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Daily Letter | 1

13 August 2013

Andy Bell +44 20 75238357

Josh Baribeau, CFA 1.617.371.3892
Transportation and Industrials -- jbaribeau@canaccordgenuity.com
Jonathan Dorsheimer 1.617.371.3875
Industrial Technologies jeddorsheimer@canaccordgenuity.com
Chip Moore, CFA 1.617.371.3879
John Quealy, CPA 1.617.371.3837


Welcome to the inaugural issue of Industrial Insights, a new publication that offers unique
analysis and actionable investment ideas targeted at the broader industrial sector.
Published on a regular basis, Industrial Insights will feature fresh content and commentary
from senior analyst teams across Canaccord Genuity's global research platform in North
America, Europe and Asia. Each team brings a differentiated perspective and award-
winning expertise in the capital goods, electrical equipment, engineering & construction,
transportation, chemicals, agriculture and sustainability disciplines. Occasionally sprinkled
with commentary from Canaccord's macroeconomic team and a dash of historical
perspective, Industrial Insights seeks to capture the trends and technologies impacting (and
perhaps transforming) the industrial marketplace in both the short and longer-term.

This issue includes brief thoughts on the tone (and at least one transformation) of business
in the electrical equipment marketplace during the Q2 earnings season (John Quealy and
Chip Moore), a related, bullish (and timely) call out of our European capital goods practice
(Andy Bell), while we wrap up with a more cautious view on a specific part of the
lighting/LED ecosystem from our resident experts (Jed Dorsheimer and Josh Baribeau).

We hope you find the reading and future installments valuable.

Earnings season – not sensational, but supportive of the recent market strength in
At a high level, we found second quarter earnings across the Industrial sector to be in line
and even encouraging in many areas (e.g., energy) while pockets of weakness seem smaller
yet continue to dampen specific sub-sectors (e.g., utility spending). By geography, North
American markets for the most part supported growth, along with Asia, while Europe,
Latin America and the Middle East appeared to offer more variable observations. As a
sector, Industrials held up well in terms of meeting and beating estimates (see below).

Canaccord Genuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : LSE)
The recommendations and opinions expressed in this research report accurately reflect the Investment Analyst’s personal, independent
and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information,
please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuity’s Online
Disclosure Database.
Daily Letter | 2
13 August 2013

Figure 1: ~74% of S&P 500 Industrials have surpassed EPS expectations (~90% reported)

Source: Factset, 8/9/13

For example, month on month order trends for the electrical equipment and capital goods
leader Emerson Electric began to grow again after a tough H1/13 (see Figure 2 below),
perhaps most encouragingly in Network Power, which saw an increased level of activity in
the European datacenter market for the first time in several years (a data-point that fellow
supplier Eaton Corp. also reported and that appears encouraging for enterprise/industrial
Ethernet vendor Belden – see our note below). At the same time, Industrial Automation
trends also seemed to improve a bit for Emerson, a proof point supportive of the recent
Schneider purchase of Invensys. Here, we agree with our colleague Andy Bell, who has
previously highlighted revenue synergy potential given Invensys' customer base of leading
global petroleum, chemical and food & beverage companies – areas where Schneider is not
so strong given its focus on non-residential and utilities & infrastructure customers (while
Schneider is a leading global discrete automation company, it currently has no presence in
process automation where Invensys is one of the top six players globally).

Figure 2: Emerson monthly order trends

Trailing 3-month averages, % change y/y (ex M&A)
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
Process Management 0 to +5 +1 to +6 +5 to +10 -5 to 0 -5 to 0 +5 to +10 +10 to +15
Industrial Automation -10 to -5 -10 to -5 -10 to -5 -15 to -10 -15 to -10 -10 to -5 -5
Network Power -5 to 0 -5 to 0 -10 to -5 -10 to -5 -10 to -5 -5 -5 to 0
Climate Technologies +5 +10 to 15 +5 to +10 0 to +5 -5 to 0 -5 to 0 0 to +5
Commercial & Resi Solutions +5 to +10 0 to +5 0 to +5 0 0 to +5 +5 0 to +5
Total 0 0 to +5 0 -5 to 0 -5 -5 to 0 0 to +5
FX 0 1 0 -2 -2 <-1 <-1

Source: Canaccord Genuity and company reports

…but pockets of demand inconsistency remain

In contrast to the aforementioned, companies with technology and product exposure to
utilities and municipalities continued to show weaker results and forward visibility (e.g.,
Xylem, Itron, Ameresco), while others made transformational strategic decisions to
streamline related muni/utility exposure.

Here, we find ESCO Technologies, a diversified provider of highly engineered products,

announcing its attention to divest the legacy Aclara business (automatic meter reading
Daily Letter | 3
13 August 2013

hardware and software) last Thursday after over 25 years of serving the U.S. marketplace.
(Interestingly enough, ESCO itself is an Emerson spin-off from 1990 – a transaction
expertly chronicled in the acclaimed value investing testament “Margin of Safety” by Seth

Figure 3: Margin of Safety: Risk Averse Value Investing Strategies for the Thoughtful Investor

Source: www.amazon.com, available new from $1,979.95/used from $995.90

While the successful penetration of AMR technology (especially powerline technology)

amongst U.S. electric cooperatives and municipalities (upwards of 70%) certainly played a
part, ESCO's management is seeking to increase both revenue visibility and returns across
its industrial portfolio, including a market-leading liquid filtration and RF testing platforms.

Europe shows some life…and we highlight Legrand as a compelling BUY…

Our colleague Andy Bell reiterates his BUY rating on Legrand as one of his top picks in the
European sector. While its business delivers as a consistent cash generator, we believe the
shares are undervalued as the Street works to understand the model. Andy's note
comments on recent Q2 numbers but then does a deeper dive on the core drivers behind
this electrical components leader (see below).

…while valuation is full for lighting sector leader Acuity Brands

Our resident lighting/LED expert Jed Dorsheimer reports that “after a +70% return since
12/11/12, we are finally stepping to the sidelines on AYI shares on the heels of a strong
quarter due to valuation. While we see nothing fundamentally wrong with the secular
thesis, company or positioning, we would simply become more constructive on pullbacks
versus at current levels.” Jed and Josh have had a strong track record in this space, and
we offer the full piece below.
Daily Letter | 4
13 August 2013



Investment recommendation
While tougher Q4 compares and a variable demand environment (including slowing China)
keep expectations in check (and risk/reward more balanced), a more constructive order
outlook and solid management execution (costs, buyback) deserve a better multiple.

Investment highlights
End-markets stay variable near-term, while order trends improve modestly (GFI
outlook stays subdued). The monetization of embedded is a clear positive, shifting
focus to core operations (and driving incremental buyback of ~$600M). FCF stays very
strong (~$1.77B YTD), supporting additional M&A opportunities.

Management expects underlying sales growth in F2013 of ~1% (from ~1.5-2.5%), with
EBIT and pretax margins roughly flat y/y (ex goodwill charges). Full-year EPS
guidance is anticipated at the lower-end of the ~$3.48-3.58 range (implying Q4 closer
to ~$1.11).

Our estimates (now ex-embedded for '14) adjust to: F2013 to $24.7B/$2.78 (from
$24.9B/$3.48); F2014 to $24.7B/$3.80 from $26.0B/$3.85.

Emerson Q3/13 review

Emerson reported Q3/13 (June) GAAP revenues/EPS of $6.34B/$027 vs. our $6.43B/$0.96
estimates and the Street at $6.44B/$0.98 (excluding goodwill impairment charges, EPS
were ~$0.97). Underlying sales declined approximately 1% (~1pt headwind from
divestitures, FX neutral). By geography (underlying), the U.S. decreased ~3%, Asia
decreased ~3% (China down ~4%), and Europe declined ~6% (underlying growth in
emerging markets ~2%). Gross margins of 40.5% and adjusted EBIT margins of 16.1%
were both flat vs. Q3/12. Revenue/EBIT margin results and related details by segment:

Process Management: $2.18B/21.5% vs. our $2.25B/22%. Sales growth of ~3%

(reported and underlying) was driven by energy and chemical markets (offsetting
difficult y/y comps with recovery from Thailand flooding). Underlying orders increased
~8%, with double-digit growth for the systems and solutions business (power and
water particularly strong). North America saw improving orders, while China orders
saw double-digit growth.

Asia +8% (13% growth in China)

Europe flat

U.S. down ~6% (improving orders)

Looking forward, management expects end-market project demand to stay strong

(with momentum carrying into next year), though sales and margin comps stay
difficult through Q4 (given flooding recovery).
Daily Letter | 5
13 August 2013

Industrial Automation: $1.28B/16.1% vs. our $1.20B/18%. Sales decreased ~7%

(reported and underlying), reflecting continued weak global markets for capital goods
(power generating alternators stay weakest, though orders look to turn positive near-
term as inventory destocking slows).

U.S. down ~6%

Europe down ~13%

Asia flat

Looking forward, management expects some stabilization (with improving order

trends), though overall conditions stay challenged (particularly Europe).

Network Power: $1.51B/8.1% vs. our $1.53B/8%. Sales decreased ~5% (reported and
underlying), as continued telecom weakness offset increased demand for data center
infrastructure (embedded computing and power business down double-digits on
product rationalization and difficult end markets).

As mentioned, Emerson announced the pending sale of the embedded business, with
Platinum Equity agreeing to purchase a 51% stake for ~$300M cash (expected close in
~3-6 months). Results will continue to be reported in Emerson's 2013 results, while
the equity method of accounting will be used (49% interest) once the transaction is
complete (with goal of exiting remaining 49% stake in ~3-4 years). Notably, this
business served as roughly a 200bps drag on sales growth and 150bps drag on
margins in '13.

U.S. down ~1%

Asia down ~13%

Europe down ~4%

Looking forward, management expects end markets to continue to improve (order

growth resumed ex embedded), though y/y comps stay difficult in Q4 (large Australian
project completed).

Climate Technologies: $1.12B/21.0% vs. our $1.1B/20%. Sales decreased 2% (reported

and underlying), as residential air conditioning markets paused after a very strong
prior quarter (inventory destocking and mild weather impacted demand).

U.S. down ~3% (residential AC paused after very strong Q2, impacted by mild
weather and destocking)

Europe down ~5%

Asia down ~2%

Looking forward, management expects growth to resume for residential AC, with
improving commercial market demand.

Commercial & Residential: $472M/20.4% vs. our $500M/22%. Sales decreased ~2%
(underlying sales growth of ~4% after adjusting for Knaack divestiture). Growth was
driven by continued growth in NA residential investment (offsetting weaker
commercial demand).

Management expects modest growth to continue near-term, with solid residential and
improving nonresidential demand (Europe stabilizing).
Daily Letter | 6
13 August 2013

Guidance: Management now expects underlying sales growth in F2013 (September) in the
range of ~1% (from ~1.5-2.5%), with EBIT and pretax margins still roughly flat y/y (ex
goodwill charges). Full-year EPS guidance is now expected at the lower-end of the prior
~$3.48-3.58 range (excluding charges, with GAAP closer to ~$2.78). FY14 growth is seen
in the ~2-4% range currently based on global GFI trends.

Balance sheet: Emerson had total cash and equivalents of ~$2.81B as of 6/30/13 (from
~$2.62B at 3/31/13), with total debt unchanged at ~$5.545B. The company generated FCF
of ~$850M in the quarter (vs. ~$705M in Q3/12), bringing year-to-date FCF to ~$1.77B (vs.
~$1.31B in equivalent period last year). Full-year FCF is projected at ~$2.7B. The sale of
embedded (and related tax repatriation) drives incremental buyback of ~$600M. M&A
appetite looks to bump up to ~$1B in '14 (from ~$100M in '13)

Our 12-month target of $65 (from $60) equates to ~9.8x our F2014 adjusted EBITDA
estimate of $5.1B.

Global macro conditions, M&A integration, commodity costs, FX fluctuations and
competition are among the risks.
Daily Letter | 7
13 August 2013


Investment recommendation
Our thesis stays intact, as Belden enters a new phase of its transformation following recent
strategic actions. The portfolio is in place, with new segment alignment positioning the
company for growth and margin enhancement, in our view. Maintain BUY.

Investment highlights
A solid quarter, as emerging markets growth (~13.5%), share gain and mix helped
offset a variable demand across developed markets (driving record profitability).
Notably, European enterprise spending looks to be improving, which could be a
welcome tailwind in 2014+.

The balance sheet stays robust (FCF ~$46.8M), supporting M&A (“dry powder”
~$468M) and buyback (~$162.5M remaining).

The mid-point of full-year guidance gets tweaked up slightly (to ~$2.09-2.12B/$3.54-

3.69 from ~$2.07-2.12B/$3.49-3.69), while Q3 expectations are set at ~$525-
535M/$0.90-0.95. Full details below.

Our revenue/adjusted EPS estimates adjust to reflect reported results. F2013 to

$2.1B/$3.68 from $2.1B/$3.63; F2014 to $2.2B/$4.16 from $2.2B/$4.10.

Belden Q2/13 review

Belden reported Q2/13 adjusted revenues/EPS of $532.6M/$0.99 vs. our $540.0M/$0.95
estimates and the Street at $536.8M/$0.94 (Q2 guidance called for revenues in the range of
~$530-540M and adjusted EPS of ~$0.90-0.95). Revenues were up 16.2% y/y (roughly flat
y/y on adjusted basis), with adjusted gross margins up 360bps y/y to a record 35.2% and
adjusted operating margins up 210bps y/y to 14.2% (already within new 14-16% long-term
goal). Miranda and PPC contributed ~$103.5M in the quarter (offset slightly by ~$24.5M
headwind from sale of Consumer Electronics), while Enterprise Connectivity outperformed
vs. our expectations. European sales (~16% total) were down ~8.1% y/y and 1.9%
sequentially, while the U.S. declined ~0.9% y/y on an adjusted basis. Adjusted growth was
strong in Mexico (+42% y/y), Indonesia (+33%), EMEA (+25%), China (+7%) and Brazil

Industrial Connectivity ($171.9M/14.4% OM): Sales decreased ~1% y/y (flat organic after
adjusting for copper, currency and inventory adjustments). Organic growth outperformed
market trends, driven by strength in emerging markets (offsetting European challenges)
and continued success with the global accounts program. Adjusted operating margins of
14.4% reached longer-term corporate goals (driven by higher volumes and productivity).

Industrial IT ($58.1M/$19.5% OM): Sales increased ~3.4% y/y (+2.2% organic adjusted,
+8% year-to-date), while adjusted operating margins of 19.5% increased ~70bps y/y and
190bps q/q (with good leverage on growth).

Enterprise Connectivity ($132.9M/11.1% OM): Sales increased ~2.7% y/y (3.5% organic
adjusted), while operating margins improved ~340bps sequentially. Management remains
focused on opportunities for margin expansion (further expansion expected), with product
mix and growth in emerging markets expected to be favorable looking forward.
Daily Letter | 8
13 August 2013

Broadcast ($169.7M/14.2% OM): Sales were up significantly y/y as expected, with Miranda
and PPC contributing a combined ~$103.5M (both performing in-line with expectations).
Core demand was soft (expected), as Q2/12 benefitted from the cyclical impact of
Olympics/elections (~$2-4M y/y headwind) and PPC organic growth was negatively
impacted by deliberate product rationalizations (~$2-3M). Secular tailwinds remain firmly
intact looking forward, with operating margins increasing ~90bps sequentially.

Balance sheet: Belden exited the quarter with total cash and equivalents of ~$476.2M
(from ~$469.4M at 3/31/13), with total debt of ~$1.33B (unchanged). Cash generated in
operations was ~$58.6M for the quarter excluding 1x tax items (~55.3M YTD, with FCF of
~$38.2M), with expectations for continued strong NI conversion in '13 (100%).

The balance sheet stays strong overall (at goal of ~2.5x net debt/EBITDA, with
management estimating total “dry powder” of ~$468M at quarter end (as M&A remains a
distinct priority). Belden also repurchased ~584K shares for $31.25M in the quarter (4.9M
shares repurchased to date, with ~$162.5M of availability).

Outlook: Belden increased the midpoint of F2013 expectations, now targeting adjusted EPS
of ~$3.54-3.69 (from $3.49-3.69), with sales in the range of ~$2.09-2.12B (from ~$2.07-
2.12B). Q3 sales are expected in the range of ~$525-535M (yielding adjusted EPS of
~$0.90-0.95). Guidance factors quarterly interest expense of ~$19M and a ~25% tax rate.

Our 12-month target of $70 (from $62) equates to P/E and EV/EBITDA multiples of ~17x/~11x
our ‘14 estimates, respectively.

Global macroeconomic conditions, lumpy and seasonal sales patterns, commodity costs,
competition and M&A integration.
Daily Letter | 9
13 August 2013


Investment recommendation
As the company transforms its strategy around the diversified industrial technology
market, out-year earnings power remains undefinable until future M&A takes hold.
Consequently, we take a wait and see approach.

Investment highlights
We favor bold moves like this - divesting Aclara (~$225M/$0.25 run-rate) in hopes of
buying a complimentary “niche” technology business that follows the more consistent
return profile like the remaining assets of Filtration and Test.

The company hopes to close this sale in 60-90 days (our sales price estimate is roughly
~1x EV/Sales) and then pay-down debt while a suitable strategic purchase is identified.

While the quarter results get de-emphasized given this news, guidance gets formally
reset, with adjusted EPS (ex Aclara) forecast in the range of ~$1.35-1.45. Underlying
bookings remain firm.

We adjust our estimates for the Aclara sale and related debt repayment. Specifically,
our FY13 rev/EPS estimates go to $558.4M/$1.45 from $705.4M/ $1.60, while FY14
goes to $552M/$2.25 from $772M/$2.50.

Q3/13 review
The Aclara business is comprised of the AMR (powerline carrier and RF) and utility
software businesses, primarily to domestic utilities. As we have noted in the past, the
lumpiness, regulatory scrutiny and competitive pressures inherent in that business are
formidable, and we can certainly understand the motivations behind the management's
decision. Importantly, the Company has elected to keep the more steady and predictable
Doble business as the core of its reformulated Utility Solutions Group.

Last night, ESCO reported Q3/13 revenue/GAAP EPS from continuing operations of
$116.9M/$0.24. More importantly, management announced plans to sell the Aclara
business (expected in next ~3 months), thus classifying related sales as discontinued
operations. While not comparable, we modeled $182M/$0.40 vs. the Street at
$188.6M/$0.55, both including Aclara. Adjusted for non-recurring restructuring charges,
reported EPS (continuing ops) would have been ~$0.33.

On a continuing basis, total sales of $117M were roughly flat y/y, with increases for
Filtration ($53.8M, +5.5%) and Doble ($26.6M, +3.6%) offsetting a ~$5M decline for Test
(down ~12.6% to $36.6M on timing of large contract deliveries). Gross margin improved
~120bps y/y, reflecting recent restructuring of the Test segment.

New order bookings (continuing ops) were ~$141M, resulting in a 1.21x book-to-bill. The
composition of the new order bookings was as follows: Filtration $62.3M (1.15x), Utility
Solutions (Doble) $26.7M (1.0x), and Test $52.2M (1.43x). Backlog was up 17% y/y to

Year-to-date cash used by continuing operations stands at ~$1.3M (~$13.5M cash

generated by Aclara). Cash/equivalents at the end of the quarter stood at $31.6M (from
35.9M exiting Q2).
Daily Letter | 10
13 August 2013

Outlook: With Aclara now classified as discontinued operations, management expects

F2013 adjusted EPS in the range of ~$1.35-1.45. Test remains on track with prior profit
commitments, while Doble revenues are expected to be slightly lower (profitability

Our $34 price target is derived by applying a 15x multiple on our F2014 EPS estimate of

The diversified business model has elevated cyclicality and complexity.
Daily Letter | 11
13 August 2013


What’s new?
A 20bps yoy increase in the H1 adjusted operating margin before acquisitions on a 0.2%
organic decline in revenues reflects the evolving geographic and product mix at Legrand.
High single-digit sales growth in new economies and in the US/Canada offset continued
difficult market conditions in mature markets outside North America while the continuing
development of new and innovative products (R&D was 4.7% of revenues) reinforced
Legrand's position in a number of markets. Not so long ago, low single-digit top-line
growth would have been required to maintain margins. Almost half of the margin increase
was accounted for by a net pricing benefit with the rest coming from lower operating costs.
Net pricing was better sequentially in Q2 and should be better again in Q3. Profitability in
France and (especially) Italy was supported by increased production (of new products) for
other group businesses. FCF of €165m (7.3% of sales) was robust and net debt/EBITDA
was 1.3x. Management expects H2 trends to be similar to those experienced in H1 and
reiterated guidance for 2013 (organic sales growth between -2% and +2% with adjusted
operating margin before acquisitions between 19% and 20% compared with -0.2% and
20.7% in H1 respectively).

Impact on the Canaccord Genuity view

We fine tune our estimates to increase our 2013 EPS forecast by 2% while leaving 2014E
unchanged. With France and Italy (33% of revenues) troughing, the US (17%) continuing to
accelerate and new economies (38%) remaining strong, we believe there is upside risk to
our numbers. Legrand is one of four companies in our universe that have generated an
annual average 10%+ free cash flow margin over the past 10 years with the cash being
successfully deployed into bolt-on acquisitions. Following the exit of private equity we
believe that the strengths of the business model may over time attract corporate buyers
(again). We remain BUYers and increase our DCF derived TP from €40 to €44. The shares
(up 24% YTD) are the second best performers in our universe after Invensys.

Legrand trades on 2.5x 2013 EV/sales compared to an adjusted EBITA margin of 19.9%.
The EV/EBITA multiple is 12.8x and the PE is 18.5x compared with the sector on 13x and
17.9x respectively. Our DCF fair value is €44. To support our PT using Quest™ we have to
delay the fade by 5 years and increase real growth to 7% which, given the management
track record, we feel comfortable with.

Share performance catalyst

PMI's and other macro data for France and Italy. Q3 results are due on 7 November
Daily Letter | 12
13 August 2013


*Please note that analyst data and Quest data may differ due to different sources and calculation
methods. The Quest analysis on this page is based on consensus forecasts
Daily Letter | 13
13 August 2013


Market share = profit margin
The key driver for margins is market share. Two thirds of sales are generated with
products where the company has a market leadership position. During the downturn the
company did not cut back on product innovation. Higher volume leads to economies of
scale, which the company believes allows the company to achieve superior margins relative
to its peers.

66% of sales (57% in 2007) with either number 1 or 2 products in any given market

Number 1 or 2 in 160 product categories (~80 in 2007)

Number 1 or 2 in 44 countries (33 in 2007)

Emerging markets (13% CAGR since 2002)

Sales in emerging markets have grown from 16% in 2000 to 38% in 2012 (Schneider:
~40%). The target is to reach 50% of group sales within five years. Management has in the
past been sceptical about the margin potential in China, building up a more emerging
market balanced exposure (BRICS 18%) than for example Schneider.

Emerging sales break down as follows:

Latin America (33% of sales)

Eastern Europe and Turkey (24%)

Asia (30%) – China represents 3-4% of group sales

Middle East and Africa (13%)

Emerging markets account for 63% of production headcount, 51% of sales and marketing
headcount and 25% of R&D headcount in 2010.

New business areas (14% CAGR since 2002)

These now represent 25% of group sales and encompass:

Digital infrastructure

Energy performance

Home systems

Wire mesh cable management

R&D spending accounts for around 4.5%-5.0% of sales (2,100 R&D staff) and the company
indicates that 53% of capex is linked to new products, which represented 37% of 2012
sales. Future product development opportunities include:

electrical vehicle charging stations,

smart grid solutions and

wiring devices designed for assisted living

Cost cutting

Cost cutting measures have been taken over the past years by moving more production to
low cost countries, outsourcing non-core components and simplifying the product range,
Daily Letter | 14
13 August 2013

reducing the number of components by 60-70% on the group's range of 200,000 products.
The number of platforms has been cut from 30 with 85 ranges to 11 platforms and 60
ranges (2014 target: from 5 to 2 in Europe, 1 in US, 10 to 3 in China, 8 to 1 in Latin
America, 2 to 1 in India, 1 in Australia, 3 to 2 in International division).

This has helped the group raise its adjusted operating margin from 14% (1990-2002) to
16% (2003-2009) and to the new target level of 19-20%.

M&A – Self-financed bolt-ons

The company has announced 5 acquisitions since the beginning of 2012 with sales totalling
€180m. These deals should boost 2013 revenue growth by 2%. 72% of sales of the acquired
businesses are in emerging markets and 72% of acquired sales are in the area of new
business segments.

Since 2004, the group has acquired 32 businesses with combined sales of €1.1bn. The aim
is to buy companies at or below the group's own multiple and raise margins to the group
level over a period of around 3 years. Acquisitions are dilutive to the group margin in the
short term (~30-50bps) as target companies typically have margins between 5% and 15%.
In 2012, the margin hit was 30 bps on an underlying level of 19.9%.

Over the past 25 years, the company has only made two larger acquisitions (BTicino* and
Wiremold). While further larger deals are not excluded, these will remain infrequent.

* Arguably one of the most successful deals in capital goods over the past 25 years

Management track record over past 20 years - organic growth coupled with a bolt-on
acquisition policy. Strict cost control.

Pricing power (pricing positive over past 20 years) – driven by market share, product
innovation and strong position with buyers (mainly electricians)

Strong cash generation (at 11.1% per annum, second highest free cash flow margins in
the sector over the past 10 years)

Exposure to renovation markets (~50% of sales in mature markets)

38% exposure to emerging markets – regionally diversified

Balanced currency exposure (50% of sales and costs in €, 15% of sales and costs in

High exposure to low-growth markets France and Italy (representing 33% of group
sales combined)

Lower level of product diversification relative to Schneider

Low service revenue

Growth opportunities in emerging markets, which remain fragmented
Daily Letter | 15
13 August 2013

Recovery in North American market (17% of sales), where the group continues to gain

Further consolidation of market through bolt-on acquisitions

Expansion of energy efficiency product offer (including UPS)

Take-over candidate

Threats/risks to investment case

Increase in interest by large competitors in the wiring devices market (Schneider, ABB,

Growing number of Asian (Chinese, Indian) competitors such as Chint or Havells,

potentially leading to pricing pressure (which has not been seen to date).

More pricing pressure in new business areas (UPS, VDI)

The management team, led by Gilles Schnepp (Chairman and CEO, joined company in
1989 as deputy CFO), has been in place for many years, including the LBO period
(following a failed take-over attempt by Schneider, the group was purchased by KKR and
Wendel and was taken private between 2002 and 2005). Legrand has a very strong
corporate culture and has been able to drive organic growth while continually raising
prices through product innovation and a strong position with distributors. At the same
time, the group has been successful in buying and integrating new companies, often
purchased at multiples below the company's level. Where acquired companies have had
lower margins, these have been raised to the group average in most cases after several
years. Given the focus of the business, management knows the end markets extremely
well, enabling the company to find the right companies to fill product or geographical gaps,
often at the right price. Through a make-or-buy policy and increased production in
emerging markets, Legrand has substantially reduced capital intensity in the business,
reflected in a fall in capital expenditure as percentage of sales from over 8% in 2000 to sub
3%. Mr Schnepp owns 0.73% of the shares.

Performance based culture: The heads of countries are driven to be entrepreneurial with a
performance-based remuneration model. At the beginning of the year, multi-scenario
budgets on sales, costs, capital employed are set up. These are monitored on a monthly
basis and during a quarterly interactive meeting between group management and country
management, potential adaptations are implemented if needed to due changes in the
macro environment.
Daily Letter | 16
13 August 2013


Investment recommendation
After a +70% return since 12/11/12, we are finally stepping to the sidelines on AYI shares
on the heels of a strong quarter due to valuation. While we see nothing fundamentally
wrong with the secular thesis, company or positioning, we would simply become more
constructive on pullbacks versus current levels.

Investment highlights
We believe that Acuity remains one of the best companies in the lighting space, but we
find that much of the upside to estimates is already priced into shares after an
impressive run over the past 18 months.
The company has done a very good job of outgrowing the lighting market, gaining
share in a flattish recovery while maintaining its GMs amid mix/price competition. It
has also shown a willingness to make the difficult decisions to cut legacy costs,
offsetting much of the required investments in new markets and technologies as well.
Economic data signals a continued recovery in the US construction market. Acuity
combines this macro tailwind with the secular trend of solid state lighting, which we
see hitting an inflection point in 2014.
Our model is already factoring in a reasonable amount of TAM expansion, share gains
and the operational performance (leverage) described above, limiting further upside to
numbers. With limited upside we do not see much more room for fundamental
multiple expansion; however, we do recognize that momentum for SSL names could
take shares higher in the near term.
As AYI should be a core holding throughout this trend, we would look to become more
constructive on pullbacks or signs our estimates are proving conservative.

Our price target of $78 is unchanged based on our CY 2014 EPS estimate minus net debt
per share. We have adjusted our model slightly. We have factored in higher revenue
growth based on better-than-expected LED momentum, gains in the retrofit/re-lamp
market and a recovery in non-residential construction. We were probably a bit too
aggressive in our OPEX assumptions previously, especially following the additional fixed
cost of the company's two recent acquisitions without commensurate revenue offsets.
However, even after increasing the company's SD&A, we still show a good degree of
operating leverage as volumes ramp, albeit at a lower rate. The net effects of the higher
revenue growth with higher OPEX approximately cancel each other out.

Investment risks
Acuity is exposed to the following risks: 1) spikes in the costs of raw materials such as
metals and petroleum, much of which is not hedged or cannot able to be passed on in the
form of price increases; 2) a high correlation with the seasonality and cyclicality of national
construction spending and general business trends; 3) competition from both the
numerous large and small lighting companies in the industry; 4) a pause in technological
development of further product differentiation; 5) changes in environmental, health and
safety regulation.
Daily Letter | 17
13 August 2013


Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby
certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring
analyst's personal, independent and objective views about any and all of the designated investments or
relevant issuers discussed herein that are within such authoring analyst's coverage universe and (ii) no part
of the authoring analyst's compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by the authoring analyst in the research.

Price Chart:*
Daily Letter | 18
13 August 2013
Daily Letter | 19
13 August 2013

Distribution of Ratings: Coverage Universe

Global Stock Ratings IB Clients
(as of 28 June 2013) Rating # % %
Buy 568 59.1% 36.6%
Daily Letter | 20
13 August 2013

Speculative Buy 58 6.0% 60.3%

Hold 288 30.0% 11.1%
Sell 47 4.9% 6.4%
964* 100.0%
*Total includes stocks that are Under Review

Canaccord Genuity BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
Ratings System: HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.

“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the
designated investment or the relevant issuer.

Risk Qualifier: SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental
criteria. Investments in the stock may result in material loss.

Canaccord Genuity Research Disclosures as of 13 August 2013

Company Disclosure
Acuity Brands 5, 7
Belden 7
ESCO Technologies 5, 7
Emerson Electric 5, 7
Legrand None

1 The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated
companies. During this period, Canaccord Genuity or its affiliated companies provided the following services
to the relevant issuer:
A. investment banking services.
B. non-investment banking securities-related services.
C. non-securities related services.
2 In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for
Corporate Finance/Investment Banking services from the relevant issuer.
3 In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead
manager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offer
of securities of the relevant issuer or in any related derivatives.
4 Canaccord Genuity acts as corporate broker for the relevant issuer and/or Canaccord Genuity or any of its
affiliated companies may have an agreement with the relevant issuer relating to the provision of Corporate
Finance/Investment Banking services.
5 Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the
securities of the relevant issuer or in any related derivatives.
6 In the past 12 months, Canaccord Genuity, its partners, affiliated companies, officers or directors, or any
authoring analyst involved in the preparation of this research has provided services to the relevant issuer for
remuneration, other than normal course investment advisory or trade execution services.
7 Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive
compensation for Corporate Finance/Investment Banking services from the relevant issuer in the next six
8 The authoring analyst, a member of the authoring analyst's household, or any individual directly involved in
the preparation of this research, has a long position in the shares or derivatives, or has any other financial
interest in the relevant issuer, the value of which increases as the value of the underlying equity increases.
9 The authoring analyst, a member of the authoring analyst's household, or any individual directly involved in
the preparation of this research, has a short position in the shares or derivatives, or has any other financial
interest in the relevant issuer, the value of which increases as the value of the underlying equity decreases.
10 Those persons identified as the author(s) of this research, or any individual involved in the preparation of this
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such person's name and details are disclosed above.
11 A partner, director, officer, employee or agent of Canaccord Genuity or its affiliated companies, or a member
of his/her household, is an officer, or director, or serves as an advisor or board member of the relevant issuer
and/or one of its subsidiaries, and such person's name is disclosed above.
Daily Letter | 21
13 August 2013

12 As of the month end immediately preceding the date of publication of this research, or the prior month end if
publication is within 10 days following a month end, Canaccord Genuity or its affiliated companies, in the
aggregate, beneficially owned 1% or more of any class of the total issued share capital or other common
equity securities of the relevant issuer or held any other financial interests in the relevant issuer which are
significant in relation to the research (as disclosed above).
13 As of the month end immediately preceding the date of publication of this research, or the prior month end if
publication is within 10 days following a month end, the relevant issuer owned 1% or more of any class of the
total issued share capital in Canaccord Genuity or any of its affiliated companies.
14 Other specific disclosures as described above.

“Canaccord Genuity” is the business name used by certain wholly owned subsidiaries of Canaccord Financial
Inc., including Canaccord Genuity Inc., Canaccord Genuity Limited, Canaccord Genuity Corp., and Canaccord
Genuity (Australia) Limited, an affiliated company that is 50%-owned by Canaccord Financial Inc.
The authoring analysts who are responsible for the preparation of this research are employed by Canaccord
Genuity Corp. a Canadian broker-dealer with principal offices located in Vancouver, Calgary, Toronto,
Montreal, or Canaccord Genuity Inc., a US broker-dealer with principal offices located in New York, Boston,
San Francisco and Houston, or Canaccord Genuity Limited., a UK broker-dealer with principal offices located
in London (UK) and Dublin (Ireland), or Canaccord Genuity (Australia) Limited, an Australian broker-dealer
with principal offices located in Sydney and Melbourne.
In the event that this is compendium research (covering six or more relevant issuers), Canaccord Genuity and
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The authoring analysts who are responsible for the preparation of this research have received (or will
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will not receive, compensation that is directly based upon or linked to one or more specific Corporate
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Canaccord Genuity and its affiliated companies may have a Corporate Finance/Investment Banking or other
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Some regulators require that a firm must establish, implement and make available a policy for managing
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The information contained in this research has been compiled by Canaccord Genuity from sources believed to
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Canaccord Genuity's salespeople, traders, and other professionals may provide oral or written market
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This research is provided for information purposes only and does not constitute an offer or solicitation to buy
or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would
be prohibited. As a result, the designated investments discussed in this research may not be eligible for sale
in some jurisdictions. This research is not, and under no circumstances should be construed as, a solicitation
to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally
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of Canaccord Genuity, its affiliated companies or any other person accepts any liability whatsoever for any
Daily Letter | 22
13 August 2013

direct or consequential loss arising from or relating to any use of the information contained in this research.

For Canadian Residents: This research has been approved by Canaccord Genuity Corp., which accepts sole responsibility for this
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