Acuity, Today and Tomorrow

Earlier this month Acuity combined their quarterly call (Q3 for them as they are on a fiscal year) with their Investor Day.

For those who remember Gilligan’s Island, it was a “3 hour journey.”  A nicely produced production but, to paraphrase a well-known commercial jingle, many were probably asking “where’s the light (beef)?”

The session was thematically informative with very high-level macro themes but came across as more promotional and “rah rah” in delivery. A good production for employees, probably repetition for key reps, helpful for competitors while providing some interesting expectations for distributors.

Diving into the transcript, we’ll try to segment the information into the quarterly report and some Investor Day / macro takeaways. (An if you want to watch the replay, click here and you can click here for a .pdf presentation.)

Quarterly Performance (Today) (from the report)

• Company experienced growth (which exceeded the average from our Q2 Pulse of Lighting Report, putting them on the upper end of respondents.
  • Overall sales increased 15.9%
• Expanded gross margins (so, the price increases are helping as they their business mix changes to selling more of their Contractor Select line.)
  • Overall gross margin is 43%, up almost 1%
• Segmented their business to Acuity Brand Lighting (ABL) and Intelligent Light Spaces (ISG)
  • ABL was up 14.6% overall with the independent sales network (lighting agents) up 14.3%
    • ABL operating profit up 28.3%
    • Attribute sales growth to “go to market” improvements and recovery in construction markets
    • Direct sales network sales saw a rebound, accounting for almost $100M in Q3 sales.
  • ISG sales, globally, increased 46.9% to $55.4M. They introduced a new president for this division, and this is the first time they have segmented this number.
    • ISG operating profit “increased $7.4M to $7.2M in Q3 (indicating it had been running at a loss?)
    • Acuity seeks to aggressively grow this business and, during the Investor portion of the call, highlighted that they sell worldwide through a VAR network.  The business, overall, is small, but there is much emphasis being put here.
    • Reportedly, none of their lighting agents now do (perhaps can) represent Lutron, indicating that Acuity is pushing their lighting agents to “sell the package” (which means another agent is now competing for the lighting controls business, the distributor now needs to work with two agents and there is increased competition for everyone’s time.)
  • Repurchased 3.3M shares, totaling $341M, last quarter as part of their capital allocation priorities, hence bumping the stock price
• Strategic Quarterly Topics
  • March price increase, although didn’t expect to see it materially in influence sales / cost impact until late Q3 or into Q4 due to ordering process.
  • Recently announced another price increase for Q4
  • Supply chain volatility continues and “working to mitigate” but, according to many other suppliers, they don’t see much change heading into the fall.
• Outlook
  • ABL – expects to perform at “Total Construction Market + mid-single digit” for performance
  • ISG – expecting “mid-teens” growth.

So, not much detail but “just the basics”. They performed on sales. Appear to be taking some share, especially in the construction market. May be able to perform somewhat better than others. They talk about wanting to be “easier to do business with” and are investing to “digitally transform” and be more “transparent”, operationally, with the channel. There is a sense that, internally, they are seeking a culture change, are investing in the business, focused on new products, and have quickly transformed from the prior management style to a more collaborative, open, model with a sense of urgency.

Distributors / Lighting agents … are you seeing / feeling a difference?

Investor Day (Tomorrow)

Now, bear with me as I “summarize” the transcript from the Investor Day. The PPT has bullets, but the transcript is “long (3 hours), but it helps “jog the memory of what was watched / heard”.

• Aside from Neil Ashe (Chair, President and CEO), had many other speakers inclusive of Trevor Palmer, the new president of ABL, and Peter Han, the president of ISG. Both will be keys in developing and executing the new vision.
  • Notably absent was Ricky Reece, whom many in the industry know.
• Investor Day focus was:
  • Talk about culture
  • Impact on the environment
  • “Running the company”
  • Some product development direction
• Goals are to:
  • Increase their service levels to remain the North American market leader.
  • Increase the amount of technology in both their products and how they provide services.
• ISG = Intelligent Spaces Group. Want to make spaces intelligent (challenge will be educating channel, designers, end-users and getting pulled-through contractors. For all of the effort in this segment, it is still only 6% of company revenue … so will take effort, perhaps take a different marketing strategy, perhaps require different sales channels to reach different buyer personas and perhaps sales personas.)
  • ISG is primarily Distech and Atrius product offerings.
• Going to grow through Mergers and Acquisitions and, while will continue with some bolt-ons such as the recent OSRAM deal, is seeking a “transformative” acquisition to diversify the company … could be in a different industry … but something that leverages core competencies and technology. (No ideas were given but building automation, HVAC, security are some areas that may make sense. Who knows, perhaps something internationally to really diversify the business.)
  • Company generates “a lot of cash”.
• Values-driven organization (this appears to be a “change” within the organization.)
  • Process called “Better. Smarter. Faster. (Which may be interesting “metrics”, or standards or expectations, that distributors could use for evaluating Acuity’s performance with them?)
  • Focus is on “satisfaction” (and let’s hope they use more than the Net Promoter Score and honestly ask their agents and distributors.)
• Discussed efforts to mitigate 100M metric tons of carbon by 2030 through carbon neutrality (and, realistically, much will be achieved through selling more energy efficient (LED) lighting and integrating this with lighting controls to generate energy savings. Also doing more digitally to reduce waste.)
• They ran some ads, which presumably we’ll see released in the coming weeks.

Acuity Brands Lighting (ABL

• ABL
  • Expects to see retrofit business increase as “opportunity for growth is in existing and new spaces with greater than 85% of planned indoor environments already built.”
  • “Think of luminaires with embedded network controls as a constellation of sensors which deliver value beyond lamination.” (While accurate, it’s a lofty sales ambition to get distributor salespeople and contractors to “sell” this while they compete for the order. They key will be getting the customer to want this “constellation of sensors” and identifying the various buying personas and getting them to have consensus … as it is no longer a “simple” construction project / sale.” Acuity has endeavored to try this. A different approach will be needed.)
  • Utilize technology and data to “reinvest” channel service experience to be more “consumer grade.”
  • Want to “lead the technology curve of the industry”
    • Typically launch 75+ new product families every year.”
• Perhaps starting to think of vertical market applications where “solutions” can be presented that integrate controls. Mentioned potential applications of embedded technologies with luminaries for K-12 schools, healthcare facilities, office complexes, and retail. (A simplified, example-driven, vertically-oriented application sales process, supported by the right marketing tools, sales targeting and support information that can be modularized for distributors (and lighting agents) with “snippets” for contractors, could be effective.)
  • Wants “control” over the luminaire … enables longer-term resale. Consider this the Apple approach. Acuity believes the lifecycle of a lighting project is 5-7 years before companies will consider “re-lighting” due to changing needs in the workspace and/or changing lighting technologies to deliver “more.”
  • OSRAM acquisition will take them more into industrial and outdoor applications. Also helps support a supply chain issue and gives them scale in this component, and perhaps access to the OEM market to generate some revenues, perhaps offer (license) technology to others to create an expanded ecosystem.)
  • “Embedded control is our growth engine.”
  • Giving more credence to the role of the contractor in the buying process and that contractors are driving more design / build initiatives. Also contractor wants “easy to install”, especially with controls.
  • Talked about changing culture and wanting to “do what is right for the customer, inclusive of distributor and agent” (distributors / agents – are you starting to “feel the love?”)
    • Positioning as “high-end technology company”.
    • Talked about people and how transitioned, seamlessly, during COVID’s height.
  • Emphasized “digital” with a focus on eCommerce
    • Need to meet the customer where they want to be, inclusive of retail and online
    • Digital website content is king, especially item pages and videos … and installation videos … to explain features, benefits and make it easy for the installer.
    • Focused on investing in forecasting.
  • Acuity thinks of “stock and flow” as “maintenance type work, maybe small jobs. No architect needed.
• Seeking to improve pricing algorithms
  • Capturing competitive pricing insights when feasible.
    • Automating processes to improve turnaround time.
    • Supply Chain
      • Have 18 global manufacturing facilities.
      • Developed(ing) a tool for distributor / contractor to see the status of their order all the way through the complexity of their supply chain until it is serviced locally. (They refer to it as similar to a Pizza Tracker. Whether this will be available for all projects and/or all distributors is unknown. Scalability is key. Could be a distributor differentiator. Probably available on a portal rather than integrated into distributor and agent ERP systems due to integration issues. Longer-term, this where product classification standards such as ETIM North America can be of assistance to the industry ecosystem.)

ISG – Intelligent Spaces Group

Corporate

Evolved to a hybrid WFH environment. More individual accountability and accountability to a team. Better collaborative and corporate performance metrics.

Added a communications leader where a big focus is on improving internal communications as this helps amplify, and accelerate, cultural change.

Acuity Summary

• Today and Short-term
  • Good quarterly performance on the sales and profitability side.
    • Construction market continues to grow
  • OSRAM acquisition fits a need and helps gain control
  • Positive Outlook
  • Expect continued supply chain volatile
• Longterm
  • Focus on
    • Service
    • Embedded controls for new products
    • Technology in products
    • Digital Transformation in Supply Chain, Pricing, Channel Services, Agent Interation, Marketing Tools
    • Increased focus on vertical sales and marketing efforts
  • Expect more investment in ISG as they determine a viable, long-term sales strategy to significantly grow the business.
  • M&A
    • Could be disruptive to the business depending upon size and compatibility with the core business unless acquire a strong management team that understands the “new” market.

But, for all the talk, and investment, into technology, still need to capture the order and deliver for the customer. The market wants high-end product (technology-driven) but there is a significant percentage of the market that does not (or at least has not gravitated to it or shown an inclination too.)

Distributors, lighting agents … what were your takeaways if you watched or have heard pieces of this? How is Acuity performing for you? Do you see, or expect, change?