Vernon J. Nagel: EdisonReport’s 2018 Person of the Year

December 20 [addtoany]

EdisonReport names Vernon J.  Nagel, Chairman, President and CEO of Acuity Brands, Inc. its 2018 Person of the Year.  While Mr. Nagel has had a profound effect on Acuity Brands and our industry over his long career, our decision for 2018 was based on his leadership in managing product portfolio and pricing challenges throughout the year.  Our industry remains in a state of turmoil and low margins which are dramatically reshaping our companies for the worse. While Acuity has pulled back their last increase, which was tied to the now-delayed 25% tariff increase, we think their strategy of addressing pricing —not all tied to tariffs—was brilliant. Some companies chose no increase while others offered one large increase, solely tied to tariffs. Those increases are now being rescinded, leaving the companies with continued low profits.

Last week, we sat down with Vern for a wide-ranging discussion.  Sero Cardamone, SVP – Global Sales and Dan Smith, SVP – Treasurer and Secretary, also participated in the discussion.

When I speak to investors, one question I cannot answer is, “Why is the lighting market not as robust as the overall market?”  What is that answer?

Yes, it’s as if the words and the music don’t quite match.   When the economy is experiencing low interest rates, good employment, absorption of real estate, and good rental rates, typically this would suggest a different trend.

The industry has been in a deflationary environment.  As LEDs have increased in efficiency, product development requires less chips, less heat sink, and less overall material.  The technology has created natural deflationary tendencies over time.  This has been exacerbated by the advent of foreign competition in Asia, which receives tremendous subsidization, and that subsidization has accelerated changes in the industry.

In addition, the non-residential new construction market, an area where we are quite strong, has trended down the last five or six quarters on an inflation-adjusted basis.   We would expect the lighting market to pick up as soon as non-residential construction improves.

What do you see for the lighting market in 2019? 

Non-residential construction should continue to move forward, but slowly, and residential construction is beginning to trend flat.   We are forecasting overall growth in the lighting market in the low single digits.

In one of your calls you discussed the effects of Asian imports.  How has that affected Acuity?

First, let me clarify. We believe in free trade and fair competition.  We don’t believe in unfair competition.

We are one of the largest importers of finished goods from China to serve some of our product lines. The notion that Asian-sourced product is bad is not the case.  In fact, in many cases the quality is quite good, especially for us because we work closely with the manufacturers to ensure they produce to our exact specification.   Our issues with many Asia imports are the inaccurate claims of performance as well as subsidization.  We have seen finished goods—complete LED luminaires—selling for less than the price of the steel content in the luminaires on the open market.  How can that be anything but subsidization?  We have spent a lot of time accumulating data. We don’t want to cast aspersions on product made in Asia, but we do want to cast aspersions on products that do not meet specifications.  We have tested a lot of products in our lab and many are not even close to their specs, such as initial lumens and the thickness of the steel as well as passing flammability tests among others.

Today, companies will knock off a form factor, so the products look almost identical, and they offer a five-year warranty. The customer sees two fixtures that look identical, and both have a five-year warranty, although the company producing the knock off may not have even been in business for five years.  Instinctively, the customer knows that our product is superior, but the customer is tempted by that low price.  It’s what’s inside that matters, as the quality of the driver, as well as the LEDs are dramatically different in these copycat products.  And we have a long history of standing behind the products that we sell. We must capture back points of differentiation.

How do you compete against Asian imports?

It requires having strategies to differentiate our products and brands to our customers.  The most obvious advantage – we have 13,000 associates that are laser-focused on the lighting industry. We have a strong presence in North America with a vast and robust R&D capability.   Because of our position in lighting and controls we are able to sell the value of what we produce and service what we sell.  We have very strong relationships with our customers, distributors and our vast rep network. We don’t sell direct on the Internet as we value our relationship with electrical distributors.  If the distributor decides to buy from the Internet, then that distributor probably is not a partner of ours.  We have 14 sales channels—all designed to bring value to different customer sets.

Electrical distributors are changing, and we have to change with them, too.  This is where our Contractor Select™ program comes in.  The Contractor Select program is a group of non-configurable products designed for the price-sensitive market.  They are made to our specification, so our product line is very strong in terms of quality as well as availability.  Contractor Select allows us to support the evolving distributor model and meet the competitive prices with quality product while offering excellent service, helping distributors to be more efficient.

Another huge differentiation is how we stand by our products.  Digital luminaires are not core and coil—they are electronics—and education is very important. There are many misapplications and we work with the channels to solve those issues.   Our customers know that we will stand behind our product.  In addition, many of those non-conforming knock-off luminaires have been on the market for a few years now and several are starting to fail.

Speaking of Contractor Select, we hear a lot about that program.  It seems like it took the industry a long time to respond to some of the tier II’s who aggressively targeted that stock and flow business.  Is that correct, and why did it take so long?

The NEMA numbers would tell a bit of a different story, at least for Acuity.  We act on our own and couldn’t speak for others in the industry.  I do agree that some Tier II luminaire companies have gained share in the stock and flow business and their numbers have gone up, but we have not necessarily lost share in this segment.  We have not lost any ownership or leadership in that channel, and it is a very important channel.

You are the largest lighting and controls company in the world.  Are you the largest controls company in N. America?

It’s difficult to precisely get market share data because many companies are privately held and it’s hard to compare and break out the numbers from our competitors who have residential lighting controls.  However, if you look at the controls markets where we participate, we are quite confident that we have the leadership position.

We are very strongly invested in IoT and controls.  Our 2015 acquisition of Distech Controls® helped bring technology to seamlessly connect lighting with HVAC.  Our more recent Lucid® acquisition complements our own technologies and makes us stronger in building management.  Our acquisitions allow us to offer a unified solution set to the customer.

Do you use beacon technology for indoor tracking?

No.  Beacon technology has been around a long time and we don’t use it.  Beacons are battery operated and not dense enough for many applications. Lighting is dense and now able to collect data. We incorporate VLC (Visual Light Communications) and BLE (Bluetooth Low Energy) into our luminaries, which means the communication technology can be paid for through the efficiency and quality of light.

Is VLC the technology you have deployed with your Atrius Navigator in the Atlanta’s Hartsfield Jackson Airport and at major retailers?

Yes, both are technologies we employ with our smart luminaires, which can dynamically change how a public space, retail environment or workplace operates. For example, the typical customer spends $1 for every 10 minutes in an airport.  Think of how the value of lighting grows if that customer will now spend $1.20 for every 10 minutes because the luminaires help the passenger better navigate the airport to locate restaurants, shops or other services.  Our customers are investing heavily in Atrius™ as they future-proof their facilities.  Airports, as well as large retailers, need to reach critical mass to really achieve meaningful benefits from the solution.  They have a great visual environment now, but when Atrius is fully enabled, customers will aggressively use that capability to create solutions.

What about security concerns?

Our team is maniacally focused on security. It’s also important to note our acquisition of Atrius location data does not collect or store personally identifiable information for our customers.  The end users own their own data; our job is to provide tools to allow them to track their assets and help their customers find their way.  The potential is enormous.  Each year the industry has a set amount of business. When we think about the installed base, and unplanned renovation, Atrius gives us the opportunity to optimize the value of their space.  Instead of focusing on the $3 per square foot cost of energy efficiency, they can focus on $30 per square foot of operational savings or, better yet, $300 per square foot of incremental retail sales opportunity.

What about LiFi?

We have looked at LiFi and continue to conduct research and experiment, but to get a LiFi receiver to fit inside a smart phone is very, very expensive and that is what is needed to make LiFi practical.  We just don’t see that happening in the next few years.

The industry has discussed Lighting-as-a-Service for at least ten years and there is very little current success. Do you see this recurring revenue model ever becoming significant?  What will trigger it?

We have looked at this and have a vehicle to offer financing.  It comes down to the numbers and the cost of capital. Typically, a customer will have access to credit at a lower rate than a luminaire manufacturer will offer, so when it is time to make the purchase, usually the user will use their own credit. Now, there are customers that don’t have access to credit, but that is a different type of customer.  We don’t see Lighting-as-a-Service having a major impact anytime soon.

Do we have enough tradeshows in our industry?

There are a lot of tradeshows, and they are expensive. We like the Light + Building model where that show is held every two years.  That makes more sense.

How important are the independent lighting manufacturer’s reps in your business?

We invest in our rep network and they are vital to our success.  We believe that our people, our 13,000 associates, along with our rep network gives us a tremendous advantage in the market place.  We bring our reps in for training to Conyers about a month before LIGHTFAIR so they know what we are launching.  Our average longevity with reps is 26 years.  In fact, next year we will celebrate 50 years with Davis and Associates in Minnesota.  We are very loyal to our reps and they are loyal to us.