Insights from Acuity Brands 3Q 2024 Performance
During today’s conference call, Neil Ashe, CEO of Acuity Brands, and Karen Holcom, SVP and CFO, shared insights into the company’s recent achievements and strategic direction. Unusually, much of the discussion centered on product innovation and industry recognition rather than solely financial performance. In an earlier article today we covered the 3Q financial performance, this article will focus on the market.
Product Innovation
Neil highlighted the launch of the Lithonia Frame, a modern and sustainable luminaire designed for various indoor applications, including commercial offices and K-12 schools. He stated, “The Lithonia Frame is a great example of making products that are more valuable for our customers and more profitable for us.” The Lithonia Frame is available in three different size options with switchable technology, allowing for various lumen outputs and color temperatures. Its lightweight design and patented snap connections facilitate quick assembly and installation, while its minimal packaging reduces shipping costs.
Your humble editor was reminded of a tour in Lithonia, Georgia, over 30 years ago, where Lithonia employees were stamping out 4-lamp troffers that seemed giant compared to this 3-pound luminaire. Basically, the Frame is 4 sticks that are snapped together. It is a very clever product and worth watching the video. For me, this simple but powerful product was the highlight of the call.
Neil also discussed Acuity’s differentiated product portfolios: Made to Order, Design Select, and Contractor Select.
Market Expansion
Acuity is expanding into new verticals, such as the refueling industry, which EdisonReport reported on earlier this week. Partnering with Red Leonard Associates, the expansion is part of a broader strategy to enter markets where Acuity has not historically competed.
Industry Recognition
Neil spent a lot of time discussing awards. It is surprising but on the other hand, the research analysts probably are not aware of the design gains Acuity has made over the past few years. There is nothing like showing off awards as proof of success.
I was pleasantly surprised to learn of the upcoming North American Connect conference in Nashville. Nashville is such a great city!
Q&A Session Highlights
The best part of an investor call is the Q&A where the CEO must think on his feet.
Order Rate Growth and Market Trends:
Ryan Merkel from William Blair inquired about the order rate growth and the specific end markets showing positive trends. Neil began by highlighting the consistency in the C&I channel, particularly in regions experiencing growth, such as the South. “We’ve seen consistency in the C&I channel, especially in areas with significant growth,” he noted. He also mentioned the strength in corporate accounts and long-term opportunities in infrastructure projects.
Karen added that infrastructure continues to show positive signs, with strong quoting activity indicating potential future business.
Addressing Production Issues:
When asked about the discrepancy between orders and shipments, Neil candidly explained that orders had exceeded shipments due to not meeting daily production targets, a situation they are actively addressing. He reassured that the backlog would be cleared in the coming quarters. “We generated backlog during the quarter, but we are in the process of addressing the production issues and will be back to where we want to be soon,” he said.
Entering the Refueling Market:
Tim Wojs from Baird asked about Acuity’s entry into the refueling markets. Neil explained that Acuity historically focused on areas where they were already strong and sometimes overlooked markets where they didn’t compete. “One of the perceptions about Acuity Brands Lighting is that because we’re the largest in North America, we assumed we were the largest everywhere, which means we weren’t always good at seeing opportunities where we didn’t compete,” Ashe noted. The refueling vertical is a prime example of this oversight.
Recognizing the potential in the refueling market, Acuity decided to enter organically. Acuity developed new fixtures, especially canopy lighting, which are competitive and complement their existing product portfolio. Neil commended his team for their rapid development of the product portfolio to meet this market’s needs. I have to assume their designs intend to replace the aging first generation LED canopy lights.
Cash Position and M&A Pipeline:
Joe O’Dea from Wells Fargo, who the day before stuck to his buy rating for Acuity, inquired about Acuity Brands’ cash position, deployment opportunities, and the M&A pipeline.
Karen began by emphasizing the company’s strong free cash flow. “Year to date, we’re at $404 million of free cash flow, and we continue to invest in the business,” she stated. Karen highlighted that the first priority is investing in current businesses for growth. She also mentioned the recent 15% increase in their dividend as a reflection of their commitment to shareholders.
Regarding share repurchases, Karen noted, “When our share price is high, we buy less. When our share price is low, we buy more. We have demonstrated that consistently over the past four years.”
Neil explained that Acuity is focused on small and medium-sized acquisitions that align with their strategy. He emphasized the importance of these acquisitions in expanding their portfolio and company. “We have a robust pipeline of small and medium-sized acquisitions that fit very well with our strategy going forward,” Neil explained. He also pointed out the potential for growth in both the spaces and lighting businesses through these acquisitions.
Production Issues and Gross Margins:
When asked about production issues impacting revenue, Ashe clarified that orders turning into backlog would be fulfilled in the subsequent quarter. “We don’t have a phenomenon where orders are cancelled. Orders are orders for us,” he stated. Neil reaffirmed Acuity’s commitment to returning the lighting business to growth and expressed confidence in their long-term ability to grow the business and improve operating performance.
Jeffrey Sprague from Vertical Research Partners raised a question about production issues in an environment where demand isn’t particularly strong.
Neil emphasized that there is nothing alarming about the production issues. “We had a mild labor issue; we didn’t ramp up labor as fast as we needed to because we didn’t think we would need to ramp it up that fast. We can solve that problem in relatively short order,” he explained. “As we’ve improved our company, our expectations for our own performance are higher,” he added.
Jeffrey also inquired about the impressive gross margins despite production problems. Neil highlighted several factors contributing to this. First, he mentioned product vitality, coming back again to the Lithonia Frame as an example. “We are delivering a higher value product to the marketplace with significantly less content,” he said, explaining how the snap-together fixture reduces material costs while maintaining high value.
Regarding pricing, he highlighted the success of their Contractor Select portfolio. Neil noted that Acuity has been strategic. “We are very competitive from a price perspective, although not the lowest, we are the most competitive from a value perspective,” he stated.
Conclusion
As the call concluded, Neil Ashe reiterated Acuity’s focus on returning the lighting and lighting control business to growth while continuing to drive margins and strong cash flow. “We feel like our spaces business is impressive and growing, and we have opportunities to continue to grow our portfolio over time,” he concluded.