Conference Transcript - AYI 2025-11-11

Tim Weiss, Analyst — Baird

Great. Good morning. Why don't we get started? I'm Tim Weiss, and I cover building products here at Baird, and we're delighted to have Acuity join us again this year at our Global Industrial Conference. Acuity is the largest luminaire manufacturer for the commercial market in North America, and they have a materially growing presence in building controls. From the company on stage with me, we have CEO Neil Ash, CFO Karen Holson, and...

Tim Weiss, Analyst — Baird

Sorry. I'm not going to go through that again.

Tim Weiss, Analyst — Baird

So we have CEO Neil Ash. We have CFO Karen Holson. Peter Hahn is in the front row. He's the president of the Intelligent Spaces Group. And then Charlotte McLaughlin is VP of IR. So we're going to start with a few prepared remarks from Neil, and then we're going to hop into Q&A.

Neil M. Ashe, CEO

Great. Tim, thank you very much. Thank you all for joining us this morning. It's great to be with you, catch you up on where we are. So Q&A Inc., a large and growing industrial technology company. We have two segments, Cutie Brands Lighting, the by far best performing lighting, lighting controls company in the world. So as Tim mentioned, we're the largest in North America, which is where our lighting footprint largely resides. And again, that business is a combination of luminaires and electronics. Electronics are basically everything that's in the luminaire and then the controls that control those luminaires. That business is a mid-singles, low-to-mid-single-digit top-line grower. Our growth algorithm there is pretty clear. We enter new verticals where we don't have the presence we feel like we should. We take share, and then we grow in the market as the largest. And our ambition there is to increase operating margins there 50 to 100 basis points a year for the foreseeable future. Second, Acuity Intelligent Spaces is, we think, the most disruptive building control business in the marketplace. We own Atreus and DysTech, which power the building, how it's operated, and then QSC, which is the experiences that happen in that built space. We're consolidating that data into a single cloud so that we, I believe, are the only ones that are combining how the built space is being run and the experiences that happen. And these are from large theme parks to NFL stadiums to J.P. Morgan's headquarters that we're talking about. All of this is built on a foundation of a values-driven organization where it's clear our associates understand how we create value. We grow net sales, we turn profits into cash, we don't grow the balance sheet as fast. And an operating system that we call Better, Smarter, Faster, which is a series of frameworks which create strategic clarity, alignment, and agency among our population. And then finally, we're effective capital allocators. So the company generates, you know, $550 to $600 million a year of free cash flow. Our capital allocation priorities are clear. We'll invest in our current businesses. We'll invest in M&A. We'll increase our dividend, and we'll repurchase shares. We've done, over the last five years, we've repurchased about a quarter of the company at about $150 stock price. So that's the framework, and Tim, we can take it wherever you'd like to go.

Tim Weiss, Analyst — Baird

Great, that's great. If anybody has any questions, you can raise your hand, or you can email session2 at rwbaird.com. Maybe just to start with Intelligent Spaces, could you just spend a minute kind of reviewing the strategy for Intelligent Spaces, kind of what ultimate solution you're trying to create?

Neil M. Ashe, CEO

So our core observation is that data is the core driver of value in this generation. And so our aspiration then is to consolidate all the data in a built space. To do that, you need to have the control layer for the built space. And that control layer is incredibly strategically valuable because it cannot be overbuilt. So we have the disruptive control layer for how the BMS is operated. So think about us competing with the big four there, Siemens, Schneider, JCI, Honeywell. You could rip and replace their controls with our controls, and you have higher performance, open protocol, and for us a higher value. And then QSC, everything that happens in this space. So these screens you see, video distribution, audio distribution, powering, kind of each one of those. Those then generate data that allows us the opportunity to deliver productivity to the people who are having the experiences and to the people who are providing the building. So imagine you walk into a room like this. We know what it's scheduled to do. We know how many people are supposed to be here. It's dark. Temperature is set at 73 when nobody's here. It knows that there are going to be 100 people or 46 in the room when we make our presentation. So it adjusts the temperature accordingly. We sense how many people are in the room. It adjusts the screens, and we can control everything that happens along that. So everyone gets a better experience, all driven on data.

Tim Weiss, Analyst — Baird

And so you're competing against the big four. How does your service offering compare to theirs? Is it really the cloud basis?

Neil M. Ashe, CEO

So the control piece that I described, you could replace their controls with our controls. Our controls are open protocol. And I want to be clear, that's not open source. That's open protocol, which means they effectively work with others that aren't branded Acuity or weren't built by us, not that we give our software away as part of the solution. So generally, companies are choosing us or building owners are choosing us because it gives them higher performance, more flexibility going forward, and the ability to scale wherever they want to take that building.

Tim Weiss, Analyst — Baird

And so you've got AV, you've got HVAC, you've got some refrigeration controls, you have lighting controls. What else in the building could you organically introduce or could be opportunities for you to add to that data set?

Neil M. Ashe, CEO

So we're working on who's in a space. So we've talked about a sensor that we developed at DISTEC called the Resets Move. That is the sensor that, among other things, is deciding that there's 46 people in this space. and that then feeds the data state for who's in a space. Notice that's not personally identifiable information so it's very productive for us to have that and not have the stuff that goes along with that. So we can deliver real solutions with that.

Tim Weiss, Analyst — Baird

And I think today the business model is largely driven on you're still selling controls but how does that model, does the model change over time? I mean, is there an outcome-based solution that you could participate in? Is there a software revenue stream that could be layered on top? Just, you know, you've got the hardware piece now. How did the other pieces kind of fall into place over the next three to five years?

Neil M. Ashe, CEO

Yeah, so let's just spend a second on kind of one of our core observations about the hardware piece. So that, we broke out gross margins by segment so you can see them. And so that segment is about a 60% gross margin business. In other words, those controls are very valuable. I think Microsoft is, what, 65% or 69% gross margin for context, right? So that's an incredible piece that cannot be overbuilt and will have continuous value over time. So, again, my point earlier, that's incredibly strategically valuable because it can't be overbuilt. Over time, then, we are building a unified cloud that will allow us to introduce software revenue and outcomes-based revenue potentially over time. So that gives us a lot of strategic flexibility with how to grow. In the meantime, we will continue to take share. We will continue to grow at the pace that we are. And the profile of the business as it currently stands is very attractive.

Tim Weiss, Analyst — Baird

And, I mean, this is something that we talked about with Acuity five, ten years ago. What has been kind of the change underneath to kind of get to this point versus maybe what investors kind of, you know, understood about this business, you know, kind of prior to your tenure?

Neil M. Ashe, CEO

Yeah, so a couple things have – well, lots of things have changed, but a couple things that I would highlight. So in fiscal 2019, the company had 38% gross profit margins and was basically a Luminaire's business. Now we're in the, what, 48-ish percent range gross profit margin combined, and it's a data, controls, and luminaires business. Within each one of those, we've made each one of those things better along the way, so they're more productive. So we're better at luminaires than we were then. They are higher productivity. We have more controls, and those controls are better. They are higher productivity, and we're using data both in the product that we sell to the marketplace as well as in how we operate the business, which drives, again, more productivity. So it's a little bit all of the above, and that transformation has been really the luminaires to a data and controls business. And it's taken kind of under-the-hood changes in the company to make those a reality.

Tim Weiss, Analyst — Baird

How do you think about investing in the business, you know, longer term, on an annualized basis? I mean, are there lumpy investments you need to make? Are there, you know, just kind of talk about the investment cadence and how you're kind of kind of doing that.

Neil M. Ashe, CEO

So so we we our strategy is to build a compounder and to build a compounder. We believe we need to compound operating capacity and we need to compound financial capacity. The operating capacity we define as talent, technology and better, smarter, faster. And the financial capacity is the outcome that we drive from the operating capacity, basically. So we think very much about, like, we need to do it next year and the year after that and the year after that. And I think very much about I want the company to do it long after I'm gone as well. So that's a mindset. We operate the company as owners, so very specifically, and we think about that kind of for the long term. So then as we think about investment, we make responsible investment. And by responsible investment, I mean if there's an opportunity to invest and we feel like we need to make a heavy investment, A, we'll do it, and B, we'll tell you that we did it. Conversely, we won't waste a lot of money on just, hey, this cost just happens to go up every year. So we don't think about that way at all. We think very much about the difference between investment and expense. we will make as much investment as is available to us, and we're really not constrained from a capacity perspective, and we try and avoid every expense.

Tim Weiss, Analyst — Baird

Yeah, okay. So with QSC, you know, that was probably, I think that might have been the biggest acquisition Acuity's ever done. You bought it about a year ago now. So can you just talk a little bit about how the integrations progress there, what's gone right, what's, you know, maybe been a little bit more challenging as you've kind of gone through that?

Neil M. Ashe, CEO

Yeah. So we paid about, round numbers, $1.2 billion for it. It was, latest 12 months, a little over $90 million of EBITDA, so 14 times, net some tax benefits 12 times. It closed January 1st, so we've owned it now for 10 months. And we've taken margins from 15% to 20% in the last quarter. So when we make a big decision like this, whether it's an acquisition or a strategic kind of initiative that we pursue, we're very clear on four things. One is the strategy, why we're doing this. Two, where is value created? Three, is the plan aligned to creating that value? And four, are the people who are responsible for executing on that plan, do they have agency? In other words, do they know they're supposed to do it? Do they believe in it? Are they aligned to it? We find that works very, very, very well for us. In this case, we wanted the company to continue to perform in their core market. So the number one priority was they continue to be who they are and be successful doing what they're doing. Obviously, we've achieved that. Second, we wanted to look for commercial overlap where we could find that, and we expected that to come from product. So that's now underway. And then the third is we wanted to complete this data state and build out the data state. So each one of those things are happening. The algebra of how they've outperformed, you know, kind of reasonable expectations is that is basically they've continued to grow and perform in the marketplace, which was the the ambition. It's a high contribution margin business. And they have bought into our ways of working around better, smarter, faster. So we have not asked them to cut a single cost in as we've done this. So this is not a cost saving exercise. This is a growth and productivity exercise. They bought into what we do culturally and how we how we do it. And they're realizing

Tim Weiss, Analyst — Baird

the benefits of that. Okay. Okay, that's great. I mean, you've seen improvement already in the margins, like you said, in AIS. You know, you're at an EBITDA margin that's maybe low 20s right now and a 60% type gross margin. I mean, what is that kind of incremental contribution margin? And how do you think about, you know, kind of investing further to kind of accelerate growth, but then

Neil M. Ashe, CEO

also kind of letting that fall to the bottom line? So we've been clear that our priority is going to be growth. We want to continue to grow this business in the mid-teens, which leaves us the opportunity to reinvest. We have demonstrated our ability to get it quickly to kind of respectable margins by performing during this period. We'll balance that over time. So we will continue to, we can do both. We can grow and increase margins. But we try and be clear, and this is how we operate. We're as clear with you as we can be about what our priorities are. Our priorities are growth. If we see an opportunity to invest, we will do it. If we don't see an opportunity, we'll accrue the value, and then we'll do it later. So we're confident that this business keeps growing. We're confident that the margins continue to expand, and over time, this becomes a larger portion of the business. I also want to take a second to point out within the lighting business, it's a lighting and lighting controls business. So we have the largest lighting controls platform in North America also. So an interesting way to think about that is we have another QSC inside of ABL as well. I've always wondered, I mean, is there, is that an opportunity within,

Tim Weiss, Analyst — Baird

I mean, can they cross collaborate between each other or do they?

Neil M. Ashe, CEO

Yes. So we are building a consolidated cloud in Atreus that interacts with all of our controls platforms. So from Q-SYS on the AV side to DISTEC on the BMS side to N-Lite and SensorSwitch on the lighting control side. So all of that data accrues. And no one else really has a platform like that on the lighting side so we have a unique we have a unique data set there as well so so and our view of these data are that they they're independently interesting but not all that value valuable they grow exponentially more valuable as you have more of them so it's more valuable to have the lighting data and the AV data than it is to have either the lighting data or the AV data for example yeah

Tim Weiss, Analyst — Baird

Yeah. Okay. Any questions from the audience? I guess one question we're kind of asking everybody at the conference, just with artificial intelligence, like if you had an example or two of how you've deployed AI internally at Acuity and any specific outcomes that you can

Neil M. Ashe, CEO

kind of talk about as a result of that. Yeah. I'll take a step back if you don't mind, Tim. And so the through line of my career is kind of leading the impact of digital changing industries, Internet 1.0, media, commerce, and now industrial. And I would say there are a couple truisms of these transformations, the impact of these transformations. One of which is that the impact in the short term is always overestimated, and the impact in the long term is underestimated. So where I think we are with AI is that we'll have certain companies which will develop the ability to organically and internally manage it. in a way that's productive, we are one of those companies. The second thing that I would say is for the companies who are capable of doing that, then the hard part actually isn't the technology. It's going to be changing the company. And that's what we're really good at. So understanding the core underlying processes, where value is created for the end user. And so I believe that we will be better than most on the ability to bring forward those larger impacts and making them realize faster over time. So we have a lot of examples. I think most of the people will tell an anecdote about kind of a portion of what I will generously refer to as the spray and pray strategy. So Charlotte manages IR by herself, and her team is her and her AI. as she told our board in our last board meeting. There are tons of personal productivity stories. The real impact will come when we start to reinvent core processes. And we're in the process of doing that. And the last thing I will leave you with on that is that our aspiration is to be the best human agentic organization in the world. And I think we have the ability to do that.

Tim Weiss, Analyst — Baird

That's great. I guess just, you know, most of your business is really exposed to non-res, you know, building controls, lighting. Can you just maybe talk a little bit about what you're kind of seeing in the non-res market overall and kind of how you kind of see this evolving into 2026?

Neil M. Ashe, CEO

Yeah, so I've been at Acuity for five years now, and I'm looking forward to the normal year. So, as we look out, I think the collection of, you know, kind of question marks, if you will, about rates, about tariffs, about regulation, about taxes, have kind of created a chop in the marketplace is kind of the best way to describe it. So I think if you take data centers out of the market, it looks pretty, it looks, I think the word we used on the last earnings call was tepid. We will perform. We will continue to perform in both of our segments. We are taking share, and we will continue to do that. And at some point, this will normalize. And the backlog of stuff that's been, there's clearly a backlog of stuff out there. That backlog will start to release as people grow more confident in their, in my opinion, will release as people grow more confident in their ability to predict what's going to happen.

Tim Weiss, Analyst — Baird

I mean, is data centers for you just another end market? Is there anything specialized within that market that you do, or is it, you know, lights per square foot, luminaries per square foot?

Neil M. Ashe, CEO

So I'll hit both, actually, lighting and controls, because I think that's interesting. So the good news about data centers and autonomous manufacturing warehouses facilities is that they're not actually dark. They all have lights. So that's good news. You know, kind of the bad news is as a percentage of content, lighting is a relatively smaller component of the headline number of CapEx. You know, the massive portion of that, as you know, is GPUs. The building is the next and the power plant is the last. So our share of addressable market is slightly smaller on that side. We do participate on the controls front. DISTEC powers a certain kind of data center, so we've performed there. And we'll continue to realize kind of what we've done there. So we're not, for the better or worse, we're not overexposed to data centers, but but we are participating okay okay any questions from the audience i guess just on

Tim Weiss, Analyst — Baird

the luminaire side or the lighting side um you know you've seen some consolidation there oems channel participants those types of things how does that you know kind of put and take relative

Neil M. Ashe, CEO

to acuity from a consolidation perspective yeah so uh so so big picture um there are three majors WE ARE THE LARGEST SIGNIFY, WHICH IS THE COMBINATION OF THE OLD PHILLIPS AND COOPER, AND THEN CURRENT, WHICH IS THE OLD GE AND HUBBLE COMBINED. I BELIEVE THAT OUR PERFORMANCE HAS TRANSFORMED THE INDUSTRY. SO YOU CAN COMPARE US TO SIGNIFY AS THE ONLY KIND OF BIG PUBLIC YOU COULD COMPARE US TO ON A MAJOR'S PERSPECTIVE. But our growth, our margins are all materially higher than theirs are. And that's true of the privates as well. So the industry has kind of reorganized, if you will, around us and our leadership in the marketplace. And we've delivered that on the lighting side really through our internal efforts. So our strategy in the lighting business is clear, consistent, and working, which is we first focus on product vitality. So we've reimagined and recreated the portfolio a couple times now on the Luminaire side over the last five years. The second is we're driving service levels in the industry. As we do that, we create value for all of the stakeholders in the industry. So our stuff is easier to install. It shows up where it's supposed to. So it's less labor, it's easier to choose and specify. So it's more productive for the specifier and the architect and the design bill contractor. And it performs better over time, so it's better for the owner. We use technology to differentiate our products. In other words, so we've increased the technology content of our controls for sure, but also of our luminaires and in how we operate the business. So to drive some of this productivity. And then the fourth is we drive productivity, and we view that as a virtuous cycle. So as our performance continues, we continue to separate from the rest of the industry. That gives us a lot of headroom.

Tim Weiss, Analyst — Baird

Okay. I guess on the product segmentation piece, I mean, you've kind of gone through this design select phase. Can you give us an update on just where the progress is there? And ultimately, what are you trying to create between contractor select, design select, and then I guess custom or made to order?

Neil M. Ashe, CEO

Yeah, so our portfolio is built in the following order, as Tim mentioned. Contractor Select, which are products which are designed to be stocked and resold and are largely sold through electrical distribution and through retailers, I think we want Contractor Select to be to the electrical distribution industry is what Kirkland is to Costco. So those are high vitality, high service level kind of stock to be resold. That drives productivity for the channel. The design select portfolio then are configurable products which are designed to deliver growth and productivity for architects, specifiers, design build contractors, and contractors. In other words, if you choose these things, A, they work better together, B, they're easier for you to install. And so we're going through an overhaul process of the portfolio to deliver on that promise, we're still in like the fourth inning, third or fourth inning of that. And then everything else is made to order. So those are specification brands, specialty things like hospital patient rooms, things like that, large industrial stuff, etc. And that over time simplifies our portfolio, delivers more value to our end users and the rest of the channel as well.

Tim Weiss, Analyst — Baird

So will those SKUs in the Design Select, I mean, will you be able to kind of standardize a lot of the selectability and the componentry and then offer a certain, it almost sounds kind of like 80-20 where you're kind of taking your 2,000 best SKUs, kind of putting them out there, and then everything else is kind of over here, has a different cost structure, price structure. Is that effectively what you're trying to do?

Neil M. Ashe, CEO

That's the aspiration. So with Design Select, it's better for you and it's better for us. at the end of the day because you know it's going to work better for you. That requires us to literally rebuild the entire portfolio, which we're in the process of doing. And that pushes everything else kind of on the maid to order the bespoke stuff to a position where it can be bespoke and we can charge for that.

Tim Weiss, Analyst — Baird

And then, I mean, you are the largest luminaire manufacturer, but you still are kind of getting into new markets, right? So you added petroleum, you added agriculture, just kind of, you know, how has that progressed? You know, how is that kind of additive to growth, and what are the strategies within those markets?

Neil M. Ashe, CEO

So our sales growth algorithm on the lighting side is to enter these new markets that Tim's identified, where we either are underpenetrated or haven't competed, and there are reasons why that exists, to take share and then we'll grow with the market. So within these, we've been really successful with health care, and we've been really successful with refuel. We weren't as successful, frankly, with agriculture. And then we just added sports lighting as a new one that we're adding. And this is representative of the portfolio of these growth opportunities. They're not all going to work as we expect them to, and some are going to work a whole lot better. By getting good at this algorithm, them, then, you know, the simple math for the lighting business is $3.7 billion, so $37 million a year of net growth is 100 basis points of growth. So, you know, kind of they should deliver one to 200 basis points of growth per year, and then kind of everything else takes care of itself. Assuming we execute effectively, and so far we have, we're guaranteed to outgrow the industry.

Tim Weiss, Analyst — Baird

Last question, just capital allocation, you know, you still have a very good balance even though you bought QSC, you've been de-levering. What are your kind of priorities from an inorganic and an organic kind of capital use perspective?

Neil M. Ashe, CEO

Yeah, so as I said earlier, our priorities are clear. We'll grow our current businesses. We'll grow through acquisitions. We'll pay our dividend, and we'll buy back stock. And we've done all of the above, and we can continue to do all of the above. The way we approach kind of like, so we're spending a lot of our time on organic opportunities right now because we see really interesting opportunities there. And the way we approach all of the opportunities is we say, okay, what's our strategic rationale? Why do we want to do something? What's the best path to get there? We accumulate as many of the ideas, whether they're actionable or not, and we keep them all in the field of view so that we start to prioritize and sequence and then resource those. So we don't have a hurdle rate for acquisitions, but we also don't have a budget for acquisitions. In other words, it's not you haven't heard me say X hundred basis points of growth are going to come from acquisitions because that doesn't really work for us. We would rather choose to make the right acquisitions at the right time, even if the balance sheet kind of flexes sometimes.

Tim Weiss, Analyst — Baird

OK, great. We're out of time. So please join me in thanking the Acuity team for being here with us today.