Earnings Call Transcript - AYI Q4 2025

Operator, Operator

Good morning, and welcome to the Acuity Fiscal 2025 Fourth Quarter and Full Year Earnings Call. 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. Charlotte, please go ahead.

Charlotte McLaughlin, Vice President of Investor Relations

Thank you, operator. Good morning, and welcome to the Acuity Fiscal 2025 Fourth Quarter and Full Year Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2025 fourth quarter and full year performance. There will be an opportunity for Q&A at the end of this call. 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 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2025 fourth 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 Ashe.

Neil Ashe, CEO

Thank you, Charlotte, and thank you all for joining us this morning. Our fiscal 2025 fourth quarter performance was strong. We grew net sales, expanded our adjusted operating profit and adjusted operating profit margin and increased our adjusted diluted earnings per share. Throughout fiscal 2025, we have demonstrated our ability to deliver growth and consistent operating performance that created stakeholder value and compounded shareholder wealth. Acuity Brands Lighting delivered sales growth and improved adjusted operating profit and adjusted operating profit margin in the fourth quarter. This performance was driven by the execution of our strategy and the aggressive actions taken over the last 2 quarters to manage margins despite the dilutive impact of the combination of higher tariff costs and corresponding price increases. We have the most dynamic and resilient supply chain in the industry, and we have adapted faster and more effectively than our competitors. We have leveraged our multinational footprint to move away from higher tariff environments and optimize our supplier relationships. We accelerated productivity efforts, including the evaluation of operating expenses and our organizational structure and ABL, and we continue to strategically manage price. I have spent the last couple of quarters describing how 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 DataLab. We're developing market-leading solutions that drive productivity for us and for our partners. A good example of this is the TLS, Twist-to-Lock sensor by SensorSwitch that offers time-saving solutions to contractors. TLS is an occupancy sensor designed for industrial spaces like warehouses and manufacturing facilities. It gives contractors the ability to easily add controls to any project, saving time and reducing complexity on the job site without the need for wires or separate installation. Our visual suite of applications are automating manual processes across the key phases of a project, design, installation and optimization. These digital tools are designed to boost productivity, encourage collaboration and build contractor preference. Visual lighting and visual control help designers create lighting solutions by mapping digital floor plans, automating design audits and offering smart recommendations. Visual installer gives installers real-time access to their design plans, enabling collaboration that results in an accelerated install and programming timeline. And Visual Cloud optimizes project management, providing site access and team contacts, leading to simplified collaboration and an overall reduction in costs. This end-to-end support improves the end user experience through increased productivity and lower costs. As part of our ABL growth algorithm, we are making organic investments for future growth, prioritizing verticals where we have not historically competed or where we are underpenetrated. This year, we strengthened our offerings across health care by launching the care collection and developing our Nightingale range of products. Care Collection is a curated portfolio of lighting and lighting control solutions that have been designed for use in a healthcare environment, making it quicker and easier for customers and agents to select the products that they need. We introduced the Nightingale brand to expand our healthcare offering into in-room patient care. Our team developed a series of lighting solutions that combine the functional needs of caregivers with the environmental needs of patients. In addition to Nightingale Embrace that we previewed last quarter, we launched Respond and Observe. Respond is a multifunctional patient bed luminaire with ambient, exam, night observation and reading modes. Respond can be paired with sensor switch. Observe is a skylight that can be used in common areas and patient rooms and can switch between exam, ambient and sky modes also using sensor switch. Nightingale has already received recognition from the industry. In the fourth quarter, it was one of several of our brands that were highlighted by the IES Industry Progress report awards that celebrate advancements in lighting products, research publications and design tools from the past year. Other products recognized include the IVO cylinders and Deep Regressed Downlights, HOLOBAY by Holophane, REBL Round High Bay and Wander Pathway by Hydrel. Now switching to Acuity Intelligent Spaces, which had another strong performance this quarter. Through Atrius, Distech and QSC, we have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Atrius and Distech control the management of the space, and QSC manages the experiences in that space. Over time, we will use the data that they generate to enhance productivity outcomes through data interoperability. During the quarter, Atrius, Distech and QSC each delivered strong results and are continuing to collaborate to explore new and interesting ways of working together. QSC is building the industry's most innovative full-stack AV platform that unifies data, devices and a cloud-first architecture to deliver real-time action, experiences and insights. The addition of QSC has evolved the geographic footprint of our AIS business, accelerating our multinational expansion. One of the markets where we have already benefited from this is India, where we compete commercially and have an experience center that we expanded during the quarter. The center includes product demonstrations for various room types in high-impact spaces as well as design workshops and training for our ecosystem partners. This center also serves as a hub for Intelligent Spaces to develop collaborative use cases for future workspaces and is the first experience center to feature the integrated Acuity Intelligent Spaces offering. Now I want to take a moment to review where our business is today and our view of how we are positioned for the future. Acuity Inc. is a leading industrial technology company comprised of Acuity Brands Lighting, which is the best-performing lighting and lighting controls company in the world, and Acuity Intelligent Spaces, which is a dynamic and growing building management and full stack AV business. We have transformed the company from principally a luminaires business to a data and controls and luminaires business, and positioned ourselves well for long-term growth. Fiscal 2025 was an important year for us. We renamed our company, Acuity Inc., reflecting our evolution and aligning to our strategy of using technology to solve problems and create impactful experiences that shape how people live, work and connect. We continue to make our Acuity Brands Lighting business more predictable, repeatable and scalable. We realigned the business into luminaires and electronics and delivered improved financial performance. ABL is a high-quality strategic asset and a core pillar of our company. In Acuity Intelligent Spaces, we acquired and integrated QSC. We have scaled AIS into a larger part of our overall company. At Acuity, we are doing things differently. Our values are at the core of who we are, guiding how we serve our customers, associates and communities. Each of our associates understands how we create value. We grow net sales, we turn profits into cash and we don't grow the balance sheet as fast. And we are empowered by our better, smarter, faster operating system to work in a structured and consistent way. The combination of these things allows us to operate more productively with greater distribution of responsibility and accountability throughout the company. It is how we are able to react aggressively to changes in the macro environment this year and how we were able to quickly and successfully integrate QSC. In Acuity Brands Lighting, 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 with the market, we will take share, and we will enter new verticals, and we have the opportunity to continue to expand margins. In Acuity Intelligent Spaces, we are making spaces smarter, safer and greener. We have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Our focus in AIS will continue to be on growth with the opportunity for margin expansion. We are effective capital allocators. We have grown our business organically and through acquisitions. We have rewarded our shareholders with increased dividends, and we have been opportunistic in repurchasing more of our outstanding shares. Acuity is positioned for long-term growth. We are innovators, disruptors and builders who are creating stakeholder value and compounding shareholder wealth. Now I'll turn the call over to Karen, who will update you on our fourth quarter performance.

Karen Holcom, CFO

Thank you, Neil, and good morning, everyone. We ended fiscal 2025 with strong fourth quarter performance. We grew net sales, improved our adjusted operating profit and adjusted operating profit margin and increased our adjusted diluted earnings per share. For total Acuity, we generated net sales in the fourth quarter of $1.2 billion which was $177 million or 17% above the prior year. This was driven by growth in both business segments and includes 3 months of QSC sales. During the quarter, our adjusted operating profit was $225 million, up $47 million or 26% from last year. This improvement was due to the growth of AIS, including the acquisition of QSC and the result of actions taken at ABL to control operating expenses. Adjusted operating profit margin during the quarter expanded to 18.6%, an increase of 130 basis points from the prior year. This quarter, there are a few additional non-GAAP adjustments to call out. First, there is a noncash charge of approximately $31 million, resulting from the derisking of our qualified pension plans in the United States and Mexico. As we said last quarter, over the last few years, we have taken steps to simplify and minimize the future impact of our pension obligations on the company. Through our investment policies and capital allocation decisions, these pension plans were overfunded. And as a result, we transferred the majority of the related obligations to a third party. Our U.K. pension plan transfer is anticipated to be completed in the first quarter of fiscal 2026, and we expect to take an additional noncash GAAP charge of around $10 million at that time. This quarter, we also recognized a one-time tax benefit of $8 million. After non-GAAP items, our adjusted diluted earnings per share was $5.20, which was an increase of $0.90 or 21% over the prior year. ABL delivered sales of $962 million, an increase of $7 million or 1% versus the prior year driven by growth in our independent sales network of $25 million or 4%, partially offset by declines in corporate accounts and our direct sales network. Adjusted operating profit increased $22 million to $194 million, and we delivered adjusted operating profit margin of 20.1% which was up 210 basis points compared to the prior year. This improvement was driven largely by the intentional actions we took in the third quarter to reduce operating costs and our increased focus on productivity. Now moving to Acuity Intelligent Spaces. Sales for the fourth quarter were $255 million, an increase of $171 million. Atrius and Distech combined grew approximately 13%, while QSC grew approximately 15% year-over-year. Adjusted operating profit in Intelligent Spaces was $55 million with adjusted operating profit margin of 21.4%. Now turning to our cash flow performance. During the fiscal year, we generated $601 million of cash flow from operations, which was $18 million lower than last year, primarily due to the acquisition-related items, the timing of tariff payments and accelerated inventory purchases driven by the tariff policy. In fiscal 2025, we continue to allocate capital effectively and consistent with our priorities. We invested for growth in our existing businesses, allocating $68 million to capital expenditures. We invested over $1.2 billion in acquisitions and repaid $200 million of our term loan, including an additional $100 million this quarter. We increased our dividend by 13% and allocated around $119 million to repurchase approximately 436,000 shares at an average price of around $270. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased approximately 10 million shares at an average price of around $150 per share, which was funded by organic cash flow. This amounts to about 25% of the then outstanding shares. I now want to spend a few minutes on our outlook for 2026. Consistent with our prior practice, we are going to provide annual guidance anchored around net sales and adjusted diluted earnings per share. We will also provide you with certain assumptions, which you can find in the supplemental presentation available on our website after the conclusion of this call. For full year fiscal 2026, our expectation is that net sales will be within the range of $4.7 billion and $4.9 billion for total AYI. This is based on the assumption that ABL will deliver low single-digit sales growth and AIS will generate organic sales growth in the low to mid-teens. We expect to deliver adjusted diluted earnings per share within the range of $19 to $20.50. In summary, we delivered strong performance in fiscal 2025. We grew net sales, improved margins and increased adjusted diluted earnings per share. We generated strong cash flow from operations and allocated capital effectively. We are positioned well to deliver another strong year in fiscal 2026. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Operator, Operator

Our first question comes from Chris Snyder at Morgan Stanley.

Christopher Snyder, Analyst

Maybe starting with a bigger picture question here, Neil. It's been maybe almost 8 months since the QSC acquisition. It seems like integration is going really well. Can you kind of just talk about the M&A pipeline? And if there are categories within the smart building ecosystem that are attractive to the company?

Neil Ashe, CEO

Yes. Thanks, Chris. Well, first off, obviously, we're pleased with the addition of QSC to the portfolio. As you know, we have a different theory of the case for Acuity Intelligent Spaces is that we can consolidate the data state of a built space, how the building operates, the experiences in that building, who is in that building, other elements of that data state. So we have a consistent pipeline of potential acquisitions that would continue to expand that portfolio as well as opportunities to continue to expand organically in that portfolio. So we feel like the path of travel for Intelligent Spaces is pretty clear. Both with deploying capital as well as organically.

Christopher Snyder, Analyst

I appreciate that. And then maybe just following up with more of a near-term one on the quarter itself. If we look at ABL, it seems like the sequential ramp in Q4 came in below seasonality despite incremental price, I would imagine quarter-on-quarter coming through. That is just a function of the pull forward that you guys highlighted on Q3? Does it signal that some of the end markets are softening? And then just kind of any color or thoughts on the channel inventory level as we start fiscal '26.

Neil Ashe, CEO

I'll start, Karen, add anything that I leave off. So you'll remember back in the last call, we suggested that it would be prudent to evaluate the second half of the year given the changes in tariff policy, the resulting actions we took to modify the supply chain to reduce operating expenses and then the corresponding price increases as well. So basically, if you take the third quarter plus the fourth quarter, ABL is exactly where we expected it to be. And I think we can be proud of the performance that the unit has delivered through all of these. As you pick apart the disaggregated revenue, we have remained strong with both the independent sales network, combined with our direct sales network. So really around the project business in the quarter and in the year, the corporate accounts business was down versus last year. So as we've said consistently, that's a really good piece of business, but it's not a very consistent piece of business because it relies on the capital decisions of a concentrated group of customers. So taken as a whole, I think the ABL performance is really strong, both from a top line as well as from a margin perspective. Our belief is that we have outperformed the industry. So numbers will come out over time, but our belief is that we've outperformed the industry.

Operator, Operator

Our next question comes from Tim Wojs with Baird.

Timothy Wojs, Analyst

Maybe just a bigger question to start off with Neil. Just on AIS. I guess as you've kind of thought about integrating the front of the house with QSC and kind of the back of the house with Distech and Atrius. What are some of the key kind of milestones that we should look for? We think about as you kind of maybe develop a more wholesome solution.

Neil Ashe, CEO

Yes, thank you, Tim. To elaborate on our strategy, we have exceptional and innovative technology driven by our control systems, Distech, and QSC. Each of these businesses will maintain their trajectory in capturing market share in their respective areas. Atrius DataLab is our initiative to integrate data, catering to both front-of-house and back-of-house functions as well as the IT and OT combination, allowing us to provide unique experiences and results in these domains. We're particularly excited about the strength of our controls platform. Given the uniqueness of each building, our position in this market is immensely valuable. Regarding milestones, you can anticipate that each of the three businesses will continue to grow organically. Additionally, we will begin to combine some of their products in terms of implementation and application. Over time, you will hear feedback from end users and customers about the new possibilities arising from the integration of our hardware solutions with the data and software solutions we are developing.

Timothy Wojs, Analyst

Okay. That's helpful. And then just kind of a 2-part around guidance. I guess the first is within the low single-digit ABL guide, is there a way to just contextualize how much price is just given all the moving pieces with tariffs? And then second, just on margins, I'm kind of backing into kind of an implied adjusted EBIT margin of 17% to 18%. Just is that kind of the ballpark level there on margins? Just anything to call up below the line?

Karen Holcom, CFO

Yes. Let me hit the one on ABL and the price first. So just to take a step back, Tim, over the past few years, we've been really strategic about pricing at ABL and focusing on the value that our products are bringing to the end user. And yes, we've had several price increases over the past couple of quarters to offset the increase in the tariffs. But we didn't take these prices broadly over our portfolio of Contractor Select, Design Select and made the order. We've taken some prices up and some prices down depending on where we've seen opportunity to be strategic in the marketplace. So I would sum it up by saying all the pricing actions have been about in the low- to mid-single digits, intending to offset the dollar impact of those tariffs.

Neil Ashe, CEO

Okay. I want to take this opportunity, Tim. We like to use the full year call to give a long-term perspective. I want to highlight the significant margin improvement in the company, especially in the lighting business. The progress from fiscal '19 and '20 to now is quite striking and ahead of our competitors. We have decided to provide both gross margin and operating profit margin at the segment level moving forward so you can better understand the performance of these businesses. The trajectory is clear; we are gaining market share and expanding margins in both lighting and lighting controls as well as on the AIS side. Expectations will continue to rise and align with our performance over time, and we feel very positive about our current position.

Operator, Operator

Our next question comes from Ryan Merkel with William Blair.

Ryan Merkel, Analyst

So Neil, the market has been soft for a while here, flat to down. Any signs that orders and demand are improving or do you think we need lower interest rates before you start to see an uplift in the lighting market?

Neil Ashe, CEO

Yes, Ryan. On the lighting side, we've been waiting for economic stability for some time, yet we continue to achieve solid performance despite the lack of that stability. As you know, we rely heavily on data. Moving forward, we expect more of the same in terms of the economic context, and we are not predicting any improvements at this stage. While I’m not an economist, I cannot pinpoint the factors driving any changes. However, I want to highlight that our growth strategy on the ABL side is quite clear, and we are showing that we can perform in this sluggish economic environment. With our market performance, gaining market share, and expansion into new sectors, we are proving our capability to consistently grow. As you saw in the third quarter, any positive momentum from market growth would enhance this further. Ultimately, we are demonstrating our capacity to achieve results regardless of the circumstances.

Ryan Merkel, Analyst

All right. So to put it in my own words, it doesn't sound like a lot has changed on the market. And for ABL to be up low-single-digits for '26. It assumes the market is flat to down. Is that fair?

Neil Ashe, CEO

I would say that's fair. It's more us than the market in our expectation.

Ryan Merkel, Analyst

Right. Okay. And then I had a question on gross margins for the outlook. I know you won't give specifics, but I think the Street is modeling gross margins in '26 down a little bit. Now I know you've done some productivity things. And I think on the last call, you said you thought you could return gross margins to 50% using productivity. So just any color on gross margins and if 50% is still a reasonable target at some point to get back to?

Neil Ashe, CEO

Let's break that down into its component parts. The whole company will continue to expand on two fronts: one is mix, and the other is improved performance at ABL. As I've mentioned, we're moving in that direction and will continue to do so. As Karen noted in her prepared remarks, the dollar impact from the combination of tariff costs and price increases is neutral, but the margin percentage impact is negative. This will somewhat reverse some margin expansion at ABL temporarily, and the impact could range between 50 to 100 basis points depending on how the periods play out. We need to take that into account as we move forward, but our strategy and long-term expectations remain consistent and clear.

Operator, Operator

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

Joseph O'Dea, Analyst

Wanted to start on QSC. Any color on the margins in the fourth quarter? It looks like it could have been kind of around 20% and legacy AIS around 23%. So really, just looking if that's kind of a reasonable expectation and then understanding the steps that you've taken. So it looks like you've already moved those QSC margins from mid-teens to low 20s. And then how you think about the timeline on the path to get them to kind of align with legacy margins?

Karen Holcom, CFO

Yes. Thanks, Joe. As Neil mentioned earlier, we really are pleased with the progress of QSC as they become part of Acuity and AIS. So, we've seen really strong performance across all of AIS. And when we did the acquisition, we expected that we would bring QSC's performance more in line with the legacy business, which is really what we've demonstrated over the past 2 quarters. They've had strong sales growth this quarter and last quarter. And so that's contributed to the margin improvement. And then they've also benefited from adopting our better, smarter, faster operating system and ways of working, which has helped them drive productivity not to add additional cost to get that growth. So I think the margin is strong. We're really pleased with where we are and our focus on AIS is going to continue to be on growth. And over time, we will make some investments to deliver that mid-teens type growth.

Joseph O'Dea, Analyst

You still see QSC as a margin expansion opportunity in '26?

Karen Holcom, CFO

Over time, I think it will be. It will continue to expand. But again, the focus will be on growth in AIS in total.

Joseph O'Dea, Analyst

Okay. And then, Neil, you made some comments around the cost side of things and talked about a dynamic supply chain advantage that you have that you moved away from higher tariff environments. And also, it sounds like some cost actions, in particular, within ABL. So can you just elaborate on some of the steps that you've taken on the cost side, inclusive of sizing what China as a percent of sourcing now versus where it was previously?

Neil Ashe, CEO

Yes. Let's begin with material pricing. The impact of the tariff is significant in this area, and we've largely shifted our sourcing away from China to other regions in Asia, as well as to our own operations as much as possible. We implemented these changes quickly, within the first month after the announcements in April. While I can't provide an exact percentage of our material spend that currently comes from China, it's clear that we've reduced it substantially. Over the past five years, our dependence on China has decreased to about 20% of what it used to be, representing a significant shift. We're actively adapting how we source our components and have ongoing initiatives to enhance this process, which we are very pleased with. Additionally, in the third quarter, we took the chance to reassess our operating expenses and organizational structure due to sales not meeting our expectations for the latter half of the year. We accelerated some productivity initiatives that were already in progress, aimed at enhancing efficiency. Furthermore, we evaluated our organizational structure and made some employee reductions to achieve cost savings. Overall, I am satisfied with the team's efforts in achieving these results in this challenging environment.

Joseph O'Dea, Analyst

And then sorry, just a clarification. The pull-forward impact you talked about in Q3, is that isolated to the back half of last year and really no anticipated impact on '26?

Neil Ashe, CEO

Basically, so I'll just reprise what we said on the last call, which is that when we have an order ahead of that like that happened in Q3, essentially what happens is backlog swells a little bit, and then we ship that on a relatively consistent basis over the following period. So there's a little bit of that that happens between the fourth quarter and the first quarter as well. But on a normalized basis, we are basically where we expect, like on a consistent basis to be.

Operator, Operator

Our next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn, Analyst

Nice to tune in to the continuing exciting story and developments here. So considering markets are relatively listless out there, directionless, you have a pretty confident revenue guide. I understand what you're talking about taking share. It's been a consistent story. But I'm wondering if, aside from product, if you could talk about on a more granular level, any angles or zones in the commercial RFP environment where you feel are the most demonstrative of relative competitive momentum.

Neil Ashe, CEO

Thank you, Chris. Regarding our growth strategy, the performance in new verticals has been exceptionally strong. Looking ahead, we see healthcare and sports lighting as significant opportunities to further enhance our revenue, potentially adding around 50 to 100 basis points to our top line. Additionally, our Contractor Select portfolio showed robust performance in the fourth quarter, and we are taking proactive steps to leverage our strengths in that marketplace. It's also worth mentioning that our specifier brands are performing well and gaining market share. Overall, we are executing effectively across our ABL portfolio, delivering solid results even in a relatively weak market environment.

Operator, Operator

Our next question comes from Brian Lee with Goldman Sachs.

Brian Lee, Analyst

I had a couple of questions. Just first on guidance. I know a lot of questions on the margins. I appreciate you guys breaking out the segment margins here. But I guess it does beg the question. There's a lot of moving pieces, both in ABL and also kind of some of the comments around AIS building for growth, maybe the margin expansion story in the near term. So thinking about this directionally, it almost sounds like ABL, you're holding the line on margins, maybe seeing a bit of expansion into '26 and then AIS really focused on growth, but do we see a little bit of backsliding on the gross margins just in that segment? And if that is the case, kind of what are some of the moving pieces there? Is it just increased investment growth or what are some of the drivers around that margin profile?

Neil Ashe, CEO

Right. I'm not sure what you mean about so many moving pieces. So I'll just break it down pretty simply. So ABL for the last 5 years and for the next 5 years, we'll continue to move forward on productivity improvements that are driving margin. The impact there at ABL is the percentage margin impact of the combination of tariff costs and price increases. So that, as I indicated earlier, on a full year basis would be in the range of 100-ish basis points as we continue to drive dollar margins. And so that's what we were trying to explain pretty clearly. I think Karen also was really clear on where AIS is going. So we're growing in the low to mid-teens. We have a continued margin expansion opportunity. When faced with the choice between expanding margins or continuing the growth, we will invest for growth. And so when you sum those across the enterprise for FY '25, obviously, we had a really strong performance where we demonstrated the dexterity in ABL and the power of QSC joining our enterprise and their margin expansion. And over the next kind of year or years, we would expect that general direction to continue.

Operator, Operator

Our next question comes from Jeffrey Sprague with Vertical Research Partners.

Jeffrey Sprague, Analyst

Just a couple of loose ends or points of clarification for me, I guess, after all that. First, just on kind of the tariff situation, Neil or Karen, given that you guys have taken so many counteractions, sourcing otherwise, are you in a position now relative to your competitors that I guess, for lack of a better phrase, your pricing for tariffs, you're no longer exposed to as we roll into 2026. Is there sort of an embedded margin opportunity there?

Neil Ashe, CEO

Yes, that's a good question. We have taken a relatively cautious approach to this matter. Our goal is to reduce the impact of tariffs by focusing on productivity and the transitions you've mentioned. Additionally, we have limited the effect on pricing. As Karen mentioned, our pricing strategy involves increasing prices in some areas while decreasing them in others. We are trying to balance the opportunity for market share growth with margin expansion. We are confident in our ability to expand margins in the foreseeable future. If we had to choose, we would likely prioritize gaining market share over slightly increasing margin at ABL.

Jeffrey Sprague, Analyst

Right. And then I guess, conversely, you're never going to stop pushing for productivity. But was there anything in these actions in 2025 that are sort of temporary in nature that need to come back from a cost standpoint as we look into '26, particularly if the top line is beginning to pick up?

Neil Ashe, CEO

The actions we took are aimed at accelerating productivity and implementing permanent changes rather than just temporary fixes. We will keep investing in technology, and as I mentioned in previous calls, the specifics on the ABL side may lead to some fluctuations in the income statement due to technology expenses affecting operating expenses, which will influence gross margins over time. The changes we've implemented are effectively permanent. As we head into the next cycle, we'll be facing merit increases, rising healthcare costs, and other related factors. However, our primary investment focus, particularly on the ABL side, will be on technology to enhance productivity.

Joseph O'Dea, Analyst

And then just finally for me, just on inventories, Neil or Karen. Your days inventories have been moving up, tried to scrape out the QSC impact best I could. But still seems somewhat elevated, maybe speak to where we're at relative to what normal inventory should be? Is there any kind of absorption benefit or anything that's occurred here that needs to normalize as we look into next year?

Karen Holcom, CFO

Yes, Jeff, there are two main factors affecting our inventory. First, the elevated costs associated with tariffs have led to a higher dollar value of inventory impacting our totals. Additionally, we have opted to increase some inventory levels to mitigate the ongoing higher costs due to rising tariffs. These two factors contribute to the increased inventory costs, but we anticipate these levels will decrease throughout the year, so we should not remain at the elevated levels we saw at the end of August.

Operator, Operator

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

Neil Ashe, CEO

Thank you all for joining us today. We believe fiscal 2025 was a strong year for Acuity. We operated effectively in a dynamic environment. The performance at ABL continues to be the best in the world, and we're confident in its ongoing improvement. On the AIS side, we're excited about what we're building with Atrius, Distech, and QSC. The combination of these elements is creating an innovative and disruptive business with significant potential for the future. Overall, we're pleased with 2025 and are already working on 2026. We appreciate your interest and look forward to speaking with you again next quarter.

Operator, Operator

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