Challenged Lighting Market Affirmed- Q2 Pulse of Lighting Report & Acuity

The US lighting market continues to be “challenged” according to our Q2 Pulse of Lighting (click here if you’d like to order for only $35) report and affirmed by this Acuity’s Q3 earnings report this morning (they are on a fiscal year.)

Based upon information from DISC, the lighting market continues to lag total sales for the electrical distribution industry.

Before I share observations from the Pulse of Lighting report, which is sponsored by William Blair and received over 200 responses from electrical / lighting distributors, manufacturer reps / lighting agents and lighting manufacturers, let’s review Acuity’s earnings call with a focus on ABL, their lighting division.

Acuity Q3 Earnings Call Insights with additional input from their presentation and 10-Q

• “Solid results” (with the emphasis on strong operating profit and margins.)
• Focused on new products, technology, productivity (Technology and productivity are hopefully resulting in improved service and product availability for distributors. The new products are needed to generate new opportunities and perhaps give end-users a reason to consider a lighting investment.)
  • It’s interesting that Acuity dedicated time to a few specific products. Given that the audience is the analyst community … do they care? Probably only if these SKUs generate significant sales. Will they ask Acuity about these SKUs next quarter or two? Doubtful!
  • Also discussed some custom projects. (Question, will Acuity convert these examples into case studies to highlight the company’s capabilities, creativity, innovation and nimbleness?)
  • And touted a number of awards that they’ve recently won.
• Mention of the 3 product portfolios – Made-to-Order, Design Select and Contractor Select. Majority of products (sales?) are Made-to-Order.
• Order rate continues to grow YoY and they built backlog. They expect the order rate to continue to grow in the next quarter (summertime).
• Q2 (Acuity Q3) lighting results:
  • Net sales $899M, a decrease of 4.5%
    • Independent sales agent channel was down 7.1% from $686 million to $637.1 million in their Q3 vs 2023 and represents 70.9% of sales. (Acuity said “challenging comparables”.)
    • Corporate accounts were up vs 2023 Q3, OEM was flat, retail was down a little (and Acuity did <$46M last quarter via retail) and down a little with its direct sales network.
    • ABL operating profit up 2%.
    • Corporate accounts up.
    • Generated $445M of cash flow. Increased dividends. Repurchased $89M in stock (helps for increasing EPS)
    • Overall, Acuity’s lighting’s outlook is for sales to be down low to mid-single digits.
  • The Distech business grew by 15%. The company expanded its go-to-market strategy in some countries and does business via the HVACR channel in the US to pursue the building automation space. (Channel expansion should lead to revenue growth.)

Insights from Analyst Questions

• Some of the margin improvement comes from their acquisition of the OPTOTRONIC business from Osram, which enables them to be more vertically integrated.
• Infrastructure opportunities continue to show positive signs although the opportunities are not “landing yet”. (longer sales cycle)
• Some margin improvement comes from product design. Some comes from being more strategic on pricing initiatives where they are doing what CMG calls “value-based pricing”.
• Company didn’t meet their daily production targets, hence the backlog. (Could be labor issues … lack of, which is what Acuity called out. Could be some longer-term projects in the order cycle and need more “short-cycle sales.”)
• Entering, more fully and intentionally, into the C-store / refueling market with a dedicated agent who calls on that market (which frequently is national accounts for other lighting companies although there are many C-store / gas station franchisees to call on.) “Invented” canopy lighting (others may have already had). Evidently, other than the canopy SKU, this was a market that lighting agents were not calling on.

Neil Ashe, Acuity’s president and CEO, closed the call be saying “we are focused on returning our Lighting, Light and Control business to growth, while we continue to drive margins and strong cash flow.” (The company is growth challenged, like most others in the lighting space. For Acuity to reach its goals it will either need to take share, which is a significant task, or the construction segment of the economy growing, which has its own challenges. One thing it has going for it is inorganic growth … entering markets where it wasn’t before such as for DisTech, its horticulture initiative and its refueling initiative. There are some headwinds, such as switchgear and contractor labor availability, that are also outside of Acuity’s control. We’re seeing that lighting lines in the ”value-engineering” lighting segment are having more success than companies relying on brand and specifications.)

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Pulse of Lighting Insights (click here to order)

Acuity’s performance, while better than the prior quarter, mirrors the trajectory of the feedback received in Channel Marketing Group’s Q2 Pulse of Lighting survey, (which showed improvement from the 2024 Q1 Pulse of Lighting Report) albeit Acuity’s performance was nominally below survey feedback.

Overall:

• Distributors shared that they are flat to nominally up, especially when the data is converted to COGS. A significant percentage of distributors reported growth over 5%, however, not “strong” growth.
• Manufacturers report their business is flat to nominally up
• Reps / lighting agents reported mid-single digit negative, however, a vast majority of reporting reps were lighting agents. This correlates to Acuity’s sales organization and this could hint that spec-oriented, architecturally-oriented, lighting manufacturers are more challenged than suppliers that many consider “value-oriented / lines that they can value-engineer projects.”
• Distributors and representatives shared that the market is very price competitive, especially for projects.
• A key driver for lighting growth is large projects. Unfortunately, this is not a strong, or even “okay” segment of the market. Many of the large projects that are under construction in the country are data centers, which do not use much lighting, and industrial facilities. Further, there are a number of market dynamics (switchgear, contractor labor, economic concerns, interest rates, etc.) that continue to inhibit the lighting market and are expected to hang on the market for awhile.
• The outlook for Q3 is for continued improvement, however, it is cautious optimism and for a nominal growth rate.
• Less than 25% of distributors report that they have increased inventory. The lack of “restocking” speaks to distributors being conservative, indicating that they are not confident in local markets to warrant restocking or supplier performance minimizes the need for distributors to carry much inventory.
• All report that their “opportunities” are primarily in the K-12 and the healthcare markets. The WFH challenges continue to inhibit the office renovation market, which is a key segment for many lighting markets.
• Pricing is benign and the most doubt this will change. Suppliers cannot push price increases through, and field-based pricing is very competitive.
• When manufacturers and reps / lighting agents were asked about what they are hearing from specifiers and ESCOs, their feedback is about half of the market feel that the market, over the next six months is “slowing down / they are concerned. This could be a presumption that the market slows due to uncertainty regarding elections as well as longer-term impact of interest rates.

Overall, an improving but a challenging market with good news that it will continue to improve, albeit fractionally.

The Q2 Pulse of Lighting Report is available to non-survey respondents for only $35. Click here to order via PayPal. It will be emailed to you within 24 hours.