Acuity Brands Q2 2025 Earnings Call Transcript

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April 3, 2025
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Operator

Good morning, and welcome to the Acuity Fiscal twenty twenty five Second 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.

Charlotte McLaughlin
Charlotte McLaughlin
Vice President, Investor Relations at Acuity Brands

Thank you, operator. Good morning, and welcome to the EQT Fiscal twenty twenty five Second Quarter Earnings Call. On the call with me this morning are Neil Asch, our Chairman, President and Chief Executive Officer and Karen Holcomb, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal twenty twenty five second quarter performance. There will be an opportunity for Q and A at the end of the call.

Charlotte McLaughlin
Charlotte McLaughlin
Vice President, Investor Relations at Acuity Brands

As a reminder, some of our comments today may be forward looking statements. We intend these forward looking statements to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on Slide two of the accompanying presentation. Reconciliations of certain non GAAP financial metrics with their corresponding GAAP measures are available in our twenty twenty five second quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investors.acuityinc.com. Thank you for your interest in Acuity. I will now turn the call over to Neil Asch.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Thank you, Charlotte, and thank you all for joining us today. We delivered steady performance in the second quarter of fiscal twenty twenty five. We grew net sales, expanded our adjusted operating profit and adjusted operating profit margin, and we increased our adjusted diluted earnings per share. In March, we changed the name of our company from Acuity Brands to Acuity. This is an exciting step in our company's evolution.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

It builds on the legacy of our past, while representing the scalability of our future. We are positioned for long term growth and to create stakeholder value and compound shareholder wealth. We have updated and aligned the names of our segments. The lighting segment will continue as Acuity Brands Lighting, or ABL, and the Intelligent Spaces segment has been renamed Acuity Intelligent Spaces, or AIS. Now, let's discuss ABL.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

We organize our business around luminaires and electronics. We've spoken a lot about our luminaires portfolio. So I want to spend some time focusing on our electronics portfolio. Our electronics portfolio is fundamental to our strategy of increasing product vitality, elevating service levels, using technology to improve and differentiate both our products and how we operate the business, and driving productivity for us and for our partners. Within electronics, we have invested in our driver portfolio to control the technology in our luminaires and developed a market leading lighting controls platform that includes sensors, controls, and software.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Through Elder LED and Optotronics, we produce the majority of the drivers we use in our luminaires. This allows us to improve our product vitality and drive productivity throughout our portfolio. Our nLIGHT and sensor switch lighting controls platform includes standalone and embedded controls, which can be cloud enabled. Taken together, our electronics portfolio is a unique offering in the marketplace, extending from the drivers that power our luminaires to the sensors, controls and software, which control light in a space and connect with the cloud seamlessly through our Atrius Data Lab. Let me give you an example of how all of this comes together in practice.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

This quarter, we expanded our range of Gotham Ivo products as part of our design select portfolio. We produce all the drivers for the entire Gotham Ivo product portfolio, and each product can be sold embedded with our nLIGHT controls. The new product launch included the Gotham Ivo deep regress downlight and the Gotham Ivo cylinder. These innovative luminaires, when combined with our nLIGHT controls platform, can be used to optimize the space for color and light distribution. The end result is an optimized user experience with elevated aesthetics.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

These products are developed with our customers needs in mind to reduce energy usage and maximize occupant comfort. And this quarter, our products have continued to be recognized by multiple industry organizations for doing this. We won fourteen twenty twenty four Product Innovation Awards from Architectural Products Magazine that celebrate the products, systems and materials that help architects achieve new levels of creativity or performance in their design. And seven of our products were recognized for design excellence as part of the lit lighting design awards, including Acculex for their five degree precision spot, which was designed for precise illumination to create dramatic effect, or to highlight a visual point of interest. Now, switching to Acuity Intelligent Spaces, which delivered another strong quarter of sales growth and margin performance.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

This quarter, we welcome QSC to the portfolio, advancing our mission to make spaces smarter, safer, and greener through our strategy of connecting the edge with the cloud using disruptive technologies. Through Atrius, Distech and QSC, we control how a built space operates and the experiences that happen within that space. We have a unique collection of disruptive technologies, which are delivering distinct end user outcomes. In the future, we can continue to add to those end user outcomes through data interoperability. In Distech, we are focused on where we compete and what we can control to expand our addressable market.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

As part of our geographic expansion, this quarter we continued to add systems integrator capacity in The UK and in Asia. Distech Eclipse facilities was awarded the twenty twenty five AHR Expo Innovation Award in the building automation category. Eclipse Facilities is a software solution embedded directly within Distech Controls Eclipse devices that provides management and control for a variety of equipment types within buildings. This quarter, we welcome QSC and we began the integration process. QSC is building the industry's most innovative full stack AV platform that unifies data devices in a cloud first architecture to deliver real time action, experiences and insights.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

And we're off to a great start. QSC continues to execute on their strategy and continues to have success in the marketplace. In March, I appointed Jatin Shah to lead QSC reporting to Peter Hahn, President of Acuity Intelligence Spaces. Jatin joined QSC in 2010, and has held various leadership roles since then. Jatin is a leader in the industry.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

In addition to his role at QSC, he is also President and Chairman of the Board of AVIXA, the Audio Visual and Integrated Experience Association. Jatin has been integral to the development and success of QSC, and I'm excited for his leadership going forward. And finally, I want to congratulate Joe Pham, who announced his retirement earlier this year. And I want to thank Joe for his contributions to both QSC and the industry over his twenty plus years with company. Now, as we look forward, there is obviously uncertainty in the marketplace, specifically with regards to tariffs.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

We approach tariffs as the equivalent of a supply shock. And our financial priorities are first to manage the dollar impact, and second to manage the margin impact. Across the company, we have taken pricing actions in response to tariffs that were in place through the March. As the tariff policy continues to evolve, we will continue to take necessary pricing actions, and we will work to accelerate our productivity efforts. We will continue to focus on factors within our control and take actions as needed.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

In ABL, we are focused on product vitality, elevating service levels, using technology to improve and differentiate both our products and how we operate the business, and driving productivity. Our growth algorithm is clear. We will grow the market, take share and enter new verticals. In intelligent spaces, we control how our built space operates and the experiences that happen within that space. We have a unique collection of disruptive technologies which are delivering distinct end user outcomes.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Our focus will continue to be on growth and the opportunity to expand margins. We have demonstrated that we have dexterity in how we operate, enabling us to continue to execute in dynamic market conditions. We have demonstrated that we can deliver value to our market and drive margins in our business. Now, I'll turn the call over to Karen, who will update you on our second quarter performance.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Thank you, Neil, and good morning to everyone on the call. In our second quarter of fiscal twenty twenty five, we grew net sales, improved our adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. We closed the acquisition of QSC during our second quarter of fiscal twenty twenty five, and two months of their performance are included in our results. The financials also include certain purchase accounting adjustments resulting from the acquisition. For total Acuity, we generated net sales in the second quarter of $1,000,000,000 which was $100,000,000 or 11% above the prior year.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

This improvement was driven by the continued growth in Intelligent Spaces and the inclusion of two months of QSC sales. During the quarter, our adjusted operating profit was $163,000,000 which was up around $23,000,000 or 16% from last year, and we expanded our adjusted operating profit margin to 16.2%, an increase of 70 basis points from the prior year. This increase was primarily a result of the year over year improvement in our gross profit and the inclusion of the QSC results. Our adjusted diluted earnings per share of $3.73 increased 35¢ or 10% over the prior year. ABL delivered sales of $841,000,000 which is $3,000,000 less than the prior year, primarily the result of declines in retail and corporate accounts due to general uncertainty in the wider market.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

This was partially offset by growth in both our independent sales channel and direct sales channel. We price strategically to realize the value that our products bring to the marketplace. Since the quarter ended, we have taken pricing actions in response to the tariffs that were in place through March. We will continue to take both pricing and operational actions as the tariff policy evolves. Despite the lower sales, adjusted operating profit increased $5,000,000 to $141,000,000 and we delivered adjusted operating profit margin of 16.8%, which was up 60 basis points compared to the prior year.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Sales in Acuity Intelligent Spaces for the second quarter were $172,000,000 an increase of $103,000,000 Atrius and Distech combined grew 12.2% during the quarter, with the remainder being the contribution from two months of QSC performance. AIS has also taken strategic pricing actions in response to the tariffs that were in place through the March. These actions were directed primarily towards products sold in The U. S. Adjusted operating profit in Intelligent Spaces was $32,000,000 during the quarter with an adjusted operating profit margin of 18.7%.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Now turning to our cash flow performance. Fiscal year to date, we've generated $192,000,000 of cash flow from operations. We We closed the QSC acquisition, financing it with $600,000,000 of additional debt and the remainder with cash on hand. And post quarter, we repaid $100,000,000 of the additional debt. We increased our dividend during our January shareholder meeting by 13% to $0.17 per share, and we allocated $23,000,000 to repurchase approximately 68,000 shares.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

In summary, we delivered steady performance in the fiscal second quarter of twenty twenty five. ABL continued to deliver adjusted operating profit margin improvement, while AIS delivered impressive results and began successfully integrating QSC. We allocated capital effectively, and we have positioned ourselves well to react to changes in our marketplace. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Operator

Thank you. Our first question comes from Chris Snyder with Morgan Stanley. Your line is now open.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Thank you. Maybe just starting off on the tariff announcements from yesterday. I know there hasn't been a lot of time maybe to digest it all. We'd just be interested in high level, what you think it means for the company. You guys are obviously highly tied to Mexico.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

My understanding is you're mostly USMCA compliant or largely compliant. And I think most of the competitors here are coming from Asia. So just any thoughts on that and what it can mean from positioning standpoint? Thank you.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Good morning, Chris and thank you for that softball to open the Q and A. As we said in the prepared remarks, our view of the tariffs is that in practice they're effectively a supply shock. So our focus number one is obviously on serving our customers. From a financial perspective, it's managing the dollar impact first and then the margin impact second. So, we have a high performing distributed global supply chain.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So we are, we have worked hard to get to where we are and have the dexterity that we do have. On a relative basis to our competitors, we feel confident in the position that we are in. As you point out, we've got about 18% from Asia, so that is China plus other countries. About half comes from Mexico and almost all of that is USMCA compliant as you pointed out. So, second though, I want to take a step back and walk through kind of how the tariffs actually work and how it will flow through us and frankly everybody else.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

As you heard yesterday, the tariffs are immediate. In other words, they will start we will start accruing those as an expense when product starts to come across the border. It will take us, a little bit of time as both Karen and I mentioned in the remarks, we will be taking pricing actions. So those pricing actions will take a little bit of time to be fully implemented. So there's a lag between the time that the price actions take effect, and the tariffs we are beginning to pay the tariffs.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Those are balanced a little bit by what we already have in inventory in The U. S, but big picture, there's a lag between those. Finally, there's also a lag from a cash flow perspective. So, those tariffs are basically due in thirty days. So we will be paying those faster than we will be collecting ultimately from customers and those tariffs then need to flow through inventory as it flows through our system and to our customers.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So big picture, we will be working to cover the dollar cost first. There will be a little bit of a lag, in our ability to do that just because of how the channel works. And there will be some cash flow impact, as a result of the tariffs. But big picture, I want emphasize, we have an outstanding, high performing diversified global supply chain. So we have, the dexterity to move throughout our platform and we will do that going forward.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Thanks, Neil. Incredibly helpful response. Maybe just a follow-up on the market. ABL came in a little bit below seasonality this quarter. I sense there probably be some maybe project freezing just with all the cost uncertainty, maybe difficulty quoting and bidding and just getting activity to move forward.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

So are you seeing any kind of freezing up in the market? And I guess, what do you think or what do you kind of see, when you look into the back half of the year as maybe there's better cost visibility, in the market? Thank you.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yeah, I'll start, Karen, you, add if I leave anything out. So, big picture, we started the year with a fair amount of momentum on the lighting side and I want to be clear now because intelligent space is a lot more impactful part of our company, so we'll keep that separate. These comments are mostly directed towards lighting. We had a fair amount of momentum starting the year and we had a fair amount of confidence in the economy in calendar 2025, which all of our data pointed to that. We did start to see the impact of uncertainty.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Obviously, marketplace abhors uncertainty and, we felt the impact of that uncertainty kind of later in the second quarter. That's balanced by, as we rolled out our price increases, the first round of price increases that are out there, the market reacted as it usually does. So the order volume reacted as it has when we've done these pricing, activities in the past. So those are there's a balance. Yes, I think your hypothesis is correct.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

The market is uncertain and there has been some there was some impact. It was pretty obvious that there was some impact. I think it's too early to declare what the impact will be on demand for of this next round of changes. So we'll need a little bit of time to settle, before we'll be able to definitively decide what we think the demand shape is going to be like for for the rest of the year.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Thank you. That's really helpful.

Operator

Our next question comes from Ryan Merkel with William Blair.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

Hey, everyone. I wanted to follow-up on Chris' question on tariffs, specifically as it relates to your competitive position. My reaction to the tariffs last night is that it could be favorable for Acuity, just given China had the bigger increase and you're protected in Mexico. Is that the right read, Neil?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Big picture, Ryan, yes. I think that we probably are advantaged. Obviously, these tariffs are everywhere. So we'll have to dig in further with our both our own portfolio as well as how it relates to others. But we're really confident.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

We structured our we've intentionally built our supply chain to have the dexterity to react to situations, like this. Big picture, the, kind of more of the normalization of the tariff amount between say Vietnam and Cambodia and China will impact many of the competitors that moved from China to Vietnam and Cambodia. As a point of fact, we did too. So, we're just bigger and more diversified. The as long as the USMCA holds, obviously, Mexico is a big advantage for us in there.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

And then finally, we've maintained and our manufacturing footprint here in The U. S. So round numbers, 20% of our manufacturing happens here. And so we've maintained that and continue to drive productivity, in that. So net net, we feel as good as we can about what our global supply chain, looks like.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

And I think on the margin we're advantaged versus our competitors.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

Okay, got it. That's really helpful. And then a question on gross margin, I guess it's a two parter, sorry for that. It looked like gross margins were better than normal seasonality this quarter. Can you just talk about why that was?

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

And then you mentioned there could be a lag in terms of passing on price. I would just love to get any more color there. Is it going to be significant? Or do you think that's something that you can manage?

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Yes. Ryan, I'll start, and then Neil can add on about the tariff impact. So when you look at the underlying business, the gross margin continues to be strong, and this really is a factor of a couple things. First, I'd highlight that AIS is continuing to be a bigger part of the company, and their gross margins are And the impact of the acquisition of QSC had a favorable impact on gross margins. The other thing I'd highlight is the execution of the strategy at ABL around product vitality, service, technology, and productivity, that's continuing to have an impact.

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

So the products like you saw today on the presentation with Ivo, they're going to continue to drive more value for us, our channel partners, and our customers, and, have lower input costs. So it's really both of those things, a greater portion of AIS, contributing favorably as well as the underlying performance of the Lighting business.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yeah, and Ryan, to pick up on my, comment on the lag. So we put a price increase in, it gets quoted, it gets bought, and ultimately it gets shipped. That's the gap that we're talking about. So during the pandemic that ranged from thirty to ninety days, based on when we were doing price increases, there. So it's tough to predict exactly.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

The second, but it was in that order of magnitude. So it's interesting, but not terribly determinative. The second, thing that I would just make sure everyone understands is we'll, when we say we're focused on dollars, if there's $100 of impact, we're going to pass on at least $100 of price. And let's ignore the impact to demand for a second, but we will do we will at least pass on $100 of price. The impact then would be mildly dilutive to the percentage margins in the periods in which we are cycling through this.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So that's why we refer to it as a supply shock and we experienced the same thing during kind of the rapid inflation periods of the pandemic. But as Karen, pointed out, the quality of our underlying business is both businesses is incredibly high. So the performance on the lighting business is, wildly different than any other company in the lighting industry anywhere else in the world. So the strategy of driving product vitality, service, technology and productivity has led to the expanding margins. And while we'll take a pause while we digest these tariffs, we will continue on that path going forward and we're confident of what we can do with that.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Second is that we've built a very interesting data and controls business inside of Acuity over the last, five years, both inside of ABL with our electronics business as well as intelligence bases. Those are highly attractive businesses with outstanding margin structure and growth opportunities. So once we get past this kind of bump in the road, we'll start to that performance shine through, again.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

Got it. Thanks so much.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Thank you.

Operator

Our next question comes from Joe O'Dea at Wells Fargo.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Hi, good morning. Just a clarification on guidance, didn't hear anything, haven't seen the slides, just how are you approaching that?

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Sure, Joe. We've really been clear about our performance to date. So where we are, we're half of our fiscal year, and we've talked about what we know for the remainder of the fiscal year. As a reminder, we did modify our guidance in Q1 to reflect the addition of QSC, and so that's where we are, and we're just going to continue to execute accordingly for the remainder of the year.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Okay. And so given all the uncertainty, it's reasonable to assume that, you know, those ranges are still intact for your expectations?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

No change.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

No change. Okay, cool. How do you do the pricing on this when we think about a 50% tariff? Is that we take those products and we're just going to go raise price by 25% to offset it or you look across the portfolio and I think in total it would mean pricing would have to be up about 5% for the total company to offset something like this. But just curious in terms of how you approach this and then should we be thinking that these announcements are coming in the next week because you're operating against an April 5 or April 9 kind of timeline?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes, so, we've been very clear, excuse me. As part of the strategy, we have transitioned to strategic pricing. Strategic pricing for us means that we charge for the value that our products deliver in the marketplace and we are mindful of where they are positioned competitively. So on the lighting side, as we look forward, there we have a pricing strategy for Contractor Select, we have a pricing strategy for Design Select and we have a pricing strategy for Made to Order. So we will look to strategically evaluate where we want to put that price to cover, any of the additional cost increases in cost of goods sold as a result of the tariffs.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So we're trying to play offense, a little bit through this process, as well with our strategic pricing. The, as Karen mentioned, we introduced pricing actions that were, in place through March 31. Obviously, we all learned the same time you did yesterday about what these actions, what the tariffs the new tariffs are and we will take appropriate actions, very quickly.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

And then just one on the QSC margin, if based on some of the details in the queue, I don't know if we're doing this right, but it looks like that was like a 17.4 adjusted op margin. Is that right? And I think previously, like based on acquisition math, was coming in at about 15%. So anything that you did in a short period of time, on those margins?

Karen Holcom
Karen Holcom
Senior VP & CFO at Acuity Brands

Directionally, that's pretty close. When we look at QSC, it is highly aligned to the Atrius Distech business or the legacy AIS business. It's pretty similar in terms of growth. It's similar in terms of margin profile, not quite as strong yet, but it's pretty close. So, I think you're directionally there.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Great. Thanks a lot.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yeah, Joe, we were clear that we're excited about the opportunities here. We'll focus on growth, but we do believe that there's margin opportunity going forward.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Yeah, just seemed to come through a little faster than we anticipate it. So, story there. Thank you.

Operator

Our next question comes from Brian Lee at Goldman Sachs.

Brian Lee
Brian Lee
Analyst at Goldman Sachs

Hey, everyone. Good morning. Thanks for taking questions. I know a lot on tariffs. I'll just throw one more in.

Brian Lee
Brian Lee
Analyst at Goldman Sachs

I mean, the ink isn't even dry yet, so I know it's super early days. But what are your thoughts around kind of Neil, you mentioned with the tariffs that you already priced in through the March, you saw kind of the customer behavior that you would expect. If you could just elaborate on that a bit. And then with these tariffs potentially just being a point of negotiation, would you anticipate again, know it's early days, you probably don't even have customer feedback, but is there the risk that customers kind of wait on placing orders, especially for kind of longer lead time projects in the anticipation that maybe tariffs do come down or there's some negotiations with certain countries where the impact is going to be lessened over time?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes, Brian. So let me take what is normal customer behavior that I alluded to. So every time we put a price increase, basically shakes loose some of the activity that would have come over the course of the next call it month or two. So we'll see an accelerated order rate for people that are ready to pull the trigger on a project that they're in the midst of, so that they can ensure that they lock in a cost. And they may take that, sooner than they wanted it, but they'll do that in order to lock in that price.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

That's what we saw, that's about what we saw as it relates to the price increases that we have already put in place. The impact of that would be, we believe contained inside of our fiscal third quarter. So just to give you kind of orders of magnitude. Then, as we, look forward, none of us know what, whether these are permanent or temporary or up for negotiation or not up for negotiation. So we have to operate based on what we know.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So our policy here is we focus on what the administration actually does and as a point of fact, they've implemented these tariffs. So we're reacting to these tariffs, as, accordingly. The second thing that I would say then is, obviously that's going to create uncertainty in the marketplace for people that are dependent, on kind of these orders over the next period. So we'll figure out what that's going to be. It may be, small.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

That's why we highlighted that, there was normal order activity, related to the first price increase. And then anecdotally, I would tell you on the customer front, obviously, we haven't had time to talk to customers, but we were speaking to one of the major distributors yesterday and they were sharing with us that they had 120 different, price letters price increase letters that they were processing currently. So obviously, the effects of this are not isolated to our company.

Brian Lee
Brian Lee
Analyst at Goldman Sachs

Awesome. Appreciate the color. And just maybe a follow-up on the QSC integration. Again, that's, you're two months into it, but, can you kind of give us a sense of what sort of progress you're seeing? Any visibility into either cost or product synergies that you might have on the horizon, whether later this year or into next year?

Brian Lee
Brian Lee
Analyst at Goldman Sachs

Thank you.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes. So, taking a step back, we are, enthusiastic about what we are building with intelligent spaces, smarter, safer and greener, connecting the edge with the cloud through disruptive technologies. Atrius, Distech and QSC. QSC fits really, really well with us from a strategy perspective, from a product perspective and from a culture perspective. Each one of those things we knew going in, but they, and each one of those have exceeded our expectations so far.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So as Karen mentioned on the in kind of the discussion of margins, we've essentially already completed or mostly completed the enablement function integration that's giving us opportunities on margin. They're continuing to perform really well in the marketplace from a consistent business perspective. The feedback they're getting is, it's great to be part of a bigger platform and they're excited about the opportunity to be part of a bigger platform. We've brought together the commercial and product and engineering teams to start to, brainstorm end user outcomes, which can be affected. As we said when we talked about, we are really confident about those and also we don't want to rush those.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So we want those to be pulled by the marketplace as opposed to us jamming through. So on the arc of time, we have a run rate billion dollar ish data and controls business now intelligence bases, that has an opportunity to continue to grow at the rates it's growing at and the opportunity to continue to expand margins.

Brian Lee
Brian Lee
Analyst at Goldman Sachs

All right. Thanks a lot. I'll pass it on.

Operator

Our next question comes from Tim Wojs at Baird. Tim, your line is now open.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Can everybody hear me?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes. We can. Good morning, Tim.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Hey. Sorry about that. So last thing covered, just two kind of clarification questions for me. So I guess the first is and maybe I missed it, can you just quantify the price that you took before the tariff announcements yesterday just in terms of percentages?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes. So, we're not going to give the percentages, Tim, just for competitive reasons. But kind of think single lower middle single digits.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Okay. And then, I guess, a capital kind of allocation perspective, just with the leverage that you kind of took for QSC, how do you think about deploying cash flow over the next, call it, twelve to eighteen months? Are buybacks still kind of in play? Do you kind of prioritize debt pay down?

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Just how are you kind of thinking about the cash flow kind of utilization over the next year, year and a half?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yes. So, let's focus on the obvious first. We are highly cash generative and we've got a tremendous amount of financial capacity. So, the performance of our business will continue to drive that level of cash generation. And we've been very clear and consistent about what our priorities are.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

We want to grow our current businesses. We want to grow through M and A. We have increased our dividend and we will repurchase shares, sometimes more than, sometimes a lot, sometimes a little. As we look at kind of where we are right now from a capacity perspective, our capacities remains very, very high. So we're positioned well for whatever happens now.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

If there's dislocation in the marketplace, which makes acquisitions more attractive, we will evaluate those. We have a healthy pipeline. If there's dislocation in the market that affects Acuity shares, we have the capacity to be aggressive there. And finally, we have the ability to do all of the above. So I feel really good about where we're positioned right now from a capital perspective.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

All options are available to us.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

Okay. Okay, great. Thanks a lot for the color.

Operator

Our next question comes from Christopher Glynn at Oppenheimer.

Christopher Glynn
Christopher Glynn
Equity Analyst at Oppenheimer Holdings

Thanks. Good morning, everyone. Just following up on Tim's question there with all options being available, being a clear punch line there. Just want to talk about how is the pipeline in terms of scope and breadth of activity? And are you in the market for another QSC?

Christopher Glynn
Christopher Glynn
Equity Analyst at Oppenheimer Holdings

A, does it exist? B, do you have enough on your plate right now or would something like that be within the square of reasonable expectations over the next twelve to twenty four months, call

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yeah, it's a good question. Obviously, with the financial capacity is not an issue, so as we've identified. Second, our operating capacity is quickly not becoming an issue. So the company has learned a lot through the integration of QSC and I'm confident in our ability to continue to execute on opportunities like QSC going forward. As in the kind of next six to twelve months, there is not anything of the magnitude of QSC in our the pipeline, the short term pipeline like that, but we do have attractive opportunities in that short term pipeline that we will continue to execute against.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

To the qualitative question, are we looking for another QSC and do they exist? The answer is yes and yes. And, we are confident that we can continue to do, to add attractive companies like that to the portfolio that fit our strategy and are more valuable as a result of being part of the portfolio. So in summary, we have plenty of capacity. The short term pipeline does not include an acquisition of the scale of QSC, but longer term, we will for sure be looking for more of those acquisitions.

Christopher Glynn
Christopher Glynn
Equity Analyst at Oppenheimer Holdings

Okay, thanks. And, I also have kind of a pan out question. Acuity said in its long history some years of accelerated performance and competitive differentiation. I think as you describe every quarter right now, it's a different shade of drivers right now to be sustainable. But competitors see what you're doing.

Christopher Glynn
Christopher Glynn
Equity Analyst at Oppenheimer Holdings

You have some resource competitors. Not that it's easy. You've brought a lot of diverse talent in and tough to replicate, particularly with the benefits of scale. But I'm curious if you're seeing any competitors start to demonstrate times of raising their game as well.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Yeah, mean, I think competitors are absolutely reacting and it's funny, I'm looking at Karen because in our QBR, we made this exact point to the lighting team. It's like we can't expect that we are going to continually beat up our competitors and they're not going to do anything in reaction. So the answer is yes, they are reacting. And that is generally on the margin as opposed to kind of straight on the core. I'm not aware of a company that can execute our strategy the way we are executing it.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So, the our electronics portfolio is central to the differentiation of the lighting business in the marketplace. So the ability to control from the driver to the sensor to the control to the software and then with Atrius Datalab to the cloud, I believe is unique in the marketplace. The, that creates our ability to deliver solutions that others, can't in marketplace. So we may intentionally lose on the edge to a super low price competitor that is low featured, but we will continue to win over time with the solutions that matter in the marketplace. And then big picture, the whole company is basically a data and controls company with a luminaire business as opposed to a luminaire business with a small electronics business.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

That is unique in the market place.

Christopher Glynn
Christopher Glynn
Equity Analyst at Oppenheimer Holdings

Yeah, thanks for that frame up Neil.

Operator

Our next question comes from Jeffrey Sprague at Vertical Research.

Jeffrey Sprague
Founder and Managing Partner at Vertical Research Partners

Good morning, everyone. Hey, a lot of ground covered. I just want to come back to kind of the early read on maybe demand destruction or customer behavior. I mean, given lights are kind of

Jeffrey Sprague
Founder and Managing Partner at Vertical Research Partners

late in the project, I assume kind

Jeffrey Sprague
Founder and Managing Partner at Vertical Research Partners

of larger projects have continued to move forward at least up to this point. So this weakness you're seeing, is it more smaller rental projects or in fact larger projects are slowing down, that sort of dynamic? Is there any color you could shed there?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Jeff, I think the most obvious answer or observation we could make in the immediate term, so think kind of second quarter and what we're executing on now is it's all just timing. So, people may have slowed some orders down in the second quarter to try and get a lay of the land and then they accelerated those orders once they realized we were increasing prices. That's the simplest explanation of kind of the up and down. As we look forward, we'll have to see how what the total impact is, on everybody and then as a result the decisions that people take on demand going forward. So, we're more in steady as she goes mode right now, so we're confident we can execute, in a differentiated manner.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

So I think it's too early to tell what the impact will be on demand.

Jeffrey Sprague
Founder and Managing Partner at Vertical Research Partners

Great. And you were quite clear about sort of the normal lag between when you raise price and when you get it and how it's got to work through inventory and everything else. But I'm I'm wondering, can you shorten that window, and not let customers, for lack of a better term, over order and get in front of kind of the cost bow wave to kind of accelerate the catch up on your end?

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Jeff, you can feel confident that we are doing everything in our power to do that.

Jeffrey Sprague
Founder and Managing Partner at Vertical Research Partners

Great. Thank you.

Operator

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

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

Well, first of all, you all for joining us this morning and it's a pleasure to be the first major company to report after 04:00 news yesterday afternoon. So in that context, want to take a step back and say, are incredibly proud of the company that we are building here and we will continue that path. We have a market leading lighting and lighting controls business with an outstanding electronics portfolio, which is differentiated in the marketplace and is delivering differentiated results in the marketplace. We have an outstanding intelligent spaces business with a different theory of the case that we can combine the data of a built space and deliver outcomes for end users and for the people that provide that space to those end users that we're really confident about. And taken together, we have a super high quality business that is clear with a demonstrated ability strategy is clear with a demonstrated ability to execute in multiple different marketplaces.

Neil Ashe
Neil Ashe
Chairman, President & CEO at Acuity Brands

And we're going to go out and do that and we will create differentiated value as a result. So thank you for spending time with us this morning and we look forward to catching up with you next quarter.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Executives
    • Charlotte McLaughlin
      Charlotte McLaughlin
      Vice President, Investor Relations
    • Neil Ashe
      Neil Ashe
      Chairman, President & CEO
    • Karen Holcom
      Karen Holcom
      Senior VP & CFO
Analysts
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Earnings Conference Call
Acuity Brands Q2 2025
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