Acuity Report Disappoints; Leadership Changes

Acuity reported its 2020 Q1 / 2019 Q4 performance last week and reported a XX% sales decline of which their independent channel (C&I distributors) was down XX%.  The question then becomes, “As the industry’s largest US focused lighting manufacturer, is Acuity’s results indicative of the overall market, is the market better represented by our Q4 2019 Pulse of Lighting Report findings, is the market better, worse or somewhere in-between?”

And if Acuity is worse, why?

From the Acuity analyst call:

• Net sales decreased 10.5% but …
  • Sales down 16%
  • Favorable price/mix of 3%
  • Acquisitions added 2.5%
• Acuity believes the overall market, for the quarter, was down low to mid single digits (how does this compare to your performance?)
• Net sales though the independent and direct sales networks, which is 84% of sales, was up 6% (which, to get to -16%, or -10.5% on a net basis, means the other 16% was “way off”.  By combining independent and direct in this calculation, can’t identify what occurred specifically in the C&I market.)
  • Some of this 6% growth is due to price increases, possibly includes acquisitions in the channel performance number and includes their controls, Contractor Select and Distech performance … so “everything else” which makes apples to apples comparison not feasible.
• Lower shipments to retail represented 33% of decline (which makes non-retail down about 6%)
• Acuity believes sales down significantly, and primarily, due to “significant pull forward of orders last year prior to two price increases. (If relates to the C&I channel, this infers that distributors, individually, were down in 2019 with Acuity.  Are you? And is this specific to Acuity or did this occur with others that had price increases at the time?)
  • This may have impacted Acuity by “mid to upper single digits from last year”.
• Feel decline in the quarter was “exacerbated by additional weakness in overall demand” (in our Pulse of Lighting Report, sales show an increase of low to single digits, however, conglomerates reported a decline, inferring non-conglomerates grew at a faster rate.)
• Had enhanced gross margin (sold less but more profitably)
• Seeing increased product substitutions to lower-priced alternatives (so, no longer a “nuisance” from lower tiered suppliers. Now a “need to play to win” issue.)
• Saw decline in shipments for larger commercial projects, which is a historical strength of the company (so, until large projects come back, if they come back, the company could be challenged unless it adjusts!)
• The company is betting much on its investment in technology and hoping the controls aspect of the business gains traction soon to generate an ROI on the investment.
• Talked about Atrius and its potential but it’s still “several large retailers with SaaS applications deployed or in detailed evaluation” with these companies defined as “earlier adopters.”
• Contractor Select brand continues to grow. Now more than 10% of net sales.
• Company is in a “cost cutting” and “productivity improvement” mode while still launching new products.  “Cost cutting” included some personnel.
• Benefited from a 2.3% drop in tax rate
• Acquisition of The Luminaires Group and LocusLab totaled $302 million.
• Feel lighting market could improve in second half of 2020 based upon Dodge Momentum Index.
• Company is “leveraged to longer-cycled, larger commercial projects” which is why investing in technology but trying to play in the smaller project renovation market with Contractor Select.
• Announced new president for Acuity Brands, Neil Ashe, who has a strong technology background.  The company became acquainted with Neil a year ago when seeking assistance for “new avenues to accelerate adoption of technologies, including Atrius-based IoT solutions” (so, here’s the focus for the future)
  • Richard Reece is president of Acuity Lighting and EVP of Acuity Brands

Analyst questions

• Corporate account business is “sluggish” due to timing of releases and limited number of accounts (which is always an issue with a direct sales model in a project-driven world … can’t control customer timing.)
• Distributor / contractor backlogs are robust.
• When asked about future direction, Vern Nagel deferred to the next earnings call for Neil Ashe to respond, which infers that there will be some enhancement / revision to strategy, perhaps with a more technology focus.  Acquisitions are expected. Acuity will be considering ways to leverage the Atrius platform.

Some things to think about

• Acuity is -10% but says independent channel is up.  Since historically Acuity has said the C&I channel is about 60-65%, what makes up the other 20% to generate 84% of sales and a 6% increase?
• Is retail or direct so significant to drive the percent decline?
• Given that the company’s strength is aligned to new large project construction, what happens if the either don’t increase their share of this market or, perhaps more concerning, if the large new construction market doesn’t become a major market revenue driver? Perhaps macro issues are changing this dynamic (yes there will be some, but perhaps not as many?)
• With the company transitioning from a lighting leadership to a technology leadership, what will this mean for future direction, investments and product development / sales focus?

It will be interesting watching the new Acuity unfold.

• How is Acuity performing for you? (Distributors? Lighting Agents?)
• What does Acuity need to do, or its agents, to capture more share or be more competitive?