Market Update: Acuity Outperforms Lighting Market in Q2

July 13, 2022

By David Gordon

Last Thursday Acuity released their Q3 earnings report and exceeded industry performance when comparing their Independent Sales Network to Channel Marketing Group’s Q2 2022 Pulse of Lighting report (average industry results.)

Congratulations to Acuity and its agents.

Acuity Q3 (spring) Quarterly Results

Taking a read-through of the report, and their slides, some highlights:

• 6% growth (an increase from 17.1% in their Q2) and exceeded $1 billion for the quarter.
  • Independent sales network (lighting agents / electrical distributors) was up 16%. Growth was in the office, education, and industrial segments.
  • Retail is only 5.8% of Acuity’s “channel” business (independent + retail) with the remainder being direct or OEM sales (or the ISG business.)
• Gross margin increased by 30 basis points (but down from 2021 due to increased freight and component and operating costs and the new OSRAM DS business which has a lower gross margin.)
• The lighting group’s performance (ABL) tripled the performance of the controls group (ISG) based upon YoY performance, which then begs the questions of:
  • Is the sales cycle significantly different for a robust controls offering?
  • Is the market significantly different?
  • Given that LightFair was more of a ConnectFair and that some of these “newer” systems will compete against the ISG division, what will be the impact of increased competition?
  • Is the broader market “ready” to embrace this type of offering or is it an “opportunistic” sales where the prospect must already be envisioning / seeking this type of solution or is the sale a demand generation sale?
  • As companies embrace ESG initiatives, this should be a natural target market for Acuity.
• Launching many new products
• Received positive feedback at recent NAED Annual on “service”. While they didn’t exhibit at LightFair, we understand that they were present in Las Vegas and interacted with “some” agents and presumably others. Assume that they received similar feedback.
• Company has increased its inventory commitment which is what is helping it deliver for its customers. This is where “size matters” and investment decisions can be made. It is also probably one of the reasons why gross margin has improved … Acuity has material in stock and may be able to command a slight premium, hence enabling it to take share … at this time.
• Company is using cash to buy its stock, hence reducing stock float and increasing stock price.

Insights from analyst questions

• Expect more price increases although Acuity is getting more “targeted” with them.

• According to Acuity, a key element of their improved pricing strategy is the utilization of technology to better understand their pricing dynamics as well as centralization of the process (perhaps some ideas for others to improve their pricing methodology? It sounds like Acuity is receiving a good ROI on their pricing technology investment.)

• Acuity has strong backlog. Expects similar performance in their Q4 (everyone else’s Q3 … which is summertime.)

• While Acuity wouldn’t address a question regarding volume activity, and declined even a 50/50 split inferring inflation / pricing would be half of the growth with the remainder being organic, in unpacking some of the information …

  • If ABL growth was 15% for the independent sales network

  • And inflation is pegged at 7-8%

  • Then the growth is 7-8%, however

  • A question is what, if any, of the OSRAM DS business is accounted for the independent sales network.

  • If OSRAM = 0%, then organic is 7-8% and hence, according to our Pulse of Lighting report, where we identify average price increase, Acuity organically outperformed the market by 3-4 points.

Takeaways

Overall …

• A good quarter for Acuity. Very solid and seem to be taking some share and being strategic on pricing to capture some incremental costs
• On the share part, it would be interesting to learn where taking share … what product categories and/or “from whom” (i.e. other conglomerates, focused companies, Tier 3 companies, etc) … (distributors and agents – your thoughts?)
• While Acuity stated that their ISG (controls) performance is due to strong comps, it makes one wonder about the market for that offering and if it can regularly compare, performance-wise, to how fixtures are sold. Further, what percent of these sales are US vs Rest of World? For a company that wants to be a “technology” company, accelerating, and developing, consistent performance is important (from stock price viewpoint.)
• Acuity wouldn’t answer questions regarding the macro market given media “chatter” about recession, and, given that DISC is forecasting a nominal electrical construction recession in 2023, it is a valid question. Given Acuity’s outperformance of the broader market, it is reasonable to consider that they will outperform … but not double-digit growth. The question really becomes, what type of organic growth are they generating?
• From reading the transcript and reviewing the slides, it appears that Acuity is trying to get good at not saying much as there wasn’t much “meat” or insights into where and how let alone how they look at the future. From seeing this type of posturing on other calls, this doesn’t help them with the analysts.

How do you see Acuity performing in your market?

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