Acuity Brands reported its Q1 FY2025 earnings, surpassing EPS expectations while slightly missing revenue forecasts. The company achieved an EPS of $3.97 compared to the expected $3.89, marking a $0.08 beat. However, revenue came in at $952 million, just shy of the $957.65 million forecast. In premarket trading, Acuity Brands' stock showed a modest increase of 0.38%, reflecting a positive investor response to the earnings beat.
Key Takeaways
- Acuity Brands beat EPS expectations for Q1 FY2025.
- Revenue slightly missed forecasts, though still showed a 2% year-over-year increase.
- The stock price rose 0.38% in premarket trading following the earnings release.
Company Performance
Acuity Brands demonstrated solid performance in Q1 FY2025, with net sales increasing by 2% year-over-year. The company's strategic focus on product innovation and expansion in international markets contributed to its robust results. Despite challenges in some retail channels, Acuity maintained its leadership in the commercial and industrial sectors.
Financial Highlights
- Revenue: $952 million, up 2% year-over-year.
- Earnings per share: $3.97, up 7% year-over-year.
- Gross profit margin: 47.2%, a 140 basis point increase.
Earnings vs. Forecast
Acuity Brands reported an EPS of $3.97, exceeding the forecasted $3.89 by approximately 2.1%. Revenue, however, fell short of expectations by about 0.6%, coming in at $952 million against a forecast of $957.65 million. The EPS beat highlights the company's effective cost management and operational efficiency.
Market Reaction
In premarket trading, Acuity Brands' stock price increased by 0.38% to $305.01. This positive movement reflects investor confidence in the company's profitability, despite the minor revenue miss. The stock remains within its 52-week range, indicating stable market conditions.
Outlook & Guidance
Acuity Brands provided a full-year net sales guidance of $4.3 to $4.5 billion and an adjusted EPS range of $16.50 to $18.00. The company anticipates continued growth, supported by the recent QSC acquisition and ongoing product innovation.
Executive Commentary
CEO Neil Ash emphasized Acuity Brands' position as a leading industrial technology company, stating, "We are an industrial technology company with the best lighting company in North America and a larger scale intelligent spaces business." He also highlighted the role of data in driving value, noting, "Data is the fundamental driver of value in this generation."
Q&A
During the earnings call, analysts focused on the strategic implications of the QSC acquisition. Management discussed potential revenue synergies and the importance of integrating data and controls to enhance product offerings.
Risks and Challenges
- Variability in corporate accounts and retail channels could impact future revenue.
- Macroeconomic pressures may affect overall market demand.
- Supply chain disruptions could pose challenges to product availability and cost management.
Full transcript - Acuity Brands Inc (NYSE:AYI) Q1 2025:
Conference Operator: Please be advised that today's conference is being recorded. I would now like to turn the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands: Thank you, operator. Good morning, and welcome to the Acuity Brands fiscal 2025 Q1 earnings call. On the call with me this morning, Anil Ash, our Chairman, President and Chief Executive Officer and Karen Holcomb, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2025 Q1 performance. There will be an opportunity for Q and 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 Q1 earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investors. Acuitybrands.com. Thank you for your interest in Acuity Brands.
I will now turn the call over to Neel Ash.
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Thank you, Charlotte, and thank you all for joining us this morning. Our fiscal 2025 first quarter performance was solid. We delivered sales growth, expanded our adjusted operating profit and adjusted operating profit margin and increased our adjusted diluted earnings per share. We're also pleased to welcome QSC to Acuity, having successfully closed the acquisition last week. Now turning to Acuity Brands Lighting.
We continue to perform well, delivering sales growth in the Q1. Our performance is more predictable, repeatable and scalable as a result of the continued actioning of our strategy to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business, and to drive productivity. Our strategy has informed the development of our differentiated product portfolios, Contractor Select, Design Select, and Made to Order, enabling us to drive growth and productivity for ourselves and for our partners. With Contractor Select, we are driving growth and productivity for our electrical distributors by lowering their cost of doing business and empowering them to carry less inventory. With Design Select, we're focused on delivering productivity to architects, lighting specifiers, design build contractors, and electrical contractors by enabling them to choose the right configurable products for their projects.
Our portfolios are constructed with high levels of product vitality. In Contractor Select, this quarter, we launched 2 new products, TrueWrap and the Rebel Round High Bay. Both products feature switchable technology and offer multiple functionality with the end result being distributors can carry fewer SKUs while providing more options for customers. True Wrap from Latonia Lighting enhances the traditional wrap, offering even lighting for spaces with limited natural lighting options like locker rooms, storage utility areas, garages, and offices. It features 3 adjustable lubin settings and 3 switchable color temperature settings.
The Rebel Round High Bay delivers uniform illumination for large open spaces like industrial facilities and indoor sports arenas. In addition to offering an expanded lumen range with switchable color temperature options, it is manufactured to withstand harsh conditions and can be easily integrated with our sensor switch controls for improved energy savings. These innovations are important to our customers, and our team has once again been recognized for the value they deliver. In the Q1, many of our lighting solutions were selected for the Grand Prix Design Awards, an international competition that celebrates the excellence and talent of creative professionals and firms. Our winners included Mochi by Cyclone, Hydrell Flame, and several Eureka products, including the Tangram family and the Frank, Jolie, Elke, and Merrell luminaires.
Our Luminus Sirios Pro was recognized by the Architect's Newspaper's Best of Product Awards, which elevates well designed products serving the architecture and design community. The Sirios Pro family includes interior and exterior luminaires for a seamless aesthetic transition. The luminaires are compatible with our in lite controls, allowing seamless control of indoor and outdoor spaces while reducing energy costs, aiding in building compliance, and improving occupant comfort. Now moving on to Intelligent Spaces, which delivered another strong quarter of sales growth and margin performance. Our mission in Intelligent Spaces is to make spaces smarter, safer, and greener through a strategy of connecting the edge with the cloud using disruptive technologies that leverage data interoperability.
In Distech, we are focused on where we compete and what we can control to expand our addressable market. As part of our geographic expansion, this quarter, we continued to add systems integrator capacity in the U. K, Asia and Australia. Distech partners with the best SIs in specific geographies to sell our full suite of controls, sensors and applications. In October, we brought together our North American SI partners in Nashville for our Connect conference.
This is a highly engaged community of the best systems integrators in the world that come together to learn more about Distech and Atrius products. During the conference, we launched new products and applications and delivered updates on the latest technology trends while also offering technical training. This year was the highest attendance since the event began and highlighted the continued strength and importance of our relationships across the building management systems industry. We are thinking about spaces differently. We're using data to maximize occupant experience and transform spaces.
Last week, we closed our acquisition of QSC. Through Distech, Atrius, and QSC, we can now control both how a space is managed and what happens in that space with our disruptive technologies that promote end user satisfaction through data interoperability. Imagine a future where you walk into a room and the space intelligently adjusts, where data is used to predict how many people will be using that room, cooling or heating the room in advance for optimum occupant comfort, aligning the in person and virtual experience by seamlessly transitioning between microphones and cameras based on who is speaking and where they are located, using data points to optimize lighting levels, lowering shades if there is an increased glare, and if a meeting is canceled, reverting a room back to its unoccupied settings to save energy and lower costs. We're excited about the addition of QSC to Intelligent Spaces as we continue to execute on our mission. Now looking forward, we are an industrial technology company with the best lighting company in North America and a larger scale intelligent spaces business.
Our path to growth and profitability is clear in both segments. In Acuity Brands Lighting, our growth algorithm is grow with the market, take share and enter verticals where we have either not historically competed or where we are underpenetrated. We will continue on our path to improve margins. In Intelligent Spaces, through Distech, Atrius and QSC, we can now control both how a space is managed and what happens in that space with our disruptive technologies that promote end user satisfaction through data interoperability. Our focus will be on growth, and we have the opportunity to expand margins.
We are creating value by growing net sales, turning profits into cash and not growing the balance sheet as fast, and we are demonstrating that we are effective capital allocators. Now I'll turn the call over to Karen, who will update you on our Q1 performance and provide more details of the expected financial impact of the QSC acquisition.
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Thank you, Neil, and good morning to everyone on the call. We delivered solid performance in our Q1 2025. We grew sales, improved our adjusted operating profit and margin and increased our adjusted diluted earnings per share. For total AYI, we generated net sales in the Q1 of $952,000,000 which was $17,000,000 or 2% above the prior year as both lighting and intelligent spaces grew. During the quarter, our adjusted profit was $159,000,000 which was up $5,000,000 or 3 percent from last year, and we expanded our adjusted operating profit margin to 16.7%, an increase of 20 basis points from the prior year.
This increase was largely a result of the significant year over year improvement in our gross profit margin, driven by product vitality, the management of price and cost, and productivity improvements. We generated net interest income as a result of the cash position on our balance sheet. This quarter, our effective tax rate of 20.8% was lower than last year and lower than the expected full year rate of around 23.5 percent due to discrete items in the quarter. Finally, our adjusted diluted earnings per share of $3.97 increased $0.25 or 7% over the prior year. In Acuity Brands lighting, net sales were $886,000,000 which was $10,000,000 or 1% above the prior year, primarily the result of sales growth in our independent sales network and in our direct sales channel.
Adjusted operating profit was $154,000,000 and we delivered adjusted operating profit margin of 17.3%, which was down slightly compared to the prior year. Sales in Intelligent Spaces for the Q1 were $74,000,000 an increase of 15% year over year as Distech continued to deliver impressive growth. Adjusted operating profit in Intelligent Spaces was $15,000,000 with an adjusted operating profit margin of 21%, an improvement of 5 percentage points year over year. Now turning to our cash flow performance. In the Q1 of 2025, we generated $132,000,000 of cash flow from operations.
We earned attractive returns on the cash that we have on our balance sheet and we ended the quarter with $936,000,000 of cash. We closed the acquisition of QSC last week. We financed this acquisition with $600,000,000 of additional debt and the remainder with cash on hand. During the quarter, we resumed our share repurchase program and allocated approximately $5,000,000 to repurchase approximately QSC will be reported in our results beginning in January. QSC will be reported in our results beginning in January.
Our updated expectation for full year fiscal 2025 is that net sales will be within the range of $4,300,000,000 $4,500,000,000 for total AYI, and we expect adjusted diluted earnings per share within the range of $16.50 to $18 Additionally, we now expect to have full year interest expense of between $20,000,000 $25,000,000 for the full year fiscal 2025. We will incur integration expenses as well as the impact of purchase accounting adjustments throughout the year. We're pleased with our performance in the Q1 of fiscal 2025. Our lighting business continued to perform well and our intelligent spaces business delivered impressive results. Thank you for joining us today.
I will now pass you over to the operator to take your questions.
Conference Operator: Thank you. Our first question coming from the line of Ryan Merkel at William Blair. Your line is now open.
Ryan Merkel, Analyst, William Blair: Hey, good morning, everyone. Thanks for taking the question. First off, just wanted to ask on QSC and the accretion and thanks for updating the guide. But could you give us the full 12 months accretion that you're expecting from QSC?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Hey, good morning, Ryan. It's Neil. Thanks everyone for being with us this morning. So actually it's not really relevant the full year. So but on a if you were to roll this forward on a calendar basis, I think you would directionally have the ability to do that just we have what 8 months of this year.
So eighttwelve looking forward. But more importantly, we're really pleased with the acquisition. This is I believe for our Intelligent Spaces Group, we have a different theory of the case. We have the opportunity to control both what the building itself and what happens
: in the
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: space. And that is a unique combination of data collection and the ability to control that data and do things with it. So we're really pleased with that. We're off to a really good start with the team at QSC and we're excited that they're part of Acuity.
Ryan Merkel, Analyst, William Blair: Okay, helpful. And then Neil, can you just comment on order trends and if visibility has improved on the backlog and the pipeline with those projects potentially getting released?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes. So, Ryan, I think you're referring more to the lighting business there. So,
Conference Operator: on
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: the lighting side, we're as we said in the prepared remarks, we're pleased with the performance. The our team there is executing consistently and we're clear on the growth algorithm. As we look forward, obviously, we believe that calendar 2025 is going to, from a market perspective, be better than calendar 2024. We base that assumption on our view of data, external data going forward, number 1, and second, then our interaction with the field, number 2. The kind of the word from the field is that our growth algorithm is working.
We are the leading player obviously in the industry and leading not just by size, but by performance and by performance, I mean quality of performance. So that is strong. If you dig into our Q1 numbers, you'll see that our C and I channel performed pretty well. Our retail channel did not perform great, but that's really just a point in time. So when you roll that forward, it gives us confidence for the rest of this year and beyond.
Ryan Merkel, Analyst, William Blair: And if I could just follow-up on that last point. Yes, I noticed that the corporate accounts and retail were down, but the most important segment, the independent channel was up. So is the read here that you're starting to see sort of demand recovery, demand inflection or is it a bit too early?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Let's call that when it happens. So I'd say kind of on the C and I and direct channel, this is really a demonstration of, I believe our product segmentation strategy coming to life and really working effectively. The as you know, on our corporate accounts, that's a it's an inconsistent business, but a high quality business. So we'll have some big quarters and some smaller quarters based on individual customer decisions. And then on the retail side, we have great relationships there.
So they haven't had great results over the course of the last year or so. So this is a little bit of a catch up, but that's just a point in time. So I think it's early to call the inflection, but obviously we're confident in where we're going in calendar 2025.
Ryan Merkel, Analyst, William Blair: All right. Thanks so much. Best of luck.
: Thanks.
Conference Operator: Thank you. And our next question coming from the line of Tim Klase with R. W. Baird. Your line is now open.
Tim Klase, Analyst, R.W. Baird: Hey, everybody. Good morning.
: Good morning.
Tim Klase, Analyst, R.W. Baird: I guess just a first question, just on the guide, I just want to confirm, is the guide rate solely for QSC and the core is unchanged? Or did you guys make any changes to kind of the core guidance?
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Hey, good morning, Tim. Yes, the guidance is just the adjustment for QSC. So we expect the base business to perform as we laid out in the Q4. And so the increase in the sales that you see and increase in EPS is really due to the impact of QSC and then also the additional interest expense.
Tim Klase, Analyst, R.W. Baird: Okay. Okay, great. And then just maybe on QSC, just what's been the initial feedback from your system kind of integrated customers? And could you give us maybe a historical example or 2 of just how these kind of businesses kind of piece together and why it makes sense to have them under one roof?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes, sure. Well, so let's take a step back, Tim. As I said earlier, we do have a different theory of the case, I believe, than the rest of the industry. And that's that data is the fundamental driver of value in this generation and that there's an opportunity to bring together the data that exists in a built space, what happens in a built space and who's in a built space. So the ability to build a data and controls business then is the differentiated opportunity that we believe we've identified.
So these have not historically overlapped. So having said that, the initial response from the systems integrator community at Distech and the systems integrator community at QSC was, hey, can we sell the other one now? And which is exactly what we expected. We're not doing that yet, however. So our strategy for bringing this online is that we believe that number 1, this is a super high quality asset and there and we want and expect them to continue to perform as they have been performing.
So that's kind of step 1. Step 2 is, we have the opportunity to create end user opportunities through the combination of data and data interoperability and that will happen over the next 12 to 24 months. And then finally, we're confident that they will benefit from being part of our organization and how we do things to drive their value. So a specific example of already how these come together though is that we initially met the companies through the interaction at an engineering and product level between Distech and QSC. So both of those now before the acquisition created data interoperability so that the Q SYS control system could control what was happening in the building through their interface and DisTek could control the AV through our interface.
So, it's a very natural combination, but it's one that hasn't existed between anyone else before.
Tim Klase, Analyst, R.W. Baird: Okay. Okay, that's helpful. And then just to sneak one last one in, just how are how is Acuity and maybe just kind of the channel in general just kind of preparing for potential tariffs? Has there been any sort of kind of pull forward in shipments? Or I guess how would you kind of think about the tariff implications for Acuity and how people are managing in the channel?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: I guess I'd summarize it, Tim, by saying there's been a lot of talk and not a whole lot of action. So we have not for ourselves, for example, we've made very small kind of targeted changes in our purchasing, which are kind of no regrets decisions about what might potentially happen in the future. From a customer perspective, we've had a lot of customers asking us, if we're going to increase prices and when because of tariffs. And then that conversation sort of died down. I'd say the expectation from our customers is that we will react accordingly when that happens.
And we've set the expectation with them that nothing's happened, so there's nothing to talk about. And if something does happen, we will be prepared and we will act accordingly.
Tim Klase, Analyst, R.W. Baird: Fair enough. Good job and good luck on the rest of the year guys.
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Thanks Tim.
Conference Operator: Thank you. Our next question coming from the line of Joe O'Dea with Wells Fargo (NYSE:WFC). Your line is now open.
Joe O'Dea, Analyst, Wells Fargo: Hi, good morning. Thanks for taking my questions. Hey, Joe. Can you just talk about the QSC margin opportunity over time? Looks like what's It looks like what's embedded in the guide for 2025 now including QSC would put their revenue maybe up to low double digits year over year.
So pretty attractive growth rate and not too dissimilar from ISG. It looks like on the margin profile, we may be looking at QSC op margins kind of mid teens versus the 20% -ish for ISG. So when you think about that margin gap, any structural differences there? And how do you think
Conference Operator: about the timeline to narrowing that?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes. So I'll take you back to what we said when we announced the acquisition, Joe, which is that this is an attractive opportunity, 1st of all, to bring together, I've talked about that already. 2nd, the underlying business is a strong business, which we have which we think has similar financial profile to our existing assets in our Intelligence Basis business. So, I think you're right. It's kind of mid teens.
We're counting on mid teens low to mid teens growth rate for them, which is consistent with where we currently are. Our priority is growth. So we did not make this acquisition with the expectation that we would be taking costs out. We don't need to. There's a natural opportunity to increase the margins over time as we grow.
Similarly to what we've done with DisTec and the ISG business. So you can see that over the course of the last 3 years where we've gone with that business. So to answer kind of your last point, there is no structural difference that would impede our ability to do that over time. But I want to emphasize that our priority is number 1, to continue the growth and performance of the existing business and then number 2, to start to deliver things to the market that other people can't.
Joe O'Dea, Analyst, Wells Fargo: And then just on the go to market and you talked about sort of encouraging feedback from systems integrators, but how much overlap is there in that system integrator go to market today in terms of the percentage of sort of QSC and ISG revenue that would be going through the same systems integrators through separate and kind of that opportunity set, to then leverage those separate paths by selling both through them?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: So I'll take this opportunity, Joe, to highlight what I think is more important than that, which is that there's a fair amount of overlap among the smartest end user customers between those who have used Distech and those who have used QSC and Q the platform, their platform brand. There is very interesting overlap there. So, one of my observations when I got here about Distech was that it seems like the smartest customers buy Distech, the smartest end users. Same thing is true with Q Sys and QSC. So as a result of that, the systems integration community, systems integrator community both for Distech and for QSC is very attractive because they have the opportunity to use the best technology and to sell into the most sophisticated customers.
So in that way, we're very similar. So we don't have any initial plans for those systems integrator communities to overlap over time, but I do believe that we're going to have a natural pull from the most sophisticated end users for the solutions that we will be able to deliver.
Joe O'Dea, Analyst, Wells Fargo: Understood. I appreciate it. Thanks.
Conference Operator: Thank you. Our next question coming from the line of Chris Snyder with Morgan Stanley (NYSE:MS). Your line is now open.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands0: Thank you. Maybe just following up on all the questions around the strategic rationale of QSC, It does seem like there is revenue synergy potential and maybe some moderate cost synergy potential. Is any of that factored into the kind of the $0.50 accretion that you guys are calling for this year? Or is that really just kind of a continuation of the steady state business we've seen at QSE, which is growing and kind of generating these mid teen margins to begin with?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes. Welcome back, Chris. So our expectation for the first 12 months or so of the business is that they continue to operate as they have operated and we'll go through the integration process. So the I think revenue synergies are in the future, not the present as a result of this. And as I said, we don't feel the need to take cost out of their business.
We want to prioritize growth.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands0: Appreciate that. And then obviously gross margin just continues to be kind of a phenomenal story for the company. And I think on the last conference call, Neil, you kind of talked about ABL continuing to grow margins in, I believe, the 50 to 100 basis point range over the, I guess, medium to long term. It seems like that implies that you guys think gross margin can continue to push higher from these levels to drive that level of operating margin expansion. I guess, is that the right takeaway?
And how do you see gross margin going from here? I mean, it wasn't that long ago where we were wondering if we could get to 42%. Thank you.
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Karen, you want to take this one?
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Yes. Hey, Chris, good to hear from you again. You're right. We're really pleased with our gross profit margin expansion over the course of time. We were at 47.2% this quarter, which was up 140 basis points year over year.
Particularly at ABL, it's a reflection of the work we've done over the past few years on the strategy with product vitality, service, technology and productivity, but also the growth of intelligent spaces is having an impact on that gross profit margin. When you think about product vitality, you've seen it on the presentation, we're not going to stop and we're going to have products like what we highlighted last quarter with the holiday. So we're delivering higher value products with less material content. So to answer your question, yes, we think there's still some room there. And our comment last quarter was on the 50 basis points to 100 basis points of margin improvement at ABL from an operating profit perspective.
We do think that over the course of time that business will continue to improve margins. We're going to make some investments. We've talked about technology investments that we need to make to power our gross profit margins. So you may see a little bit more investment in SD and A to get benefits elsewhere. But overall, we feel really good about that business continuing to perform and improve margins over time.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands0: Thank you. Appreciate all that.
Conference Operator: Thank you. Our next question coming from the line of Christopher Glynn with Oppenheimer. Your line is now open.
: Thanks. A lot of good detail on QSC, so I'll pivot to ABL a little more. You've talked about the last few quarters kind of agency activity being a fairly positive input and some project delays and release times a factor there. So I'm wondering if the agency activity is still suggesting a bit of a momentum build opportunity as the year goes on and if financing and inflation are the main pacing items for the release to coalesce?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes, Chris, I think those are good questions. So big picture, and I'll react to kind of the agency network in general. Our agency network continues to perform. So, the independent sales network is an important part of what we do at ABL. I highlighted their performance or the performance of that channel earlier in the call.
As we look at data to predict the future for us, we do look at inflation, we do look at interest rates, we do look at ABI, we look at kind of a few other factors and all of those collectively point towards a trend which improves in 2025. It's unclear exactly what or let me rephrase that. It's unclear to me personally exactly what opens those. And I'm not sure it's consistent based on the data that we've seen. Having said that, net net, the sentiment is remained strong in our agency community.
We, A, we talk to them, but B, we survey them on a regular basis. And everyone expects this to be a kind of normal and accelerating performance over time. Well, not everybody. The majority expected to be improving over time. So, net net, this feels sort of normal, not like there's going to be a floodgate that opens or anything like that, but it feels like a steady build from here.
: Okay, great. So it sounds like normal seasonal patterns is a very good baseline for us to focus on, you would say, for ABL?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes. I think that's the starting point and we'll see if we can outgrow that. Great. Thank you.
Conference Operator: Thank you. Our next question coming from the line of Jeffrey Sprague with Vertical Research. Your line is now open.
: Hey, thank you. Good morning, everyone. Maybe just a couple of loose ends for me, a lot of ground cover. First, just want to touch base on ABL operating margins, which did tick down a little bit. So maybe the larger question is in terms of what's going on with SD and A and investment and the fact that the gross margin and operating margin went in different directions in the quarter.
Erin?
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Yes. So Jeff, as I talked about before, we are continuing to make some investments in ABL. And if you look at it sequentially, kind of on a dollar basis, you'll see that our expenses are more consistent with where we trended in the back half of last year. So the opportunity really is to continue to manage those expenses and as sales come back as we've described a little bit more in the second half, then you'll see the percent of sales start to improve. But we feel good about our management of those investments.
We will invest in technology, which could identify some benefits elsewhere in the P and L. But overall, we think there's opportunity to leverage some of those fixed expenses as or the operating expenses as we come back and grow sales a little bit higher in the back half of the year.
: And then Neil, this idea of sort of the smartest, most sophisticated customers using Distech QSC, Is there a common theme as it relates to that customer type in terms of, I don't know, youth or lack thereof of the company or business or the vertical market or some characteristic that you'd say applies across that set of customers that you're referencing?
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes, Jeff, I'd say that the things that we I have identified about the consistency of those customers is generally that they're technology forward. They manage their operations centrally and they want to get consistency across their fleet of buildings or locations. So they're looking for 1, productivity of the uses of their space, number 1. And number 2, they're looking for productivity in how they are able to manage those spaces. So the and I'll give you 2 specific examples.
So we had the Distech Conference that we mentioned. So the Connect Conference in Nashville that's 700 systems integrators who showed up, they paid to attend. It's a combination of family reunion, kind of tech forward business opportunity. So we were there and one of the panels was a obviously, it was one of our some of our best customers from our what we call our Building Advisory Council. So the guy who runs facilities for Stanford University was talking about the benefits of using Distech and the leverage ability that he gets, they get over their campus by the consistency and the technology that this tech provides them.
Similarly, if you go to QSC's website, they have a ton of case studies on CUSIPs, which are really interesting to read. I'd highlight one that I found really interesting, which is Indiana University basically normalized each of their class room interfaces. So large spaces, small spaces, so that there's a consistency to the end user when they walk into that space of how it operates, which gives them a significant amount of additional productivity and they can manage that centrally. So the trends become the same, which is technology, which is creating data, getting closer to the CIO than the head of facilities that are driving end user outcomes in the space and are driving productivity to the organization and how they manage the space.
: Great. Thank you. And maybe just one quick one for Karen. I'm sorry, Karen, you mentioned purchase accounting and inventory and the like. All that's adjusted out of your construct though, correct?
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Yes, it is. All of that would not be included in our adjusted diluted earnings per share expectations, correct.
: Great. Thank you, everyone.
Conference Operator: Thank you. And our next question coming from the line of Brad Costa with Morningstar. Your line is now open.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands1: Hi, thank you. Just wanted to ask on ABL and specifically on the Design Select product portfolio and just the traction you're seeing there with customers.
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Yes, Brad, welcome. The as we've highlighted, the portfolio segmentation strategy is really about how we drive growth and productivity for ourselves and our partners. So the Design Select portfolio is really created to drive growth and productivity with the design community, not surprisingly given the name and how they can execute their projects. So traction is good there. Our growth is we expect this to be a multi year, I think, 3 to 5 year kind of progression for us.
The percentage of our sales, which are attributable to Design Select is ahead of where we expected it to be at this point, but we're still really early in the process. So we're in the 2nd inning of second, 3rd inning of what we think we can do with Design Select. But the reaction from the external community has been very strong. They understand the premise. They understand how it creates value for them and they're starting to select it.
The gating item for us is we're going to roll it out in over time, meaning the products that are available to that when we get those products right. So we're not muscling through this. We're doing this the right way to create long term value.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands1: That's great. And then maybe for Karen, just on capital allocation for the remainder of the year and just curious what you're thinking in terms of potential debt pay down, if any, as part of that? Thank you.
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Sure. Yes. So first on capital allocation, let me just reiterate our priorities. So our priorities for capital allocation are to invest in our current businesses for growth, invest in M and A as you clearly see what we're doing there, increase our dividend and then also to make share repurchases. So to address your question specifically, we do generate a lot of cash and as we said when we announced the acquisition, as we do have the ability to pay down this debt pretty quickly to give us options to do more things in the future.
So with our cash generation, we can address all of our capital allocation priorities, including paying over the paying down the debt over the next 12 to 18 months. I would also highlight, we did resume our share repurchase program this quarter. We were out of the market a little bit because of the announcement of QSC. So we entered late in the quarter, probably just had the last month of the quarter. So it looks a little bit light, but we continue to be pleased with our repurchase program and the outcome of that program.
And so expect that to continue as well.
Charlotte McLaughlin, Vice President of Investor Relations, Acuity Brands1: Thank you. I'll leave it there.
Karen Holcomb, Senior Vice President and Chief Financial Officer, Acuity Brands: Thank you.
Conference Operator: Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Neil Ash for any closing remarks.
Neil Ash, Chairman, President and Chief Executive Officer, Acuity Brands: Great. Thank you, operator. Thank you all for joining us this morning. Obviously, we're pleased with our performance in the Q1. As we said in the prepared remarks, we have the best lighting company in North America.
It's performing. We have a clear algorithm for growth and the opportunity to continue to increase margins. We also now have a larger scale intelligence spaces business, which brings together data and control in a way that is unique to us and we believe can provide differentiated opportunities and growth in the marketplace. We're clear on how we create value. We grow net sales.
We turn profits into cash and we don't grow the balance sheet as fast. So thank you for joining us this morning and we look forward to talking to you again next quarter.
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