Acuity Brands, Inc.

Good morning, and welcome to the Acuity Brands Fiscal 2024 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, the company will conduct a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead.

Good morning, and welcome to the Acuity Brands Fiscal 2024 Second Quarter Earnings Call. On the call with me this morning is Neil Ashe, 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 2024 Second Quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on slide two of the accompanying presentation. Reconciliations of certain non-gap financial metrics with their corresponding gap measures are available in our 2024 second quarter 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 Neil Ash.

Thank you, Charlotte, and thank you all for joining us this morning. Our fiscal 2024 second quarter was another quarter of solid execution. We increased our adjusted operating profit, adjusted operating profit margin, and adjusted diluted earnings per share. We generated strong free cash flow, and we allocated capital effectively to drive value. Both our lighting and our intelligent spaces businesses delivered strong financial performance. In ABL, we increased adjusted operating profit by $3 million on $47 million less sales and increased the adjusted operating profit margin 120 basis points to 16.2%. This performance is the cumulative result of the changes that we have made to the business over the last four years. We have made the business more predictable, repeatable, and scalable by executing on 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 by driving productivity. During the second quarter, we continue to make progress on our strategy. By focusing on the needs of our customers, we are elevating our service through our differentiated portfolios. Contractors Select is about 300 of our most popular products that are used in common, everyday lighting applications. These products are designed to be resold and are in stock at retailers and electrical distributors. Through high levels of product vitality, we have been able to create a portfolio that offers quality products that our customers want at competitive prices, while at the same time allowing our distributor partners to carry less inventory. Design Select is comprised of products that are configurable and allow customers to easily select the products needed for their projects. We are less than a year into launching the first wave of Design Select, and we are continuing to expand the product families and configurations available. The reception so far has been positive. A recent project in California is a great example, where a customer needed indoor fixtures, outdoor fixtures, and lighting controls. Using options from the Design Select portfolio, we were able to meet the unique product combination of the project, ensure it was there when the customer needed it, and that it was easy for the contractor to install. The remainder of our product portfolio is made to order. These are specialty products or solutions made for specific applications, such as national accounts, that satisfy all of the wants and needs of the lighting design community. At the same time, we continue to make investments for future growth. In the second quarter, we expanded our horticulture product solutions. We added the Arise family of products to our existing Berger line in order to take advantage of a growing market. Arise is a collection of professional-grade LED horticulture luminaires that are compatible with our in-light air wireless controls and are used in commercial greenhouses, indoor cultivation, and vertical farming. This small investment accelerates our product portfolio efforts in this attractive vertical. This approach to investment in ABL is the right one, as evidenced by the value being realized in our Optitronic driver and component business. We acquired Optitronic in 2021 in order to control more of the technology in our luminaires, to expand our OEM channel, and to take greater control of our electronics supply chain. Today, we are one of the top driver suppliers to the lighting industry and to ourselves as we manufacture the majority of our drivers for our own products. This control not only offers us a financial benefit, but also offers us greater engineering flexibility during the design and development process that is core to our product vitality efforts. This quarter, we introduced the Ivo family of shallow recess downlights from Gotham, which is a new platform of indoor downlights that have a compact design for use in confined spaces that replace the traditional canned recess lighting fixtures. Ivo can be used in most non-residential settings, in both new construction and renovation. The compact design and high efficiency options deliver real value for our customers, while the use of less steel, less aluminum, and less plastic drives margin for us. Finally, this quarter several of our brands were recognized by the industry. Our AccuLux, Eureka, Hydrel, Luminous, and Peerless brands were awarded nine Good Design Awards from the Chicago-Athenium Museum of Architecture and Design. We were awarded 11 2023 Product Innovation Awards by Architectural Products Magazine for impressive innovation in terms of form, functionality, and sustainability. And 14 of our luminaires were selected across multiple product categories by the Lit Design Awards for exemplifying outstanding creativity and innovation. Now, moving to our Intelligence Basis Group. Our mission in our intelligent spaces business is to make spaces smarter, safer, and greener through our strategy of connecting the edge to the cloud. Distech has the best edge control devices on the market, while Atrius will be the best in cloud applications. At Distech, we are focused on expanding our addressable market in two ways. The first is geographic, and the second is increasing what we can control in a built space. As part of our geographic expansion, this quarter we added additional systems integrator capacity in Australia, and we released Atrius Sustainability and Atrius Energy in France. Our independent SIs are key to the organic expansion of our Spaces business. We partner with the best SIs in specific geographies to sell our full suite of DISTEC and Atrius product portfolios. Our Atrius applications are making a difference for our customers. Atrius Sustainability is an automation tool that captures, categorizes, and reports on carbon emissions, while Atrius Energy facilitates the reduction of energy and carbon usage by allowing facilities teams to benchmark their usage and prepare for upcoming reporting obligations. Our Atrius Energy and Sustainability applications are gaining recognition. Commercial Property Executive Magazine named Atrius an Innovative Technology winner in its annual Influence Awards. And CRE Tech selected Atrius as a finalist in its Real Estate Tech Awards that honor technology vendors that are advancing solutions for commercial buildings. Now, turning to the outlook for the remainder of the year. We are performing well. We are satisfying customers, expanding margins, and generating strong free cash flow. The order rates in both our lighting business and our spaces business are growing year over year. In our lighting business, we are back to typical lead times and absent the impact of sales from excess backlog last year, we would be experiencing sales growth. In our lighting and lighting controls business, our strategy drives strong execution and we are focused on returning the business to growth in a normalized environment while leveraging our fixed costs and generating strong cashflow. In our spaces business, we will continue to grow geographically and by adding to what we can control in a built space. Karen will outline what that means for our second half outlook after giving you an update on our second quarter performance. Karen?

Thank you, Neil, and good morning to everyone on the call. As Neil said, we continue to execute well. In our fiscal second quarter, we increased our adjusted operating profits. improved our adjusted operating profit margin, and increased our adjusted diluted earnings per share while generating strong cash flow. We continued to allocate capital effectively while making progress on our strategic priorities. For total AYI, we generated net sales in the second quarter of $906 million, which was $38 million, or 4% lower than the prior year, as a result of the lower net sales in our ABL business. This was partially offset by continued growth in the ISG business of 17% in the quarter. We continued to deliver year-over-year margin improvement. During the quarter, our adjusted operating profit increased by $8 million on lower net sales, and we expanded adjusted operating profit margin to 15.5%, an increase of approximately 150 basis points from the prior year. This increase was driven largely by the significant year-over-year improvement in our gross profit margin as we continue to execute our strategy and drive margin through product vitality, the management of price and cost, and productivity improvements. During the quarter, our adjusted diluted earnings per share of $3.38 increased 32 cents, or 11%, over the prior year, primarily a result of higher net income and to a lesser extent, lower shares outstanding due to share repurchases. In ABL, net sales were $844 million in the quarter, a decrease of around 5% compared with the prior year, driven by declines across all of our channels. As Neil mentioned previously, our order rate in ABL continues to grow year over year, meaning absent the sales last year from the excess backlog, ABL would have experienced sales growth. ABL's adjusted operating profit increased 2% to $136 million on lower net sales, while we delivered adjusted operating profit margin of 16.2%, a 120 basis point improvement over the prior year. ISG's net sales for the second quarter were $68 million, an increase of 17%, as DISTEC continued to grow and Key2Therm performed as we expected. ISG's adjusted operating profit was $14 million, with the adjusted operating profit margin at 21%, a 240 basis point improvement over the prior year. Now, turning to our year-to-date cash flow performance. We generated $293 million of cash flow from operating activities in the first half of the year, down slightly from the same period last year. We continued to allocate capital consistent with our priorities. Year to date, we invested $29 million in capital expenditures. We acquired the assets of Arise Horticulture Lighting. We increased our dividend per share 15% and allocated approximately $68 million to repurchase over 370,000 shares. In January, our Board of Directors authorized the additional repurchase of up to 3 million shares of common stock, bringing the outstanding authorization to approximately 4 million shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased approximately 9.5 million shares at an average price of about $145 per share, which was funded by organic cash flow. This amounts to about 24% of the then shares outstanding. We had a strong first half performance. We delivered improved margins and increased adjusted diluted earnings per share. We generated strong cash flow from operations and continued to allocate capital effectively. While it is not our practice to address our outlook during the year, our performance in the first half was very strong and we are raising our full year expectations for EPS. We now expect our 2024 adjusted diluted earnings per share range to be between $14.75 and $15.50. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joe O'Day with Wells Fargo. Your line is now open.

Hi, good morning. Hey, good morning, Joe. Good morning. So first question, I guess I'll group kind of two in one, but I want to ask about sort of infrastructure and SD&A, and really the angle is are you seeing evidence that some of the changes in the commissions that she implemented last year are translating to better winds at this point. You can talk about the infrastructure pipeline a little bit, as well as just when you see where STNA is as a percent of sales opportunities that you see there, either volume leverage or cost down.

Okay, great, Joe. Thank you. So first of all, on infrastructure, we're feeling good about our positioning for the larger projects that are coming down the pike. I think everyone's recognizing that they're coming down on a longer-term basis than anyone would like. We'd like them to be here today, but orders are strong, but shipments and sales will be spread out over the next year or two. So there will be a continued impact from infrastructure, and we're confident we'll get at least our fair share, and we're working to get a disproportionate share. So we feel like that's a good opportunity for us going forward. We also feel, to your question, we positioned ourselves well from an execution perspective. So first around products that are necessary to win those projects, and then the combination and the interrelationship between our direct sales network and our independent sales network as we approach those. So we feel good about those. As it relates to specific SD&A spending, obviously we're in a position this year where our performance appears different than it would normally. And the reason for that is the excess sales from backlog in last year. So, we're confident that, number one, we'll return the lighting business to growth, and that, number two, when we do that, the combination of the increased margin performance we've demonstrated at the gross margin level, as well as our ability to leverage SD&A costs going forward, will continue to expand margins in that business. You know, it's not an insignificant achievement to expand margins on lower sales, obviously. And so we're looking forward to that business returning to normalized growth.

I appreciate it. And then also just wanted to touch on cash and deployment. The cash balance at this point is approaching $600 million. and how you're thinking about sort of repurchase activity, any revisions to that within the guidance framework, as well as with the higher cash balance, just what we should interpret within that and perhaps the strength of the M&A kind of pipeline if you're seeing more opportunities out there.

Yeah, Joe, thanks for that. Overall, we are really pleased with our cash flow performances. This quarter or this year-to-date period, we've generated $263 million of free cash flow, so really strong cash flow performance. It's driven a lot by our margin performance, which is contributing to the higher net income despite the lower sales. So overall, really pleased with that. When we look at our capital allocation priorities, we've been really clear over time that it's first to invest in the business for growth. Second, to invest in M&A, which we've done over the past few years. We've made some small, but relatively small, but strategic acquisitions with Optitronics, with Kichu Therm, and now with the Arise Horticulture asset. So really pleased with the progress we've made there. Maybe you noticed we did increase our dividend by 15% this quarter. So excited to see that increase. And then finally, share repurchases. You know, we've demonstrated when the share price is high, we buy less, and when the share price is low, we buy a lot more. So, you know, this quarter, we've repurchased a cumulative 24% of our shares outstanding, and this year-to-date period, it's been at about $180 a share. So, feel really good about where we are from our capital allocation priorities.

Karen, I'll build on that just for a second. So we feel really good about our ability to generate value through capital allocation. So first on the M&A pipeline, our focus continues to be on expanding the intelligence basis group. We have a good pipeline of both small, medium, and large-size acquisitions. As Karen mentioned, we've done really well with the acquisitions that we've made to date, and we're patient. So we don't feel an obligation to move until we find the right opportunity that is going to have the right impact at the right valuation. Second, as Karen mentioned, we increased the dividend. We did that because we can. We can continue to, we can afford to pay the dividend at a higher rate and achieve the strategic opportunities that we perceive. And finally, we've demonstrated in our repurchase of almost a quarter of the company at very attractive prices. As Karen mentioned, that when the stock price is lower, we'll buy more, and when the stock price is less, we'll buy higher. So when you put it all back together, we view capital allocation as a strategic lever for us to generate value, and we feel really good about our progress on that so far. Thank you.

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

Hey, everyone. Thanks. Nice quarter. Good morning, Ryan. I wanted to ask first on the new EPS guide, what does it assume for sales for the full year? Neil, you mentioned orders are growing and you expect to return the lighting business to growth in the second half. Can you just talk about that a little bit more?

Sure. So, first of all, we're really pleased with our performance so far this year. As you know, it's not our practice to address guidance other than in the beginning of the year. It's our preference to define an outlook at the beginning of the year and then to execute against it. Our first quarter performance, obviously, though, was really strong, largely driven by the margin performance. As we look forward for the remainder of the year, obviously we planned conservatively given all of the uncertainties going on in the world. So we were appropriately conservative in our plan and we're adjusting our performance as we perform for the rest of the year. The lighting business will perform as we expect going forward. I would extend that line to be more than just the back half of the year, but as we return that to growth over a normalized period. So the rest of this year, next year, and beyond. So we feel really good about how we're going to do that as well. It'll take a minute for us to continue to work through kind of the inflated sales from last year. But when you look at the performance over a longer period of time on a multi-year stack or where we are in the lighting business, we feel really good about that. We did not change the revenue guidance, so we feel confident we're within that range, and we're really pleased with our performance from a profitability perspective.

Got it. All right. And then I wanted to ask on ISG, really nice growth, just high level. Are you seeing a lot more interest in controls, and are there any drivers of that that may be new?

Yeah, so thanks for that question, and I'm going to use it as an opportunity to kind of explain two things, if you'll allow me, Ryan. First is that we have a very strong controls business in the lighting business. So Acuity Brands Lighting is one of the largest, if not the largest, control player for lighting controls specifically. And DISTEC is an OEM provider to Acuity Brands Lighting for those controls. Specifically now as it relates to our performance on ISG, we feel really good about our strategy there of growth. We're expanding the addressable market for this tech, and we're seeing disproportionate demand there for two reasons. One is I think it's fair to say our controls in sensors at this tech are perceived to be the highest quality in the marketplace, so they're very attractive to consumers. building owners and facilities managers, because it gives them more flexibility than many other solutions. So they have, because they're open protocol and because we have open SI distribution, they have the opportunity to be confident that that investment will carry them forward in an attractive way. We also feel really good about our ability to add more things that we can't control. So Key2Therm is a great example where we acquired effectively products which fit into the DISTEC portfolio, work within the broader DISTEC ecosystem, and open up additional verticals like retail, convenience stores, et cetera, that have high refrigeration needs. So we feel good about that strategy going forward. This tech has been taking share in each of the markets which it competes in, and now we have the opportunity to expand the markets it competes in, number one, and expand the number of things that it controls. And then finally, when you connect the edge to the cloud, which is the Atrius data layer that we have been building, it allows us to take the data that all of those sensors and controls generate, excuse me, and present it to the cloud in a manner in which applications can be built, which make a difference in those built spaces. So we feel really good about the business that we're building there. We think we're building a really valuable technology business.

Super helpful. I'll pass it on. Thanks. Thanks.

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

Thanks. Good morning. I wanted to dive into some of the implications for contractor select and design select. You know, that manner of product management or categorization internally, would you consider that the backbone of your productivity momentum?

I think it's a big part of it, Chris. So to spend just another minute on Contractor Select. So our strategy with Contractor Select is to make it the brand of choice for retail and electrical distribution with high product vitality at appropriate prices with high service levels, largely for distributors. And as I mentioned, it's built to be stocked and resold, so designed to be stocked and resold. And it's a very constrained number of SKUs. What that's allowed us to do is to build a very consistent relationship with the distribution and retail community. And what that has done is provided us with a foundation and easy for them to choose. And it's worth noting that there's a lot in it for them, too. Because we've created a portfolio that allows them to have less inventory on hand and satisfy the needs of their customers at an appropriate price, they're able to drive significantly higher returns on investment in the execution of their business. So at the same margins, they're making significantly more money as a result. So, yes, it's been a really important part of that product portfolio. The second thing is we've raised the margin of that portfolio to much more consistent levels with where we are now. So that's driven some of our margin performance. With design select, we're really just getting started. So where contractor select is designed to be resold, design select is designed such that options can be chosen so that you can, a specifier has the opportunity to choose from options to configure the products and the projects that they need. As we mentioned in the script, we're at the early days of this, so this will be a multi-year process, but it is changing how both specifiers think about our portfolio and how we think about the execution of that portfolio. The majority of our business, though, remains made to order, and so that made to order, it's made to order for a reason, so that specifiers can make the choices that they need so that they can satisfy large projects, we can satisfy national accounts, we can There are a lot of different pieces of that puzzle. Joe asked about infrastructure earlier. We won the relight of the city of Philadelphia. That's a good example of a made-to-order project. We made some changes to our product portfolio to satisfy some of their specific needs, and we can roll those out. When you take those all together, then everything's operating at a higher margin profile, and it's doing a much better job of satisfying very specific end user needs in the marketplace.

Thanks. The extension of that question, you know, you've talked a lot about ability to choose and select the projects you want to be on. Considering all the productivity you're generating that you just elaborated on, Do you see a consistent widening of the aperture moving ahead in terms of what's attractive to you to select within the overall lighting market?

uh well we feel very good about how we're positioned competitively so um we um you know obviously we pay excuse me close attention to our competitors to the to and we generally think about this from a windshield perspective as you indicated like which projects we want to we want to select so we're obviously competitive on the contractor select side we're doing really well there we've been competitive on the project side so um There are a handful of examples where we've passed on projects because we don't like the margin profile and we're happy for our competitors to execute on those at a lower margin profile, especially given that their margin profiles are already lower than ours. So when we do not select those projects, that means someone else has selected those projects and they're executing them at a lower margin than we have and at a lower margin than we would accept. So as we look going forward, we still see the opportunity then to build on that to grow, both on the business that we already have as well as when we add new verticals. So horticulture is a great example. As you know, two or three years ago, there was a rush to invest in that vertical, and people invested significant amounts of money, multiple companies did, to try and pursue that vertical. We identified that vertical then as an attractive vertical. We just didn't think it was worth the level of investment that the market was asking for at that time. So what we did instead was we started organically. We built a product portfolio from scratch, organically designed from scratch, built from the ground up. And now we've started with the Arise portfolio to add to that and to add to the distribution of that, which gives us a green light opportunity to grow in a vertical that over the long term we think will be attractive and with a measured level of investment. So when you put that all together, we're You know, we're choosing where we want to compete in the marketplace. We are demonstrating the ability to do that through product and service innovation as well as through our management of price and margin.

Thanks, Neal.

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

Thank you. Good morning, everyone. Emil, maybe just address a little bit more kind of the geographic expansion, you know, how you're, you know, which geographies you're choosing to target, you know, the bandwidth of the company, you know, to kind of execute on that. And, you know, is this something where we could see, you know, a higher level of activity, you know, from this point forward?

Yeah, thanks, Jeff. So our geographic expansion is focused on the intelligence bases group. So it's worth pointing out that standards are mostly global for the DISTEC product portfolio, and the edge-to-cloud opportunity, the applications for Atrius are global. So that gives us the opportunity to expand without having to create new product portfolios with some small exceptions which are not available to us, like Germany, for example. As a result, we are building on the strength there to roll that out. So we have strength in North America. Obviously, that's our home market. We are probably half penetrated where we think we can be in the U.S., and so obviously the bigger markets will invest for growth there. We're also successful in France. I think in the last quarter we identified we have really high market share in France. We're now expanding into more of Europe and, well, through the UK and other markets. And then we're focused on markets that look like that. So Australia, we added SI capacity. We'll be looking for ways over the course of, you know, kind of the next six to 12 months to figure out how to accelerate that expansion for ISG geographically. Our aspiration for that business unit is that it is a global unit that makes spaces smarter, safer, and greener through a combination of edge to cloud. Edge controls and sensors devices and the cloud are applications that do something with the data that those sensors and controls generate. So yes, you can expect us to be focused on expanding that business globally. And we're basically in North America and France at this point. So there's a big opportunity there.

Great. And then perhaps for Karen, Neil, you can take it too, of course. We've gotten this far in the Q&A without any real discussion of price. I know you're not going to talk about price specifically, but Maybe just give us a little bit of update in kind of the tone of the market, what you're doing there. And transportation costs were, you know, a big topic to the good last quarter. Are you seeing any significant changes there with kind of the chaos and global shipping and everything that's going on?

Chaos is a good word. Karen, why don't you address pricing?

I'll address some of the pricing. So, you know, Jeff, overall, we continue to be really pleased with our gross profit. performance. And that really is resulting from what we've talked about on the call already is the strategic management of price and being able to get the value for our products that they deserve in the marketplace. While at the same time, we are working on input costs with our suppliers. We've seen some benefits this quarter in steel and electronics, so that's helping us. And then freight is continuing to benefit year over year. So overall, we feel the focus on our portfolio segmentation that we talked about with contractor select, design select, and made to order helps us strategically price the products and get the value that they deserve in the marketplace.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Bobby Schultz with Baird. Your line is now open.

Hey, good morning, guys. Now, Ben, I think three quarters now where you've posted 45% plus growth margins. How should we think about the sustainability of those margins into the second half year and then looking into 2025? Yeah, thanks, Bobby.

So as I mentioned when we were talking about our adjustment to our EPS guidance, we feel really good about our performance. And I'll build on Karen's answer to Jeff's question about price and margin, which is that we are managing our pricing such that we're realizing the value that our products are providing in the marketplace. And on the input cost, we're doing two things. One is our product vitality efforts are changing the amount of content that is in each of our products. and how we ship those products. So more products can be shipped on the same pallet. So I mentioned the Ivo in my opening comments. That's a really innovative product in the marketplace because it's roughly half the size or less of what it is replacing, number one, which obviously means there's a lot less content. It also means that we can fit a lot more on a pallet as we ship those around North America. And then third, it delivers significant value to the installers because of significant patented innovation in how it is constructed at the job site. So the ability to use one housing basically to put in different lighting. So that's a great example of a product that delivers real value to the entire value chain. The combination of all those things has gotten us to the margin levels where we are right now. So, yes, we feel good about our margin performance. It'll go up a little or up and down a little from quarter to quarter, but we feel really good about kind of the structural improvement of our margin performance. And our team has demonstrated significant dexterity and the ability to deliver on that in all kinds of different market conditions. And so... So we feel like we're on a journey here. We're not at a destination, and we're pleased with our performance.

Got it. Thanks. And then I wanted to ask on data centers, what is your exposure there today, and kind of what are you seeing in that market right now?

So we have two exposures to data centers. So on a good news front, data centers have lighting. So one might think that they could operate in the dark, but they don't. So that's a very attractive opportunity and continues to be for the lighting business. On the control side, DISSEC is flat-specced into some of the largest data scalers. So as their... Their control of choice. There are two different kinds of controls in data centers. So we focus on digital controls. And so that means not the entire market is addressable for us, but the market that is addressable for us is growing as we build on those global scalers. We had another win on that front over the course of the quarter where we converted a large agent data center operator to our way of control, and so that will be a multi-year opportunity for us going forward. So we're exposed to the data center opportunity in both of our segments, both the lighting segment as well as the spaces segment. Awesome. Thanks, guys.

I'll leave it there.

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

Thank you. I wanted to ask about the back half guidance. It seems to me that it calls for gross margin to be kind of similar, maybe a slightly lower than what we just saw in fiscal Q2, that 45.5. So I guess, is that right, the right interpretation? And then What are some of the puts and takes on that? Because it does seem like there is some volume leverage here from the second quarter to the back half. Thank you.

Yeah, thanks, Chris. Thanks, Chris. Karen can help you in the after call on building your model, but I'll talk qualitatively about how we're thinking about the back half of the year and build on some of my comments earlier. Our lighting business is strong. We are competing effectively in the marketplace. We are demonstrating that the market is valuing what we are selling from a product perspective. We're demonstrating that we can innovate on a product portfolio and deliver what are innovative products to the marketplace that are more valuable to the marketplace and more profitable for us. And we've demonstrated that we're managing input costs, material costs, in a rapidly changing environment, whether it's electronics or freight or steel or any of the different things. So if we feel really good about the continued performance of our continued margin performance, excuse me, So as you look to the back half of the year and, more importantly, to the year after and the year after that and the year after that, we're on a mission to continue to make this a much more predictable, repeatable, scalable business on the lighting side. and a growth business on the intelligence basis side, and to use capital then to expand that portfolio. So, yeah, we feel fine about the, feel good about the guidance for the remainder of the year, and we feel even better about the year after and the year after that.

Appreciate that. And maybe just following up on the market competition points. Do you feel like the lighting industry is less competitive from a price standpoint than it was five years ago? Or is it that acuity is being more selective and shying away from the most competitive aspects of the market? And then, you know, what you guys have done with Contractor Select is kind of raising the gross margin floor. Just kind of any thoughts on that?

Yeah, so I wasn't here five years ago, so I can't address that, but I will address kind of how we've, how we've performed over the last four years, which is, um, I would say that, um, obviously we're the largest in the industry. We have the highest margins in the industry. We have the highest product vitality in the industry. We have raised the floor on margins with contractor select. We are innovating with design select and our new portfolio. So our performance is, is objectively very strong. That makes us a much more formidable competitor to the marketplace, no matter who you are. Whether you're a large competitor, you're a small competitor, whether you're housed in North America or somewhere else, we're just a significantly stronger competitor than we were four years ago. And so that puts us in a position to have significantly more control over our destinies. And we're demonstrating that control in our performance. And so, and we think this is a good point to build on. So we will continue to press our advantage on the lighting side. So I would answer your question by saying, you know, something that we said when the market was really choppy, which is that we control what we can control. we are controlling more of what's happening in the marketplace as a result of our strategy and the execution of that strategy and the cumulative performance and the impact of that.

I appreciate that. If I could just squeeze one last one in, and I know it's hard to call a cycle, but I'd be interested, Neil, in where you think we are in this non-residential construction cycle. Activity is still pretty healthy. A lot of the leading indicators are, you know, I wouldn't say terribly negative, but, you know, on the more negative side. Do you feel like that's cycle pressure on the horizon or that, you know, maybe you've already felt that with a lot of the G-stock? Just, you know, any thoughts on that? And I appreciate it. Thank you.

Yeah, sure, Chris. I think the cycle question has been a really hard one because we collectively, and by that I mean the economy, industry, et cetera, has been thrown so many curveballs over the course of the last three years. So I feel like we've lived, you know, kind of multiple years in a single year or a single period. So it's hard to call it as a normal historical cycle. So obviously, we had the shutdown. Then we had the bullwhip of projects and activity that was waiting to be executed, which led to increased backlogs, which we accelerated to satisfy, which happened last year. And you see a little bit of the hangover impact on our sales growth this year. We've been looking at the market on a multi-year basis, though. So when you look at first the market on a multi-year basis, it really does start to normalize. It doesn't look like there's any kind of boom and bust cycle. It looks like there was just a fair amount of business that got executed last year that maybe would have normally been executed this year. And so As we look forward, we are, and I've mentioned this on the call before, we do a fair amount of data analysis, and I think we're pretty good at it, and we're outperforming the regression analysis of what we would expect to do. So we are, you know, our performance is a contributor to where we are. As we think about the cycle going forward, we strive for normalcy. We don't feel like we need a really super hot environment, and we've demonstrated we can execute in a relatively cool environment. So kind of where are we on the cycle front? I would say that our data indicates that lighting moves earlier than the other parts of the industry do. There are a thousand reasons for that to have happened, but that has been borne out in other people's performance. And we feel good about kind of where we are from an order right perspective. We've seen that relationship between lighting and other industries between ABL and the Spaces Group with this tech. In DISTEC, we're also outperforming what the market's expectations are. So we're outperforming where our SIs expect to be, which means we're taking share there also. So then as we look forward, what we strive for is a more normalized environment. I'm not confident calling a cycle because I don't think this is a normal cycle, or it doesn't look like cycles that we've studied that we've had in the past. taking now three steps back, our lighting and lighting controls business grows consistently over time on a compounded annual growth rate. And our spaces group is taking share and we're building something pretty special there. So, net-net, you know, we feel like we can execute in any environment. I don't, you know, I don't want to play, you know, kind of Fed governor and try and figure out where we are from a cycle perspective other than to say we're going to control what we can control. We feel really good about where we are from the lighting and lighting controls business. We feel really good about where we are from the spaces business. And we've got a lot of capital to grow our platform. Thank you. Really appreciate all that, Conor.

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

Hey, good morning. Neil, maybe just to follow up on the prior question. In terms of the, I think the last earnings call you touched on a rebound in larger projects visible in 2025. I'm just curious what the CRM system is showing for the larger projects. And then historically, I think larger projects were considerably more profitable than the contractor-select and some of the more commoditized projects that you've greatly improved the profitability of. Would you expect as the potential rebound of those larger projects flows through that there's a disproportionate makeshift in profitability?

Yeah, thanks. As I said, so if we focus on the kind of large projects is a big bucket. So let's talk about kind of infrastructure on the one hand, and then we'll talk about kind of traditional large projects on the other. On the infrastructure side, there's obviously still a significant amount of capital that's going to run through what others are calling the megaprojects. And we're confident we'll get our fair share of those and hopefully a disproportionate share. From a mixed perspective, that is an attractive piece of business. We price fairly there, so we're delivering value to basically the citizens who are funding those, so we feel good about that. At the same time, we can operate in the margin portfolio that we expect. Then within, you know, kind of larger projects, there are a number of other kind of private sector impacts of that also. So impacts of the CHIP Act and our ability to light fabs, to light data centers, to deliver control. Obviously, those are all consistently attractive margin pieces of business for us. We're scaling in industrial as a lot of reshoring is happening in the U.S., and so the mix of our portfolio is, however, tighter from a margin perspective. As we indicated earlier, effectively the floor has been raised on the contractor select portfolio, and we will price fairly for citizens that are funding the infrastructure, and we'll continue to deliver the performance that we're demonstrating.

Got it. And then just one for Karen on the contractor select and design select portfolios. Does that, by definition, sort of require more investment and inventory than you might have had in the years past?

So, for contractor select and design select, when we look at the inventory levels, you know, first on contractor select, the 300 of the kind of most common everyday lighting products, we stock those. here, but then also our distributors. But given the high turnover with that portfolio, it allows our distributors to carry less inventory and also for us to carry less inventory. So that doesn't really have a higher requirement. On Design Select, we are able to manage those inventory levels effectively and, you know, improve our terms. So neither of those should have a negative impact on our working capital inventory going forward. And in fact, if you look at our inventory days over the course of time, we are we've improved our inventory turns versus last year and versus kind of over from our high point and certainly over last year when we reduced it and then continue to have room to improve. So feel really good about where we are on our inventory and don't believe that that should have a negative impact. And if anything, Some of that should improve our ability around our raw materials going forward.

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

Thank you. Thank you all for joining us this morning. We are, as we said in our comments and in the questions, we're really pleased with our performance. Our team is executing really well. We feel confident in where the lighting and lighting controls business is for this year and beyond. We feel like our growth opportunity on the spaces side is clear, and we're executing against it. And we've demonstrated that we can create real value with capital allocation. And so we'll keep doing that, and we'll look forward to seeing you next quarter.

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