Acuity Brands Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 9, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Acuity Brands Fiscal 20 24 First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations.

Operator

Charlotte, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to the Acuity Brands fiscal 20 24 1st quarter As a reminder, some of our comments today may be forward looking statements based on our management's beliefs and assumptions and information currently available to our management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that our company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements. Reconciliations of certain non GAAP financial metrics with their corresponding GAAP measures are available in our 2024 1st quarter earnings release, which is available on our Investor Relations website at www.investors.

Speaker 1

Acuitybrands.com. With me this morning is Neil Ash, our Chairman, President and Chief Executive Officer, who will provide an update on our strategy and give an overview of the quarter and Karen Holcomb, our Senior Vice President and Chief Financial Officer, We are webcasting today's conference call live. Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ash.

Speaker 2

Thank you, Charlotte, and thanks to all of you for joining us this morning. We continue to demonstrate strong execution in our fiscal 2024 Q1. We increased our adjusted operating profit, our adjusted operating profit margin and our adjusted diluted earnings per share. We generated significant free cash flow and we allocated capital effectively to drive value. Both our Lighting and our Intelligent Spaces businesses continued to perform well during the quarter.

Speaker 2

Particularly in ABL, our performance was excellent. We increased adjusted operating profit by $15,000,000 on $71,000,000 less sales and increased operating profit margin, 280 basis points to 17.5%. Our strategy is yielding results. We're increasing product vitality, Elevating service levels, using technology to improve and differentiate both our products and how we operate the business, and we are driving productivity. Today, our products are perceived as being more valuable in the marketplace, at the same time, we are lowering costs.

Speaker 2

Our product vitality efforts are the combination of new product introductions and improvements to our existing portfolio to ensure that our products are more valuable to our customers and more profitable for us. Our Contractor Select portfolio It's about 300 of our most popular products. They are used in common everyday lighting applications and are in stock at retailers and electrical distributors. We continue to invest in product vitality and we have expanded our Lithonia Lighting ESXF Floodlight family. This is a better product for distributors because it allows them to carry less inventory and is better for contractors because it is easier to install.

Speaker 2

This product family was first introduced in 2022 to offer a uniform lighting solution for parking lots, walkways and outer buildings. It uses switchable technology to provide installers 36 on-site options, including lumen output, color temperature, photocell And mounting options. Our Design Select portfolio consists of configurable product options That meet the key choices of lighting specifiers with high levels of service. This quarter, we added additional products in our downlighting, Panel, emergency lighting and outdoor categories. As we expand the options available in this portfolio, our focus is on product vitality And making it easier for the specification community to choose superior solutions.

Speaker 2

Our efforts to elevate service are having a positive impact on our customers. In October, we were once again recognized by the voters of EyeMark Electrical as one of the suppliers of the year for 2023. Our Mexican manufacturing facilities to open our new state of the art Santa Rosa production facility, which includes our highly efficient new paint line. This facility embraces technology to deliver a better product to our customers and improves the efficiency of the paint line process, while also reducing the environmental impact. I'd like to highlight a couple of ways we're doing this.

Speaker 2

Our paint guns and torque guns in our new facility Are powered by a high efficiency air compressor that aims to reduce approximately half of our CO2 generation compared to the air compressor from our previous paint line. High efficiency walls, burners and booster technology in our ovens require less gas than similar systems We relocated an existing facility to the new SPF facility without any service interruption and now have capacity available for future growth. Our combined paint and natural gas savings are delivering on our required financial return for the facility, while also meeting our sustainability objectives. You can learn more about this project and other accomplishments in our recently released Earthlight report available on our ESG for Investors page on our Investor Relations website. Now moving to our Spaces Group.

Speaker 2

Our mission in our Intelligent Spaces business is to make spaces smarter, Safer and greener through our strategy of connecting the edge to the cloud. Distech has the best edge control devices on the market, While Atrius will be the best in cloud applications, at DisTech we are focused on expanding our addressable market in 2 ways. The first is geographic and the second is increasing what we control in a build space. This quarter, We continued our geographic expansion, adding several new system integrators in the UK, Asia and Australia. In one of our original markets, France, our hard work is paying off.

Speaker 2

The Building Services Research and Information Association called out Distech as dominating the French building, automation and control systems market in a newly released report. We also continue to increase what we can control in a built space. In October, we launched our Distech ReSense moves sensor at several industry conferences in Europe. This is an advanced 7 in-one ceiling mounted sensor It is AI powered and can be used to optimize indoor air quality, reduce energy and cleaning costs and enhance occupancy comfort. It will be revealed to our North American and international customers at the AHR Expo in Chicago later this month.

Speaker 2

Our expansion into refrigeration controls is also going well with the integration of Key2 Therm on track and performing as we expected. During the quarter, we released the Key2 Therm Edge Manager with a BACnet communication stack. This is the same open protocol technology Now turning to our outlook. The changes that we have made to the business are impactful and long lasting. Our order rates are growing both year over year and sequentially.

Speaker 2

We're back to typical lead times, and absent the excess backlog from last year, We would be experiencing sales growth. We are focused on controlling what we can control, and we are confident our execution will continue. In our Lighting and Lighting Controls business, we will continue to focus on delivering margin and cash flow. In our Spaces group, we will continue to grow geographically and by adding to what we can control in a built space. We're delivering applications that are making a difference.

Speaker 2

Now, I'll turn the call over to Karen, who will update you on our Q1 performance.

Speaker 3

Thank you, Neil, and good morning to everyone on the call. We started the year with strong performance. We increased our adjusted operating profit by $14,000,000 year over year, improved our adjusted operating profit margin by 2.50 basis points over the prior year and by 40 basis points sequentially. We increased our adjusted diluted earnings per share by $0.43 year over year and generated cash flow from operations of $190,000,000 We continued to improve our businesses and allocated capital effectively. For total AYI, we generated net sales in the Q1 of $935,000,000 which was $63,000,000 or 6% lower than the prior year as a result of the lower net sales in our ABL business.

Speaker 3

This was partially offset by continued growth in the ISG business of 13% in the quarter. We continue to deliver year over year margin improvement. During the quarter, our adjusted operating profit increased by $14,000,000 on lower sales, while we expanded adjusted operating profit margin to 16.5%, the management of price and cost and productivity improvements. During the quarter, our adjusted diluted earnings per share $3.72 increased $0.43 or 13% over the prior year, In ABL, net sales were $876,000,000 in the quarter, a decrease of around 7% Compared with the prior year, driven by declines across most of our channels, offset slightly by continued strong performance in our retail channel. Sales growth in ABL this quarter had a challenging year over year comparison as the results in the Q1 of fiscal 2023 benefited from working down an elevated level of backlog.

Speaker 3

ABL's adjusted operating profit increased 11% to $154,000,000 on lower net sales, and we delivered adjusted operating profit margin of 17.5%, A 280 basis point improvement over the prior year. ISG's net sales for the Q1 were $64,000,000 An increase of 13% as Distech continued to grow and KEYTRUTHERM performed as we expected. ISG's adjusted operating profit was $10,000,000 Now turning to our cash flow performance. We generated $190,000,000 of cash flow from operating activities for the Q1 of fiscal 2024, An increase of $3,000,000 over the prior year, primarily due to an improvement in net income, partially offset by a decrease in cash flow from working capital. During the Q1 of fiscal 2024, we continued to allocate capital consistent with our priorities.

Speaker 3

We invested $15,000,000 in capital expenditures and allocated approximately $50,000,000 to repurchase around 300,000 shares. Since the beginning of Q4 of fiscal 2020, we have repurchased over 9,000,000 shares at an average price of about $143 per share, Which was funded by organic cash flow. To wrap up, we had a strong quarter, particularly in ABL. We continued to deliver strong margin and cash flow performance. We grew adjusted operating profit and improved adjusted operating profit margin.

Speaker 3

We are pleased with our performance, and we will reevaluate the outlook at the midpoint of the year. Thank you for joining us today. I will now

Operator

Our first question comes from the line of Joe O'Dea with Wells Fargo. Your line is now open.

Speaker 4

Hi, good morning. Can you hear me?

Speaker 5

Yes. Good morning, Joe.

Speaker 4

Hi. So I mean, really impressive gross margin obviously this quarter. I think just any additional detail unpacking that? You talked kind of high level on vitality, productivity, price cost, but anything in terms of kind of Quantifying that bridge when we think about sequentially gross profit down kind of less than what we saw out of the revenue decline I'm trying to appreciate sort of what some of the moving pieces are there and then bigger picture just the sustainability of a 45.8% gross margin.

Speaker 5

Yes. Thank you, Joe. Good morning to all of you. So as we unpack the margin performance, a couple of things To talk about, first of all, obviously, our year is off to a really good start. We're taking the companies to levels of performance that it has never seen before.

Speaker 5

And these margins are the result of the impacts of the strategy and the work that our team has been doing to implement that around product vitality, around service, Around technology and around productivity. That has culminated in this performance. Specifically, in this quarter, We're recognizing that our products, as I said in the prepared remarks, are being valued for their impact in the marketplace, which Afford us the opportunity to manage price strategically. We continue to take cost Out of the production of the products, so the output is the margin that you see. This quarter was mildly impacted by some mix.

Speaker 5

The our controls business was strong. Our ISG is obviously growth accretive, margin accretive and So that has some impact. But when you boil it all down, this quarter is a result and the margin performance in this quarter As a result of the strategy and the work that we've been doing around product vitality, around service, around technology and around productivity.

Speaker 4

And just a quick clarification because you did make the point in prepared remarks and just kind of reiterated there where products perceived as more valuable in the market I've thought about sort of the pricing dynamic over the last couple of years as being price in response to cost. But is it fair to sort of deduce that this quarter you're actually in the market sort of taking price up because it's the value that you're

Speaker 5

So we I believe that's a fair conclusion. Yes, we Are realizing the benefits in the Q1 price. We talked about in the last call and in the Q2, we also implemented a price increase. Number 1, our products need to be valued in the marketplace because they need to deserve to be valued. We're in a good position on that front.

Speaker 5

The second around our product vitality efforts is that we need to demonstrate that we can make more money with profit as a result of those Extraordinary margin. So we don't need to continue to perform at this level for the rest of the year, but to deliver outstanding results. But We feel very good about the how in these margins.

Speaker 4

I appreciate it. Thanks very much. Thanks.

Operator

Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is now open.

Speaker 6

Hey, everybody. Good. Good morning.

Speaker 5

Hey, good morning, Tim.

Speaker 7

Good morning.

Speaker 6

Maybe just my first question. Neil, you had kind of talked about in the prepared remarks That order rates have kind of improved sequentially and that they were up year over year. I know it's probably hard, but I'll ask the question anyways. How much of that do you think is just the year over year comparisons kind of lapping some of the backlog depletion and the lead time improvement versus I mean, what's going on in the underlying end market?

Speaker 5

Yes. Thanks for the question, Tim. Let me unpack that, I think this is really important. So our net sales is obviously a result of our shipments in the period. The shipments in the period are a result of the orders that led up to at times the lead time basically.

Speaker 5

So We are now in a position where our lead times have more normalized. In other words, the order and the shipment rates are relatively consistent with each other. And so it's Important that on both a sequential basis and on a year over year basis, our order rates are modestly up. In other words, Without last year's comparable, sales would be growing. Last year was the net sales were the beneficiary of Backlog reduction from orders which had been placed earlier.

Speaker 5

So the order when we talk about this Order rate being up modestly, that's versus the daily order rate of last year's Q1 and last year's Q4. So The best way that we've come to think about this is that there was more of a pull forward last year industry wide than there was a So, in effect, we processed a lot more business last year than existed. When you smooth the line over time and we've talked about this consistently, when you smooth the line over time, we will be a the lighting and light control business will be a consistent grower.

Speaker 6

And I guess, have you seen any sort of kind of underlying improvement in the end market? I mean, obviously, Rates have kind of moved back with what the Fed has done. I'm just kind of curious if you've seen that in your order rates at all.

Speaker 5

Yes. So obviously, we're seeing if it's year over year improvement and sequential improvement, there is improvement in our order rate. As we look forward to our kind of our view on the macro, as I've been consistent with this, we don't have a better crystal ball Then you do. We are confident in the current levels Of the order rate and the performance of the order rate, as I said last quarter, we're comfortable operating in this environment. And as we look forward, we feel pretty good about where things are.

Speaker 5

Our outlook doesn't expect things to get materially better or materially worse Basically. So, as Karen said, we'll reevaluate at the middle of the year where we are for the rest of the year.

Speaker 6

Okay, perfect. And then maybe just the second question just on maybe margin. Just given where the gross margins have kind of landed over the last couple of quarters, I mean, has that changed how you think about kind of the reinvestment That you'd want to make or need to make in the business to drive above market growth? Or do you think it's just kind of A higher base level of margin for the business kind of going forward?

Speaker 5

It's a little bit of both and. I would say on that Tim, we don't believe that this these margins are a result of harvesting. So we believe that they're the outcome of the strategy as I've said kind of and I won't continue to be redundant on it, but I believe there are an outcome. So we believe this is a point in time. At the same time, we also are beginning to focus On verticals and areas where we haven't on the lighting side either been strong or participated at all.

Speaker 5

A very small example, we made a tiny investment in horticulture. Why? Because we think over the next Kind of period of time that will be an opportunity, and so we're positioning for that now. So we'll start to make those kind of investments, Tim, so that we can continue to hopefully address expand the addressable market on the legging side. And then I don't want to miss the opportunity to talk about Spaces and Terren can address the specifics of the quarter, the financials in the quarter That's during later, but in the big picture, the Spaces Group is growth accretive, margin accretive and returns accretive.

Speaker 5

And We feel really good about what we're doing there and their impact their ability to continue to impact the company going forward.

Speaker 6

Very good. Good luck on the rest of the year guys. Thank you. Thank you.

Operator

Thank you. Our next question Comes from the line of Chris Snyder with UBS. Your line is now open.

Speaker 8

Thank you. I wanted to follow-up on the gross margin, up 4 10 basis points year on year despite the sales decline, which is Really impressive. It seems to us that the driver there is 1 price cost. You guys have held prices, costs have moderated due to the technology, The vitality and all the stuff you mentioned, Neil, but also some level of selectivity, which you've talked to over the past couple of quarters. When we think about that 4 10 basis points, Could you kind of break down the build between selectivity and price cost improvement over the last year?

Speaker 8

Thank you.

Speaker 5

Yes, I'll start. Karen, you fill in for us. We have not built a walk directly from to break down the 410. So I'm going to do this more off the top of my head, Chris, Then I am kind of reading on a walk. Big picture, let's start with price.

Speaker 5

So As we've said consistently, we manage price to where we think we need to be in the marketplace. So Obviously, we have real strength in Contractor Select. You can see the retail channel was up this quarter. It's the growth Despite the fact that net sales were down. So obviously, we're meeting the market at that level of the market.

Speaker 5

On the project side, we have the ability to choose which projects we take obviously. So And our pricing and then our bidding on those projects, we are choosing which projects we want to invest And so and we do invest in some projects. So this is not we're not pure price takers here. We are choosing and based in the marketplace. And that's really the key for us is that when we talk about managing price strategically, we're meeting price where it needs to be.

Speaker 5

2nd, on the cost front. So, obviously, there's been material improvements in the portfolio Distribution of margin within the portfolio. So we don't have the laggards that we had in the past. And So it's not wholly dependent on mix in a way that it has been in the past. Now I would say that This quarter, we had a good quarter in controls and obviously ISG performed at a higher growth level than ABL, so there is some mix impact, but it is modest.

Speaker 5

It is not determinative. And then finally, to your point on cost moderating, there are kind of there are some obvious post pandemic costs, Which have changed, steel, containers, etcetera. And it's worth kind of calling out containers as an example, because Now we're dealing with obviously the Red Sea challenges. So container costs that were about $3,000 container can now rise as much as $6,000 per container. To put that in context, at the peak, those were In the $20,000 per container kind of rate.

Speaker 5

So that gives you an idea of kind of where those differences are. And so we have a plan to deal with Those higher container costs for the remainder of the year. So when I summarize those three things together, one is, as I said in the remarks, Our products are being recognized for their value in the marketplace. That's fundamental. That's key.

Speaker 5

That's number 1. 2 The strategy has produced a more consistent result across our portfolio. So mix is less impactful than it may have been in the past. And then the third is we've moved aggressively to get to a more Consistent cost basis on materials.

Speaker 8

I appreciate that. And if I could just may follow-up more thematically. It sounds like a lot of it's, hey, we want to Price for the value we're bringing to the market. But the company has always been, particularly I know Nidhi has only been there for a few years, but over your time, I think 41, 42 now to 45 plus because it feels like a lot of the you've always kind of leading on the product technology side. Thank you.

Speaker 5

Yes. Thanks, Chris. I mean, these things take time. I wish I was not as old as I am, but I've been around the barn more than once. And you just realize that like kind of all of these changes are cumulative and it takes time for them to all kind of line up.

Speaker 5

And obviously, and this is a conversation that we have with our team here, which is that We're taking the company to levels of performance that it's never seen before. That's true in the market, broader market, where the Confidence of our product quality cascades through our sales team, through our independent sales agents, etcetera, Through distributors, through the service levels and the programs that we've put in place. So those things cumulatively add up To the performance that you're seeing today.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Merkel with William Blair. Your line is now open.

Speaker 7

Hey, good morning. Can you guys hear me?

Speaker 5

Hey, Ryan. Good morning.

Speaker 7

Great. So my first question, Neil, can you talk about Large projects, spec market, how is activity? Are you seeing delays, cancellations? Or is that sort of improving? Just what's the latest update?

Speaker 5

Yes, Ryan, thanks. I mean, we called out the order rate to kind of demonstrate that we're Finding a new kind of normal. I think anecdotally, there's a lot of talk around big projects in kind of calendar 2025 that sort of Whether it's infrastructure or other things, I think that's just kind of the general kind of on the street sentiment about kind of what's going on out there. So other than that, we're in a relatively I think we're in a kind of a new normal from a consistency perspective. Okay.

Speaker 7

So you're not seeing large projects be particularly weak?

Speaker 5

I mean anecdotally, there is some discussion about kind of that. I don't know what weak means. And I think that's a it's worth us all kind of taking a step back Okay. If we had an industry wide pull forward over kind of, call it, 2022 and 2023, which is what we're talking about on our comparables, That has manifested in net sales higher than order rates for some period As we were very clear about that in 2023, now with order rate and shipments more equilibrated in a normal relationship in a period, this is Kind of the normal run rate of the market. And so yes, there are some good days and some bad days within that obviously.

Speaker 5

So, but it's not we don't we're not viewing a cliff on the horizon anywhere.

Speaker 7

Okay. And then I had a question on gross margin as well. Obviously, Q1 was really strong. Normal seasonality would put you at about 45% for the year. I'm just curious, is there any reason that we should be below that?

Speaker 7

Is the biggest risk just sales and fixed cost deleverage at this point?

Speaker 5

Karen, you want to take that?

Speaker 9

Yes. Ryan, so in terms of seasonality, just when we look at where we are today, I think we are probably, as Neil said, order rates and shipment rates are coming in alignment. So it's looking like we're getting back to seasonality, but we haven't Fully seeing that. On the margin side, when you look at where we are, comparative to the Q1 last year, We ended up last year at 45.1%. So we increased our gross profit margin throughout the year.

Speaker 9

And as Neel described, That was a combination of our strategy and also executing on some costs that were higher in the first half of the year that moderated in the second half. So really, if you look at where we are now, we think this is a pretty strong level of gross profit, impacted by the mix for controls, impacted by the mix of The higher ISG. So I would say that around this level is probably pretty high, but we expect to be pretty confident in our gross profit margin.

Speaker 7

Okay. Thanks. That's it on.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer and Company. Your line is now open.

Speaker 10

Thanks. Good morning and congrats on a strong start to the year. I was curious on Design Select, still kind of early days, but anything kind of Pithi or interesting, you could share about the market reception on that rollout?

Speaker 5

Yes. Hey, good morning, Chris. Thanks. The market reception has been really strong. So, we continue to tweak how it's presented in the market so That people can understand it.

Speaker 5

The industry has historically focused on something that's called QuickShip. And so sometimes this is confused for QuickShip. It is not QuickShip. This is an overhaul of a group of products that the Specification community can know that they can choose and the options they can choose with those products. And so that's starting to manifest.

Speaker 5

As we talked about nothing I'm thinking trying to think of a pithy answer for you. I don't have a good pithy answer for you, But we're really or a good anecdote for you, but it is progressing really well and we're pleased with where it is.

Speaker 10

Okay. Well, that was pithy enough for me. And then on the seasonality, it sounds like, I think Karen said not declaring victory really if I could paraphrase, but sort of Leaning into normal seasonality, I think is the message I got there as we look at the forward quarters. I'm curious, The market is one part of that. And then, it sounds like maybe your share momentum Relative to the market in any given period might be adding muscle.

Speaker 10

So I'm curious about the interplay of that verse Mark, when we say that we're kind of leaning towards normal seasonality here.

Speaker 5

Yes. So let me kind of take your comment. Thank you for paraphrasing Karen. That was a long answer to get to. We're not clearing victory yet, but that's exactly what the message was meant to be.

Speaker 5

The so building up, 1st of all, on what we can control, we feel very, very good about what we control. So that is, that's the kind of the foundation. I think a lot of questions So we've gotten from this crowd over the course of the last few quarters is, hey, are you sacrificing share for margin? And we don't believe that we are. We've said that consistently as we've gone through.

Speaker 5

So that culminates in the order rates So that is, as I said earlier, we believe these things are cumulative. In other words, the market really starting to realize those things. As I said when we opened, we don't need to operate at these levels of margin for the rest of the year to deliver outstanding results. So, we don't have outrageous aspirations for the remainder of the year, But we're very confident in the quality, the how of how we're delivering these results. Thanks, Neil.

Operator

Thank you. Our next question comes from the line of Jeffrey Sprague with Vertical Research, your line is now open.

Speaker 11

Thank you. Good morning, everyone.

Speaker 12

Hey, Jeff.

Speaker 11

Hey, Neil. Maybe just kind of picking up on that. I know you don't want to kind of speak to the framework or the guidance every quarter. But Coming off this quarter and thinking about what you said about you don't need to do anything heroic now for the remainder of the year. What would In your mind, what would drive you to the bottom half or bottom even 2 thirds of that larger framework that you put out?

Speaker 5

Yes. So let me unpack that a little bit and make sure kind of we're all on the same page. It is not our desire To provide quarterly guidance or update guidance on a quarterly basis. Karen was clear in her prepared remarks that We are going to take a look at the outlook and framework at the middle of the year, which is inconsistent with how we would normally do things. So obviously, we can do the math also.

Speaker 5

If we take consensus plus our beat this quarter on an EPS basis, you get way up in the In our EPS range. So as she said, we'll take a look going forward in the middle point of the year.

Speaker 11

Great. And then just on SD and A, so that did move up a couple of 100 bps on a full year basis last year and up again this Quarter, probably some deleverage on the sales decline, obviously. But where are we at in terms of kind of getting to a Normalization there or the ability to deliver some operating leverage on the SD and A line?

Speaker 9

Sure, Jeff. As you recall in the Q4, we did take some costs out of the ABL business. So we feel pretty good about those cost reductions as we evaluate how we do the work. And we think we're really at the right level of investment for where we need to be to leverage when the Sales growth comes back. That being said, in the ISG business, we did have some isolated costs this year that don't really affect the run rate of that business.

Speaker 9

So overall, just feel good about the current level of investment going forward that we can leverage.

Speaker 11

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Osborne with TD Cowen. Your line is now open.

Speaker 12

Yes. Thank you. Good morning. Karen, I just had a question on what was the surprise relative to the guidance that you had given The commentary 3 months ago around margins declining sequentially, was it the strength in controls or the strength in the retail channel? Just trying to get a sense of the surprise because Neil had indicated that the 4 areas of Vitality, Service, Technology and Productivity are Essentially a combination of years of investment.

Speaker 12

So what was the differential relative to 3 months ago's outlook?

Speaker 9

Yes. So what I would say is that I would not use the word surprise. We really weren't surprised by the level of gross margin That you're seeing this quarter, as Neil said, we're taking the company to levels of performance that it hasn't seen before. What Kind of the gross margin at the 45.8%, the not typical level of performance that you would see is just a higher mix of controls That had some impact this quarter. But overall, it's really the execution of the business, the continued growth of ISG and really the strategy as we Acute over product vitality, service, technology and productivity improvements that are driving this level of gross profit margin.

Speaker 5

And then just quickly build on that. What Karen had said last quarter is that normally on a sequential basis, gross margin would go down from Q4 to Q1.

Speaker 12

Got it. And then what was abnormal then this time? I guess I'm so confused on that.

Speaker 5

Performance. We continue to perform.

Speaker 12

Perfect. And then, Neil, your predecessor, Vern, would I think the past two election cycles that highlighted weakness in the end markets and sort of the skittish buyer, if I recall the terminology correct. I'm just curious, it sounds there smaller projects?

Speaker 5

I mean, I don't know what Vern's logic was there. I can tell you the one thing I do know about Vern's feelings this morning is that he is a Proud Michigan Wolverine. So I am sure that he is that he was celebrating late into the night last night. As we look forward on the macro, the it is as we have

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.

Speaker 13

Hey, Neil. Hey, Karen. This is Grace on for Brian. Thanks for taking the questions. I guess questions on margins.

Speaker 13

So I just have one question on the demand trend on the order rate. I think a year ago, you were the first one to call out the interest rate impact and the slower order rate. Now you talked about order rates up year over year and sequentially. So can you talk about what are the drivers of that? Are you taking market share?

Speaker 13

Is it because of lower interest rates? And also given how interest rates have been trending in the past few months, maybe this is too early to tell, but do you see any order rate acceleration

Speaker 5

I want to kind of make the same kind of point, so this will be mildly redundant. But the order rate is obviously year over year. The Issue on a last year basis, not the issue, the results last year on a net sales basis were the results of order rates that had happened prior to that. We pointed out that through kind of through the course of the year that there was an impact on those order rates. You're seeing the impact on those order rates.

Speaker 5

Now those order rates have normalized and we have found a kind of a consistent level of Operating performance. So, as we annualize those the comps and eliminate The excess backlog impact that happened at the beginning of FY2023, then you'll start to see a kind of more normal performance Specifically from the lighting business, obviously ISG has continued to grow. So over the long arc of time, this will continue the lighting business Basically had a pull forward and industry wide pull forward and will look like on a compounded annual growth rate, exactly where we expect it to be, which is in the kind of mid to

Speaker 6

Thank you.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Neil Ash for closing remarks.

Speaker 5

Thank you all for joining us this morning. Obviously, our year is off to a really good start and we are both pleased about that and encouraged about what That means for the future. We are focused on the strategy and it is yielding results both in ABL and in the Spaces Group And we look forward to catching up with you again this time next quarter. Have a good day. Good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now

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Key Takeaways

  • Strong Q1 2024 results: Adjusted operating profit rose $14 M, margin expanded 250 bps to 16.5%, adjusted EPS reached $3.72 (+13%), and operating cash flow was $190 M.
  • In the Lighting & Controls (ABL) segment, net sales fell 7% but adjusted operating profit grew 11% ($15 M) and margin improved 280 bps to 17.5% by focusing on product vitality, service, technology, and productivity.
  • The Intelligent Spaces Group (ISG) delivered 13% sales growth, expanded geographically in the UK, Asia and Australia, dominated the French market, and launched the AI-powered Distech ReSense sensor plus integrated Key2Therm refrigeration controls.
  • Acuity opened a new state-of-the-art Santa Rosa manufacturing facility in Mexico with an efficient paint line cutting CO2 emissions by half, saving energy and natural gas costs while adding capacity.
  • Outlook: Order rates are up year-over-year and sequentially with normalized lead times, and the company remains focused on margin and cash flow delivery in Lighting while pursuing continued growth and margin accretion in Spaces.
A.I. generated. May contain errors.
Earnings Conference Call
Acuity Brands Q1 2024
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