Acuity Shares Fall 2019 Performance

Last week Acuity shared their FY 2019 Q1, fall 2018, performance. From a macro sales viewpoint, Acuity’s sales performance was good with a net sales increase of 11%, outperforming our Q4 Pulse of Lighting overall market projections (which are strictly for the electrical distribution channel.)  The increased top line enthusiasm, from an investor viewpoint, was somewhat tempered as performance is impacted by tariffs implemented in the fall.

From the earnings report:

• Performance was “solid, despite continuing inflationary cost pressures.”
• Net sales for quarter were up 11% to $933M
  • Added new customers
  • New product introductions
  • Customers accelerating orders due to tariffs (but didn’t quantify this or share sales performance by month to validate assertion)
  • Increased demand for Atrius-based luminaires and lighting controls
  • Greater shipments of high volume, more basic fixtures for smaller and mid-sized projects (basically the introduction of their Contractor Select offering. Question is, is it gaining adoption or are distributors being “encouraged” to give them some shelf space and are they taking share?)
• Sales through C&I channel was up 10%, which approximates our Q4 Pulse of Lighting Report. (of interest is last earnings report they stated that the C&I channel, for the first time, was less than 60% of business.  Now they state it is approximately 70% of net sales.)
  • “Continued weak demand for larger, non-residential lighting projects and continued product substitution to lower-priced alternatives. (The substitution issue is not going to change / migrate to premium-priced brands. The large project issue, according to Dodge Data Analytics, will continue as the market is projected to be flat, at best. Acuity would need to take share in this segment of the market to have any change.)
• Had 2 price increases in quarter.
• Expect tariffs to have some impact on growth rate (due to product consumption / customers delaying projects)
• Commented about price mix (longer term reality is that this is probably not going to improve if Acuity is successful with their Contractor Select offering – or competitors are successful with their comparable offering.  A significant segment of the market, especially for retrofits, wants / needs the lesser featured, lower price offering as contractors, and perhaps end-users, do not see a reason for premium-branded line at a higher price point, especially when they have the power of “choice” and don’t see a product difference.)
• Adjusted operating profit margin was 14.4%, down 170 basis points vs prior quarter
• Adjusted gross profit margin down 2 points to 39.5% due to “higher input costs of about 1.7 points” (An additional reason may be product mix due to Contractor Select given the need to be price competitive. Worst case it is lower GM$ / fixture, even if GM% is high … and if GM% is high for these products, eventually the market will drive it down to be further price competitive with other brands.)
• Margin impact could have been more except for “improvement in sales channel mix” (which means, given that Acuity increased sales to the C&I channel, that the C&I channel is more profitable for them than “other channels”.)
• Tier 3 & 4 sales were up 25% (from a distributor perspective, do you track this and have strategies to impact it / focus on these products or “whatever will be will be?” Lighting agents, are you tracked this way? Do you focus on it?)
• While Atrius-enabled deployments “increased” it is only with “several” large retailers. (Which begs the question, what’s the strategy to gain greater adoption for mass market? If C&I channel is 70% of Acuity sales, what % of Atrius sales and deployment are occurring through the C&I channel to capitalize upon Acuity’s largest sales channel?)
• Commented, again, on Chinese-based lighting companies (which is where much LED fixture products come from) and will continue to expand Contractor Select offering. (and key challenge here is their sales channel … and connecting with distributor inside sales to capture the retrofit business.)
• Benefited from a 10 point reduction in effective tax rate vs prior quarter
• Believe that “lighting industry will lag the overall growth rate of construction market somewhat primarily due to continued product substitutions to lower priced alternatives sold through certain channels” (unfortunately, for Acuity, the “lower priced alternatives” are an embedded reality that have been here and will be here long term.  As distributors know, it just means selling more units to make the sales goal.)

From analyst questions:

• Some of Contractor Select manufactured in Asia, and some in North America
• Contractor Select margins have improved since originally launched (perhaps better sourced or the benefit of increased volume?)
• Contractor Select sold through home center channel and electrical distribution as well as showrooms and digital retail – read … online.
• 20% of Acuity’s total sales are “produced by others” – sourced.  15% is produced in Asia which is up a bit from prior years.
• Over past 18 months, Acuity is the largest seller of flat panels in the North American market, per their data.
• Slim form wafers are replacing some types of downlighting. Good GM% but lower GM$ due to lower selling price (another concern for distributors!)
• Software revenues, as a service stream, are very small and adoption is very slow. (the expectations of this being meaningful revenue is a ways off. Nice concept, but customer utilization isn’t there yet, possibly because of going after big projects where there is theoretical benefit but need much CapEx to get fixture deployment to make it profitable and a meaningful revenue number.)
• Analysts where trying to understand when, where and why products are substituted. Acuity was a little “nebulous” about it and inferred that it is driven by the customer and only sometimes by the contractor. There was no mention of the role of the channel in this as well as the competitive environment which is not only lighting agents but also supply reps.
• 66% of Acuity business is “bid business”
• Price increases adopted at different rates due to geography, protected bids, contractual obligations with distributors / other channels.
• Primary competitors have adopted price increases (and while many other, non-branded, suppliers have done some increase, some haven’t and some delayed to the beginning of the year … or later.)
• Retail channel was up about 10%
• Utility business is growing “significantly”
• Talked much about contractor labor shortage impacting their ability to capture sales (albeit, this is a long-term industry issue, just like the product substitution issue as there are not more electricians in training coming into the market to replace the “outflow”.)

Some observations from their 10-Q:

• Finished goods inventory increased only $10M
• Acuity’s % of sales by sales channel
  • Independent sales network … 69.68%
  • Direct sales 10.61%
  • Retail 9.17%
  • Corporate accounts / sales 5.59%
  • Other .5%

Overall appears to be a good quarter albeit GM% down. Going forward, understanding the % increase for Contractor Select and what % of the business that represents would probably make analysts “happier”. The issues of product substitutions and contractor labor have been “belabored” on these calls / reports. They are the reality of the market.

As a distributor, how is Acuity performing for you? As a lighting agent, where are your challenges in selling premium branded lines and for supply reps, how are you competing vs Acuity?

Is Acuity’s perception of the market comparable to yours?