On October 3, Acuity Brand released its fourth quarter and year-end financial reports, saying it beaten earning estimates, and the company was “cautiously optimistic” about the next fiscal year. Following the release of the earnings report, Acuity held a conference call with financial reporters to go over the numbers, and give some ideas on what to expect over the next year.
The year ahead comes with concerns about tariffs with China, potential price increases, acquisitions, and a looks at the status of Acuity’s Contractor Select program.
Tariffs:
A first round of tariffs on components used in lighting products began on September 18 with a 10% increase. A second round is expected on January 1, 2019 with a 25% increase. “We believe the outcome of the tariff situation could have a dampening effect on overall demand due to higher component costs and finished good prices,” Acuity chairman, President and CEO Vern Nagel told reporters during the conference call. “Particularly at the proposed increase in tariffs to 25% from 10% on finished goods made in China takes effect on January 1, 2019. It is not possible for us to precisely determine what the potential impact tariffs will have on demand as it is a very complex situation impacted by numerous factors including currency fluctuations and political outcomes.”
Acuity pointed out that it is looking at alternatives to Chinese components if the additional tariff happens at the beginning of the new year. “We primarily manufacture our products in North America,” Ricky Reece, Executive Vice-President and Chief Financial officer told reporters. “However, we source certain components and approximately 15% of our finished goods from China that are subject to the recently enacted import tariffs. We are aggressively seeking to mitigate the impact on our profitability of these added costs. Our mitigation efforts included a variety of activities such as finding alternative of non-Chinese suppliers, in-sourcing the production of certain products.”
But, even if that happens, there is still a chance Acuity will be raising prices when the new tariff begins. “We identified that should the tariff increase on 1/1 go to 25%, that the price increases that we would put in place would be effective immediately on that date. So, we didn’t announce what that price increase would be, but we said it would be effective that date. So, we gave our many, many channels way advance warning on this,” Nagel announced.
Price Increases:
In addition to the tariffs, Acuity had previously announced a price increase. Acuity says a it expects to see other issues with production costs in its next fiscal year, so it implemented a price increase before the tariffs began. Nagel told reporters the price increase is simply to offset the expected rise in production costs. “We believe that the timing of the price increases and other actions implemented will begin to offset these and other cost pressures midway through our first quarter of 2019.”
Acquisitions:
In the last fiscal year, Acuity acquired Lucid Design Group and IOTA Engineering as it expanded its portfolio. Nagel told reporters he is looking at ways to “expand our access to the market, and to expand our technology capabilities”. With that, Nagel added more acquisitions are possible next fiscal year. ”
Economic Outlook:
Angel sees the economy as strong, and he looks at next year as being equally strong. Right now, a shortage of contractors has created a huge backlog of work, so many Acuity products are waiting to be purchased and installed. “I believe that folks continue — and when I say folks, I’m talking about contractors, electrical distributors, if you look at people who are in the specification world, architects, engineers, lighting designers, people continue to be busy. Contractors and electrical distributors, many of them are operating with record backlogs,” Nagel said.
Chinese influence on pricing:
As we have seen in the past couple of years, the emergence of small, Chinese lighting manufacturers has resulted in a price war for LED products. While Acuity has witnessed this situation, it is making plans to provide its services, including meeting backlog demands, to compete in this arena. “It is now evident that certain Chinese-based lighting companies, many clearly being subsidized in some form are influencing pricing for certain basic, lesser-featured fixtures sold in certain channels. We will not yield this space for many strategic reasons. As such, we aggressively will reintroduce our expanded Contractor Select portfolio to profitably compete in this portion of the market,” Nagel added.
Contractor Select:
Acuity is using its Contractor Select program to combat the competition from Chinese competitors. The program guarantees distributors will have Acuity’s most popular products, and will have the products ready for shipment on the same day. Acuity will also use its six distribution centers across North America for other lighting products and controls in the Contractor Select program. Nagel says the program is necessary for Acuity. “The margin profile on Contractor Select is solid. But when I look at the overall average or compare it to larger projects, it’s not there and it never will be, but our cost-to-serve is also a lot less.”
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