Q1 2024 Acuity Brands Inc Earnings Call
Paul.
At this time all participants are in a listen only mode.
After the Speakers' presentation, the company will conduct a question and answer session.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Charlotte Mclaughlin, Vice President of Investor Relations Charlotte. Please go ahead.
Charlotte Mclaughlin: Thank you.
Charlotte Mclaughlin: Good morning, and welcome to the acuity brands fiscal 2024 third quarter earnings call.
Charlotte Mclaughlin: As a reminder, some of our comments today may be forward looking statements.
Charlotte Mclaughlin: And on management's beliefs and assumptions and information currently available to our management at this time.
Charlotte Mclaughlin: These beliefs are subject to known and unknown risks and uncertainties, many of which maybe beyond our control.
Charlotte Mclaughlin: Including those detailed in our periodic SEC filings.
Charlotte Mclaughlin: Please note that our company's actual results may differ materially from those anticipated.
Charlotte Mclaughlin: We undertake no obligation to update these statements.
Charlotte Mclaughlin: Reconciliations of certain non-GAAP financial metrics with our corresponding GAAP measures are available in our 2024 third quarter earnings release.
Charlotte Mclaughlin: Which is available on our Investor relations website at Www dot investors that acuity brands dotcom.
Charlotte Mclaughlin: With me. This morning is Neil Ash, our chairman President and Chief Executive Officer, who will provide an update on our strategy and give an overview of the quarter.
Charlotte Mclaughlin: And Karen <unk>, our senior Vice President and Chief Financial Officer.
Karen: Who will walk us through our fiscal third quarter financial performance.
There will be an opportunity for Q&A at the end of this call.
Karen: For those participating please limit your remarks to one question and one follow up if necessary.
Karen: We are webcasting today's conference call live.
Karen: Thank you for your interest in acuity brands I will now turn the call over to Neil Ash.
Neil M. Ashe: Thank you Charlotte and thanks to all of you for joining us this morning.
We continue to demonstrate strong execution in our fiscal 2020 for first quarter.
Neil M. Ashe: We increased our adjusted operating profit our adjusted operating profit margin and our adjusted diluted earnings per share with.
Neil M. Ashe: We generated significant free cash flow and we allocated capital effectively to drive value.
Neil M. Ashe: Both our lighting and our intelligence spaces businesses continued to perform well during the quarter.
Neil M. Ashe: Particularly in ABL, our performance was excellent.
Neil M. Ashe: We increased adjusted operating profit by $15 million of $71 million less sales and increase the adjusted operating profit margin 280 basis points to 17, 5%.
Neil M. Ashe: Our strategy is yielding results, we're increasing product vitality elevating service levels using technology to improve and differentiate both our products and how we operate the business and we are driving productivity.
Neil M. Ashe: Today, our products are perceived as being more valuable in the marketplace at the same time, we are lowering costs.
Neil M. Ashe: Our product vitality efforts are the combination of new product introductions and improvements to our existing portfolio to ensure that our products are more valuable to our customers and more profitable for us.
Neil M. Ashe: Our contractor select portfolio is about 300 of our most popular products.
They are using common everyday lighting applications and our in stock at retailers and electrical distributors.
We continue to invest in product vitality, and we have expanded our life O'neil lighting es excess floodlight family.
Neil M. Ashe: This is a better product for distributors because it allows them to carry less inventory.
Neil M. Ashe: And it's better for contractors, because it is easier to install.
This product family was first introduced in 2022 to offer a uniform lighting solution for parking lots walkways and outer buildings.
Neil M. Ashe: It uses switchable technology to provide installers 36, onsite options, including alumina output color temperature photo shell and mounting options.
Neil M. Ashe: Our design select portfolio consists of configurable product options that meet the key choices of lighting specifier with high levels of service.
Neil M. Ashe: This quarter, we added additional products in our downloading panel emergency lighting and outdoor categories as.
Neil M. Ashe: As we expand the options available in this portfolio, our focus is on product vitality and making it easier for the specification community to choose superior solutions.
Neil M. Ashe: Our efforts to elevate service are having a positive impact on our customers.
Neil M. Ashe: In October we were once again recognized by the voters of Iron Mark Electrical is one of the suppliers of the year for 2023.
Neil M. Ashe: We also continue to invest in productivity improvements in our operations.
Neil M. Ashe: Earlier this quarter, we traveled with the group of associates to our Mexican manufacturing facilities to open our new state of the art Santa Rosa production facility, which includes our highly efficient new paint line.
Neil M. Ashe: This facility embraces technology to deliver a better product to our customers and improves the efficiency of the paint line process, while also reducing the environmental impact.
Neil M. Ashe: I'd like to highlight a couple of ways we're doing this.
Our paint guns and torque guns, and our new facility are powered by our high efficiency air compressor that aims to reduce approximately half of our <unk> compared to the air compressor from our previous paint line.
Neil M. Ashe: High efficiency walls, burners, and booster technology in our ovens require less gas and similar systems and use around 40% less natural gas than our previous infrared ovens.
Neil M. Ashe: The transition to this facility has been seamless.
Neil M. Ashe: We relocated and existing facility to the new SPF facility without any service interruption and now have capacity available for future growth.
Neil M. Ashe: Our combined paint and natural gas savings are delivering on our required financial return for this facility, while also meeting our sustainability objectives.
Neil M. Ashe: Can learn more about this project and other accomplishments in our recently released Earth-like report available on our ESG for investors page on our Investor Relations website.
Neil M. Ashe: Now moving to our spaces group.
Our mission and our intelligence spaces business is to make spaces smarter safer and greener.
Neil M. Ashe: Through our strategy of connecting the edge to the cloud.
<unk> is the best edge control devices on the market, while atreus will be the best in cloud applications.
Neil M. Ashe: At this tech we are focused on expanding our addressable market in two ways.
Neil M. Ashe: The first is geographic and the second is increasing what we control and have built space.
Neil M. Ashe: This quarter, we continued our geographic expansion, adding several new system integrators in the U K Asia and Australia.
Neil M. Ashe: And one of our original markets, France, our hard work is paying off.
Neil M. Ashe: The building services research and information Association called out <unk> is dominating the French building automation and control systems market and a newly released report.
Neil M. Ashe: We also continue to increase what we can control and have built space in.
Neil M. Ashe: In October we launched our <unk> <unk> sensor at several industry conferences in Europe.
Neil M. Ashe: This is an advanced seven in one ceiling mounted sensor that is able to detect occupancy and spaces.
Accounts, the number of people using our space, providing feedback on occupancy requirements to the building users.
Neil M. Ashe: It has AI powered and can be used to optimize indoor air quality reduce energy and cleaning costs and enhanced occupancy comfort.
Neil M. Ashe: It will be revealed to our north American and international customers at the HR Expo in Chicago later this month.
Neil M. Ashe: Our expansion into refrigeration controls is also going well with the integration of <unk> on track and performing as we expected.
During the quarter, we released a key to <unk> edge manager with a back neck communication stack.
Neil M. Ashe: This is the same open protocol technology that is used by <unk> and is an important step to ensure compatibility between both the district edge controllers and the key to therm edge controllers.
Neil M. Ashe: Now turning to our outlook.
Neil M. Ashe: The changes that we've made to the business are impactful and long lasting.
Neil M. Ashe: Our order rates are growing both year over year and sequentially.
Neil M. Ashe: We're back to typical lead times and absent the excess backlog from last year, we would be experiencing sales growth.
Neil M. Ashe: We are focused on controlling what we can control and we are confident our execution will continue.
Neil M. Ashe: And our lighting and lighting controls business, we will continue to focus on delivering margin and cash flow.
Neil M. Ashe: And our spaces group, we will continue to grow geographically and by adding to what we can control and have built space. We're delivering applications that are making a difference.
Neil M. Ashe: Now I'll turn the call over to Karen who will update you on our first quarter performance.
Karen: Thank you Neal and good morning to everyone on the call.
Karen: We started the year with strong performance, we increased our adjusted operating profit by $14 million year over year improved our adjusted operating profit margin by 250 basis points over the prior year and by 40 basis points sequentially.
Karen: We increased our adjusted diluted earnings per share by 43% year over year and generated cash flow from operations of $190 million.
We continue to improve our businesses and allocated capital effectively.
Karen: For total <unk> Yi, we generated net sales in the first quarter of $935 million, which was $63 million.
Karen: Or 6% lower than the prior year as a result of the lower net sales in our ABL business.
Karen: This was partially offset by continued growth in the ISG business of 13% in the quarter.
Karen: We continued to deliver year over year margin improvement.
Karen: During the quarter, our adjusted operating profit increased by $14 million on lower sales, while we expanded adjusted operating profit margin to 16, 5% an increase of approximately 250 basis points from the prior year.
Karen: This increase was driven largely by the significant year over year improvement in our gross profit margin as we continued to execute and drive margin through product vitality, the management of price and cost and productivity improvements.
Karen: During the quarter, our adjusted diluted earnings per share of $3 72.
Karen: Increased 43.
Karen: Or 13% over the prior year, primarily as a result of higher net income and to a lesser extent lower shares outstanding due to the share repurchases.
Karen: In ABL net sales were $876 million in the quarter, a decrease of around 7% compared with the prior year driven by declines across most of our channels offset slightly by continued strong performance in our retail channel.
Karen: Sales growth in ABL this quarter had a challenging year over year comparison as the results in the first quarter of fiscal 2023 benefited from working down an elevated level of backlog.
Karen: <unk> adjusted operating profit increased 11% to $154 million on lower net sales and we delivered adjusted operating profit margin of 17, 5%, a 280 basis point improvement over the prior year.
Isg's net sales for the first quarter were $64 million, an increase of 13% as <unk> continued to grow and <unk> performed as we expected.
Karen: <unk> adjusted operating profit was $10 million.
Karen: Now turning to our cash flow performance we.
Karen: We generated $190 million of cash flow from operating activities for the first quarter of fiscal 2024, an increase of $3 million over the prior year, primarily due to an improvement in net income partially offset by a decrease in cash flow from working capital.
Karen: During the first quarter of fiscal 2024, we continued to allocate capital consistent with our priorities.
Karen: We invested $15 million in capital expenditures and allocated approximately $50 million to repurchase around 300000 shares.
Karen: Since the beginning of the fourth quarter of fiscal 2020, we have repurchased over 9 million shares at an average price of about $143 per share, which was funded by organic cash flow.
To wrap up we had a strong quarter, particularly in ABL.
Karen: We continued to deliver strong margin and cash flow performance.
Karen: We grew adjusted operating profit and improved adjusted operating profit margin.
Karen: We increased adjusted diluted earnings per share generated strong cash flow from operations and allocated capital effectively.
Karen: We are pleased with our performance and we will reevaluate the outlook at the midpoint of the year.
Speaker Change: Thank you for joining us today I will now pass you over to the operator to take your questions.
Speaker Change: Thank you.
Speaker Change: Ask a question. Please press star one one of your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question. Please press star one again.
Speaker Change: One moment please for our first question.
Speaker Change: Our first question comes from the line of.
Speaker Change: Joe O'dea with Wells Fargo. Your line is now open.
Joseph Osha: Hi, Good morning can you hear me.
Speaker Change: Yes, good morning, Joe.
Hi.
So really impressive gross margin obviously this quarter I think just any additional detail unpacking that.
Speaker Change: Talk to kind of high level on vitality productivity price cost but.
Speaker Change: Anything in terms of kind of quantifying that bridge when we think about sequentially.
Speaker Change: Gross profit.
Speaker Change: Down kind of less than what we saw out of the revenue decline and trying to appreciate what some of the moving pieces are there and then bigger picture just the sustainability of a 45, 8% gross margin.
Speaker Change: Yes. Thank you Joe good morning to all of you.
Speaker Change: So as we unpack the margin performance a couple of things to talk about first of all.
Speaker Change: Obviously, our year is off to a really good start.
Speaker Change: We're taking the companies to levels of performance that it has never seen before and these margins are the result of the impacts of the strategy and the work that our team has been doing to implement that around product vitality around service around technology and around productivity.
Speaker Change: That that has culminated in this performance specifically in this quarter.
Speaker Change: We're recognizing that our products as I said in the prepared remarks are being valued for their impact in the in the marketplace, which is which affords us the opportunity to to manage price strategically we continue to take costs out of the production of the of the product so the.
Speaker Change: The output is the margin that you see this quarter was mildly impacted by some mix.
Speaker Change: Our controls business was strong our ISG is obviously growth at <unk>.
Speaker Change: Growth accretive margin accretive and return accretive so so that has some impact but.
Speaker Change: When you boil it all down this quarter as a result in the margin performance in this quarter is a result of the of the strategy and the work that we've been doing around product vitality around service around technology and around productivity.
Speaker Change: And just a quick clarification, because you did make the point in prepared remarks, and just kind of reiterated their products perceived as more valuable in the marketplace today.
Speaker Change: Okay thought about sort of the.
The pricing dynamic over the last couple of years as being price in response to cost.
Speaker Change: But.
Speaker Change: Is it fair to sure.
Speaker Change: To do that this quarter youre actually in the market, taking taking price up because it's the value that you're delivering and so youre still able to achieve price up.
Speaker Change: So I believe that's a fair conclusion, yes. We are we are realizing the benefits in the first quarter of price we talked about in the last call and in the second quarter. We also implemented a price increase so we're demonstrating to the market that that we will continue to to manage.
Speaker Change: So.
Speaker Change: And that's obviously in the second quarter. So has no impact on these numbers, but but as I've said consistently we're moving to strategically manage price and by that we mean that number one our products need to be valued in the marketplace because they need to to deserve to be valued we're in a good position on that front the second around our product.
Speaker Change: <unk> efforts is that we need to demonstrate that we can make more money with with profit as a result of those prices, which is what we're doing from a cost perspective. So so I believe this is a good foundation now obviously these are extraordinary margins. So we don't need to continue to perform at this level for for the rest of the year, but.
To deliver outstanding results, but we feel very good about about the how in these in these margins.
Speaker Change: I appreciate it thanks very much.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Tim Walsh with Baird. Your line is now open.
Okay.
John Walsh: Hey, everybody good morning.
John Walsh: Hey, good morning, Tim Good morning.
John Walsh: Maybe just my first question.
Speaker Change: Neil you had kind of talked about in the prepared remarks.
Speaker Change: That order rate.
Speaker Change: <unk> improved sequentially and from what they were up year over year.
Speaker Change: I know, it's probably hard but I'll ask the question anyway, how much of that do you think is just the year over year comparison kind of lapping some of the backlog depletion.
Speaker Change: And our lead time improvement versus maybe what's going on in the underlying market.
Speaker Change: Yes.
Speaker Change: Thanks for the question, Tim Let me unpack that because I think this is really important so.
Speaker Change: So our net sales is obviously a result of our shipments in the period the shipments in the period are a result of the orders that led up to at times. The lead time basically so we are now in a position where our lead times have more normalized in other words, the order and the shipment rates are relatively consistent.
Speaker Change: With each other and so it's important that on both a sequential basis and on a year over year basis, our order rates are modestly up in other words.
Speaker Change: Without last year's comparable sales would be growing.
Speaker Change: Last year was.
Speaker Change: <unk> net sales were the beneficiary of backlog reduction from orders, which had been placed earlier so that when we talk about this order rate being up modestly that's versus the daily order rate of last year's first quarter and last year's fourth quarter. So so.
The best way that we've come to think about this is that there was more of a pull forward last year industry wide. Then there was a cycle. So so in effect we.
Speaker Change: We processed a lot more business last year, then that existed when you smooth line over time and we've talked about this consistently when you smooth a line over time, we will be.
Speaker Change: The lighting and lighting control business will be a consistent grower.
Speaker Change: And I guess have you seen any any sort of kind of.
Speaker Change: Underlying improvement in the end market I mean, obviously rates have kind of moved back with what the fed is done and just kind of curious if you've seen that in your order rates at all.
Yeah. So so obviously, we're seeing if it's year over year improvement and sequential improvement. There is there is improvement in in our order rate as we look forward to two are kind of our view on the macro as ive been consistent with this we.
Speaker Change: We don't have a better crystal ball than than than you do R. R.
Speaker Change: We are confident in the current levels of of the order rate and the performance of the order rate as I said last quarter, we're comfortable operating in this environment and.
Speaker Change: And as we look forward, we feel we feel we feel pretty good about about where things are our outlook doesn't expect things to get materially better or materially worse basically so.
Speaker Change: As Karen said, we'll reevaluate at the middle of the year, where where we are for the rest of the year.
Speaker Change: Okay perfect.
Speaker Change: Then maybe just the second question just on maybe margin.
Speaker Change: Just given where the gross margins have kind of landed over the last couple of quarters. I mean has that changed how you think about kind of the reinvestment.
Speaker Change: That you'd want to make or need to make in the business to drive.
Speaker Change: Above market growth or do you think it's just kind of a higher base level of margin for the business kind of go forward.
Speaker Change: So a little bit of both and I would say on that front Tim.
Speaker Change: We don't believe that this.
Speaker Change: These margins are a result of harvesting. So we believe that they're the outcome of the strategy is set.
Speaker Change: Kind of.
Speaker Change: And I will continue to be redundant on it but I believe they're an outcome. So we believe this is a point in time at the same time. We also are beginning to focus on.
Speaker Change: On verticals in areas, where we haven't on the lighting side, either been strong or participated at all.
Speaker Change: A very small example, we we made a tiny investment in horticulture why because we think over the next kind of period of time that will be an opportunity.
Speaker Change: And so we're positioning for that now so we will start to make those kind of investments Tim. So that we can continue to hopefully address expand the addressable market on the lighting side and then I don't want to Miss the opportunity to talk about to talk about spaces and Karen can address the specifics of the quarter.
Speaker Change: <unk> the financials in the quarter necessary later, but in the Big picture. The basis group is is growth accretive margin accretive and returns accretive and we feel really good about what we're doing there and their impact their ability to continue to impact the company going forward.
Speaker Change: Very good good luck on the rest of the year guys. Thank you. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Thank you.
Chris Snyder: Wanted to follow up on the gross margin up 410 basis points year on year. Despite the sales decline, which is really impressive it seems to us that the driver. There was one point cost you guys have held prices costs have moderated due to the technology the vitality.
Supplements and Neil will also some level of selectivity, which you've talked to over the past couple of quarters. When we think about that 410 basis points could you kind of breakdown.
Chris Snyder: Yields between selectivity and produce cost improvement over the last year. Thank you.
Yes, I'll start and Karen.
Karen: Can you fill in for us.
Karen: We have not built a walk directly from to break down the 410, so I'm going to do this more off top of my head Chris than than I am kind of read on a walk.
Karen: Big picture.
Karen: Let's start with that.
Start with price so.
As we've said consistently we manage we manage price to to where we think we need to be in the marketplace. So obviously, we have real strength and contractor select you can see the retail channel was up this this quarter. It's the it's the growth spot. Despite the fact that net sales were down. So obviously, we're meeting the market at.
Karen: That level of the of the market on the project side, we have the ability to to choose which projects. We we take obviously so in our and our.
And our pricing and then our bidding on those projects we are.
Karen: We are.
Karen: Choosing which which projects we want to invest it and so and we do invest in some projects. So this is not.
Karen: Not pure price takers here, we are we are choosing.
Karen: And based on the marketplace and Thats really the key for US is that when we talk about managing price strategically, we're meeting price, where where it needs to be.
Karen: Second on the cost front. So obviously there has been material improvements in the in the portfolio over the course of the last three years and that continues.
Karen: That has allowed us to create a more normalized distribution of margin within the portfolio. So we don't have the laggards that we had in the past.
And so it's not wholly dependent on mix in a way that that it had been in the past now I would say that this quarter, we had a good quarter and controls and.
Karen: And obviously ISG performed at a higher growth level. Then then ABL. So there is some mixed impact but it is modest it is not it is not determined a determinative and then finally to your point on cost moderating there are kind of there are some obvious.
Post pandemic costs, which have which have changed steel.
Karen: <unk> et cetera, and it's worth calling out containers as an example, because now we're dealing with obviously the red sea challenges. So so container cost that that were about $3000 per container can now rise as much as $6000 per container to put that in context.
Karen: At the peak.
Karen: Those were in the $20 per container kind of rate. So that gives you an idea of kind of where those those differences are.
And so we have a plan to deal with those those higher container cost for for the remainder of the year. So when I summarize those three things together one is as I said in our remarks or our products are being are being recognized for their value in the marketplace. That's fundamental that's key.
Karen: That's number one to US is the strategy has produced a a more consistent result across our portfolio. So so mix is less impactful than it may have been in the past and then the third is we've.
Karen: We've moved aggressively to get to a more.
Karen: Consistent cost basis on materials.
Speaker Change: I appreciate that and if I could just maybe follow up more thematically it sounds like a lot of attention we want to get price for the value, we're bringing to the market.
Speaker Change: The company has always been particularly a new music only been there for a few years, but over time I think the company has always been a leader on technology and a leader on yield product quality.
Kind of slipped to there to get the gross.
Margin from $41 42, now amount to 45, plus because it feels like a lot of the.
Speaker Change: Most of our leading on the prominent technology side. Thank you.
Speaker Change: Yes, Thanks, Chris I mean, these things take time.
Speaker Change: I wish I was I was not as old as I am, but ive been around the bar and more than once and you just realize that like kind of all of these changes are cumulative and and it takes time for them to all kind of lineup and.
Speaker Change: And obviously this is a conversation that we have with our team here, which is that we're taking the company to levels of performance that it's never seen before that's true in the market broader market where.
Speaker Change: The confidence of our product quality cascades through our sales team through our independent sales agents et cetera through distributors through the service levels and the programs that we've put in place.
Speaker Change: So those things those things cumulatively add up to.
Speaker Change: The performance that that Youre seeing today.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Ryan J. Merkel: Hey, Good morning can you guys hear me.
Ryan J. Merkel: Hey, Ryan good morning.
Ryan J. Merkel: Great.
Speaker Change: My first question Neil can you talk about large projects back market.
Speaker Change: How is activity are you seeing delays cancellations or is that sort of improving.
Speaker Change: Just what's the latest update.
Yes, Ryan Thanks, I mean, we called out the order rate to kind of demonstrate that we're finding a new kind of normal I think anecdotally. There is theres a lot of talk around big projects and kind of calendar 'twenty five that sort of period, whether it's infrastructure or other things I think that's just kind of the general.
Speaker Change: Kind of on the street sentiment about kind of what's going on out there.
Speaker Change: So other than that we are.
Speaker Change: We're in a relatively I think we're in a we're in a kind of a new normal from a from a consistency perspective.
Speaker Change: Okay, So youre not seeing large projects being particularly weak.
Speaker Change: I mean anecdotally there is some there is some discussion about kind of that I don't know what week means and I think that's a it's worth us all kind of taken a step back and saying, okay. If we had an industry wide pull forward over kind of call. It 22, and 'twenty three which is what we're talking about on our comparable.
Speaker Change: <unk>.
Speaker Change: That has manifested in net sales higher than.
Speaker Change: Then order rates for some period as we were very clear about that in 'twenty, three now with order rates and shipments more equilibrate. It in a normal relationship in a period. This is kind of a normal run rate of.
Speaker Change: Of the market and so yes, there are some good days and some bad days within that obviously.
Speaker Change: So, but it's not we don't we're not we're not viewing a cliff on the horizon anywhere.
Speaker Change: Okay.
And then I had a question on gross margin as well, obviously first quarter was really strong normal seasonality would put you at about 45% for the year I'm. Just curious is there any reason that we should be below that is the biggest risk just sales and fixed cost deleverage at this point.
Speaker Change: Darren you want to take that yeah, Brian So in terms of seasonality when we look at where we are today I think we are probably.
Brian: The <unk> order rates and shipment rates are coming in alignment. So it's looking like we're getting back to seasonality, but we haven't fully seen that on the margin side. When you look at where we are comparative to the first quarter last year. We ended up last year at 45, 1%. So we increased our gross profit margin throughout the year and as Neil described.
Brian: That was a combination of our strategy and also executing on some costs that were higher in the first half of the year that moderated in the second half. So really if you look at where we are now we think this is a pretty strong level of gross profit impacted by the mix for control impacted by the mix the higher ISG, So I would.
Brian: Say that again around this level is probably pretty high but we expect it to be pretty confident in our gross profit margin.
Speaker Change: Okay. Thanks, that's it on.
Speaker Change: Thank you Sir.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Christopher Glynn with Oppenheimer <unk> Company. Your line is now open.
Thanks, Good morning, and congrats on a strong start to the year I was curious on.
Speaker Change: Design select still kind of early days, but anything kind of pithy or interesting you could share about the market reception on that rollout.
Speaker Change: Yeah, Hey, good morning, Chris Thanks.
Speaker Change: The market Resect reception has been really strong. So we continue to tweak how it's presented in the market. So that people can understand it.
Speaker Change: The industry has historically focused on something Thats called quick ship and so sometimes this is confused for quick ship. It is not quick ship. This is a this is an overhaul of our group of products that the specification community can know that they can choose in the options. They can choose with those products.
So so that's starting to to.
Speaker Change: Manifest.
Speaker Change: As we've talked about nothing I'm thinking trying to think of a pithy answer for you I don't have a good pithy answer for you but.
Speaker Change: But.
Speaker Change: We're really are a good anecdote for you, but it is it is progressing really well and we're pleased with where it is.
Speaker Change: Okay, well that was pithy enough for me.
Speaker Change: And then on the.
Speaker Change: Seasonality it sounds like.
Speaker Change: I think Karen said, not declaring victory really if I could paraphrase, but sort of.
Speaker Change: Leaning into normal seasonality I think is the message I got there as we look at the forward quarters I'm curious.
Speaker Change: The market is one part of that and then.
Speaker Change: It sounds like maybe your share momentum.
Speaker Change: Relative to the market in any given period might be adding muscle.
Speaker Change: I'm curious about the interplay of that versus market.
Speaker Change: We say that we're kind of leaning towards normal seasonality here.
Speaker Change: Yes, So let me kind of take your comment. Thank you for for Paraphrasing, Karen that was a long answer to get to we're not declaring victory, yet, but thats exactly what the message was meant to be the <unk>.
Speaker Change: Building up first of all on what we can control we feel very very good about what we control so.
So that is.
Speaker Change: That's the kind of the foundation.
Speaker Change: I think a lot of questions. We've gotten from this crowd over the course of the last few quarters is hey are you sacrificing.
Speaker Change: Are you sacrificing share for margin.
Speaker Change: And we don't believe that we are we've said that consistently as we've gone through so.
Speaker Change: So that culminates in the order rates that we are describing so up sequentially and up year over year, however, modestly they're up sequentially and year over year. So that is as I said earlier. We believe these things are cumulative in other words the market really starting to.
Speaker Change: To realize those things.
Speaker Change: As I said why don't we open we don't need to operate at these levels of margin for the rest of the year or two to deliver outstanding results. So.
Speaker Change: So we don't we don't have outrageous aspirations for the remainder of the year, but we're very confident in.
Speaker Change: The quality of the how of how we're delivering these these results.
Speaker Change: Thanks Neil.
Neil M. Ashe: Thank you.
Speaker Change: Our next question comes from the line of Jeffrey Sprague with vertical research. Your line is now open.
Jeffrey Todd Sprague: Thank you good morning, everyone.
Jeffrey Todd Sprague: Hey, Jeff Hey, Neil.
Jeffrey Todd Sprague: Just kind of picking up on that I know you don't want to kind of speak to the framework or the guidance Rick.
Jeffrey Todd Sprague: Quarter, but.
Jeffrey Todd Sprague: Coming off this quarter and thinking about what you said about you don't need to do anything heroic now for the remainder of the euro.
Jeffrey Todd Sprague: What would.
Jeffrey Todd Sprague: In your mind, what would drive you to the bottom half for a bottom.
Jeffrey Todd Sprague: Two thirds of that larger framework that you put out.
Speaker Change: Yes, so so let me unpack that a little bit and make sure. We're all on the same page. It is not our desire to provide quarterly guidance, our update guidance on a quarterly basis.
Speaker Change: Karen was was clear in her prepared remarks that we.
Speaker Change: We are going to take a look at the outlook and framework at the middle of the year, which is which is inconsistent with with how we were we would normally do things.
Speaker Change: So obviously, we can do the math also if we take consensus plus our beat this quarter on an EPS basis, you get way up in the in our in our EPS range. So.
Speaker Change: So as she said, we'll take a look going forward.
Speaker Change: In the middle point of the year.
Speaker Change: Great and then just just on SG&A.
Speaker Change: So it did move up a couple of hundred bps on a full year basis last year.
Speaker Change: Again, this quarter, probably some deleverage on the sales decline obviously, but.
Speaker Change: Where are we at in terms of kind of getting to a normalization there or the ability to deliver some operating.
Operating leverage on the SG&A line.
Speaker Change: Sure Jeff as you recall in the fourth quarter, we did take some cost out of the ABL business. So we feel pretty good about those cost reductions as we evaluate how we do the work.
Speaker Change: And we think we're really at the right level of investment for where we need to be to leverage when the sales growth comes back that being said in the ISG business. We did have some isolated cost.
Speaker Change: This year that don't really affect the run rate of that business. So overall just feel good about the current level of investment going forward that we can leverage.
Speaker Change: Alright, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jeff Osborne with TD Cowen. Your line is now open.
Jeffrey Osborne: Yes. Thank you good morning, Karen I just had a question on <unk>.
Jeffrey Osborne: What was the surprise relative to the guidance that you had given.
Jeffrey Osborne: The commentary three months ago around margins declining sequentially was it the strengthen controls or the strength in the retail channel I'm, just trying to get a sense of the surprise because Neil had indicated that.
Jeffrey Osborne: The four areas vitality service technology and productivity are essentially a culmination of years of investment.
Jeffrey Osborne: So what was the the differential relative to three months ago outlook.
Speaker Change: Yes, so what I would say.
Speaker Change: I would not use the word surprise, we really weren't surprised by the level of gross margin that youre seeing this quarter as Neil said, we're taking the company to levels of performance that it hasn't seen before.
What.
Speaker Change: Kind of the gross margin of 45 eight.
Speaker Change: Not typical level of performance that you would see is just a higher mix of control that had some impact this quarter, but overall, it's really the execution of the business. The continued growth of ISG and really the strategy as we execute of our product vitality service technology and productivity improvements that are driving this level of gross profit.
Speaker Change: <unk>.
Speaker Change: And then yes, just because quicker build on that what Karyn had said last quarter is that normally on a sequential basis. The gross margin would go down from Q4 to Q1.
Speaker Change: Got it and then what was abnormal than at this time I guess im still confused on that.
Speaker Change: Performance, we continue to to perform.
Speaker Change: Perfect and then Neill your predecessor, Vern would I think the past election cycles that highlighted.
Speaker Change: Weakness in the end markets and sort of a skittish buyer.
Speaker Change: If I recall the terminology correct I'm just curious it sounds like your outlook on the macro is a bit more.
Speaker Change: <unk> com and pipeline looks good et cetera, do you anticipate the November election, having any impact on either a larger projects are smaller projects.
I mean, I don't know what vernes logic was there I can tell you. The one thing I do know about burn feelings. This morning is that he is a proud Michigan Wolverine. So I am sure that he is he was celebrating late into the night last night.
Speaker Change: As we look forward on the on the macro the.
Speaker Change: It is as we have described earlier in the call. We believe that we found a kind of new normal and we're not expecting.
Speaker Change: We're not expecting anything extraordinarily positive or extraordinarily negative between now and the end of the calendar year.
Speaker Change: Got it that's all I had thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.
Speaker Change: Hi, Neil Hi, Karen This is Chris on for Brian Thanks for taking the questions.
I guess there is a lot of questions on margin. So I just have one question on the.
Speaker Change: Demand trends on the order rate.
Speaker Change: I think a year ago, you were the first one to quality interest rate impact and slower order right now you talked about order rates.
Speaker Change: Year over year and sequentially. So can you talk about what are the drivers of that are you taking market share or is it because of lower interest rates and also given how interest rates have been trending in the past few months. Maybe this is too early to tell but do you have any do we see any order.
Speaker Change: Acceleration based on your conversations with customers today.
Speaker Change: Yes, good morning, Grace I mean.
Speaker Change: I want to kind of make the same kind of point. So this will be mildly redundant, but the order rate is obviously year over year.
Speaker Change: The issue on a last year basis, not the issue. The result last year on a net sales basis, where the results of order rates that had happened prior to that.
Speaker Change: We pointed out that through kind of through the course of the year that there was an impact on those order rates youre seeing the impact on those order rates now those order rates have normalized and we have found a found a kind of a.
Speaker Change: Consistent level of of.
Speaker Change: Operating performance, so as we annualize those comps and eliminate the.
The excess backlog impact that happened at the beginning of FY 'twenty. Three then youll start to see a kind of more normal performance specifically from the lighting business. Obviously ISG has continued to.
Speaker Change: To grow so over the long arc of time this will continue the lighting business.
Speaker Change: Basically had a pull forward in industry wide pull forward and we will look like on a compounded annual growth rate.
Speaker Change: <unk>, where we expect it to be which is in the kind of mid single digits of growth rate.
Speaker Change: Yeah.
Speaker Change: Okay I'll take the rest offline.
Speaker Change: Thank you.
Speaker Change: Thank you and I'm showing no further questions in the queue at this time.
Like to turn the call back to know asks for closing remarks.
Speaker Change: Thank you all for joining us. This morning, obviously, our year is off to a really good start and we are both pleased about that and encouraged about what that means for the future.
Speaker Change: We are focused on the strategy and it is yielding results both in ABL and in the space. This group and we look forward to catching up with you again. This time next quarter have a good day today.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.