February 28, 2018

David Gordon

Along with earnings updates, the last couple of weeks have brought lighting news from Cree, Philips, Hubbell Lighting and Eaton Lighting. Their recent announcements shed light on where the “Big 7” (Acuity, Eaton Lighting Solutions, Hubbell Lighting, Philips Lighting, Current powered by GE, Rab and Cree) feel the market is. And yes, they have a perspective whereas many of the unfamiliar brands see a different market.

Cree

Cree shared their earnings report recently and it the lighting division was “odd man out” as it related to company growth and profitability as Wolfspeed and the LED division experienced growth. Highlights from the earnings call, and some information from Semi-Conductor Today[1], include:

Exceeded top end of range led by Wolfspeed and LED. Lighting revenues were at upper end of target range. Overall revenue sequentially up 2%. Overall revenue was US$367.8M, down 8% from US$401.3M last year
Lighting gross margins down significantly due to warranty reserve (due to quality issues) and factory utilization (which also means, didn’t meet demand needs)
Wolfspeed revenue up 7% sequentially and up 30% year over year. This division is 18% of revenues.
LED products up 6% sequentially and 11% year over year. This division is 42% of revenue.
Lighting products down 3% sequentially (down to US$145M). Down 31% vs. last year. Lighting is 39% of revenue “despite continued weakness in the North American market” (participating in the renovation market? Success of C-Lite, their value line?). Consumer sales are in line with target (essentially, this is probably lamps, which indicates not gaining share from Home Depot buyers. May be selling more units at decreased average price, which is par for the course in this product category.)
Capital spending priority is Wolfspeed.
Their Q3 goals:
- Wolfspeed up 5%
- LED revenues seasonally lower 10%
- Lighting revenue down 10% due to outdoor product seasonality and North American softness (distributors, do you see your lighting business being down 10% from January through March?)
Strategic Review feedback
- Excitement and opportunity for Wolfspeed due to electric vehicle movement.
- LED products stable, growing automotive LED initiative
- Lighting … past year about fixing problems and supporting customers. New approach to new product development to improve quality. Presence in channel increasing. Increased # reps by 75%. Moving to “re-establishing a growth vector for the business.”
- Plan to roll out direction by end of quarter
Responses to analyst questions as it relates to lighting: “Economists are saying low single digit growth in non-resi construction through 2018.” Most of the questions and commentary related to Wolfspeed.

Takeaway: lighting had challenges in the quarter. There doesn’t appear to be much going on in the renovation market, nor the small to mid-sized market. Nothing was discussed related to the future.

Philips Lighting

Philips reported an array of news over the past couple of weeks. We’ll highlight their performance and some news. Among earnings news:

Royal Philips decreased their holdings of Philips Lighting to 29.01% so deconsolidated financial information.
Overall, worldwide, a 0.5% sales increase for year, 3% increase in Q4. The professional segment (fixtures) is up 11.2%.
- “Comparable sales trend in the U.S.” (so they are growing at a rate much higher than comparable companies. Taking share from whom? Earning some of the small / mid-sized retrofit market?)
- According to an article in LEDs Magazine[2], Philips commented “Notably, the professional sector, by far Philips’ largest with sales in the quarter of €781 million and for the year of €2.76 billion, was the top contributor to profits for the first time ever. The professional sector is one where Philips is striving to move to service business models as opposed to hardware sales.”
- Lamps down 18.4%
LEDs represent 65% of sales
Continued focus, globally, on cost-reduction
Organizationally continuing to consolidate / rationalize businesses and flatten the organization, digitize the business, reduce locations, simplify product portfolios.
Philips has 29 million light points that they have connected out of 26 billion light points (they claim) on the planet.

For 2018, expect positive comparable sales growth (huh?), and a soft Q1.

According to the same article in LEDs Magazine, Philips Lighting will be changing its corporate name. This infers the brand name may not change as they are licensing the name… “for the coming decade” as Philips is one of the stronger brand names and we’ve seen what happens with brand changes… GE Lighting? Sylvania?… it takes much for the market to adapt.

Philips also named a new head of Americas, Chris White, who comes from CISCO. (Interesting candidate choice given that CISCO is the driver on the PoE (Power over Ethernet) movement, has a history of growth through acquisitions, and is a company that sells through VARs… a precursor to potential changes?

According to an interview on CNBC[3], CEO Eric Rondolat stated

S. market turned soft
Saw double digit growth in its connected lighting business
Its CityTouch smart street lighting management platform has been deployed in 1000 projects (wonder if distributors have been involved, or in what % of projects)
Thinks the U.S. lighting market will remain soft

Hubbell Lighting

Some comments from their earnings call / press release relating to lighting:

“Competitive pricing in lighting markets and commodity inflation continue to present challenges to be overcome” (we’ve heard this as unit increases are higher than sales increases for many)
“The highlight of adjusted operating margin performance in the fourth quarter was expansion in the electrical segment, despite material cost headwind across electrical and negative price in lighting. The benefits of incremental volume, ongoing productivity efforts, including lighting remediation, and savings from restructuring actions bolstered electrical (segment) margins and more than offset our investment in Internet of Things capabilities.”

Eaton Lighting

Some comments about lighting in their earnings report:

Think the lighting business in 2018 is flat to down slightly (must be from a revenue aspect as distributors see the number of units continue to be strong. It then starts to beg the question of “if conglomerates can’t make money / increase sales in lighting, why be in the space? Will the business go somewhere else? … and one analyst asked “do you need to be in the lighting business long-term?”)
“Feel the market is more competitive today than it has been in the past as LED technology becomes more proven and more of a standard. Seeing more price competition in the market.”
Seeing growth in the connected and controlled lighting space, consistent with competition, but not a big enough piece to offset decline in legacy lighting.
LEDs represent 79% of lighting revenues.

Overall takeaways

According to the large players, the market is soft / flat
There is extensive price competition
It’s moving to a connected / controls market
If Acuity and Philips are to be believed, the market will evolve to a services market.

But, distributors, are you seeing this occur in the renovation / retrofit market? With unfamiliar leading the charge to lower pricing, do you foresee this changing or are we racing to the bottom and maybe eventually just giving the lighting away so data can be monitored (being facetious of course).

Where is the lighting market headed in a few years? Will manufacturers and distributors be able to serve the market profitably? This is a key question as lighting is 20-40% of most distributor sales (depending upon their business focus).

Thoughts?

David Gordon is President of Channel Marketing Group. Channel Marketing Group develops market share and growth strategies for manufacturers and distributors and develops market research. CMG’s specialty is the electrical industry. He also authors an electrical industry blog, www.electricaltrends.com/. He can be reached at 919-488-8635 or dgordon@channelmkt.com.

Photo source: Pexels

Notes