Missing on both the top and bottom lines for Q1, shares of Acuity Brands (AYI 163.13, -22.60 -12.2%) are seeing increased pressure in light of management commentary and the run-up into the print.
As a quick bit of background, AYI primarily operates in the lighting solutions market. The company’s Lithonia Lighting, Holophane, Peerless, Gotham, Mark Architectural Lighting, Winona Lighting, Juno, Indy, Aculux, Healthcare Lighting, and Hydrel are among the most recognizable.
Off the bat, Q1 earnings of $1.94 were below the market expectations while revenue declines of 1.0% compared to last year to about $842.8 million were equally unimpressive on the Street. Management highlighted that the aforementioned sales decline was primarily due to a 1% decrease in sales volume and a 1% net unfavorable change in product prices and mix of products sold, partially offset by a 1% favorable impact from changes in foreign exchange rates. Further, the change in price/mix was due primarily to lower pricing on luminaires, reflecting the decline in certain LED component costs as well as increased competition in more basic, lesser-featured products. Sales of LED-based products during the first quarter of fiscal 2018 and 2017 accounted for about two-thirds of total net sales.
Management also stated that better than market level performance as initial industry data suggests that the growth rate of the company’s key end markets in North America was down low-single digits, which was in line with previous expectations.
Further, the year-over-year decline in AYI’s net sales of was due primarily to lower sales in the home center/showroom channel and certain international sales channels, including the U.K and Mexico. The company believes the decline in the home center/showroom channel was primarily due to changes in the in-house branding strategies being deployed by certain customers for select products in certain categories, while the decline in sales in certain international markets was due to weaker demand resulting from economic and or political headwinds. Excluding these specific sales channels, net sales increased 2%.
Management also gave a lengthy commentary on their outlook; some highlights include:
- While various leading indicators continue to generally reflect favorable conditions for AYI’s end markets, the company is cautious regarding a meaningful rebound in its end markets over the next quarter or so
- The company believes the recent passage of the U.S. Tax Cuts and Jobs Act may have a favorable impact on future demand for many end markets it serves as positive business sentiment may lead to further investments in facilities and infrastructure in the U.S
- AYI also continues to expect the growth rate for lighting and building management solutions in the North American market, which includes renovation and retrofit activity and comprises about 97% of its revenues, will be up low single-digits for fiscal 2018, reflecting an expected rebound in the second half of the year
- Also, management expects the pricing environment to continue to be challenging in certain portions of the market, particularly for more basic, lesser-featured products sold through certain sales channels
- The company does not foresee a meaningful rebound in demand in the near term in certain international markets that they serve. In addition, they expect certain headwinds in the home center/showroom channel to continue in the near term, giving way to growth in the second half of calendar 2018 as the company brings new solutions to key customers and expand their access to market in this important sales channel
Lastly, management commented on the recently passed Tax Cuts and Jobs Act; the company expects the legislation to favorably impact its net income, diluted EPS and cash flows in future periods primarily to the reduction in the federal corporate tax rate from 35 percent to 21 percent effective for periods beginning January 1, 2018. Management currently estimates that the company’s blended consolidated effective income tax rate for full-year fiscal 2018 will about 26 to 28% before discrete items, compared with nearly 35% for the prior year. Additionally, management currently estimates the second quarter tax expense to be reduced by about $30 million for discrete items, primarily due to a non-cash income tax benefit from the re-measurement of the company’s net U.S. deferred tax liabilities, partially offset by an unfavorable impact related to the taxation of the company's accumulated un-remitted foreign earnings.