EdisonReport has named Alan J. Ruud the 2011 Person of the Year. Over the last month we had discussions with several leaders in the industry as well as our regular sources. We asked who has had the greatest impact on our industry in the last twelve months? The general consensus was that Al Ruud selling his company to Cree has revolutionized our industry.
Before Christmas, your humble editor interviewed Al Ruud to better understand the scope of his work. I congratulated Al on being selected and below is our conversation:
Al: You must be running out of candidates.
Ed: Oh no, no one has played a larger role in transforming the industry this year than you. Tell me about the early years, prior to Ruud Lighting.
Al: My dad was an electrician, and I worked for him as early as junior high and worked on several jobsites in high school and college so I knew what it was like to bend pipe and pull wire.
After college, in 1969, I started a consulting firm called Goulet-Ruud and Associates with one of my college professors. Don Goulet was a terrific power guy and I was a lighting guy. The business was located in Milwaukee and we grew that consulting business to over 100 people. In 1973 we were awarded the IES Edwin Guth Design Award for an indirect metal halide job at Belleville Middle School. We lit a number of schools and we began to see our product designs showing up in various catalogs.
In 1975, I started SPI Lighting while still working at Goulet-Ruud. In 1977, I sold my half of the consulting firm to Ken Rigby, so Goulet-Ruud Associates became Goulet-Rigby Associates and it still exists today under name changes that have occurred over the years.
During this time, I met Don Wandler. Don was an engineering manager at McGraw Edison in 1977. We worked on a job for the City of Wauwatosa, a suburb of Milwaukee. The city had about 8000 incandescent streetlights and wanted to replace them with 175 watt mercury vapor lamps on 23 foot mounting height and 175 foot spacing. As the design engineering firm, we were not willing to do this. GE had been selling a lot of 150 watt HPS, but we calculated that a 100-watt HPS would be the optimal solution. The problem was that there was no 100-watt HPS lamp. We went to GE and convinced them to alter their 150-watt HPS. Basically we took the pole spacing out to 200 feet and implemented the 100-watt and probably saved the city several million dollars over the lifetime costs on that job.
We sold SPI Lighting to McGraw Edison.
Ed: I was very sorry to hear of Don’s passing a few weeks ago.
Al: He was a great guy. You know the doctors diagnosed him with cancer and only gave him six months to live—that was four years ago. He continued working right up to the end. He was a great person and a great listener. He learned more from people that they probably realized. He was instrumental in our success and had a great knack for hiring. Don would interview people and not discuss the business side but the personal side. He would get in their brain a little bit and understand the way they thought. A lot of those people we hired are still with us. Don was very intuitive. We’ll miss him.
Ed: So after SPI, you and Don started Ruud Lighting?
Al: But first, I received my MBA from the University of Chicago. I realized that the second biggest cost of a fixture was all of the mark ups related to the sales channel. I wrote a paper that would later be the business plan for Ruud Lighting. In that paper, I proposed selling direct to the contractor.
Ed: I thought you sold direct to contractors because the distributors would not buy from you, because of pressure on distributors from the large fixture companies.
Al: Wrong. There is no truth to that at all. The whole concept of Ruud Lighting was based on selling direct long before the company even started. My thought was that if it didn’t work, I could always go back, with my tail between my legs, through distribution if there were no other choices.
Ed: So how did you start?
Al: We went to the NECA show in 1982 and were very well received by contractors. We were profitable in 1983 and doubled business every year for many years.
Ed: Were you well received by ALL contractors?
Al: Not all. Certain contractors had issues with buying direct. It was the smaller and medium contractors who were the most receptive. Some contractors were beholden to distributors because of credit and some contractors felt there would be retribution from distributors.
We felt like we helped the industry because we would establish competitive price levels and we published those price levels. Other manufacturers would match Ruud prices, but we could ship faster than anyone else.
Because of my spec background, we developed spec grade products, which matched the performance of the legacy companies. The contractors became our best salesman. They would see how hassle-free our ordering process was compared to the electrical distributor who would wait and aggregate orders. Our quality and service really set us apart. With the experience of working for my dad, I recognized how important it was to make the entire process contractor friendly. Even today, we are making improvements. Recently, we looked at the Cree CR series of Troffers and developed very unique packaging that reduce contractor time for moving materials. Because there is less packaging, there is less labor. Less packaging is also better for the environment. I am conscious of these things from my upbringing.
Ed: Did you offer credit to the contractor?
Al: No not really. We did have a credit price, but it was so much more expensive than our pre-paid price, very few contractors used it.
Ed: In the early 80’s not everyone had credit cards. Did you ship COD?
Al: We really did not do COD as we would try to get the check in advance. We even allowed people to fax a copy of the check and we could enter their account number with the bank. We really were on the forefront of electronic commerce. Fortunately, there were enough good contractors that did not need the distributor. We wanted to reward these contractors that had the cash flow to front end the order. We felt they should have a price advantage on the bid. It was payment in advance. Period. We didn’t have to spend money chasing contractors for money.
Ed: What were your product core competencies?
Al: We had very good thermal management. At that time, there were many HID failures because of ballast heat. We created a chimney between the capacitor and ignitor and the core and coil. This chimney helped to remove ballast heat so thermal management was one of our most important design features—and it still is today with LEDs.
Another design win was to have a distinctive look with one base platform, which allowed us to offer seven different fixtures from the same base design. Take security lighting for an example, this one to seven platform allowed us to have lower inventory and superior service. When we developed our floodlights, we patented the internal hinge. This was one of Don Wandler’s ideas. It was so simple it was brilliant. We started with a 16-inch shoebox then a 12-inch, then a 22-inch. It could be a shoebox, a ceiling mount, a canopy, etc.
Ed: I used to sell ballasts to you in the 90’s and I remember Kris Pomeroy and Cindy Madsen telling me that some electrical distributors purchased from you in spite of your selling direct to contractors.
Al: That’s true. Even today, probably 20 to 25% of Ruud Lighting’s sales are from Electrical Distributors. First, there are a lot of specifications from engineers who know that we don’t play around with pricing. Second, the specifier knows there won’t be problems. The lighting designer gets a package price and it will be problem-free, so designers specify Ruud fixtures. Third, distributors usually receive our products faster and we gave them volume pricing.
Ed: Kris and Cindy also told me about surprising statement about benchmarking. Ruud Lighting did not want to know what their competitors were doing as it would only slow you down. They said that Ruud preferred to benchmark against the automotive and airline industries.
Al: We didn’t look over our shoulder a lot. The electrical industry is too inbred and there were things we could learn from the outside. The electrical industry by and large is pretty slow to change. You know this, Ed. Some companies in our industry prefer slowness to change as they receive better utilization of their assets over time. The core technology has been the same in the lighting industry and some people are pretty comfortable with that. I am not.
Ed: In the 1990’s, I attended the open house when the DeltaGuard® finish was introduced.
Al: That was a great move for us. Originally it was a defensive move which turned offensive. Prior to implementing Delta Guard, we outsourced our painting and used the same polyester coat over a five stage pretreatment, like everyone else. And we had the same problems as everyone else. Our largest warranty cost by far was paint finish problems.
When we added an additional building, we were going to have a normal powder-coat paint system. Then we learned what Lee Iacocca was doing in auto industry and we chose an in-between approach. Quality improvement does reduce cost. In some ways, we spent the first 25 years building a basis to launch LED. Today, the paint finish is so much more important. There is an expectation that no corrosion will occur in15 years and we can do that with some of the things we did 20 years ago.
Ed: Do your competitors have an equivalent to DeltaGuard®?
Al: I think no one else had done DeltaGuard because of the high implementation costs. All of the legacy companies already had invested in powder coat, so it would not make sense to do this. We had no investment in powder coat, so when we did invest, we went state-of-the art. We actually stopped the project and added the pits because the building roof was already in place.
Ed: What was the deal with selling to ADLT/Venture Lighting and then repurchasing the company?
Al: We were both at a point where the growth was leveling and we needed a catalyst to grow. Venture had pulse start and reduced jacketed lamps. We thought we could do more together than separately. However we had different cultures in the two companies. On paper it made sense. They had good people and we had good people. But at the core, the cultures were different.
GE was a 20% shareholder and my family and I had another 20% and ADLT needed some money for growth. It was this need for cash to continue progress that was the catalyst for buying back the company, as it was easy to carve out Ruud Lighting. Since I had a 20% stake in ADLT, I had an incentive to protect my interest and it worked great for both parties. Buying Ruud back gave ADLT cash, which they used to grow their business.
Ed: So no there was no rift between you and Wayne Hellman.
Al: Not at all. It was a way to generate cash and it was a win-win for ADLT and for Ruud Lighting. They are still a major supplier today.
Ed: I think Ian Lewin did a similar thing with Lighting Sciences.
Ed: Let’s talk about LED.
Al: We started in 2006 and went to LIGHTFAIR and showed a few products in a hotel suite in Las Vegas. This was an effort to show what can be done with LEDs. Basically we tried to put LED in existing products and we learned that it must be a ground-up design. We pulled one team to work solely on THE EDGE® LED product line. That year, we held a national sales conference at American Club in Kohler, Wisconsin. You may have seen a great photo on the Whistling Straits Golf Course with HPS on one side and LED on the other and the moon came up between the two. Ian Lewin spoke about the white light and the photopic-scotopic discussion was quite helpful. This was the initial introduction.
We decided that LIGHTFAIR 2007 would be our major launch and had a 20 x 20 booth for BetaLED®. You’ll recall that I have not been a fan of LIGHTFAIR, but we were going after the specifier market and this was a perfect venue. This is why we were there and it was a great show. There were only three companies showing LED: Cree, LLF, and Ruud (BetaLED).
Ed: You made a statement in 2008 that surprised many of our readers. You said in a press release, thank goodness for LED’s because you were making money in that business. We had a lot of comments on that statement, because the consensus at the time was that NO one made money in LED.
Al: We did. We were able to do it because we had the infrastructure in place. We were fully allocating cost and we were increasing sales. Yes, we did have an increase in R&D costs, but the LED line had good margins—more than enough to cover the incremental cost. The structure was there and that was the key.
Early on we knew that solid state lighting will replace most incumbent technologies. The question was how fast. I made the bet when I did. What was the downside of moving fast? Maybe we will be there a little before technology is ready. That was OK, because we would establish our processes, get the jobs, develop the IP and have the experience to optimize products as the technology moved along. Fortunately, the technology moved along at about the same rate as we introduced fixtures and our timing was just about perfect.
Ed: You also tried electronic eHID but did not have success.
Al. That is fair. We tried it. It failed and we moved on. The metal halide lamp is a very complex lamp and there are a lot of issues with it. We bloodied our nose with it. Today there are some good eHID products, but it is probably too little too late. Fiber optics has the same issue. All of a sudden LED has replaced it.
Ed: What is the latest on your IP litigation with IMS/Cooper Lighting? I think you were on the Board of Directors of IMS?
Al: I was on the Board of Directors of IMS for a short time. We owned a portion of the company but sold that interest years ago. The cases are proceeding in the hands of the lawyers now and I don't really have any comment.
Ed: Let’s talk about the $525 million sale to Cree. How long was the mental process of considering the opportunity.
Al: January or February, Christopher and I had dinner with Chuck Swoboda and he raised the idea. We knew they were coming with the CR series at LIGHTFAIR in May and that they really wanted a more comprehensive package to offer including the outdoor and I told him we would consider it.
We told Chuck like we told everyone and that was that we are having a good time and thought that we were having an impact on industry. We were not looking to sell the company, but we did not close the door. We talked it over a couple of months and we knew a lot of great people at Cree so we felt very comfortable with them. Internally, we had the ADLT thing about culture and had to bring our minds around it. Early on, money was never discussed. There were two basic issues: Do the two cultures mesh and does it make sense from a business proposition?
We knew we would be a major Cree shareholder afterwards and wanted to make sure there was no debt. There was none. On Good Friday, we met with them, and discussed the framework of a deal. In essence that became the deal. We had an informal structure until the end.
Ed: How is it going with the reps?
Al: We are still working on that. We are 120 days into this and we have some great reps. There were only had five common reps between the two companies. Over 300 sales reps are coming in for meetings and training in the next few weeks.
Ed: The value of Cree stock is down from about $37 when the acquisition occurred to about $21 to $22. Comment?
Al: The world economy is in a mess right now. We are a high beta stock because of our growth and we are going through a transition now and that integration is going very well but things never move fast enough for me. Between the economy and the transition, we have seen a decline in the stock price. Now, I am not blaming the economy on stock price as we have yet to prove what we can do together.
Our goal is to grow the LED revolution and we must continue selling LED components on the other side. Some companies feel threatened but this is a huge opportunity for companies to grow their business.
We will have a strong presence at Light +Building in Germany next year as well as LIGHTFAIR. We have a solid technology platform which will continue to experience dramatic improvements.
We have the opportunity, as an industry, to change out everything we have done in the last 50 years. It makes financial sense and the end user will have a better visual space. Think about that opportunity. If we just look at new construction and remodeling, it is a pittance of what it can be. It just makes common sense to change everything out. Some companies don’t grasp this.
My objective is to show that Cree did not pay anywhere near enough for this company. If that is the case, we are all winners.
Disclosure: I am long CREE.