Earnings Call Transcript - AYI Q1 2024

Operator, Operator

Good morning, and welcome to the Acuity Brands Fiscal 2024 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's 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. Charlotte, please go ahead.

Charlotte McLaughlin, Vice President of Investor Relations

Thank you. Good morning, and welcome to the Acuity Brands fiscal 2024 first quarter earnings call. As a reminder, some of our comments today may be forward-looking statements based on our management's beliefs and assumptions and information currently available to our management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that our company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements. Reconciliations of certain non-GAAP financial metrics with our corresponding GAAP measures are available in our 2024 first quarter earnings release, which is available on our Investor Relations website at www.investors.acuitybrands.com. With me this morning is Neil Ashe, our Chairman, President, and Chief Executive Officer, who will provide an update on our strategy and give an overview of the quarter. And Karen Holcom, our Senior Vice President and Chief Financial Officer, who will walk us through our fiscal first quarter financial performance. There will be an opportunity for Q&A at the end of this call. For those participating, please limit your remarks to one question and one follow-up, if necessary. We are webcasting today's conference call live. Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ashe.

Neil M. Ashe, Chairman, President, and CEO

Thank you, Charlotte, and thanks to all of you for joining us this morning. We continue to demonstrate strong execution in our fiscal 2024 first quarter. We increased our adjusted operating profit, our adjusted operating profit margin, and our adjusted diluted earnings per share. We generated significant free cash flow and we allocated capital effectively to drive value. Both our Lighting and our Intelligent Spaces businesses continued to perform well during the quarter. Particularly in ABL, our performance was excellent. We increased adjusted operating profit by $15 million on $71 million less sales and increased the adjusted operating profit margin by 280 basis points to 17.5%. Our strategy is yielding results. We're increasing product vitality, elevating service levels, using technology to improve and differentiate both our products and how we operate the business, and we are driving productivity. Today, our products are perceived as being more valuable in the marketplace and at the same time, we are lowering costs. Our product vitality efforts combine new product introductions and improvements to our existing portfolio to ensure that our products are more valuable to our customers and more profitable for us. Our Contractor Select portfolio consists of about 300 of our most popular products. They are used in common everyday lighting applications and are in stock at retailers and electrical distributors. We continue to invest in product vitality and we have expanded our Lithonia Lighting ESXF floodlight family. This is a better product for distributors because it allows them to carry less inventory and is better for contractors because it is easier to install. This product family was first introduced in 2022 to offer a uniform lighting solution for parking lots, walkways, and outer buildings. It uses switchable technology to provide installers with 36 on-site options, including lumen output, color temperature, photocell, and mounting options. Our Design Select portfolio consists of configurable product options that meet the key choices of lighting specifiers with high levels of service. This quarter, we added additional products in our down lighting, panel, emergency lighting, and outdoor categories. As we expand the options available in this portfolio, our focus is on product vitality and making it easier for the specification community to choose superior solutions. Our efforts to elevate service are having a positive impact on our customers. In October, we were once again recognized by the voters of IMARK Electrical as one of the suppliers of the year for 2023. We also continue to invest in productivity improvements in our operations. Earlier this quarter, we traveled with a group of associates to our Mexican manufacturing facilities to open our new state-of-the-art Santa Rosa production facility, which includes our highly efficient new paint line. This facility embraces technology to deliver a better product to our customers and improves the efficiency of the paint line process while also reducing the environmental impact. I'd like to highlight a couple of ways we're doing this. Our paint guns and torque guns in our new facility are powered by a high-efficiency air compressor that aims to reduce approximately half of our CO2 generation compared to the air compressor from our previous paint line. High-efficiency walls, burners, and booster technology in our ovens require less gas than similar systems and use around 40% less natural gas than our previous infrared ovens. The transition to this facility has been seamless. We relocated an existing facility to the new SPF facility without any service interruption, and now have capacity available for future growth. Our combined paint and natural gas savings are delivering on our required financial return for the facility while also meeting our sustainability objectives. You can learn more about this project and other accomplishments in our recently released Earth Light Report, available on our ESG for investors page on our Investor Relations website. Now moving to our Spaces Group. Our mission in our intelligent spaces business is to make spaces smarter, safer, and greener through a strategy of connecting the edge to the cloud. This tech has the best edge control devices on the market, while Atrius will be the best in cloud applications. At Distech, we are focused on expanding our addressable market in two ways. The first is geographic, and the second is increasing what we control in a build space. This quarter, we continued our geographic expansion, adding several new system integrators in the UK, Asia, and Australia. In one of our original markets, France, our hard work is paying off. The Building Services, Research, and Information Association called out Distech as dominating the French building, automation, and control systems market in a newly released report. We also continue to increase what we can control in a build space. In October, we launched our Distech Reset Move Sensor at several industry conferences in Europe. This is an advanced 7 in 1 ceiling mounted sensor that is able to detect occupancy in spaces. It counts the number of people using a space, providing feedback on occupancy requirements to the building users. It is AI-powered and can be used to optimize indoor air quality, reduce energy and cleaning costs, and enhance occupancy comfort. It will be revealed to our North American and international customers at the AAHR Expo in Chicago later this month. Our expansion into refrigeration controls is also going well with the integration of KE2 Therm on track and performing as we expect it. During the quarter, we released the KE2 Therm Edge manager with a back net communication stack. This is the same open protocol technology that is used by Distech, and is an important step to ensure compatibility between both the Distech edge controllers and the KE2 Therm edge controllers. Now turning to our outlook. The changes that we have made to the business are impactful and long-lasting. Our order rates are growing both year-over-year and sequentially. We're back to typical lead times, and absent the excess backlog from last year, we would be experiencing sales growth. We are focused on controlling what we can control, and we are confident our execution will continue. In our Lighting and Lighting Controls business, we will continue to focus on delivering margin and cash flow. In our Spaces Group, we will continue to grow geographically and by adding to what we can control in a build space. We're delivering applications that are making a difference. Now I'll turn the call over to Karen, who will update you on our first quarter performance.

Karen J. Holcom, Senior Vice President and CFO

Thank you, Neil, and good morning to everyone on the call. We started the year with strong performance. We increased our adjusted operating profit by $14 million year-over-year, improved our adjusted operating profit margin by 250 basis points over the prior year, and by 40 basis points sequentially. We increased our adjusted diluted earnings per share by $0.43 year-over-year and generated cash flow from operations of $190 million. We continue to improve our businesses and allocate capital effectively. For total AYI, we generated net sales in the first quarter of $935 million, which was $63 million or 6% lower than the prior year as a result of the lower net sales in our ABL business. This was partially offset by continued growth in the ISG business of 13% in the quarter. We continue to deliver year-over-year margin improvement. During the quarter, our adjusted operating profit increased by $14 million on lower sales, while we expanded our adjusted operating profit margin to 16.5%, an increase of approximately 250 basis points from the prior year. This increase was driven largely by the significant year-over-year improvement in our gross profit margin as we continued to execute and drive margin through product vitality, the management of price and cost, and productivity improvements. During the quarter, our adjusted diluted earnings per share of $3.72 increased by $0.43 or 13% over the prior year, primarily as a result of higher net income and, to a lesser extent, lower shares outstanding due to the share repurchases. In ABL, net sales were $876 million in the quarter, a decrease of around 7% compared with the prior year, driven by declines across most of our channels, offset slightly by continued strong performance in our retail channel. Sales growth in ABL this quarter had a challenging year-over-year comparison as the results in the first quarter of fiscal 2023 benefited from working down an elevated level of backlog. ABL's adjusted operating profit increased 11% to $154 million on lower net sales and we delivered an adjusted operating profit margin of 17.5%, a 280 basis point improvement over the prior year. ISG's net sales for the first quarter were $64 million, an increase of 13% as Distech continued to grow and KE2 Therm performed as we expected. ISG's adjusted operating profit was $10 million. Now turning to our cash flow performance. We generated $190 million of cash flow from operating activities for the first quarter of fiscal 2024, an increase of $3 million over the prior year, primarily due to an improvement in net income, partially offset by a decrease in cash flow from working capital. During the first quarter of fiscal 2024, we continued to allocate capital consistent with our priorities. We invested $15 million in capital expenditures and allocated approximately $50 million to repurchase around 300,000 shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased over 9 million shares at an average price of about $143 per share, which was funded by organic cash flow. To wrap up, we had a strong quarter, particularly in ABL. We continued to deliver strong margin and cash flow performance. We grew adjusted operating profit and improved adjusted operating profit margin. We increased adjusted diluted earnings per share, generated strong cash flow from operations, and allocated capital effectively. We are pleased with our performance, and we will reevaluate the outlook at the midpoint of the year. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Operator, Operator

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

Joseph O’Dea, Analyst

Hi, good morning. Can you hear me?

Neil M. Ashe, Chairman, President, and CEO

Yeah, good morning, Jeff.

Joseph O’Dea, Analyst

Hi. This quarter showed an impressive gross margin. Can you provide more details regarding that? You mentioned aspects such as vitality, productivity, and price cost at a high level. I'm interested in understanding the specifics behind the gross profit decline relative to the revenue drop and what the key factors are. Additionally, can you speak to the long-term sustainability of a 45.8% gross margin?

Neil M. Ashe, Chairman, President, and CEO

Thank you, Joe. Good morning everyone. As we go over the margin performance, there are several key points to discuss. Firstly, our year has started off very well. We are elevating the company's performance to unprecedented levels, and the margins reflect the effects of our strategy and the efforts our team has put into implementing it, focusing on product vitality, service, technology, and productivity which has led to these results. In this quarter, we are acknowledging that our products, as mentioned earlier, are being recognized for their impact in the market, allowing us to manage pricing strategically. We continue to reduce costs in product production, contributing to the margins you've observed. This quarter experienced a slight mix impact. Our controls business performed strongly, and our ISG has contributed positively to growth, margins, and returns, influencing the overall results. Ultimately, this quarter's performance and the margin outcomes stem from our ongoing strategy and work related to product vitality, service, technology, and productivity.

Joseph O’Dea, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

I believe that's a fair conclusion. Yes, we are seeing the benefits of price increases in the first quarter. We mentioned this in the last call and implemented another price increase in the second quarter. This shows the market that we will continue to manage pricing. While the second quarter impacts are not reflected in these numbers, we are consistently moving toward a strategic management of price. This means that our products must be valued in the marketplace because they deserve that value, and we're in a strong position regarding this. Additionally, with our product vitality efforts, we need to prove that we can generate higher profits as a result of these prices, which is what we are focusing on from a cost perspective. I believe we have laid a solid foundation. Although these margins are extraordinary, we don't need to maintain this level for the entire year to deliver excellent results, but we are optimistic about our performance in these margins.

Joseph O’Dea, Analyst

I appreciate it, thanks very much.

Operator, Operator

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

Timothy Wojs, Analyst

Hey everybody, good morning.

Neil M. Ashe, Chairman, President, and CEO

Hey, good morning, Tim.

Timothy Wojs, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

Thank you for the question, Tim. Let me explain this as it's quite important. Our net sales result from shipments during the period, which are influenced by the preceding orders and lead times. Currently, our lead times have stabilized. This means that order and shipment rates are relatively aligned. It's essential to note that both sequentially and year-over-year, our order rates have seen a modest increase. If we exclude last year's comparable sales, we would see growth. Last year, net sales rose due to the reduction of backlog from prior orders. When we mention that our order rate is up modestly, it refers to the daily order rate compared to last year's first and fourth quarters. Overall, we believe that there was more of a pull forward in business last year across the industry than an actual cycle. Therefore, we processed significantly more business last year that was already there. When you look at the trends over time, we consistently observe that the Lighting and Lighting Control business will show steady growth.

Timothy Wojs, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

Yes, we are seeing year-over-year and sequential improvement in our order rate. Looking ahead, we don't have greater insight into the macro situation than you do. We are confident in the current order rate and its performance. As I mentioned last quarter, we are comfortable operating in this environment, and we feel optimistic about the future. Our outlook suggests we do not expect significant improvements or declines. As Karen noted, we will reassess our position in the middle of the year for the remainder of the year.

Timothy Wojs, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

We believe that the margins we are experiencing are not merely a result of harvesting, but rather the result of our strategic approach. We see this as a specific moment in time. Additionally, we are starting to focus on sectors where we have previously been weak or not involved at all in the Lighting area. For instance, we made a small investment in horticulture because we anticipate that it will present an opportunity in the near future, so we are preparing for that. We will begin making such investments to expand our addressable market in Lighting. Furthermore, I want to highlight the Spaces Group. While Karen can provide details about the financials for the quarter later if needed, the overarching view is that the Spaces Group contributes to growth, improves margins, and enhances returns. We are very optimistic about our efforts there and their ongoing impact on the company.

Timothy Wojs, Analyst

Very good, good luck for the rest of the year, guys. Thank you.

Operator, Operator

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

Christopher Snyder, Analyst

Thank you. I wanted to follow up on the gross margin, up 410 basis points year-on-year despite the sales decline, which is really impressive. It seems to us that the driver there is one price cost, you guys have helped prices costs have moderated due to the technology, the vitality and all the stuff you mentioned, Neil, but also some level of selectivity, which you've talked to over the past couple of quarters. When we think about that 410 basis points, could you kind of break down the build between selectivity and price cost improvement over the last year? Thank you.

Neil M. Ashe, Chairman, President, and CEO

Sure, I'll begin. We haven't specifically outlined the breakdown of the 410 basis points, so I'll provide my thoughts rather than a detailed analysis. To start with pricing, we have consistently managed our prices based on market needs. We’ve seen strong performance from Contractor Select, with growth in the retail channel this quarter, even though net sales decreased. This indicates we are positioning ourselves well in the market. When it comes to projects, we have the flexibility to choose which ones to pursue, and we strategically decide where to invest. We are not simply taking prices from the market; we adjust based on our assessment of the landscape. Regarding costs, we've seen significant improvements in our portfolio over the past three years, allowing for a more balanced margin distribution. We no longer have the underperforming segments we had previously, and although there was some positive performance in controls this quarter, with ISG growing faster than ABL, the mix effect is slight and not a major factor. As for post-pandemic cost levels, there have been notable changes, particularly in steel and shipping containers. For instance, container costs have surged from around $3,000 to as much as $6,000, although they previously peaked at about $20,000. We have a strategy in place to manage these increased container costs for the rest of the year. To summarize, our products are being recognized for their value, the strategy we've implemented has led to more consistent results across our portfolio, and we've taken decisive action to achieve a more stable cost base for materials.

Christopher Snyder, Analyst

I appreciate that. If I could follow up thematically, it seems like we want to achieve pricing that reflects the value we provide in the market. The company has consistently been a leader in technology and product quality. What has changed to increase the gross margin from 41% and 42% to above 45% when it seems you've always excelled in product technology? Thank you.

Neil M. Ashe, Chairman, President, and CEO

Yes, thanks, Chris. These matters require time. I wish I were younger, but I have been through this process multiple times. You come to understand that all these changes accumulate and need time to align. We have discussions with our team about taking the company to levels of performance it has never experienced before. This is evident in the broader market where the quality of our product strengthens our sales team, independent sales agents, distributors, and the service levels and programs we've implemented. All these aspects together contribute to the performance you're witnessing today.

Operator, Operator

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

Ryan Merkel, Analyst

Hey, good morning. Can you guys hear me?

Neil M. Ashe, Chairman, President, and CEO

Hey, Ryan, good morning.

Ryan Merkel, Analyst

Great, so my first question, Neil, can you talk about large projects back market, how is activity, are you seeing delays, cancellations, or is that sort of improving, just what's the latest update?

Neil M. Ashe, Chairman, President, and CEO

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

Ryan Merkel, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

There's been some discussion about the current state of the industry. I'm not sure what "weak" really means. We should take a moment to consider that there was an industry-wide acceleration in 2022 and 2023, which has resulted in net sales exceeding order rates for a certain duration, as we previously mentioned. Now that order rates and shipments are more balanced, this reflects a normal market run rate. There are certainly fluctuations in performance, but we don't see any imminent downturn ahead.

Ryan Merkel, Analyst

Okay. And then I had a question on gross margin as well. Obviously, first quarter was really strong. Normal seasonality would put you at about 45% for the year. I'm just curious, is there any reason that we should be below that, is the biggest risk just sales and fixed cost deleverage at this point?

Neil M. Ashe, Chairman, President, and CEO

Karen, do you want to take that?

Karen J. Holcom, Senior Vice President and CFO

Yes, Ryan. Regarding seasonality, as we assess our current position, it appears that order and shipment rates are starting to align. We are progressing towards normal seasonality, although we haven't fully achieved it yet. On the margin side, when comparing ourselves to last year's first quarter, we finished last year at 45.1%. We have managed to enhance our gross profit margin over the year. As Neil mentioned, this improvement resulted from our strategic approach and the management of higher costs in the first half of the year, which have since stabilized. Presently, we believe our gross profit is at a strong level, influenced by the mix for controls and the higher ISG. Overall, I would estimate that our gross profit margin is quite robust, and we feel confident about maintaining this level.

Ryan Merkel, Analyst

Okay, thanks. Passing on.

Operator, Operator

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

Christopher Glynn, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

Good morning, Chris. Thank you. The market reception has been very positive. We are continuously refining how we present it to ensure clarity. Historically, the industry has emphasized something called Quick Ship, and this has sometimes led to confusion, as this is not Quick Ship. This is a comprehensive update of a range of products that the specification community can select and customize. This is beginning to show results. While I'm searching for a clever response for you, I don't have one, but I can say that progress is going very well, and we are satisfied with its current status.

Christopher Glynn, Analyst

Okay. Well, that was pithy enough for me. And then on the seasonality, it sounds like I think Karen said, not declaring victory really, if I could paraphrase but sort of leaning into normal seasonality I think is the message I got there as we look at the forward quarters. I'm curious, the market is one part of that and then it sounds like maybe your share of momentum relative to the market in any given period might be adding muscle. So I'm curious about the interplay of that versus market when we say that we're kind of leaning towards normal seasonality here?

Neil M. Ashe, Chairman, President, and CEO

Thank you for your comment, Karen. We are not claiming victory yet, but that's the message we intended to convey. Let’s start with what we can control, which we feel very positive about. This forms the foundation of our outlook. A common question we receive is whether we are sacrificing market share for margin, and we consistently believe we are not. This is reflected in the order rates we've discussed, which are up both sequentially and year-over-year, albeit modestly. We think these trends are cumulative, indicating the market is starting to recognize these factors. As I mentioned earlier, we don't need to operate at these margin levels for the rest of the year to achieve excellent results. Our aspirations for the rest of the year are realistic, but we are very confident in the quality of the results we are delivering.

Christopher Glynn, Analyst

Thanks Neil.

Operator, Operator

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

Jeffrey Sprague, Analyst

Thank you. Good morning everyone.

Neil M. Ashe, Chairman, President, and CEO

Hey Jeff.

Jeffrey Sprague, Analyst

Hey Neil. Continuing on that point, I know you prefer not to discuss the framework or guidance each quarter. However, reflecting on this quarter and your comments about not needing to perform any extraordinary actions for the rest of the year, what factors do you believe could lead you to the lower end or even the lower two-thirds of the larger framework you previously outlined?

Neil M. Ashe, Chairman, President, and CEO

Yes, let me clarify that for everyone. We do not intend to provide quarterly guidance or updates on a quarterly basis. Karen clearly mentioned in her remarks that we will review the outlook and framework at the middle of the year, which is different from our usual approach. Additionally, if we consider the consensus plus our basis points this quarter regarding EPS, we are well within our EPS range. As she noted, we will reassess later in the year.

Jeffrey Sprague, Analyst

Great, regarding SG&A, it increased a couple of hundred basis points on a full-year basis last year and has risen again this quarter, likely due to some deleverage from the sales decline. What is the current status of striving for normalization or achieving some operating leverage on the SG&A line?

Karen J. Holcom, Senior Vice President and CFO

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

Jeffrey Sprague, Analyst

Right, thank you.

Operator, Operator

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

Jeff Osborne, Analyst

Yeah, thank you. Good morning. Karen, I just had a question on what was the surprise relative to the guidance that you had given or the commentary three months ago around margins declining sequentially. Was it the strength in controls or the strength in the retail channel, just trying to get a sense of the surprise because Neil had indicated that the four areas of vitality service, technology and productivity are essentially a culmination of years of investment. So what was the differential relative to three months ago outlook?

Karen J. Holcom, Senior Vice President and CFO

I wouldn't use the word surprise. We really weren't taken aback by the gross margin level this quarter. As Neil mentioned, we are pushing the company to achieve performance levels it hasn't reached before. The gross margin of 45.8% isn't a typical performance level; it was influenced by a higher mix of control this quarter. Overall, the business execution, continued growth of ISG, and our strategy focused on product vitality, service, technology, and productivity improvements are what are driving this gross profit margin.

Neil M. Ashe, Chairman, President, and CEO

Yes, Jeff, just a quick build on that. What Karen had said last quarter is that normally, on a sequential basis, the gross margin would go down from Q4 to Q1.

Jeffrey Osborne, Analyst

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

Neil M. Ashe, Chairman, President, and CEO

Performance. We continue to perform.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey Neil, hey Karen. This is Grace for Brian. Thank you for addressing my question. There seems to be a lot of inquiries regarding margins. I have one question about the demand trend and order rate. About a year ago, you were the first to mention the impact of interest rates and the slowing order rate. Now you've mentioned that order rates have increased both year-over-year and sequentially. Can you explain what is driving that change? Are you gaining market share, is it related to lower interest rates? Also, given the trend of interest rates in recent months, it might be too early to tell, but do you foresee any acceleration in order rates based on your discussions with customers today? Thank you.

Neil M. Ashe, Chairman, President, and CEO

Good morning, Grace. I want to echo a similar point, which may sound a bit repetitive. The order rate is indeed improving year-over-year. The results from last year in terms of net sales were influenced by order rates that occurred beforehand. We have mentioned that throughout the year, there was a noticeable impact on those order rates, and you can now see that effect. Currently, order rates have stabilized, and we have achieved a consistent level of operating performance. As we adjust for the comparisons and remove the impact of the excess backlog that occurred at the beginning of fiscal year 2023, you will begin to see a more typical performance, particularly within the Lighting business. It’s worth noting that ISG has continued to show growth. Over the long term, we expect the Lighting business, which experienced an industry-wide surge, to align with our projections for compounded annual growth in the mid-single digits.

Unidentified Analyst, Analyst

Okay sir, I will take the rest offline.

Neil M. Ashe, Chairman, President, and CEO

Thank you.

Operator, Operator

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

Neil M. Ashe, Chairman, President, and CEO

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

Operator, Operator

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