Acuity Brands, Inc. (AYI) Earnings

Management highlights

### Overall Quarterly Performance - Management reported solid overall execution in Q3 FY2026, with growing net sales, expanded adjusted operating profit, increased adjusted diluted EPS, and strong cash flow generation. - The company completed a successful refinancing of its revolving credit facility, closing a new 5-year, $800 million unsecured facility that upsizes capacity, extends maturity, and improves financial flexibility. - Year-to-date through the first nine months of FY2026, operating cash flow totaled $520 million, $121 million higher than the same period in FY2025. Capital allocation has been disciplined: the company repaid $200 million in term loan debt, increased the quarterly dividend by 18%, and repurchased over 766,000 shares for $230 million. ### Acuity Brands Lighting (ABL) Updates - ABL's sequential performance improved in the quarter, with strong industry-leading margins maintained. Management's strategy focuses on increasing product vitality, elevating service levels, using technology for product and operational differentiation, and driving productivity. - The ABL portfolio is aligned into three customer-focused segments: Contractor Select (for distributors/retailers, reducing inventory and operating costs), Design Select (for architects/specifiers/contractors, enabling efficient project configuration), and made-to-order (for custom solutions). - New product launches this quarter included: Beyond by Lithonia (next-generation linear high bay for industrial applications added to Design Select, integrating complete lighting and controls to simplify installation/specification), and CPX3P three-pane panel (offered in both Contractor Select and Design Select, with switchable lumen output and color temperature, reducing SKU complexity for partners). - ABL earned multiple industry design awards: Eureka received Best of the Best Red Dot recognition, with additional Product Design Awards for Tulip, Jari, and Arela. Eureka has now won 27 Red Dot Awards over 15 years, reflecting consistent design leadership. - Q3 order trends indicate lighting market demand is firming after a period of extended order conversion rates. ### Acuity Intelligent Spaces (AIS) Updates - AIS delivered strong sales and margin expansion, driven by Distech Controls and QSC, with multiple industry awards recognizing the segment's product strength. The long-term strategy is to combine space management (Atrius, Distech) and space experience (QSC) data via interoperability to deliver autonomous spaces. - Distech's strong consistent growth and margin expansion reflect its successful open architecture strategy, which delivers both local resilience and enterprise cloud intelligence, and gives customers full control over system deployment, service, and upgrades. - Distech has gained market share by displacing incumbent competitors across end markets including major universities, professional sports venues, data centers, and enterprise campuses, and is increasingly winning design wins from OEM manufacturers. - New Distech product launches included: Eclipse Resilience (a programmable logic controller for mission-critical data center cooling applications, expanding the segment's offering to combine PLC and direct digital controllers), and a preloaded ResenseMove occupancy and utilization dashboard for Eclipse facilities. - AIS investments in AI-enabled programming tools, workflow automation, and partner training (Distech Academy) improve partner efficiency and drive platform growth. Distech has transitioned from a pure controls business to a full-stack platform business.

Guidance

There were no specific numerical full-year guidance revisions provided in this call. Key forward-looking outlooks from management include: - Management expects continued double-digit AIS growth driven by sustained share gains from innovation, expansion into adjacent end markets including data center and refrigeration/OEM, and new product development. AIS is expected to expand margins over time as it grows. - ABL order conversion rates are normalizing after being extended in the winter months (October-January), with demand firming as project backlog clears after delayed activity from the 2025 pre-tariff ordering pull-forward and U.S. government shutdown. Management expects ABL to outperform the broader lighting market. - A sequential increase in net sales from Q3 to Q4 FY2026 is expected, in line with typical seasonal trends, though the increase may not be as steep as the Q2 to Q3 sequential gain. - Management expects ABL to continue expanding gross margins even if sales volumes remain muted, driven by sustained productivity gains, product innovation, strategic pricing, and technology investments in the supply chain. Operating leverage will increase as ABL grows, with AIS's higher-margin growth driving overall company operating leverage over time. - The company maintains sufficient capital capacity to pursue all priorities simultaneously: organic business investment, tuck-in acquisitions to expand the AIS platform, dividend growth, and opportunistic share repurchases.

Segment performance

Total company net sales for the third quarter of fiscal 2026 were $1.2 billion, a 2% increase (up $19 million) year-over-year, with adjusted gross profit margin of 50.1% (up 10 bps YoY), adjusted operating profit of $224 million (up 1% YoY), adjusted operating margin of 18.7%, and adjusted diluted earnings per share of $5.31 (up 4% YoY). 1. Acuity Brands Lighting (ABL): Net sales were $905 million, a 2% decrease (down $18 million) year-over-year, representing 75.4% of total company net sales. On a two-year stacked basis, ABL grew 1% overall, and 4% for its combined independent and direct sales networks. Adjusted gross profit margin was 46.1%, and adjusted operating profit was $165 million (down $9 million YoY), with an adjusted operating margin of 18.2% (down 60 bps YoY). 2. Acuity Intelligent Spaces (AIS): Net sales were $304 million, a 15% increase (up $39 million) year-over-year, representing 25.3% of total company net sales. Growth was driven by strong performance from Distech and QSC. Adjusted gross profit margin was 60.3% (up 10 bps YoY), and adjusted operating profit was $76 million (up 22.5% YoY), with an adjusted operating margin of 25.1% (up 150 bps YoY).

Risks & headwinds

• General inflation is impacting the business across materials (including metals), employee benefit costs (with projected 12% medical cost increases), and SG&A line items. • Ongoing supply shocks exist for memory components, which primarily impact the AIS segment; management is focused on maintaining component access, offsetting margin pressure, and driving productivity improvements to mitigate impacts over the next 1-2 years. • ABL faced challenging year-over-year comparisons in Q3 FY2026 due to accelerated ordering ahead of 2025 tariff increases, which drove higher sales in the prior year quarter.

Analyst Q&A

• Q: Morgan Stanley asked why AIS is delivering sustained double-digit top-line growth that outpaces the broader intelligent spaces market, specifically asking if this comes from innovation, share gain, or entry into new higher-growth verticals like data centers. /

  A: Management stated that AIS (and specifically Distech) growth comes from three overlapping factors: 1) ongoing product innovation that has allowed Distech to outcompete legacy large competitors and displace incumbents in core projects (citing a recent win at Hartsfield-Jackson Atlanta International Airport Terminal D after 20+ years of incumbency); 2) new product expansion including the recent launch of PLC controllers for mission-critical cooling, which gives Distech a unique combined PLC/DDC product portfolio well positioned for hyperscale data center customers; and 3) expansion into adjacent markets including refrigeration and OEM manufacturing. This combination will allow AIS to continue its high growth rate over the next several years.

• Q: Morgan Stanley followed up asking about the company's capital allocation priorities, given strong cash generation, a solid cash balance, and ongoing share repurchases, specifically asking about acquisition priorities for AIS. /

  A: Management confirmed the unchanged capital allocation framework: prioritizing organic growth investment, maintaining dividend growth, evaluating high-quality acquisition opportunities, and opportunistic disciplined share repurchases. Acquisitions focused on expanding the AIS platform are the top priority for incremental capital, and management prioritizes quality over quantity, pointing to the successful QSC acquisition that has already delivered stronger-than-expected growth and market recognition. Management confirmed it has capacity to pursue all capital priorities simultaneously.

• Q: Baird asked about recent lighting order trends, asking if the gap between quoting and order conversion is narrowing, and what inflation and long-term SG&A leverage trends look like. /

  A: Management confirmed order conversion is firming and returning to normal after extended conversion rates between October 2025 and January 2026, with delayed project activity clearing after the 2025 pre-tariff pull-forward and U.S. government shutdown. Management noted broad-based mild inflation across materials and operating costs, plus supply-side shocks for memory components (primarily impacting AIS), and is offsetting pressure via strategic pricing and productivity improvements. Most SG&A increases are targeted technology investments (AI, supply chain digitization) that drive gross margin expansion, and the company will see significant SG&A leverage as ABL grows and AIS scales its higher-margin business.

• Q: Goldman Sachs asked for more detail on the data center market opportunity, including the expanded product set, market size, and competitive positioning for Acuity. /

  A: Management explained that on the controls side, Distech previously competed with direct digital controllers for data centers, and has added PLC controllers to meet hyperscaler preferences, creating a full combined product portfolio that positions Distech to serve multiple major hyperscalers. While the opportunity is still scaling and no specific financial targets were provided, it is expected to become a meaningful growth contributor for AIS over time. On the lighting side, Acuity has already seen hyper-growth in data center lighting shipments, and is positioned as a preferred supplier directly to contractors and prefabricators. All current data center expansion is organic product development, which management views as the most valuable growth path.