Acuity and the Q1 Pulse of Lighting

Last week’s Acuity quarterly earnings report coincided with the release of our Pulse of Lighting report and, surprisingly, the Acuity’s performance mirrored the Pulse of Lighting results.

Many have expressed concern for the first quarter, especially on the lighting side of the business. The concern was due to:

• Q1 seasonally being the slowest for lighting.
• A decline in the commercial construction market
• Implications from distribution equipment challenges
• Weather
• Interest rates, and
• A general slowdown in the electrical industry.

Further, lighting, and electrical, results, were disappointing. Was Q1 going to be a further decline?

It appears that Q3 and Q4 may have been the low point.

Let’s first take a look at the Acuity earnings report and then I’ll share an overview of the Pusle of Lighting Report (below)… a little “compare and contrast.”

Acuity Quarterly report

Looking at the Acuity Q2 transcript (which covers calendar Q1), and focusing on ABL, the lighting segment of the business:

• “Solid execution” (Which is a euphemism to analysts of “we focused on profitability because we’re not growing. Someone told me a while ago, in dealing with Wall Street, either needs to be a cash flow, or profit, engine and find a way to increase EPS or a growth engine. Acuity is focused on being a cash flow company.)
• The company is increasing margins and generating strong free cash flow. Talked about some product launches and how the 300 SKU Contractor Select offering and the Design Select offerings of configurable products is helping it meet order demands and simplify processes. This has helped to get back to “standard” lead times.
• Q2 net sales were down 4%, overall due to ABL, although its Intelligent Spaces Group was up 17%.
  • ABL order rate “continues to grow and that absent sales last year from the excess backlog, would have experienced growth” (and, if you read the transcript, there was no mention of the decline or performance of the independent sales channel. This information was left to the PPT and other sources.
• Improved gross profit margin (some probably due to product mix, more likely due to productivity gains and streamlining processes. From talking to distributors, they can be “opportunistically competitive.”)
• Increased share repurchases.

Input from Analyst Questions

• Infrastructure (IILA) projects are taking longer to turn into orders than expected.
• An analyst asked about the controls business. Acuity feels that they are “one of the largest, if not the largest control player for lighting controls.” (Interesting comment that I’m sure Lutron would disagree with, perhaps others. Acuity may be talking about a specific type / application for controls; however, I presume the industry does not view Acuity as “the largest” lighting control manufacturer.)
• Acuity was asked about Contractor Select. They’ve also improved their profitability on this segment of the business. (Acuity wants it to be perceived as “the brand of choice” for retail / electrical distributors to support stock. This is a good goal and is the approach that other comparable offerings from conglomerates should aspire to and could be why Genlyte Solutions Group (formerly Philips) and Current have been migrating to full-service reps (supply plus lighting). Cooper Lighting is investing in distributor lighting specialists, which mimics the Acuity approach. The approach also helps capture greater share of mind at distributors and can have the ripple effect of increasing mindshare / awareness / preference at contractors for design/build and discretionary business.)
• Focused on growing the Distech business in other countries. Currently doing well in US and France. See expanding in most of Europe and Australia.
• Feel margins have improved due to product design. In some cases, uses less material, others enables more to be shipped in the same containers, other times able to price for increased value, sometimes labor benefits. All contribute to improved margins.

From Acuity’s Quarterly Presentation.

• Q2 revenues of $906M, which was -4% but adjusted operating profit was $140M or up 6%
• ABL (lighting) revenues were $844M, down 5% from the prior year, or 93% of the business. The operating profit of this business was $136M, up 2%.
• For FY ’24, Acuity is expecting lighting to be down low to mid-single digits (which is where it is now.)
• Acuity shared quarterly results over the past 10 quarters which showed a net sales growth for ABL of 17.3% in Q1’22 to experiencing declines to Q4’23 of -10.5% (which was CY Q3) and slowly improved to -5.3% in this most recent quarter. Interestingly, its operating margin has not varied much.

Additional Acuity insights from other sources,

Sales segment performance:

• Independent -4% (This is, essentially, their electrical / lighting distributor segment in North America)
• Direct -2%
• Retail down -8%
• Corporate -29%
• OEM -5%

Channel Marketing Group’s Q1 Pulse of Lighting Report

Our Q1 Pulse of Lighting Report, which received almost 200 responses and was shared with those who participated and requested last week, revealed:

• Distributor performance diverged from manufacturer and rep / agent performance.
• Distributors projected almost mid-single digit performance whereas manufacturers and reps / agents had pretty much the opposite.
• Much of the difference can probably be attributed to distributors fulfilling backorders as well as serving small projects from stock.
• For manufacturers, there are “winners and losers”. Some are up, some are down.
• While in Q4 there was more destocking, it appears that stock inventories have stabilized. Almost half of the distributors have had some projects delayed.
• We heard of continuing issues with distribution equipment, Acuity and Cooper having success with product launches, price competitiveness, good quotation activity but longer sales cycles, a “choppy” construction market and more.
• Overall, the industry is not benefiting from price appreciation.

The good news …

• Each audience projects a better Q2, but not robust. It appears we’re returning to pre-pandemic industry performance.
• There is little confidence that there will be price increases from manufacturers and their sales organizations but a number of distributors either have hope or expect there to be.
• Key market segments to focus on are education, commercial retrofits, industrial segments, multi-family and healthcare.

There were also many who attended LEDucation and commented favorably on what they saw, and heard, there.

If you did not participate and want a copy, it is available for only $35 by clicking here.

And make sure to watch ElectricalTrends for our next survey.

Overall, Acuity approximated manufacturer performance in our Pulse of Lighting Report.

What are you seeing in the lighting market in your area? From manufacturers?