3% growth.  Resi being -4 to -5%, industrial 2-4%, power 2-3%
  • Thinking about 2018
    • 2-4%
      • Heavy industry to improve
      • Light industrial to grow
      • Slow / low growth in resi and non-resi
      • Expect pricing in the lighting space to remain “challenging”
Pentair

Pentair shared its results and also introduced the new name of the electrical company that will be spun out of Pentair .. nVent Electric (which, with that name is positioning it as a holding company and hopefully owning / investing in “innovative” companies / solutions.  Erico has been known for unique / productivity-oriented products, so maybe it becomes the example?)

And here is a copy of their slides.

We’ll focus on the electrical business (Hoffman and Erico)

  • Electrical up 2% to $541M for the quarter (slides show a -1% YoY)
    • Electrical is made up of Enclosures (2% for quarter, 1% YTD), Thermal Management (down 11% for quarter, 14% YTD, and Electrical & Fastening Solutions (flat for quarter, up 1% YTD)
    • Strengthening in “short-cycle” industrial business (more MRO type, small projects)
    • Enclosures grew 2%
      • Strength in the industrial segment
        • Seeing some oil & gas business recovering
      • Enclosures has 2 components – Industrial and Electronic
        • Industrial enclosure growth is 2+x overall Enclosures (so, if overall enclosures is 2%, Industrial Enclosures (i.e. what electrical distributors sell) is 4+%)
          • Drag of some large telecom projects
    • Electrical & Fastening Solutions (Erico / Caddy) was flat
      • Commercial business strong
      • Expanded into pre-fab solutions
      • Industrial business stabilized
  • Material inflation providing some headwind (mentioned by a couple of manufacturers as a nominal pressure that they are having difficulty in pushing through the channel.)
    • Inflation for Pentair running about 2% of cost
    • Recovering via pricing on electrical side has been a “challenge
      • Expect to recoup some / all of this during “natural price cycle that gets followed in the industry. (so, expect at least a 2% price increase from Hoffman / Erico this winter)
  • Expect electrical, for full year, to be 2% growth
  • After the split, Water will be a $3B company and Electrical a $2B company
    • Adding a “Chief Growth Officer” into the new electrical business.
    • Planning to invest more in marketing

So, slow growth businesses that are seeing growth in the non-res space with more opportunities in the industrial segment.

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