Acuity Brands, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Acuity Brand second quarter 2021 earnings conference call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Charlotte McLaughlin, Vice President of Investor Relations. Please go ahead.

Thank you, Liz. Good morning, and welcome to the QT Brand's 2021 Second Quota Earnings Call. As a reminder, some of our comments today may be forward-looking statements based on management's beliefs and assumptions and information currently available to 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 the 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 their corresponding GAAP measures are available in our 2021 second quarter earnings release, which is available on our Investor Relations website at www.investorrelations.com. investors.acuitybrands.com. With me this morning is Neil Ash, our Chairman, President, and Chief Executive Officer, who will provide an update on our strategy and detailed highlights from the last quarter, and Karen Holcomb, our Senior Vice President and Chief Financial Officer, who will walk us through this quarter's earnings performance. There will be an opportunity for Q&A at the end of the 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 Ash.

Thank you, Charlotte. And good morning, everyone. Thank you for joining us to discuss Acuity Brands. I'm pleased with our company's performance in the second quarter of fiscal 2021. We have delivered solid results while continuing to make progress on our strategy. We've improved the way in which we serve our customers, expanded margins, and allocated capital effectively. As you know, the pandemic has created real challenges over the past several quarters, and we have yet to return to a steady state. The slowdown last year had a global impact on supply chains and logistics, and we continue to feel the impact of this in the economy and in our operations, yet we have continued to have consistent and strong performance during this time. As we look forward, we are facing some new and existing challenges. As demand begins to rebound, global logistics, for example, continues to encounter issues. New challenges include the global chip shortages and the rising cost of some components. To be clear, these are good problems to have. We are managing these challenges aggressively, and our entire team will work tirelessly to deliver the best possible outcomes for our customers and continued high-quality results. So moving on to the second quarter highlights, Our team delivered great results this quarter. Sales were down 5.8%. However, we saw gross profit margin of 43.4%, expand 170 basis points, and reported operating profit margin expand 180 basis points against the prior year. The expansion was largely a result of product and productivity improvements throughout the business, and we are very happy with the results. Karen will speak in more detail about this later in the call. As we highlighted in our earnings release, we continue to allocate capital effectively, and as of February 28th, 2021, had repurchased nearly 10% of our shares outstanding since last May. Finally, in a message to our associates earlier this month, we announced that we were carbon neutral in our operations. I will talk more around this later in the call, but I'm delighted that we were able to announce this milestone as quickly as we did. I now want to update you on our ongoing transformation. I have been at Acuity Brands for a little over 12 months, and what I continue to see every day is a team that is striving for success, that is not shy about changing, and that believes in Acuity and where we are going. It is no secret that I came to Acuity because I saw the opportunity for our company to be more than a lighting business. Our core lighting and lighting controls business was and is way more durable than the market gives it credit for, as evidenced by our performance over the past several quarters. and we will continue to transform our business and the broader industry. We have the best go-to-market network in the industry and the broadest product lines that serve a wide variety of end markets. We continue to improve the effectiveness of our products and the efficiency of our supply chain through the implementation of new technologies. We have a valuable and growing business in DISTEC, and in Atrius we have the potential to build a very valuable technology business. Finally, we have the ability to grow through acquisitions, both in our current businesses as well as in new ones. In our lighting and lighting controls business, we announced an exciting evolution in the leadership of that business. Trevor Palmer has taken over as president. Most recently, Trevor was leading our controls business. He joined the company through the Distech acquisition nearly five years ago, and he exemplifies the talent that already exists within our organization. Trevor brings 27 years of industry experience to the role. I'm excited for what Trevor and his team will do with this business going forward. During the quarter, we continue to invest in product development. We have introduced new lighting and controls products and improved and evolved parts of our product and solutions portfolio. In our contractor select portfolio, we saw significant demand for the Compact Pro high bay, a versatile high bay that has been in demand as a result of the increase in warehouse renovations driven by the shift to online retail and the expansion of logistics networks across North America. The CPHB is a breakthrough product that was designed to deliver improved performance in a smaller size to ensure ease in installation. The product uses fewer inputs, is more efficient to transport, and is both globally sourced and manufactured in our facilities to ensure supply chain flexibility. Within our GUV category, we introduced EvolAir with UV technology, with UV angel technology, excuse me. This product uses onboard 254 nanometer technology and circulation above the fixture to locally disinfect air in occupied and unoccupied spaces. We have installed this product in multiple acuity locations and have specifications being developed with this product in education, office, and healthcare applications. It is worth pointing out that our controls capabilities are a key differentiator for successful GUV lighting solutions. Our Hall of Fame products continue to win bids in infrastructure projects. We were awarded the order for the relighting of the Big Dig project in Massachusetts that will begin in the second half of our fiscal year. Part of the scope of this mandate was to replace existing low-cost fixtures that had been installed several years ago and were not performing as expected. Hall of Fame is known for its quality and durability, and I am pleased we are the partner of choice to make the necessary improvements. Throughout the pandemic, we have continued to invest in product vitality. We have maintained the pace and quality of product rollouts this year, which positions us well for the market recovery. I continue to be impressed by the agility of our team. Transitioning to go-to-market, we are committed to our independent sales network. This quarter, we announced a realignment in the Northeast that will benefit our customers in the region and nationwide. We are creating a new agency through the consolidation of what were formerly the Acuity-owned agency in New York, the New Jersey Territory, and the independent agency in Philadelphia. This transaction demonstrates our commitment to the independent sales network, which we believe to be the strongest in the industry. By creating this new agency, we are better positioned to participate in designs and specifications that start in New York and travel around the country. We are also better positioned to serve contractors who work in New York, New Jersey, and Philadelphia. We continue to make progress with DISTEC and Atrius. DISTEC is uniquely positioned in the building management space, built on open protocols and distributed through a network of independent systems integrators. It has continued to grow throughout the COVID-19 pandemic. We're also making progress around the product roadmap for Atrius. We are recruiting best-in-class talent to drive the capabilities in that business. In early January, Sandeep Mudvadia joined the business as Vice President of Product Development. Sandeep comes to us from Google Cloud, where he was responsible for the product development team building vertical solutions for the manufacturing, industrial, automotive, power, and transportation industries. We will continue to add talent to Atrius and make progress building unique and valuable technology solutions. Now I would like to take a few minutes to highlight our progress on the ESG front. ESG is directly aligned with our values and our business strategy. We care about the environment, our people, and our communities. Our company has been built on products, technologies, and services that deliver sustainability and energy efficiency. Over the last year, we have focused on our own operations. Our recent accomplishment of achieving carbon neutrality across scope one and two emissions in our operations is the result of this work and demonstrates our commitment to continually improving our communities. We achieve carbon neutrality as a result of reducing environmental impacts in our facilities and through investing in carbon offsite projects. Some of the energy efficient improvements made in our facilities can be highlighted by our Crawfordsville, Indiana facility where we optimized air compressors, installed more efficient belts, and added switches to reduce energy consumption. And by our Conyers, Georgia, and Des Plaines, Illinois, facilities, where we installed our new I-beam IBG and Holophane FUSION high bay lights and used our Atrius Building OS technology to conserve energy and improve the quality of light in the space. And in our facility in Newark, Ohio, in which we rebuilt the glass furnace to improve overall efficiency, and which has now completely converted to renewable electricity, a win for the environment and a cost savings. Our priority is a reduction of energy usage in our facilities and for our customers. Until we are able to realize the full impact of our energy efficiency improvements, we are supplementing with an offset program that is focused on helping the communities where we operate. We are investing in a series of carbon offset projects in Mexico, Indiana, and California. all communities where we have a presence. These projects support energy efficiency and renewable energy options at colleges and universities, landfills, and agricultural sites. These programs allow us to remove carbon from the atmosphere and balance our carbon footprint from operations. While the focus of our recent accomplishment has been environmental, we are giving equal prominence to the S and the G parts of ESG. Simply stated, We want to be the place where the best people come to do their best work. To do this, we are continuing to focus on improving the lives of our associates by strengthening our culture and removing the barriers to success. Acuity is proud to be an inclusive company where we all succeed together. Finally, we have addressed several issues of governance over the last year by, among other things, diversifying and restructuring our board of directors and overhauling our total rewards program including improving our long-term incentive plans. Moving on to capital allocation. As I previously mentioned, we have now repurchased nearly 10% of our outstanding shares since May 2020. Effectively allocating capital is an important part of how we will create value for our company. To reiterate, our capital allocation priorities are clear. First, to grow our current businesses. Second, to grow our company through acquisitions, third, to maintain our dividend, and fourth, to create value through share repurchases. We were able to capitalize on the dislocation in our share price and have been very effective repurchasing shares over the last year. As we look forward, and barring another significant market dislocation, we do not anticipate maintaining this rate of share repurchases. we will return to our priority of using capital to grow the business. As we look ahead, we see improvements in the end markets we serve, and we are cautiously optimistic about the outlook for the remainder of fiscal year 21. We intend to use the breadth of our product portfolio and the strength of our go-to-market teams to deliver a solid top-line performance. While there will be global challenges ramping back up, we are aggressively addressing them. We will continue to invest in our business with the intention of becoming a larger, more dynamic company. With that, I'll turn the call over to Karen and be back for Q&A and for some closing remarks. Karen?

Thank you, Neil. I want to start by echoing Neil's initial comments regarding this quarter's performance. Our associates pulled together to deliver a solid performance in the fourth consecutive quarter of gross profit margin over 42%. I am proud of the changes and progress we continue to make. Moving to our second quarter results, net sales were $777 million, a decrease of 5.8% compared to the prior year, which we believe was a very good performance in this market. Notably, within our sales performance, our independent sales network and direct sales network were approximately flat with the prior year, as we continued to see strength in medium to large projects, offsetting some of the pressure in the commercial office space, which continues to be impacted by the COVID-19 pandemic. Retail channel sales declined approximately 24% as compared to the prior year as a result of strong year-over-year pre-pandemic comparison. This was exacerbated by one of our large customers carrying out an inventory rebalancing, which we believe to be a one-off impact. We expect to see sequential growth in this channel in our fiscal third quarter of 2021. Finally, sales and corporate accounts declined just over 50% as compared to the prior year. We continue to see large retailers defer renovation spend as a result of safety concerns resulted from the COVID-19 pandemic. In the last few weeks, there have been indications that these concerns are slowly lifting and we expect to see continued sequential recovery through the balance of the year. Moving on to the rest of the income statement. Gross profit margin was 43.4% for the second quarter of fiscal 2021, an increase of 170 basis points over the prior year. This was an outstanding achievement. This outperformance was the result of product and productivity improvements that yielded returns, and we believe that this will position us well for any unforeseen challenges. Given this gross profit margin improvement, we believe attaining a gross profit margin above 42% is reasonable on an annualized basis. Reported operating profit margin was 11.7% of net sales for the second quarter of fiscal 2021, an increase of 180 basis points over the prior year. Adjusted operating profit margin was 14% of net sales for the second quarter of fiscal 2021, an increase of 170 basis points over the prior year. The majority of this improvement was driven by the higher gross profit margin and continued cost containment efforts, particularly around travel expenses and sales and marketing costs resulting from less in-person activity due to the pandemic. As we continue to demonstrate our ability to drive margins, we will begin to reassess our reinvestment strategy, prioritizing systems and software development as we focus on executing our digital transformation. As the economy continues to open up, we expect to see travel and other marketing expenses increase throughout the balance of the year. We are working with our associates to ensure that only essential travel and marketing expenses are being incurred and do not expect to return to pre-pandemic expense levels in fiscal 2021. As previously discussed, this quarter, we were able to share with our associates that we achieved 100% carbon neutrality within our operations by prioritizing efficiency improvements in operations and some offsetting measures. This is not just an initiative for the management team. Both Neil and I believe this is the core to the ongoing success of the company. As part of the offsetting measures, We expect to see a modest SDA investment, but this will not be material. The effective tax rate for the second quarter of fiscal 2021 was 23.5% compared with 23.4% in the prior year quarter. We currently estimate that our blended effective income tax rate will be around 24% for the full year fiscal 2021. Finally, we saw significant improvement in diluted earnings per share for the second quarter of fiscal 2021. Diluted EPS of $1.74 increased 30 cents or 20.8% over the prior year, and adjusted diluted earnings per share of $2.12 increased 28 cents or 15.2% over the prior year. Moving on to cash flow. Net cash from operating activities for the first half of fiscal 2021 was relatively flat at approximately $213 million compared to the prior year. We invested $21 million or 1.4% of net sales in capital expenditures during the first half of fiscal 2021 and currently expect to invest approximately 1.5% of net sales in capital expenditures in the full year of fiscal 2021. On February 28, 2021, we had cash and cash equivalent balance of $499 million. I am pleased with the continued solid cash generation. Over the last 12 months, we have been extremely judicious around our capital allocation decisions. We continue to prioritize long-term growth and believe that reinvestment into the future of the company is core to our success. We have further committed to maintaining our dividend and being opportunistic around allocating capital to buybacks. As a result, we have repurchased 3.2 million shares of common stock during the first half of fiscal 2021 for a total of 338.3 million at an average price of $104 per share, with 4.4 million shares still remaining under our current board authorization. Before I turn to the Q&A, I would like to introduce a new section of our earnings call. Going forward, I will spend a few minutes reviewing some of the most important conversations around our company and industry and offer insights into how we are thinking about them. There are three discussions that have been top of mind. How are we seeing the price increases play out? What is the potential impact of commodity price increases throughout the balance of the year? And what is our plan to deal with the electrical component shortage? Price increases did not affect our fiscal second quarter earnings. We had previously announced that price increases would go into effect March 15, 2021, across the portfolio, which is the beginning of our third quarter, with any potential effect not being felt until April. To date, we did not anticipate any drop-off in demand as a result of the price increases. Similarly, our fiscal second quarter was not impacted by escalating input pricing. On our first quarter 2021 earnings call and throughout the second quarter, we have been deliberate about changing the conversation around the impact of price and cost. As we highlighted last quarter, a prior discussion ignored that we as a company control several levers within our cost of goods sold structure. Our associates understand that it is our obligation to be in control of the relationship between our price and cost, separate from whether raw material prices go up or go down. The continuous improvement in our gross profit margin demonstrates that the move away from the price mix conversation is appropriate and that the discussion around operating the company towards a gross profit margin target is the correct lens in which to view our margin performance. The ongoing improvements have been a result of product and productivity improvements. Essentially, we are reengineering our products to meet the needs of our customers while also meeting our margin obligations. Whether commodity prices increase or decline, We believe we can hold gross profit margin above 42% by controlling what we can control and through the ongoing improvements throughout our business. Finally, the electrical component shortage is starting to make its way through the supply chain, which will create challenges for the entire industry. We have seen indications that some of our products may experience procurement issues, and we are working diligently to service our customers. To wrap up, we have seen encouraging signs of improvement in our end markets, although some challenges still remain, and I continue to be proud of our dedicated team. We are committed to instilling discipline across the organization to ensure the long-term stability and predictability of the company, and we are to date satisfied with the progress we are making. Thank you for joining us today. I would now like to turn the call over to the operator for questions.

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from John Walsh with Credit Suisse.

Hi. Good morning, everyone. Good morning, John. Good morning. Hi. First, appreciate the extra detail you're now providing in the prepared script. found that very helpful and wanted to kind of use that as a springboard for the first question here. So I guess one of your competitors was out with additional price increases. You talked about how the raws really haven't flowed through yet, but you have both this product and productivity benefit. You called out, can you, provide a little bit more color around if you need to get more pricing, if you need to kind of pull the product value engineering lever more, or maybe the productivity lever more? I mean, where will that offset come from as you see those RAS flowing through?

Yeah, John, thanks for the question. And, you know, obviously, Karen was pretty deliberate about pointing out the team is focused on the relationship between price and cost. So, We are extremely pleased with the benefits that we've seen from the improvements in our products and in productivity, and obviously that will continue as we go forward. So you saw the benefit of that in the second quarter, and that will continue on into the third quarter. An example of that is the Compact Pro High Bay that I mentioned, which focuses uses less material, delivers a higher quality customer experience and output. So that's what we mean when we say there are multiple levers. So, you know, that product is not going to require more steel in the third or fourth quarter, for example. So we'll continue to see that. As it relates to price, our focus right now is on the – on the successful implementation of the price increase we already announced. So as we look forward, we think that relationship in price and cost, as Karen indicated, on an annualized basis gets us comfortable over the 42% gross margin, which it's worth noting is significantly higher on a consistent basis than the company has been in the past. So we like where we are going into this process, but as we both mentioned, this is, you know, the ramp-up is going to have its challenges. There are, you know, there are going to, we are, the entire industry is going to be working through these supply chain challenges and costs. And, you know, we feel really good about our team, but it's going to be, this is hard work and the team is up for it.

Great. And then as a follow-up to that, I was just wondering if you could talk a little bit about the competitive nature in the quarter and You know, we can all see the supply chain bottlenecks and higher freight that maybe some of the Asian imports or importers will feel coming into the U.S. But have you been able to use, you know, delivery times or other things to, you know, actually take market share? And, you know, is that actually a correct premise that maybe some of the importers haven't been able to fulfill demand?

Well, I mean, of course we're going to use, John, every advantage we have in the marketplace to deliver the highest customer experience, and that is our priority. So, you know, as it relates to service levels, yes, we have consistently throughout the pandemic when there were other challenges been able to smooth those challenges to the benefit of our customers, and we believe that that has accrued to increased market share for us. And we'll continue to do that going forward. And it's worth just spending one second on the balance in our supply chain. So we have, you know, as you know, we have about 20% imported from Asian finished goods, about 60% manufactured in our facilities in Mexico, and the remaining 20% manufactured in our facilities in the U.S. and a little bit in Canada. So that gives us more dexterity often than many of our competitors, and we're definitely using that to our advantage.

Great. Appreciate all the color. Thank you. Thanks, John.

Our next question comes from Ryan Merkle with William Blair.

Hey, everyone. Congrats on the quarter.

Thank you, Ryan.

So I guess first off, can you dig a little bit more into your comments about end markets improving? I've heard in some of my checks that agents and distributors have seen backlogs in quoting bills the past couple months. So are you seeing the same thing, and what do you think are the main drivers?

Sure. You know, Ryan, you know, we continue to be impressed with how our agents have performed really early on in the pandemic, and also as we continue to see improvements in our end markets. You know, in the first quarter, we mentioned that we saw inconsistencies across geographies, and we continue to see that same performance today just can be very inconsistent across the different geographies that we serve. We've seen some improvements due to activity for warehouses and logistics. Those are really strong areas for us, as well as K-12 performance, and that's helping us kind of manage where we see some softness in the market. So, you know, we still see some optimism, and we're just cautiously optimistic about the ramp-up that we're seeing currently.

Okay, perfect. And then, Neil, can you articulate why you see a growth story in intelligent buildings? Just talk about what's changed versus a few years ago, and then what are the main use cases?

Yeah, Ryan, so let's kind of frame this first. First, with DISTEC, and I mentioned this in my comments, we have an attractive asset that's uniquely positioned in the market. From a technology perspective, it's built on open protocols. And from a distribution perspective, it's distributed with independent systems integrators. That gives DISTEC the opportunity to really present building owners with the opportunity to adapt to a number of different scenarios going forward. With Atrius, we've pivoted the focus then to really be about the applications largely in the cloud, which deliver real business value around buildings, around people, and around independent use cases, which are different than really we can see anybody in the marketplace doing right now. For a long time, IoT has been a solution in search of a problem, in my opinion. And what we're really focused on are, what are these applications that can deliver demonstrable value for our customers? So we're in the course of building that out. And so over time, what you will see with this group is you'll see a high-quality product business in DISTEC, and a high-quality technology application solutions business with Atrius, which should deliver continuous recurring revenue and growth. But as I said, Atrius is still an option at this point. We're obviously recruiting very impressive talent to take this where We are pivoting it to go, but it's still early. But when you summarize that, this tech will continue to grow, and you'll see that more later in the year as we provide more transparency, and Atrius, we believe, can grow to be a meaningful recurring revenue business.

Very helpful. I'll pass it on. Thanks. Thank you, Ryan.

Our next question comes from Chris Snyder with UBS.

Thank you. First on gross margin, can you just provide a bit more color on the sequential improvement in the quarter? You know, I know the company called out productivity improvement, but I feel like a sharp kind of sequential improvement. And then, you know, what level of pricing improvement, if any, is embedded into the, you know, 42% plus target going forward?

All right. Hi, Chris. How are you? If we look over the past several quarters, for the past eight quarters, we've delivered gross profit margins above 40%, and six of those eight quarters have been above 42%. So you're right, this was a sequentially strong quarter at 43.4. But, you know, as we mentioned, we continue to work on product and productivity improvements, and some of those did yield results a bit faster than we expected, which really positions us well for what we see ahead. You know, given our current gross profit margin improvement, we think that we can achieve the gross profit of above 42%, you know, for the balance of the fiscal year.

But I guess on that, is there any, you know, that 42% plus for the balance of the year, does that embed, you know, or what level of pricing improvement does that embed?

Sure. We announced the price increase, and it was effective in March, and we'll feel the benefits of that probably later in the third quarter. We are focused on full capture of the price increase and just taking advantage of the price increase to offset some of the costs that we see ahead of us. Neil, anything you want to add?

Chris, it's just worth noting that we consistently have the highest gross margin in the industry. So, This positions us well competitively as we look forward. So, you know, as we've been saying for really every quarter since I've gotten here, we are working on these product and productivity improvements to make this company more predictable and reliable. Number one, and this goes back to the earlier question about the supply chain, number one, to our customers and in the marketplace. We want the entire marketplace to know that they can rely on Acuity Brands to solve their needs. And in so doing, we've been able to increase the quality and the margin profile of our products and how we make them and deliver them, which is delivering these productivity improvements. So, you know, as we said, the ramp back up is going to be bumpy for the entire industry, frankly for the entire economy. So we don't want to get out in front of ourselves, which is why we've done so much hard work to position ourselves for where we're going to be for the remainder of the year.

Appreciate that. And then I guess for the second question, you know, for then thinking about non-res new construction business, you know, could you provide some color on when you think, you know, revenues there could bottom, assuming they haven't already, you know, just because when we look at the start data, you know, the comps are turning easier and, you know, it's definitely getting better, but you know, given a lighting lag, you know, it would just be helpful for when we're trying to model that out to, you know, here when you guys think back to bottom.

Yeah, Karen addressed this in her comments, but, you know, as we said in the last call, it's helpful to see the disaggregated revenue in our lighting explanation, and the C&I Independent Sales Network has been incredibly consistent at a level through the – through the pandemic, obviously that's starting to increase. And, Chris, that's a combination of a number of different verticals and products and, as Karen mentioned, some inconsistency around regions across the country. So we think that return will be a little bit bumpy as a result of that. But there's no question that there's demand. As we look to external indicators, which are spot on, we've talked about this in the past, it really is around total construction. As you look forward and think about where we're going to be over the next several years, I just want to emphasize a really simple yet pretty obvious point, which is that you can't build anything or renovate anything without lights. So whether it's a highway, a building, a warehouse, a school, a hospital, an office, et cetera, a home, nothing, you can't build anything or change anything without lights. So, you know, we feel like we have a place to play in the economy over the foreseeable future.

Appreciate that. Thanks for the time, guys. Thanks, Chris.

Our next question comes from Jeff Sprague with Vertical Research.

Jeff Sprague Thank you. Good morning, everyone. I guess if we could just talk about supply chain a little bit more, Neal. So, the semiconductor thing is pretty well understood, as may be obvious, and enough of a challenge for everyone. But are there any particular other areas where, you know, you see constraints that you're trying to get ahead of? And, you know, is there, I mean, no one knows what the future brings in terms of end demand, but do you actually see kind of supply governing, you know, your revenue trajectory, you know, here's call it the next two to four quarters?

Yeah, Jeff, that's a really good question. So, you know, the global chip shortage goes all the way back to the fabs. So this is a problem which spans everyone. That impacts largely our controls business, so we're working our way through that. Obviously, we're the largest supplier in the lighting business, so we can use that to our advantage, but we're small when you compare us to, say, the auto industry, for example. We will do the best we can, and I'm confident our team is working incredibly hard, and they will do better than most. As you think about other challenges, there are some discrete items, which are maybe unique to some of our products, but there won't be a systemic kind of impact to everything that we do. So, yes, it may create some bumpiness in our shipments over the course of the next several quarters, but we are, as I said earlier, We're doing the best we can, and we've demonstrated, we're working really hard on it. We've demonstrated through the pandemic that we'll be better than most. And our team is primarily focused on how can we be as consistent and predictable as possible to our customers and end users so that, you know, over time we continue to drive preference to Acuity. Thank you.

Great. And could you just elaborate a little bit more on this sales agency change in the Northeast, a little more color on what you attempt to accomplish with this change? And is this something that would be happening across the country if you can get the stars to align? How it might impact just kind of the front end of your business would be interesting.

Yeah, Jeff, it's a really good question. So it's worth a little bit of background here. The New York market was a bit of an odd duck in our go-to-market strategy in that it was an owned agency. The only other place we have that is in Toronto, and everywhere else we rely on independent sales agents. So we saw two things that happened as a result of that. First, we were constrained in the New York City market on our ability to serve projects where where designers and specifiers may want, I don't know why they would, but may want a product that wasn't made by Acuity. So the logic of these independent sales agents is that they can curate a collection of products that allows us to have a higher success ratio when it comes to bid day, and we can win more projects and, as a result, grow market share. So we were pretty hamstrung in the New York market. At the same time, we saw that we needed to provide some consistency to contractors that did business across New York, New Jersey, and Philadelphia. So that effectively, from their perspective, is a single market, and it was ineffective for them to be doing business with multiple of our different agencies. So we see the consolidation of these agencies as a way for us to better serve the New York design and specification community, which we hope will carry specifications across the country, number one. And then number two, better serve and more consistently serve these contractors that are working in New York, New Jersey, and Philadelphia. So we feel really good about this. It doesn't necessarily portend similar changes across the country because we don't own any agencies in other markets. But we've been underperforming in the largest market in North America as a result of this owned agency. So it was pretty important for us to get this sorted out. And then finally, I do want to emphasize that this is demonstrating our commitment to this independent sales network, which we believe to be the strongest in the industry. We'll continue to work with the independent sales network to improve their performance, and we will continue to drive for better outcomes for both them and for us in other markets across the country.

Great. Thank you.

Our next question comes from Christopher Glenn with Oppenheimer.

Thanks. Good morning. Congrats on the results. I was curious about capital. You know, the repurchase sounds like the high-level repurchase is kind of done. You're quite asset-light, and you have no net debt, a lot of cash. So it kind of shines a light on the pipelines. question. What are your intents for deals over the next, say, year and a half or so?

Yeah, thanks for the question. And your observations are spot on and are a large part of the reason why I'm here in the first place. So if we kind of do a check-in, we talked about the durability of our lighting and lighting controls business and the opportunity to transform that business. I feel really good about where we are going there. We talked about the opportunity and the option to build a technology business with Atrius, and as I indicated earlier, it's still early stages, but we're assembling a rock star team there that we believe can make a real difference, which gives us the opportunity then to focus on how can we, the company is in a position to process, and how can we focus on how to continue to grow the company through acquisitions. That'll flow into two big camps. The first would be bolt-on acquisitions to our existing businesses, So we have a healthy pipeline now of opportunities that are relatively small, but which we feel like we can do in the foreseeable future around our existing businesses. And then we'll start to turn our attention, and it's very early and we don't have a lot to share on this, on what other areas we would invest in post that. But our objective, as I said earlier, was to be a technology company that solves problems and spaces in life, and we see the opportunity to expand to additional areas over time. And, you know, so I would expect kind of bolt-ons in the immediate future, and then we'll start to focus on larger things after that.

Great. And I was curious, a lot of border topics in the news lately, and, you know, maybe the word chaos comes to mind a little bit. I'm not sure how the Maquiladora regions intersect with some of the border issues, but could you update us on the security, the visibility and risk factor of, you know, just sustaining all your output out of Mexico?

Yeah, that's a great question. Let me start at the border, and obviously we move a lot of product from Mexico to the U.S. We actually haven't seen challenges as a result of some of the stuff that you're referencing in the news. We did see them when the storms went through that region and Texas shut off natural gas to Mexico, which cost us a couple days of production in Mexico. I personally didn't see that one coming. As we think about the maquiladoras, they're obviously incredibly important to the economic infrastructure of really all of Mexico. And so our leadership team in Monterey is highly visible and highly relevant to the industry group of the maquiladoras. We meet regularly with the key members of the government there to ensure that there is continuity. And we have been for example, really helpful throughout the pandemic on health and safety issues. We've developed them in our facility, shared them with the other maquiladores, shared them back with the health and labor secretaries as we've progressed there. So I would say that we work very hard at making that area of the world as stable as possible so that we can continue, and we feel pretty good about where that stands right now.

Nice answer. Thank you.

Our next question comes from Tim Wolf with Baird.

Hey, everybody. Good morning. Nice job. I guess my first question, just on productivity, could you just, I guess, give us a little bit more color or detail about maybe what's really changed on the productivity side? Because it sounds like things have, and it's always been a lever that's been available to the community for a long time. Are you doing just more on the productivity front than before? Is there more structure or maybe some internal incentives around it internally? Just trying to understand. It does seem like there's more emphasis on that. I'm just trying to understand if there's anything that's really changed behind the scenes.

Yeah, Tim, so a lot has changed. So we've been able to optimize our productivity around specific facilities. So We've consolidated one facility. We've changed the flow through several of our facilities. On the manufacturing side, we, you know, transparently as a result of COVID, we were forced to rethink many, many things. And so we re-architected the cell structure to keep people distanced, and we were able to process the, frankly, the same amount of output as you've seen with a smaller base. and kind of never missed the opportunity presented in a crisis to improve our operations. And then on the distribution side, we've increased the throughput of our distribution facilities so we can process more through On our Asian finished goods, we've changed how we distribute those. So in addition to, we've spread the distribution out throughout the country so that we're delivering materials from Asia to the East Coast as well as to the West Coast. So it's a series of, it's a cumulative series of things. And, you know, as I say a lot about transformation around here, Tim, is oftentimes we think that there are really things, really large things, but the cumulative impact of small things can be really meaningful and differentiated. And I would say that this both product and productivity improvement point to the accumulation of a number of small things which have been really impactful.

Okay. Okay. Okay, great. That's really helpful. Thanks for that. And then maybe on a go-forward basis, I mean, you did talk about the 42% plus gross margin, you know, targets. How are you thinking about SDNA and just leverage? Because, you know, that's been a source of opportunity over time. You know, kind of pre-pandemic, you were in this kind of 26 or so percent of revenue as a percent of sales, you know, for SDNA, and that's obviously migrated higher with the pandemic. I mean, is 26% still a target or attainable as you see the end markets recover and you don't have to put as much SDNA back into the business?

Yes, Tim, that's a great question. We have been managing costs very closely during the pandemic. As you know, some of these costs came down naturally as we traveled less, we held less in-person events. And as the market comes back, we see that starting to increase a bit. But we really are going to manage this carefully and not invest ahead of the market recovery. So we'll continue to work with our associates to make sure when they are traveling and when we're doing these marketing events, that they are the right ones and are delivering a return for us. But I could see us sequentially start to increase just a little bit throughout the balance of the year, but probably not to the full level of dollar spend that we were pre-pandemic.

Okay. So from a dollar perspective, you see it. Sorry, Renil, go ahead.

Yeah, no, Tim, I just wanted to add in to Karen's point there. And we want to prioritize our reinvestment going forward because, and I want to make sure we put a marker out there that we are going to reinvest going forward. And we're going to prioritize a lot of that reinvestment around things which we consider investments as opposed to expenses, predominantly around the software development and other changes that we want to make as part of the transformation. So, So we will be adding back some expenses going forward, but we believe those are investments as opposed to spent dollars.

Right. Okay. Okay, great. Well, nice job again, and good luck on the rest of the year, guys.

Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star, then 1. Our next question comes from Brian Lee with Goldman Sachs.

Hey, team. Thanks for taking the questions. Good morning. Most of my questions have been answered, but maybe just could you give us a sense on the, you know, and, Neil, I know you came in with a big view on the digitalization opportunity here for the company, Tier 3, 4, Atrius-type solutions. You sort of alluded to, you know, building that out here as well. Can you also kind of put that into the context of the corporate channel here? How does the, you know, the makeshift You know, you guys have been struggling kind of in that channel here through the pandemic. But even before the pandemic, it seemed like that channel was struggling to grow. Is it fair to assume that a lot of the digitalization opportunities through that channel and just try to understand where it shows up in your new sort of segment breakouts?

Yeah, Brian, we've addressed this in the past, so let me just spend a second on generally what enterprise accounts are. Obviously, the largest accounts we have there are retail accounts, and we've had a lot of success with some of the most important retailers in North America. The results have been – we've said consistently that those results will be inconsistent based on the need for those customers to manage access to their buildings, and you've seen that throughout the pandemic. So a lot of the drop-off you've seen, and if you look at it on a sequential basis, it's literally a drop-off. It's not a declining curve. is the result of the reality that throughout the pandemic, their priority was only having their associates and their customers in their facilities. But as you know, these entities can't go on forever without renovation. So retailers are generally on a seven to 10 year-ish kind of renovation schedule. So this will come back and we will participate in it when it does. We're I think the best position in the industry for that segment. The second part of that question that we've said or I've said consistently since I got here is that what's interesting about the luminaire and lighting is that it's a capital-efficient way to introduce technology to spaces. By that, it's the incremental cost of the technology is relatively low, and the real cost is around the installation of that technology and the changes necessary in that process. When you're renovating, it's a very efficient time to introduce new technology into spaces, which we have done and we will continue to do going forward. So you will see the manifestation of that to your question as we think about the lines of business through sales of Atrius-enabled luminaires, lighting control products, and products through the ABL channel. As we start to develop applications which drive business value, you will see those applications show up in Atrius and see those in our spaces, in the conversation about our spaces group. So the synopsis of that is that lighting and luminaires and the renovation opportunities around them provide a capital-efficient way to introduce new technology to spaces. We'll benefit from that by having the highest quality technology. And then second, we will use that technology to power as a part of the powering of applications which deliver real business value to our customers through Atrius.

Okay, great. That's helpful. And then maybe just a quick one. I know the ink's not even dry on this, but have you guys had a chance to sort of sift through the President Biden's infrastructure agenda? I think he's out this afternoon outlining it in a speech, but the White House has put out some high-level markers around different parts of the package here. Any impact or tailwinds that you'd be anticipating from what you've seen thus far?

Yeah. Unfortunately, we haven't had the time to dig through it. Obviously, if that were to happen, it would be a benefit for the economy. And as I mentioned earlier, it's impossible to build anything without lights. So whether it's a highway or a school or a VA hospital, as the treetops view I saw early this morning, all of those things will need lights. And so We'll continue to use this as an opportunity to drive our product and productivity improvements so that we're best positioned for whatever that ends up being.

All right, thanks a lot. I'll pass it on.

Our next question comes from Jeff Osborne with Cowen.

Yeah, good morning. Just one question on my end. I was curious if you could update us on what the status is of the UV lights. Any momentum there with the acquisitions you've done and new product introductions?

Yeah. Thanks, Jeff. We are now officially in the market with those, as I mentioned earlier, around the 254 nanometer and light luminaires, which are interesting. And I didn't explain them perfectly, but they include the 254 nanometer technology. They circulate air above the fixture to so that they work in a situation where people are present or not present, which is unique for the 254 nanometer technology. That's now in the marketplace. We've obviously, as I mentioned, we're eating our own cooking, so we've installed that throughout our supply chain facilities, and it's having a positive impact. You know, we expect kind of revenues in the third and fourth quarter from that going forward. And then, you know, we'll layer in the rest of the products that you've heard us mention before. Perfect. That's all I had. Thank you. Thanks, Jeff.

That concludes today's question and answer session. I'd like to turn the call back to Neil Ash for closing remarks.

Thank you, Liz. We're pleased with our results in the second quarter. Our team is hard at work at dealing with the challenges that we've been discussing of ramping up, and our focus will remain on serving the needs of our customers and on delivering quality results. So I'd like to thank you all for joining us today. As we've said, we will be providing deeper insight into our lines of business later this year, and we intend to host and Investor Day. So please sign up at the investor website and be in touch with Charlotte for updates, and we'll announce that date soon. So with that, thank you for your time, and thank you for your interest in Acuity Brands, and we hope you have a great rest of your day. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.