Acuity Brands Stock

Good morning, and welcome to the Acuity Fiscal 2026 Fourth Quarter and Full Year Earnings Call. [Operator Instructions] 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.

Thank you, operator. Good morning, and welcome to the Acuity Fiscal 2026 Fourth Quarter and Full Year Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2026 fourth quarter and full year performance. There will be an opportunity for Q&A at the end of the 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 provision of the Private Securities Litigation Reform Act of 1995, as detailed on Slide 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP metric are available in our 2026 fourth quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investor.acuityinc.com.

Thank you for your interest in Acuity. I will now turn the call over to Neil Ashe.

Thank you, Charlotte, and thank you all for joining us this morning. We demonstrated solid execution in the fourth quarter of fiscal 2026. We grew sales, expanded our adjusted operating profit and adjusted operating profit margin. We increased our adjusted diluted earnings per share, generated strong cash flow and allocated capital effectively. Throughout fiscal 2026, we strengthened ABL while continuing to scale AIS, building the operating and financial capacity needed to compound growth and value over time.

In Acuity Brands Lighting, we continue to advance our strategic and operational priorities. During the fourth quarter, I appointed [ Ruth Gratzsky ] as President of ABL. Ruth brings extensive leadership experience across go-to-market, product and engineering and operations in complex industrial technology and infrastructure businesses. Lighting and light controls are essential technologies in every built space, and we have differentiated ABL through our industry-leading capabilities, trusted brand portfolio and strong customer relationships across luminaires and electronics. I believe the combination of Ruth's experience advancing growth and innovation, technical depth and operating discipline, make her the right leader to build on ABL's strong foundation and capture the opportunities ahead.

Product vitality is core to our strategy in ABL. Within a luminaires portfolio, we are introducing new products and leveraging established product families to address customer needs and growth opportunities. In the fourth quarter, we expanded the BLT family from Lithonia Lighting with a purpose-built luminaire for data centers. designed around the specialized ceiling grid system used in these facilities, it simplifies installation while bringing BLT's proven performance and reliability to a growing end market. In Luminus, we expanded the Hollowcore family with the introduction of Hollowcore Element. The solution extends the offering by broadening the range of applications and mounting options, providing architects and designers with greater flexibility while delivering a cohesive visual aesthetic across bases. And we introduced Ridge by Hydrel, a premium outdoor linear floodlight range used for facade bridges, tunnels and stadiums. Ridge combines precision optics with durability and installation flexibility to deliver differentiated architectural lighting outcomes in some of the most challenging environments.

Our electronics portfolio also continues to evolve. At the controls layer, nLight connects luminaires and sensors into a single intelligent control architecture that scales from a single room to an entire campus. nLight helps customers reduce energy consumption, improve occupancy, simplify code compliance and gain visibility into building performance through both wired and wireless control options. Sensor Switch completes the offering with contractor preferred solutions for simpler applications. At the components layer, Elbow LED is transforming LED drivers from traditional hardware components into configurable solutions through Elbow LED Studio, a cloud-based application that enables customers to configure, deploy, manage and update drivers efficiently. The newly released Accella 85-watt driver leverages elderly studio and NFC technology to allow customers to tailor the driver to specific applications while simplifying deployment and ongoing management. This creates opportunities to deliver new updates, enhanced capabilities and differentiate performance throughout the life cycle of the Lighting solution.

The industry continues to recognize our innovation. This quarter, 6 of our products, including Eureka River and the Sensor Switch, TLS, Twistlock sensor were included in the IES progress report. 3 of our campaigns are in Ted Best of the Best awards, and 3 products, including Eureka Cornea, received SIT Design Awards, an international program recognizing creativity and innovation in furniture and interior design.

Now switching to Acuity Intelligence Spaces, which continued to deliver strong sales and margin performance. In AIS, we have differentiated and growing portfolios and building operations and in experiences. Over time, a common data architecture will enable interoperability across these portfolios, improving productivity for our customers and making spaces increasingly autonomous. I want to spend some time reflecting on QSC's first full year as part of Acuity. We have aligned the team and established a solid foundation for continued growth. During 2026, our focus was on delivering strong performance and increasing our addressable market by extending QSC into new customer spaces, introducing new solutions and making progress on our multinational expansion.

QSC is recognized for delivering high-quality experiences and spaces, ranging from theme parks and stadiums to campuses and corporate offices. Our recently introduced network video management offering, or NVM, represents the next generation of video distribution within the QSC platform. NVM enables customers to connect, distribute and manage low-latency video across hundreds of endpoints through a common operating environment. This allows customers to deliver live video to hundreds of screens in complex environments, like stadiums and casinos. In 2026, we also advanced our vision of transforming all spaces into high-impact spaces. We introduced Room Suite, the collaboration bar and the scheduling panel to bring this capability to small- and medium-sized spaces. These solutions illustrate how QSC provides a common platform to manage experiences of all sizes, from individual collaboration rooms to complex high-impact environments.

The industry is already recognizing the value this delivers to our customers. During the quarter, QSC received multiple awards at InfoComm 2026, including the Best of InfoComm awards for the Room Suite Collaboration Bar and The Scheduling Panel and Commercial Integrators' Best Case Study of the Year Award for the QSC Microsoft Experience Center. As we enter 2027, I want to step back and talk about what we are building at Acuity.

Our strategy is simple. We are building a compounder, compounding our operating capacity that, in turn, compounds our financial capacity. 2026 was an important year. We advanced core strategic and operational initiatives in Acuity Brands Lighting and invested in the capabilities needed for long-term growth. And we scaled Acuity Intelligence Basis, which is now 1/4 of our business, by developing strategically differentiated portfolios that uniquely position us in the market. We believe that our Acuity platform is our strategic differentiator. We define our platform as our values how we create value, better, smarter, faster operating system and increasingly our human agentic organization.

We are leading in the development of human-agentic organization, one of which people and intelligent systems work seamlessly together to unlock new capabilities, elevate performance and accelerate growth. We've been very purposeful in how we have rolled out AI in our business. We are redesigning core processes across the organization through the combination of agenticabilities and reimagined workflows. This is creating repeatable capabilities that can be deployed across the company, accelerating productivity improvements and scaling expertise. We are embedding AI in many of our products. Examples of this [indiscernible] in [ Atria's ] data lab, which help customers better understand, manage and optimize their spaces through data, analytics and actionable insights. These capabilities improve outcomes today while creating opportunities to deliver new applications and services in the future.

And we are increasing associate productivity through LLMs and agentic workflow development so that our associates can spend more time applying judgment and creating value. Our Acuity platform provides the context, capabilities and operating discipline to make better decisions, move with greater velocity and turn knowledge, judgment and experience into repeatable advantage. It is how we are able to operate more productively with greater distribution of responsibility and accountability throughout the organization. It creates financial capacity by driving performance that leads to strong free cash flow generation and the decision-making that supports disciplined capital allocation. The result is a more capable, productive and resilient business positioned to create stakeholder value over the long term.

Now looking ahead, in Acuity Brands Lighting, we are focused on product vitality, elevating service levels using technology to improve and differentiate both our products and how we operate the business and driving productivity. Our growth algorithm is clear. We will enter new verticals. We will take share, and we will grow with the market. And as we have done in the past, we intend to add around 50 to 100 basis points of adjusted operating profit margin per year. In Acuity Intelligent Spaces, we have differentiated and growing portfolios and building operations and in experiences. Our focus will continue to be on growth, both organic and inorganic, and we have the opportunity to continue to expand margins over time.

We are effective capital allocators. We have grown our business organically, and through acquisitions, we have increased our dividends, and we have been opportunistic in repurchasing more of our outstanding shares. In conclusion, we have demonstrated resilience and adaptability across our organization. We are building the operating and financial capacity needed to compound growth and value over time.

Now I'll turn the call over to Karen, who will update you on our fourth quarter performance and our fiscal 2027 outlook.

Thank you, Neil, and good morning, everyone. We delivered solid performance in the fourth quarter of fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin and increased our adjusted diluted earnings per share. For total Acuity, we generated net sales of $1.2 billion, which was $35 million or 3% above the prior year. This was driven by growth in AIS partially offset by revenue declines at ABL. Both adjusted gross profit margin and adjusted operating profit margin benefited from the continued growth of AIS as it becomes a larger part of the total company.

Adjusted gross profit margin improved to 50.2%, an increase of 130 basis points above the prior year. Adjusted operating profit was $233 million, an increase of $8 million or 3% from last year. Adjusted operating profit margin during the quarter was 18.7%, an increase of 10 basis points above the prior year. Our adjusted diluted earnings per share was $5.77, which is an increase of $0.57 or 11% compared to the prior year, primarily reflecting higher profitability and lower diluted shares outstanding. ABL sales of $959 million decreased $3 million or less than 1% versus the fourth quarter of fiscal 2025 when we were working through an elevated backlog that resulted from orders accelerated in advance of price increases during the back half of fiscal 2025. On a 2-year stacked basis, total ABL sales were flat and the independent sales network and direct sales network combined grew 3%.

ABL again delivered strong adjusted gross profit margin of 46.2%, driven largely by product and productivity improvements. This quarter, we received $32 million in tariff refunds and had a $15 million special charge that resulted from certain actions related to productivity improvements, including initiatives involving our product portfolio, supply chain and operating footprint. Both of these items were adjusted out of our results. Adjusted operating profit declined $14 million to $180 million, and we delivered adjusted operating profit margin of 18.8%, which was a decrease of 130 basis points compared to the prior year as we invested in technology, which supported the stronger gross profit margin.

Now moving to Acuity Intelligence Spaces. Sales for the fourth quarter were $298 million, an increase of $43 million or 17%, driven by strong growth across our portfolios. AIS delivered adjusted gross profit margin of 61.2%, an increase of 200 basis points compared to the prior year. This quarter, we received $13 million in tariff refunds and had a $3 million special charge due to an impairment of a facility. Both of these items were adjusted out of our results. Adjusted operating profit was $74 million, an increase of $19 million or 36%, with an adjusted operating profit margin of 24.9%, which was up 350 basis points compared to the prior year.

Memory cost increases did not affect our performance in the fourth quarter. However, we do expect an impact to our margins in AIS in fiscal 2027. We plan to manage this as we have other supply chain disruptions. Our first priority is to secure the inventory needed to service our customers. Our second priority is to recover the incremental cost in dollars. We will also begin the process of accelerating our product and productivity initiatives to recover margins.

Now turning to our cash flow performance. During the fiscal year, we generated $826 million of cash flow from operations which was $225 million higher than in fiscal 2025. This increase was due to our operating performance, tariff refunds and lower tax payments. In fiscal 2026, we continue to allocate capital effectively and consistent with our priorities. We invested for growth in our existing businesses by allocating $78 million for capital expenditures. During the year, we refinanced our revolving credit facility and continued to reduce debt. We repaid $200 million of our debt during fiscal 2026, and after the close of the year, we repaid another $200 million. As a result, we have now fully repaid the borrowings used to finance the QSC acquisition.

We increased our dividend by 18% and allocated $287 million to repurchase over 940,000 shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased almost 11 million shares at an average price of around $164 per share, which was funded through organic cash flow. This amounts to nearly 28% of the then outstanding shares.

Now I want to spend a few minutes on our outlook for 2027. Consistent with our prior practice, we are going to provide annual guidance anchored around net sales and adjusted diluted earnings per share. We will also provide you with certain assumptions, which you can find in the supplemental presentation available on our website after the conclusion of this call. For full year fiscal 2027, our expectation is that net sales will be within the range of $4.7 billion and $4.9 billion for total AYI. This is based on the assumption that ABL will deliver flat to low single-digit sales growth and AIS will generate low to mid-teens sales growth. We expect to deliver adjusted diluted earnings per share within the range of $20.50 to $22.

In summary, we delivered a solid performance in fiscal 2026 and finished the year with momentum. AIS continued to grow and deliver strong margins while we strengthened the foundation of our ABL business. We generated significant cash flow, allocated capital effectively and ended the year with a strong balance sheet. We are well positioned to deliver sales and EPS growth in fiscal 2027.

Thank you for joining us today. I will now pass you over to the operator to take your questions.

[Operator Instructions] Our first question comes from Tim Wojs with Baird.

Karen, maybe just to kind of circle back on the guidance commentary that you just gave. I don't think, just kind of quick back the envelope, that it implies a lot of margin expansion. We obviously have a fair amount of inflation that's kind of entering the system. So maybe you can just talk about, a, is that correct, and b, how we should think about inflation kind of pricing and maybe the cadence of margins as we think about fiscal '27?

Yes. Tim, thank you for that question, and thanks for being here this morning. So let me just reiterate what I said in the prepared remarks. We expect sales to be in the range of $4.7 billion and $4.9 billion and EPS $20.50 to $22. And what this reflects is our low single digit -- flat to low single-digit sales with the ABL and low to mid-teens at AIS. So what you're seeing is continued growth in AIS is also impacting the favorable mix. So that's having some improvement on the overall EPS as well as ongoing productivity. But I think, to your question of why you're not seeing a lot of margin improvement is what I was referring to with some of the memory cost increases at AIS that we're anticipating for next year. So the underlying business is still really strong, but just the impact of those memory cost increases while it doesn't impact the pricing and to cover the cost is having some impact.

So as we said, our priority there, we ensure we have the right supply for our customers. The second will be to cover the cost in dollars. And then over time, we will work back that margin. So that's probably a little bit of what you see. But overall, we think we're in a really good place as we enter 2027 and continue to adapt to these conditions.

Okay. Is there a way to kind of, I guess, pinpoint or just kind of ring sense like what the memory cost headwind is? Are we talking about kind of flattish margins in AIS this year, kind of all-inclusive of everything? Or just trying to kind of conceptualize what the higher memory costs actually mean for the model?

Yes. I think if you take memory costs alone, similar to what we've talked about before with tariffs and other disruptions that we've had, this is around a couple of hundred basis points. So think of it that way. Now they will still work to improve that with some SG&A leverage as they grow their sales. But -- so you may not be the full impact of that couple of hundred basis points, but that's the gross impact around that.

Okay. Got you. And then, Neil, you added a new leader in the ABL business recently. Can you just kind of talk about what she adds to the business and kind of what it means for the ABL business going forward just in terms of focus?

Sure. So before we -- before I talk about Ruth though, let's -- I do want to talk about Acuity Brands Lighting for a second. Acuity Brands Lighting is the undisputed leader in North America and the best performing lighting company in the world. And lighting and lighting controls are essential technology in every built space. In other words, this is an outstanding platform. Over the course of the last 5 or 6 years, we've taken that business from high 30s gross profit margins to upper middle 40s gross profit margins, through structural improvements in the business. And we are confident in the continued trajectory that we can display with Acuity Brands Lighting.

I chose to bring Ruth in because of what I believe ABL can do and also what I believe she can do. So she comes to us from Siemens. She's got a demonstrated history in industrial technology and everything from go-to-market to product and engineering to operations with disciplined growth, where she's taken large businesses and increased their size materially. She fits with us culturally and can grow. But what I want to emphasize is, I feel like even all the way back to when I joined Acuity, the narrative around the lighting industry has always been what can the lighting industry be that's different than what it is. And I think we need to celebrate what the lighting business and the lighting industry is, which is what I said when I got here.

The lighting business is incredibly durable. It's essential to every build space, and we have the opportunity. We've demonstrated the opportunity for material structural improvement in the quality of the business, and we'll continue that over time. So she is a perfect fit for where that business is now and where I want it to go over the course of the next 5 years.

Our next question comes from Ryan Merkel with William Blair.

Neil or Karen, can you talk about ABL order trends and how we should think about seasonality for fiscal 1Q? And then can you comment on if you've seen any impact from higher interest rates and higher cost inflation on project activity?

Yes. Thanks, Ryan. So we talked about in the last earnings call that the order rate and the general business climate around ABL had firmed and that's what we expect to continue into next year. So in fact, we were just down this week at our next sales conference where we bring other the entire independent sales network and many of our product leaders and introduced the new products for 2027 and beyond. And it was hard to not appreciate the energy in the room kind of all around. So we feel pretty good about where the business is.

On the seasonality, I think that the only impact to normal seasonality is 2 things. One is the increased backlog that we were dealing with last year, number one, on a year-over-year basis. And then, number two, the impact of corporate accounts, which you can start to see kind of working their way into our performance. As it relates to interest rates, obviously, we don't control the economy or the interest rates. But what we have done is we've demonstrated that we perform in all environments. And as it relates to the top level context via interest rates, interest rates now are back to where they have been on an average basis over the last 30 years and a lot of stuff got built in the last 30 years.

So our view is that is that the business will normalize based on the opportunities that are in front of us. And our ABL business is so resilient, partly because we address many segments of the market. So we can find our way to where growth is in the market. So obviously, you can imagine we had a very strong year in data centers in '26 for lighting. We introduced, as I mentioned in the prepared comments, a purpose-built solution for data centers going forward. So we'll continue to get our own fair share of data centers, which -- on the lighting side, which is an example of us adapting to where the market is taking us. So put all that together and our durable lighting business will continue to perform in 2027.

That's great. And then a follow-up on AIS gross margin, I guess, a 2-parter. The margin in the quarter was a lot better than we were thinking. So maybe just unpack why it was so good. And then back to Tim's question, a couple of hundred basis point impact from memory. I just want to make sure I heard that right. And what does that impact hit? Should we think about that impacting right away as we model fiscal 1Q? Or does that take a quarter or 2 before that shows up?

Yes. Let me first take a step back and talk about AIS. So as I textualize ABL and the improvement in ABL over time, I want to do the same for AIS. So AIS has gone from about $150 million in revenues and negative operating income to what you see today, which is a large, vibrant and growing business with outstanding opportunities ahead. And we've done that both mostly organically, but also inorganically. And so we have a playbook to continue to improve this business over time, to grow this business over time and to make it an increasingly important part of Acuity.

So all of the dexterity that we've demonstrated in our performance in ABL now we're bringing also to AIS. So when there are supply chain shocks, whether it's the pandemic, land wars, oil prices, interest rates, memory costs, whatever they are, we've demonstrated that, a, we can adapt to them; b, we can continue to deliver; and c, we can continue the trajectory of improvement in the business. So the memory cost impact in AIS is just another one of those mild speed bumps on the path to where we are going. As Karen indicated, they probably work out about 200 basis points of gross margin impact in the -- over the course of the year, and they basically keep operating margins flat to slightly up. But we will continue to recover those on a percentage basis over time.

As you do your modeling, the modeling will depend on when the inventory works its way through sales. So it didn't end the fourth quarter, as Karen indicated in her prepared remarks, it will probably start to impact late in the first quarter and into our fiscal second quarter.

Our next question comes from Christopher Glynn at Oppenheimer.

Yes, just wanted to spend a moment on the margin profile for ABL. So you had some -- a little bit of sequential gross margin improvement. Usually, I think it ticked down seasonally. I know the last couple of quarters, you've been rebuilding momentum and forecasting that, that will hold. And at any rate, it is a pretty solid jumping off point into the new fiscal year to anticipate strong gross margin trends for ABL. And you did reemphasize the 50 to 100 basis points a year, Neil, for the longer term.

So I'm kind of leading here a little bit, but we're pretty happy with the gross margin picture and moving into that framework of 50 to 100 for ABL next year?

Yes, Chris, thanks for the question. And then picking up on the earlier comment and tie it back to the results. The trend for ABL is pretty obvious. And you unpack the gross margin improvement that we've made over the last period and as we look forward to the periods going forward. The primary driver of that are structural improvements we've made in the business. So those improvements have been in the face of relatively low growth as is pretty obvious from the results. So the impact of those structural improvements is greater than the impact of growth. However, growth with those structural improvements compound on each other.

So as you look forward, obviously, we guided to flat to low singles for the lighting business next year. So we're not counting on a growth tailwind to drive those margins. We are counting on our continued structural improvement in the business. And as I said earlier on the earlier answer to the Ruth coming in now, this is a great setup for where this business is going to go over the next 5 years. And as I indicated, we're really bullish about that.

Okay. Great. And then the savings for the $15 million special charges, does that benefit [ COGS ] a little bit in each of the 2 segments?

Yes. So those were primarily related to a few things. One is we've started to adjust our manufacturing network as a result of all of the productivity improvements that we have implemented over the last 5 years. So we closed one facility. We consolidated into another. That's the primary driver of those costs. And so you'll see the impact of that primarily in gross profit margin over time. Otherwise, we also eliminated some smaller brands, which -- and some smaller product lines, which we didn't expect to be contributors over the long term.

So you should expect to see us continue to do this, Chris. We will continue to -- as we drive productivity, we can rationalize our footprint because we don't need the whole footprint anymore even as we grow. So that -- expect to see us continue to push that forward over time.

Okay. Great. And just if I could sneak in another. The -- you talked about the data center initiative and controls last quarter, the direct digital control and the PLC side of things. So just wondering if you could update where that technology is in terms of qualification and getting recognized in the channel. And also your acquisition pipeline, any updates there?

Yes. So first on Intelligence. First of all, I address data centers for lighting in the lighting section. So now addressing data centers on the Intelligence Spaces side. We have the premier DDC controller in the market and Distech at a PLC controller, which puts in position to service multiple hyperscalers. Going forward and those discussions, those -- first of all, the existing sales continue and are growing, as you would expect, and we are in the door with more and more hyperscalers over time. So I feel like we're well positioned, and we will continue that push on the data centers.

So as we look forward to our acquisition pipeline, we also have a strong acquisition pipeline with multiple choices of companies to choose from. Again, our priority is around growing Intelligence Spaces, continuing to grow Intelligence Spaces into a larger and larger portion of our company. But our philosophy is really straightforward. We buy high-quality assets at fair prices. And then we've demonstrated that we can operate them really effectively going forward. So we feel good about the pipeline. We've got multiple things to choose from, and they will continue to be additive to our direction.

Our next question comes from [ Joe O'Dea ] with Vertical Research.

Can you talk about the cost inflation and price side of things in ABL, just any sizing of the type of inflation you're seeing across components as we see freight as well? And then the pricing response to that. Is the pricing in the market? Or how should we think about the timing and magnitude of pricing that would be coming?

Yes. Thanks, Joe. Let me talk about pricing generally at ABL, and then I will answer the specifics. So first, we've been very consistent in explaining how we price at ABL. We price strategically to realize the value that our products derive in the marketplace. And through our performance, you can see that we continue to increase gross margins over time as we've done that. So primary driver of the gross margin is the structural improvements that are derive. So in other words, we don't price to a markup of changing inflation. So -- but we do cover the dollar cost of supply shocks and the continued evolution in trade policy and other things.

So now to the specific inflation, yes, we do see some inflation in some commodities deal, freights, those sorts of things, which we deal with and through our purchasing through our product development efforts and through productivity and our manufacturing going forward. We also continue on our normal strategic cadence of pricing, which includes controls pricing and others. So we announced a price increase for the -- which is our normal price increase -- for the business we've announced in September, it goes live in December. That's where our continued direction will be is, one, to lead the industry, two, through strategic pricing, which we focus on really identifying and realizing the value that our products deliver in the marketplace. And the smaller percentage then is to adjust that to deal with any changes in inflation, trade policy, et cetera.

And then on ABL and SD&A specifically, those dollars went up a little more than we anticipated sequentially. A percent of revenue, that's up 200 bps versus where it was a year ago in the fourth quarter. So it sounds like there's some COGS coming out structurally, but are you structurally adding SD&A? And then specifically, any color around the technology investments that you're making there?

Yes. So those will normalize over time. That's just 1 quarter, so I wouldn't place too much credence on the fourth quarter. There's some timing things going on, et cetera, and one timers. The investment that we're making in technology is incredibly purposeful and unbelievably valuable. So you know my background, I've been through these technology transformation multiple times, from Internet to social to mobile, now to AI or, I guess, as of today, superintelligence. And I will tell you that I am incredibly bullish on both the impact -- well, first of all, the technology. So I'm an optimist. Second, I believe that the benefits of that technology will not be evenly distributed. So everyone will get some benefit, but organizations like ours that know how to, a, to control it ourselves; and b, to use it to actually change the business will have disproportionate benefit over time. And so these are incredibly responsible investments that we're making in technology, and I expect them to yield very positive results.

Last one, just related to that, you recently added a Board member, maybe someone who also would be characterized as AI optimist. But as you think about the AI value creation opportunity, how do you think about that on the revenue side of things? And when we'll hear you talking more about AI as a revenue tailwind?

Let me kind of stack the benefits over time of what we're doing. So the AI is technology and what AI does is write software at the end of the day, so then we use that to reevaluate our core processes and drive structural improvement in our ability to deliver whatever it is that we choose to deliver, from the back of the house, on things like how we pay invoices, forward to the structural kind of gross margin, to product development. The revenue growth impact will come over time as we shorten our product development life cycles and we move faster -- continue to move faster than anyone else in the industry. That, I think, is going to be the ultimate growth drivers.

Then over time, at AIS, we believe -- principally, but not maybe exclusively, we believe that we can use AI to drive applications or to deliver applications to drive outcomes for our customers and in spaces. So again, basically, it increases our velocity, and it increases our ability to do more with the same resources, which ultimately benefits us both on the revenue line and then in productivity from profit margin and returns on investment.

Our next question comes from Brandon Knutson with Morgan Stanley.

Within the ABL segment, the independent sales network grew 4% after being flat for the last 2 quarters. Can you just talk about what's driving that inflection and kind of split it off between market, which you said is firming? And then independent actions you're always taking to gain share?

Yes, Brandon, welcome. Nice to have you. On the independent sales network, I would say that's an indication of us taking share. So we're pretty confident in where our position is across each of these markets. So I say markets because the independent sales network represents 80 independent markets across North America. So we see that pretty consistently over North America, and it's our view that we're taking share.

Great. And then on capital allocation, you guys had $57 million of share repurchases during the quarter. It sounds like you paid off the rest of the QSC debt post quarter. So now free cash flow going forward, how are you thinking about capital allocation? And then also on the QSC front, can you just talk a little bit about the revenue synergies you've been seeing there and the opportunity you see there? It sounds like the cost level is normalized there. So on the revenue side, just any color there?

Yes. So our capital allocation strategy is very clear. We grow our current businesses. We go through acquisitions. We increase dividend, and we repurchase our shares. So as we look forward, obviously, I believe that organic cash generation is a strategic asset, and it has been a focus of ours, and you can see it in our results. That ties back to our overall strategy, which is to build a compounder. So we compound our operating capacity, which then compounds our financial capacity, and you see the impact of that in free cash flow. And then more importantly, what we do with that free cash flow.

So as we take a step back and we think about kind of where Acuity is positioned for the market going forward and specifically, the question earlier about interest rates, our organic cash generation is incredibly valuable, and we can use that to then continue to grow the business. So QSC is just a good example of that. We bought a very high-quality asset at a fair price, as we do. We onboarded them into our AIS segment. We normalize their performance with our performance through the introduction of our better, smarter, faster operating system and their improvement.

And then to your question on sales synergies, now we're starting to see end users who recognize that there is only one solution in the marketplace that ties everything together. So as we tie the data from how the building operates, all the way through to what's happening in the building, then we're starting to get customers who say, "I now know where I need to go to centralize each 1 of those things" because we give them the opportunity to do things that other people don't give them the opportunity to do. So in both of our experiences and operations areas, QSC and in Distech and [indiscernible], we have open-protocol technologies that come together in a single data layer, which gives our ultimate end users the ultimate power and flexibility to basically to do whatever they need to do and to be positioned to do that over time.

And we are uniquely positioned around that in the marketplace. So increasingly the end users are starting to pull our solutions through the channel, which is how you will see the revenue combination synergies going forward.

Our next question comes from Brian Lee at Goldman Sachs.

Operator, I guess we have no Brian Lee.

Apologies, I was on mute. I wanted to just follow up on the last question around kind of the ABL outlook here, Neil. It seems like you guys continue to gain share. So embedded in your flat to low single-digit growth outlook for fiscal '27, is that still the underlying assumption of the market's kind of broadly flat to down, and you're still gaining share? Maybe just kind of dissect what's embedded in that view for ABL specifically?

Yes. So on ABL, as Karen indicated, we're guiding to flat to low singles. We do expect the market to be flat to debt low singles. So that's the underlying assumption in there, and we're taking share and increasing our penetration of the new verticals to drive that, and we're adding some quality performance in our corporate accounts.

Okay. Awesome. Helpful. And then I guess on the margin front, this year, you've quoted the investments you made in ABL kind of impacted the margins a bit. Does that reverse fully into '27? And then juxtaposing that against couple of hundred bps of headwind in AIS, if we try to kind of break out the margin cadence between the 2 segments, is it sort of ABL improves year-on-year, AIS may be a bit more sluggish, flattish given the strong performance we've had throughout the year? Is that kind of the way to think about the different trend lines between the 2 from an operating margin performance standpoint?

Yes. I'll contextualize the direction of travel first and then the specifics for the year second. So on ABL, over time, we will continue to make structural improvements in the business, which will drive gross profit margin, and that will then cascade to operating margin. The -- and that's true this year also. So the structural improvements in gross margin, we will make this year, will be in spite of the low -- flat to low single digits top line, which then cascade to operating profit.

The story at AIS is slightly different, which is we really have high-margin businesses there, high [ 15 60 ]. And really, the operating margin improvement over time continues from our scaling of those businesses. So in 2027, as Karen indicated, the -- over the course of the year, the memory impact will be about a couple of hundred basis points as the gross margin line, but you will continue to grow, which will mitigate that impact at the operating profit margin line. So think about operating profit margins about flat or slightly growing. So however, on a dollar basis, they continue to improve.

And there's some confusion about this when this happened at ABL as it related to other supply shocks in the past. So the percentage margin here doesn't matter as much as the dollar -- continued dollar margin. And so at AIS, the dollar margins will continue to scale. We will continue to grow in the mid- to kind of the mid-teens. And then when we don't have this supply shock or when we annualize the supply shock, then we'll return to our cadence of margin improvement. So this is just a point in time, dollars will continue to go up, and the company will continue to be more valuable.

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

Thank you all for joining us today. I always try and reflect at the end of year conference call as we look forward about kind of where we are strategically and where we're going. It's hard to not be enthusiastic about where Acuity is positioned now. We have the leading and best performing lighting company in the world with ample opportunity ahead, and I'm excited about Ruth's leadership and impact on that business.

At the same time, we continue to scale AIS both organically and inorganically. We're solving problems for end users in the marketplace better and in different ways than anyone else can. And I'm excited about their continued growth and confident in where we can go. And then finally, we're building a compounder where we compound our operating capacity through through our values, through how we create value for better, smarter, faster and our human agentic platform. And that is then, in turn, compounding our financial capacity, and we've demonstrated the ability to use that financial capacity to create value.

So we appreciate your interest in Acuity, and we look forward to catching up with you again end of the quarter.

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

Good morning, and welcome to the Acuity Fiscal 2026 Third Quarter Earnings Call. 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.

Thank you, operator. Good morning, and welcome to the Acuity Fiscal 2026 Third Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and in our fiscal 2026 third 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 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026, third quarter earnings release and supplemental presentation. Both of which are available on our Investor Relations website at www.investors.ctync.com.

Thank you for your interest in Acuity. I will now turn the call over to Neil Ashe.

Thank you, Charlotte, and thank you all for joining us this morning. We demonstrated solid execution in our third quarter of fiscal 2026. We grew net sales. We expanded our adjusted operating profit, and we increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively.

In Acuity -- translating, our sequential performance improved, while our margins remain strong. Our ability to drive performance in this market is a result of the -- the execution of 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 drive productivity.

Over the past several years, we have focused on enhancing our product portfolios, Contractor Select, Design Select and made to order. By aligning these portfolios to the specific needs of our customers, we have reduced complexity across the value chain, while driving productivity for both our partners and ourselves. Contractor Select drives growth and productivity for electrical distributors and retailers by lowering their cost of doing business and reducing their inventory requirements.

Design Select enhances productivity for architects, specifiers and contractors by enabling efficient configuration of the right products for each project. The balance of the portfolio is made to order, providing customized solutions tailored to specific customer needs. This quarter, we introduced Beyond by Lithonia into our Design Select portfolio. Beyond is our next-generation linear high bay designed for large-scale industrial applications with preconfigured trim packages for common use cases such as cold storage, automotive, manufacturing and warehousing.

It integrates elder led drivers with embedded sensor switch and nLight controls, delivering a complete lighting and control solution that simplifies specification, ordering and installation. We also introduced CPX 3P, our new 3 pain panel available in both Contractor Select and Design Select. The CPX 3P combines an architectural aesthetic with switchable lumen output and switchable color temperature at an accessible price point. By enabling configuration and install, we reduce SKU complexity for our distributor partners and simplify specification, inventory management and installation for our customers.

The industry continues to recognize the value that our products deliver to our customers. This quarter, we received several Red Dot awards, our Eureka brand continues to demonstrate design leadership. The Eureka segment earned the prestigious Best of the Best recognition, while Tulip, Jari and Irala received multiple product design awards. Over the past 15 years, Eureka has won 27 Red Dot awards, reflecting consistent design strength across the portfolio.

Now switching to Acuity Intelligence spaces, which continued to deliver strong sales and margin performance. Atrius and Distech control the management of the space, and QSC manages the experience in the space. And over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous.

Today, I want to focus on Distech, where we have delivered strong, consistent growth and margin expansion. Our performance reflects the strength of our open architecture strategy. Our Edge with cloud platform delivers both local resilience and enterprise scale intelligence, eliminating traditional trade-offs through open protocols, open tools and an independent system integrator network, we have customers full control over how their systems are deployed, serviced and upgraded over time. This differentiation is translating into share gains across our end markets.

We are winning projects and displacing incumbents at major universities, professional sports venues, data centers and enterprise campuses. And we are winning OEM manufacturers who are selecting our Eclipse portfolio for next-generation applications, where our architecture enables capabilities, their legacy platforms cannot support. We continue to invest in product vitality. We recently launched Eclipse Resilience, a programmable logic controller designed for mission-critical cooling applications for use primarily in data centers.

We now have a powerful combination of programmable logic controllers and direct digital controllers to solve customer problems. We also introduced a preloaded recent move dashboard within Eclipse facilities, providing immediate visibility into occupancy and space utilization out of the box, accelerating returns for both operators and systems integrators. Our investments in product innovation, combined with productivity enablers, such as AI-enabled programming tools, workflow automation and the expansion of Distech Academy are making our partners more efficient and driving growth across the platform.

Distech is no longer just a controls company. It is a platform company investing across every layer of the stack and uniquely combining edge control, cloud intelligence and occupant experience. AIS continues to build momentum with strong external recognition across the portfolio. RESETs Move was featured in the AHR product showcase and received a CSC award highlighting the strength of our sensing and analytics capabilities.

Distech Controls earned an Ecovadis metal for sustainability performance. and QSC was recognized with Rave's Best of IS 2026 award for the CSIS Room Suite modular system and named in the AV Nation Readers Choice Awards, underscoring increased customer adoption and preference across the AV ecosystem. Now looking ahead, Acuity Brands Lighting remains the best-performing lighting company in the world.

Our third quarter order trends indicate that demand in the lighting market is firming. We are focused on executing our strategy and advancing our growth algorithm while managing gross profit margin through strategic pricing, product innovation and productivity improvements, positioning us well for today and for the future. Acuity Intelligence spaces is strategically differentiated. We have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people providing those spaces.

Our focus will continue to be on growth and we have the opportunity to continue to expand margins over time. We are confident in the long-term performance of both the Lighting and spaces businesses. Now I'll turn the call over to Karen, who will update you on our third quarter performance.

Thank you, Neil, and good morning, everyone. We delivered solid performance in the third quarter of fiscal 2026. We grew net sales improved adjusted operating profit and increased our adjusted diluted earnings per share. For total Acuity, we generated net sales of $1.2 billion which was $19 million or 2% above the prior year. This was driven by growth in AIS partially offset by revenue declines at ABL.

Adjusted gross profit margin improved to 50.1%, an increase of 10 basis points above the prior year due primarily to a higher mix of AIS sales. During the quarter, our adjusted operating profit was $224 million, an increase of $2 million or 1% from last year. Adjusted operating profit margin during the quarter was 18.7% and -- our adjusted diluted earnings per share was $5.31, which was an increase of $0.19 or 4% compared to the prior year primarily reflecting higher profitability and lower diluted shares outstanding.

AVL sales of $905 million decreased $18 million or 2% versus the prior year. reflecting a challenging comparison to the third quarter of 2025 when orders were accelerated ahead of price increases. On a 2-year stacked basis, total ABL grew 1% and the independent sales network and direct sales network combined grew 4%. ABL again delivered strong adjusted gross profit margin of 46.1%, driven largely by strategic pricing, product and productivity improvements. This quarter, we also had a $6.4 million tariff refund in ABL that we have adjusted out of our numbers.

Adjusted operating profit declined $9 million to $165 million, and we delivered adjusted operating profit margin of 18.2% and which was a decline of 60 basis points compared to the prior year, driven largely by lower sales. Now moving on to Acuity Intelligence spaces. Sales for the third quarter were $304 million, an increase of $39 million or 15%, driven by strong growth in Distech and QSC. AIS delivered adjusted gross profit margin of 60.3% and an increase of 10 basis points compared to the prior year.

Adjusted operating profit was $76 million, an increase of $14 million or 22.5% with an adjusted operating profit margin of 25.1%, which is up 150 basis points compared to the prior year. Now turning to our cash flow performance. In the first 9 months of fiscal 2026, we generated $520 million of cash flow from operations, which was $121 million higher than the same period in fiscal 2025.

During the quarter, we successfully refinanced our existing revolving credit facility with a new 5-year $800 million unsecured revolving credit facility. This upsized facility enhances our financial flexibility and extends our maturity profile. We continue to allocate capital effectively. Year-to-date, we have repaid $200 million of our outstanding term loan increased our quarterly dividend by 18% and repurchased over 766,000 shares for $230 million.

In summary, our execution is solid. AIS continues to grow and expand margins, while ABL is delivering industry-leading performance. We continue to generate strong cash flow and allocate capital effectively taking advantage of market dislocations to create long-term value. Thank you for joining us today. I will now pass you over to the operator to take your questions.

[Operator Instructions] Our first question comes from Chris Snyder with Morgan Stanley.

I wanted to ask about AIS top line growth. And I think we appreciate that the category grows faster than core lighting but it also doesn't seem like a teens growth category that you guys have been delivering for the -- for a long time now. So I guess, can you just talk about -- is that just all innovation and share gain at the company level? Or is the company starting to break into some higher growth verticals -- and I specifically wanted to touch on data center, which you guys called out in the prepared remarks, and it's not a vertical that we've ever really thought about associated with the company before.

Yes. So -- let's focus on AIS first. So -- and Distech and QSC really kind of rhyme with each other. So we wanted to talk about Distech this quarter, and I will emphasize kind of Distech performance relative to your question. So over the 5 years I've been here, we've been very purposeful about adding products and innovation to Distech that allows it to compete and compete effectively first against the traditional big 4 competitors. And then second, to enter into adjacencies, which will grow their TAM and expand the company as a result.

You're really seeing all of those things come together in a very constructive way. So first, we are in the core business, the Eclipse controllers we are out innovating the competition, and we are taking share. So for example, in Atlanta in the Hartsfield Airport, -- for the first time in over 20 years, Distech was a new operating platform, which was placed in Terminal D category. So an example of where we're displacing incumbents.

Second, we obviously announced the introduction of the PLC controllers. So we have had data center exposure with our digital controllers. Now we have a unique combination of digital and PLC controllers, which positions us well for several of the hyperscalers, and that will be a growing business over time for us. Third, we've entered adjacencies like refrigeration, which we talked about with the Q2 Therm acquisition a couple of years ago. and also with the addition of more OEM exposure to other manufacturers in the industry.

So taken together, we've taken the growth rate of the industry. We've expanded dramatically beyond that through share gain and innovation; and third, availed ourselves of additional opportunities in adjacent markets and adjacent end markets. So -- when you put that all together, you get the opportunity for us to continue to grow in these -- at these rates as we look forward over the next several years.

I really appreciate that. And then if I could just follow up on capital deployment. So you guys bought back a good amount of stock in the quarter. I think have more than $400 million of cash on the balance sheet. Obviously, more free cash generation to come -- can you talk about how you think about capital deployment? I know in the past, there's been I guess you've talked about opportunities to kind of just further build out this AIS platform.

Are there any -- is there anything within that, that you think would be a great fit -- and then also just buyback. I mean you've kind of demonstrated over the last how many years that you guys are committed to buybacks when it's opportunistic.

Yes, Chris, I'll start, and then I'll pass it over to Neil to talk more about the opportunities for acquisitions. So our capital allocation framework has not changed. We continue to invest in the business for growth -- we've increased our dividend this year, and we will evaluate acquisition opportunities. And then also we repurchase shares. So the repurchasing shares, we've demonstrated that we're super disciplined and opportunistic in our approach.

And I'd highlight this quarter, specifically, we purchased nearly 500,000 shares at an average price of $281 a share. So we feel really good about our program and it's working to create permanent value for our shareholders, and we'll continue to be opportunistic when the opportunity presents itself.

And to build on Karen's comments, 1 of the other things that we've highlighted about our capital availability and compounding a generation of cash is that it empowers us to do all of the above. We can invest in our current businesses for growth. We can invest in acquisitions, we can increase our dividend and we can repurchase shares, which we've demonstrated we do very effectively.

So as we look forward on the acquisition front, we are enthusiastic about the opportunities that are ahead of us in AIS. There are multiple areas that we have identified that are attractive for us to continue to add to the portfolio. So we can expand Distech. We can expand QSC and their footprint, and we can add additional things.

So -- but I balance that by saying our view on acquisitions is really quality and not quantity. So we're focused on ensuring that we buy the right assets. And so I'll emphasize the QSC acquisition as an example. We waited and did our work so that we knew we would buy the right asset, and we were confident that when that asset and that team were part of acuity, they would be able to do things that they previously had not been able to achieve.

And you're seeing that in their results. And you see that in a market perspective at a trade show like Infocom where they're celebrated as the clear differentiated leader and on an earnings call where you can see their performance has dramatically improved. So in summary, we believe from a capital allocation perspective, we have the ability to do all of the above to grow our current businesses, to acquire businesses, to pay our dividend and to repurchase stock. And we're looking forward to additional acquisitions, which will build out AIS as our first priority.

Our next question comes from Tim Wojs with Baird.

Everybody. Nice job. Maybe just, Neil, just kind of referring back to some of your prepared comments on just kind of order trends. I know there's been some elongation in the marketplace around kind of quoting activity and release activity. So -- are you hearing from your agents that, that gap is kind of closing? And is there any particular catalyst for that? Or is it just, hey, there's a little less volatility and we're comfortable kind of releasing some of these orders?

Yes, Tim. So I would say the order rate was softest in kind of the winter months. So through January, basically. And our conversion rates were longer during those periods than they had been in the past. And those conversion rates are highly consistent over a long period of time. So we believed it to be an anomaly, and you can see it and you've heard it in your checks through as the releases are extending.

We're starting to see that firm up as I indicated in the prepared remarks. And I think firming is probably the right -- the best definition. So we're seeing more normal project activity and more normal conversion rates on the lighting side. And I also believe that we're performing better than the competition. So that's a -- so taken together, I think that gets us to where we are from a firming perspective.

As Karen mentioned in her remarks, remember last year at this time was the tariff 1.0. I don't know if it's 1.0, but tariff, April tariffs, which obviously kicked up a lot of activity, which we think we saw the impact all the way through -- we also haven't really spoken about the impact of the government shutdown, but we think that clogged up the works during that period also a little bit. So I think we're starting to see some clearing of that activity as well.

Okay. Okay. That's really encouraging. And then I kind of have a 2-part question on margins. I guess the first part is -- is there anything on the inflation side that you guys are particularly focused on right now, whether it's certain kind of electrical components or just kind of general areas of inflation?

And then the second is as we kind of think over the next couple of years, do you feel like we're at a point in the business where we could start seeing a little bit more SG&A leverage on an annualized basis? Or is that something that you would think continues to grow as a percentage of sales?

Yes. I'll break my answer into basically 3 parts and Karen weigh in if I leave anything out here. So first on general inflation, yes, we are seeing it across the complex I would say. So there is some material inflation that we're seeing, metals, et cetera, as 1 example. And we're seeing inflation in the SDA lines.

So I'll get to SD&A last to your question, but we're seeing inflation through those. I mean medical costs are up 12% going forward for us, for example. So that's kind of piece one. Piece 2 is what I would say are the continuing examples of supply shocks. So memory treating as we have tariffs and other supply shocks along the way. So we're focused first on ensuring access and availability; second, covering the -- any margin dilution with dollars.

And then third, restarting architectural and productivity improvements to continue our margin expansion. We'll deal with that over the course of the next year or so. And the memory is largely an AIS impact as opposed to an ABL impact.

And then finally on SG&A. The vast majority of the increase in our SG&A expenses have been investments in technology. So that's investments in our ability to -- over the course of the last 2 years, for example, to use AI. We're using that and driving our operations its investments, we were just in Mexico this week with our Board of Directors in our digital focus factories and digitizing our supply chain, things like that. largely investments that are helping to drive the margin expansion we see in the gross margin.

Our lighting business will continue to outgrow the market and the market will grow. When that does, we will see significant operating leverage on the SG&A line. At the same time, our AIS business continues to demonstrate that inside of their own kind of expenses, they are leveraging operating expenses as they continue to grow at a higher rate. When you take those 2 together, they will continue to be a larger portion of the company, and we will see leverage as a result of them being a larger portion of the total.

Our next question comes from Ryan Merkel with William Blair.

I wanted to follow up on the orders comment. Things are firming there. Neil, should we think about ABL for 4Q showing normal seasonality? Or -- could it be above normal seasonality. And I'm curious if there's any color on end markets, any specific end markets where the order trends might be firming up?

Karen, why don't you take the sequential and then I'll talk about the categories.

Yes, Ryan, as you know, there is nothing perfect about the sequential trends, and it's not perfectly going to align with history. But Here's what I would say. Q3 was a little bit of an outperformance on our sequential trends and we will see an increase from Q3 to Q4 as we normally do.

It may not be what the Q3 increase was, but we should see continued growth from Q3 to Q4. So we do feel like based on the current order rates that things are firming as Neil mentioned, and that should set us up well for Q4.

So then in terms of end markets, so first starting with our disaggregated revenue. Karen called out a 2-year stack for the C&I plus direct network. That's -- as I've said on this call in prior quarters, I tend to look at those together and because it normalizes back and forth between those 2. And so -- on a 2-year basis, that's up 4%. So that normalizes for tariffs and it normalizes for accounts moving back and forth between the 2 of them. So I think it's a pretty good way to look at that business.

That then highlights that there over that 2-year period would have been weakness in corporate accounts, retail and OEM for us. As we looked into the fourth quarter, and you can see through the performance of the third quarter, corporate accounts is performing pretty well this year. So as we've said consistently, that's a very good piece of business that we are the clear leaders in.

And -- but people don't refresh their buildings at the same time or on a continuous basis. So -- but we expect that to be a strong part of the business for us in the fourth quarter and beyond first. Then on end markets, we talked about data centers in the AIS conversation. We have strong lighting performance in data centers as well. So that -- it's just a smaller vertical because there are less lights, but as a content percentage of dollars.

So that's an example of where we're performing really well. The other 1 I'd call out, which we've talked about is our entry into refuel. So we are really continuing to grind out our advancement in that business. So we've won many of the largest accounts that will only -- their performance with us will only increase over time, and we have the stamina to continue to perform in that business. So I'm really pleased with the way our team has entered that market, has built a product presence and a go-to-market presence, and we've got great relationships with that and then we'll continue to grind forward.

And then finally, when you look at kind of the end markets in total, it's worth repeating that on the Acuity Brands Lighting side, we have the ability to flex into where the opportunities are because we have pretty generally pretty good market coverage. And so when 1 market is challenging, say, office, another is expanding, say, industrial, which would include the data center performance. So Net-net, I think, firming is the right determination, and it will demonstrate how much we outperform the rest of the lighting industry.

All right. Great. That was awesome color. And then my second question is just on gross margins longer term. You've been able to expand gross margins and ABL despite weak volumes for a while now. And I guess my question is, can you continue to expand there? If volumes stay soft? Is there more room on productivity and new products to keep raising gross margins?

The short answer is yes.

Okay. Any -- is it more productivity driven?

So we -- so I'll remind kind of everyone, the strategy at ABL is basically a virtuous cycle of product vitality, increasing service levels, using technology to differentiate our products and how we operate the business and driving productivity. So each 1 of those is starting to -- not starting to. Each 1 of those is contributing to the margin opportunity that we -- or the margin performance we've delivered and the opportunity that remains in front of us.

I would say we are on a -- we have moved the lighting business to a more productive product vitality cadence than it's been, at least since I've been here. So that will be a contributor. On the service levels, we are increasing our ability to tie together an order and deliver a higher outcome for both distributors and then projects through higher performance and higher reliability.

I indicated in the SD&A comment earlier that the technology in our supply chain is starting to impact our productivity even more than it has in the past. And then those all come together in our ability to drive productivity. I'll also remind that third quarter last year, we had some more volume than we normally would have as a result of the -- and this was pre-price increases pre-tariffs. And you can see the expansion that ABL was naturally able to deliver in its gross profit margin.

So we're doing all of this work, as you point out, in a soft volume environment or a tepid volume environment, I shouldn't use that word anymore. But when there is volume growth and there will be volume growth because there is literally not anything in the world that doesn't have a lights in it, we will continue to expand those margins.

Our next question comes from Christopher Glynn with Oppenheimer.

Thanks. Good morning. You're getting tired of the word tepid Neil?

I thought I managed it from my vocabulary and it stuck back in. So please strike that from the record.

We'll do. wanted to to click on 1 of the Distech comments about winning with OEM manufacturers. I hadn't heard that before and you -- I think you indicated that's sort of a new win for the business.

Yes. I mean in summary, Chris, the industry recognizes that we have the best technology. And so as we pointed out, because we're open protocol, we have the ability and they -- and our partners have the ability to do more things with our controllers than they've been able to do in the past. And so -- the trend I see there and that I predict will be going forward is that we will be able to consolidate more of the control opportunities among more manufacturers because they have the best of both worlds with the Distech controllers.

They have the best technology. They have open protocol, over time, they have access to the Atrius data lab, which gives them the opportunity to do all of the things that they want to do it with data, with digital control. At the same time, they can remain expert in the things that they are expert in, which are valves and other things.

So -- so we're confident about what the opportunity is there. And as an aside, that's also how we participate in the data center and market, which is largely as an OEM provider.

Great. and covered a lot of ground this morning so far. So I was actually just curious what you -- during the quarter, the past few months, what you've been spending most of your focus time and energy and priorities around the organization. A little bird told me you've been traveling a lot around the business.

Yes, you've got a bird following me around now, Chris. This is a whole another level of -- that spent a fair amount of time in the business this quarter. I would highlight maybe 3 things that have -- or 4 things that have taken up my time. The first is I'm pleased with our -- the development of our AI platform inside the company. And -- my view is that AI, everyone was going to impact -- have a positive impact from AI, all organizations.

But the ones that understand how to integrate the change in the technology with the change in the business will have the greatest opportunity. So I think that's the biggest opportunity for us, and that's where I've spent most of my time, one. Two is I've spent a lot of time with each of our teams around product and product velocity and how to use our better, smarter, faster operating system to drive product velocity, which is, I think, a differentiator for our company and a long-term opportunity for us.

The third is I spent a lot of time in our facilities. So I mentioned earlier, we hosted our Board of Directors this week in our Mexican production facilities. And I would tell you that every time I go there, I'm proud of what they are capable of doing. We have a high productivity incredibly engaged population, who are completely aligned with our strategy and literally get better every time I go there.

And then fourth, we mentioned acquisitions on the -- earlier in the call, there are opportunities for us to expand AIS. And so we're out meeting with potential partners and companies on that front. So taken together, I feel really good about kind of what we're doing in this market and the impact that it will have the opportunity for us on the future.

Our next question comes from Jeffrey Sprague with Vertical Research Partners.

Just trying to get a little bit better or maybe clear to me anyhow perspective on the firming you're speaking to, Neil. Just curious, is this more kind of backlog normalization kind of some of the delayed conversion coming through -- or do you see a clear kind of uptick in the -- just kind of the demand response in the end markets themselves.

Yes. I say it's a combination of both, primarily I'd focus on a bit of the normalization of the backlog. So obviously, a lot of these are kind of long tenured projects. So they're -- we're seeing them start to move through the pipeline. We've said in the past that we believe that with a normalization or any clarity around policy, inflation, tariffs, et cetera, that we would have a that the market will react positively to that.

And so we're starting to see this -- I think people can't wait forever on these projects. So they're starting to move through with those. As we look forward in our proprietary data around our proprietary models around data, we see kind of a firming of demand for the next kind of like 12 months or so or next 4 quarters. We don't see a dramatic increase in demand, but we definitely see a firming in demand. So we think that kind of that's a combination of basically the market trying to find some normal patterns.

As you've looked at your own data and kind of the external things that many of us look at, like -- have you gotten your head around why ABI continues to be weak and Dodge momentum looks better. We had another bad ABI print this morning, by the way.

Yes. We're aware of the ABI print. I mean, in fact, I was talking to our head of research this morning. And we -- we don't know what's going on with the ABI number, but I'd just remind everyone, you already know this, but ABI measures month-over-month change and it has been down for 3 years. So if you stack that you would be in a -- we haven't done the calculation, but you'd be in a really negative place, which is not where the world is. So something going on in that data that we have not figured out yet.

Yes. I sense there's some sentiment in that as opposed to real activity. But who knows? I appreciate it.

Our next question comes from Brian Lee with Goldman Sachs.

I guess, Neil, for you, I was curious the talk around the data center opportunity. I think you've alluded to it at times over the past several calls, but it seems like you may be more front-footed at this point. Can you talk to sort of the increasing product set for that end market opportunity, quantify? I don't know if it's SKUs or offerings you have there and then the kind of product vitality specifically?

And then maybe secondarily, just the opportunity, if you can frame it in terms of numbers and the competitive landscape and how it compares to other end markets that Acuity has traditionally been participating in? Just provide a little bit of context, that would be helpful.

Sure. I'll start on the controllers at Distech. So prior, we had -- we had competed principally with digital direct controllers, DDCs, which are -- and we are -- we have participated with at least 1 of the hyperscalers with DTC controllers. We've added PLC controllers to the mix so that we can meet the requirements or the request, frankly, of, I think it's a better word of those hyperscalers that favor PLCs.

What we're also seeing from a trend perspective is that more and more of the hyperscalers are realizing the benefits of DDCs, our original DDC control platform. Taken together, this gives us the opportunity to be a reliable supplier for multiple hyperscalers. We are -- so that's on the control side. In terms of magnitude, I think this can be a an interesting portion of Distech's business, which obviously is an interesting portion of AIS' business going forward.

Without putting specific dollars around it. So we'll see how that scales. Then on the lighting side, it's kind of worth noting that on a percentage basis, we've had hyper growth in lighting in data centers, but it's -- they're smaller dollar numbers compared to the others. We expect that to continue. So we're dealing directly now with contractors who are building for the hyperscale -- we sell into directly and to them as well as to prefab operators so that we can be the lighting system of choice and we will be going forward.

So I would summarize all of this, Brian, by saying I think we've got a responsible entry into the data center market that's both on the control side as well as on the lighting side. And it should be a predictable portion of our growth going forward.

Super helpful. Maybe just a quick follow-up, Neil. Now that you kind of have that proverbial foot in the door with those key customers, are you seeing kind of more organic growth opportunities within the product set that you can build off of based on feedback hearing? Or is this something where you're probably going to have to go and tax things on through inorganic growth, but you're seeing kind of the frontline insights that help you kind of inform what you might do next to expand the footprint opportunity there?

Well, at this point, Brian, I would emphasize it's all organic. So this is all product development on our side, which is the most valuable path to -- for us to grow. So I won't rule out that there might be opportunities to tack on things in the future, but I am pleased with our team's ability to enter this market -- this dynamic market organically.

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

Okay. Thanks, Liz. Thank you all for joining us this morning. As we said in our prepared remarks, we feel like we have delivered solid execution in this quarter. The light demand market is firming. So we will continue to differentiate ourselves from the competitive set in the lighting side. And it's hard not to be impressed with what AIS is doing, both on the Distech side, which we highlighted this quarter as well as on the QSC side.

So we're pleased with where we are. We're excited about where we're going, and we look forward to talking to you again next quarter.

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

Good morning, and welcome to the Acuity Fiscal 2026 Second Quarter Earnings Call. [Operator Instructions] 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.

Thank you, operator. Good morning, and welcome to the Acuity Fiscal 2026 Second Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer.

Today's call will include updates on our strategic progress and our fiscal 2026 second quarter performance. There will be an opportunity for Q&A at the end of the 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 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026 second quarter earnings release and supplemental presentation. both of which are available on our Investor Relations website at www.investors.acuityinc.com. Thank you for your interest in Acuity.

I will now turn the call over to Neil Ashe.

Thank you, Charlotte, and thank you all for joining us today. We demonstrated strong execution in our second quarter of fiscal 2026. We grew net sales, we expanded our adjusted operating profit and adjusted operating profit margin, and we increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively.

In Acuity Brands Lighting, we are managing our business aggressively in a soft lighting environment. We are aligning our cost structure to current market dynamics while continuing to serve customers effectively. Over the last 5 years, we've made meaningful progress accelerating our strategy of increasing product vitality, elevating service levels using technology to improve and differentiate both our products and how we operate the business and driving productivity.

These efforts have expanded capacity in our manufacturing network and given us greater flexibility to evaluate our production costs. As a result, this quarter, we took certain actions, including targeted labor cost reductions, which Karen will discuss later in the call.

We are managing gross profit margin through the combination of strategic pricing and product and productivity improvements. This enables us to deliver in this market environment and positions us well for the future.

Now I want to spend a moment on our growth algorithm, which is designed to ensure that we outgrow the lighting market. We enter new verticals, we take share, and we grow with the market. Last year, we strengthened our floodlight portfolio with the acquisition of M3 Innovation. These solutions are used in education, municipalities and infrastructure and are designed to reduce total installation costs and enhance the user experience.

We have won several notable projects that include retrofit and new construction across verticals, including parks and rec and education. One of our larger projects was an installation at Baldwinsville High School in New York. This project retrofitted an existing football field and installed our solution at a new athletics field. Combined with our lighting controls, we created dynamic control capabilities for a high-impact gameday environment across both facilities, all managed from a single control device.

The industry continues to recognize the strength of our products and the value they bring our customers. This quarter, several products in our portfolio were awarded the Architecture MasterPrize by the Farmani Group, including the Eureka Junction, a made-to-order luminaire that can be configured to create custom installations that are compatible with our nLight controls for use in large shared interior spaces such as lobbies, atriums, reception areas and event venues.

Multiple products were also awarded Product Innovation Awards by Architectural Products magazine, including the Juno Trac Linear Ambient family in our Design Select portfolio, that offers architects, lighting designers and installers versatile options for combining accent and ambient illumination within a single system, simplifying specification and expanding creative possibilities.

Now switching to Acuity Intelligence Spaces, which continued to deliver strong sales and margin performance. Atrius and Distech control the management of the space, and QSC manages the experiences in the space. And over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous.

Both Distech and QSC performed well this quarter. Within Distech controls, our Eclipse portfolio is a strategic differentiator. It is a comprehensive building automation platform that unifies hardware and software into a cohesive ecosystem for intelligent building management. The portfolio includes hardware devices and software used to manage how a building operates, including HVAC control, lighting and refrigeration.

During the quarter, we released the ECLYPSE retrofit solution. a building controls upgrade designed for use in buildings with legacy wiring and control architectures. This solution allows newer ECLYPSE-based control capabilities to be deployed, providing IP-based performance, embedded edge intelligence and modern user interfaces without the associated cost or disruption of completely rewiring the space.

We are also expanding our addressable market at QSC. Q-SYS is building the industry's most innovative full-stack AV platform that unifies data, devices and a cloud-first architecture to deliver real-time action, experiences and insights. Historically, the Q-SYS solutions were developed for use in large rooms and spaces. This quarter, we expanded our Q-SYS solution into smaller and medium-sized collaboration spaces with the introduction of the room suite modular system.

This gives customers the option to increase their room capabilities using audio, video and integrated networking, all supported by Q-SYS Reflect.

AIS continues to gain industry recognition. Earlier this quarter, the Q-SYS Room Suite modular system won the Best of Show Award at the ISE 2026 in Europe, the largest AV trade show in the world. While Q-SYS Loud speakers won in both the NAM Best of Show Award and in the NAM TEC awards. Distech Controls received the 2025 Global Company of the Year for excellence and integrated smart building solutions by Frost & Sullivan and won the smart HVAC Product of the Year category at the U.K. HVR Awards for our move.

Now moving to our outlook. Acuity Brands Lighting remains the best-performing lighting company in the world. Given our performance year-to-date and our expectations for the lighting market for the remainder of the year, we now expect our full year ABL sales performance will be flat to down low single digits year-over-year. We will continue to control what we can control.

We are focused on product vitality, elevating service levels, using technology to improve and differentiate both our products and how we operate the business and driving productivity. We are executing on our growth algorithm. We are managing gross profit margin through the combination of strategic pricing and product and productivity improvements. This positions us well for today and for the future.

Acuity Intelligence Space is strategically differentiated. We have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people providing those spaces. Our focus will continue to be on growth. and we have the opportunity to expand margins over time.

We are confident in the long-term performance of both the lighting and spaces businesses. We have demonstrated that we have dexterity in how we operate, enabling us to continue to execute in dynamic market conditions.

Now I'll turn the call over to Karen, who will update you on our second quarter performance.

Thank you, Neil, and good morning, everyone. Our strong execution delivered solid performance in the second quarter of fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin and increased our adjusted diluted earnings per share.

For total Acuity, we generated net sales of $1.1 billion which was $49 million or 5% above the prior year. This was driven by growth in AIS, which included an additional month of QSC sales, partially offset by revenue declines at ABL.

During the quarter, our adjusted operating profit was $176 million, an increase of $13 million or 8% from last year. Adjusted operating profit margin during the quarter was 16.7%, an increase of 50 basis points from the prior year, with margin improvement at both ABL and AIS.

Our adjusted diluted earnings per share was $4.14, which was an increase of $0.41 or 11% compared to the prior year. primarily reflecting higher profitability and to a lesser extent, lower diluted shares outstanding.

ABL sales of $817 million decreased $23 million or 3% versus the prior year driven by declines in the direct sales channel. This was due in part to several large projects in the same period last year that did not repeat. Despite the sales declines, ABL delivered gross profit margin of 45.7%, an increase of 70 basis points compared to the prior year, driven largely by strategic pricing and product and productivity improvements.

Adjusted operating profit increased $1 million to $142 million, and we delivered adjusted operating profit margin of 17.3%, which was an improvement of 50 basis points compared to the prior year. This is a result of the improvement in gross profit margin.

As Neil mentioned earlier, this quarter, as a result of our productivity improvements, we took certain actions, including the reduction of labor. This resulted in a $6 million special charge.

Now moving to Acuity Intelligence Spaces. Sales for the second quarter were $248 million, an increase of $77 million driven by strong growth in Distech and QSC, and as a result of the inclusion of an additional 1 month of QSC compared to last year. AIS delivered adjusted gross profit margin of 59.1%, an increase of 60 basis points compared to the prior year.

Adjusted operating profit in Intelligent Spaces was $48 million, with an adjusted operating profit margin of 19.3%, which was up 60 basis points compared to the prior year.

Now turning to our cash flow performance. In the first half of fiscal 2026, we generated $230 million of cash flow from operations which was $38 million higher than the same period in fiscal 2025, primarily due to higher profitability. During the quarter, we repaid another $100 million of our term loan, bringing the total repaid this year to $200 million. We now have $200 million of the debt remaining from the financing of the QSC acquisition.

We increased our quarterly dividend during our January shareholder meeting by 18% to $0.20 per share, and we allocated $106 million to repurchase 318,000 shares.

In summary, our execution remains strong. ABL is driving margin improvement in the current market environment and AIS continues to perform. We continue to generate strong cash flow and allocate capital effectively, aggressively taking advantage of market dislocations.

Thank you for joining us today. I will now pass you over to the operator to take your questions.

Our first question comes from Joe O'Dea at Wells Fargo.

Can we just start on demand trends? And so when you think about what you've observed in ABL year-to-date and the prior outlook for up low single digits, you're now seeing kind of flat to down low single digits. Just additional color on these demand trends and in particular, what you're seeing in independent sales network, where things have trended softer regionally by end market?

And then on the direct sales network side of things, the project business that didn't recur, whether you had line of sight to that or if that was a surprise? And then long-winded question, but just what you're seeing on market share trends with respect to kind of the softer market you see versus peers. I guess some questions out there, whether price has any impact on demand trends for you.

Joe, anything else you want to add before we get started?

I got a follow-up too.

We'll save that for after we started. So let's first talk about general demand trends and I'd highlight really 2 things that we think are going on. The first, we've been highly consistent about, which is we believe that the market is looking for consistency or at least consistent direction around policy, around tariffs, around rates, et cetera. .

The second is the impact of data centers and their flow-through on everything else. So they're creating a bit of a crowding out, both from a labor perspective, and I'm sure we'll talk about memory at some point in the call, but their impact on the market is being felt.

The way that manifests is that we -- on the lighting side is there are a significant number of projects that or in queue and either our independent sales network or our direct sales network which are releasing at slower paces than they have historically. So our conversion rates are about the same, but the time to release is increasing. So we've talked about this in other quarters where we think there's sort of a gumming up that's going on in the marketplace. And that's really what we're seeing from a demand perspective.

Second, yes, on the direct sales network, we expected this. We had large projects last year, as Karen mentioned in the prepared remarks, which did not repeat. There are -- and there are large projects in the future, which will come along. So those are largely infrastructure projects.

We do think that those were at least mildly impacted. So this is not -- this obviously does not affect year-over-year, but they were mildly impacted by the government shutdown because basically, decisions, permitting and funding were stalled for a while. So there's a little bit of ripple effect that's going through that.

And I believe your third question was around market share and price. So we have no indication that we are down in market share. And as we've talked about in strategic pricing, what strategic pricing means for us generally is that we price our products to the value that they deliver to the market. number one.

Number 2 is we don't have necessarily a universal pricing strategy. In other words, at places in the market where we choose to be very competitive, we will be very competitive, and other places where we choose to take price, we will take price. The net of which is we're managing the relationship between top line and profitability while maintaining our market leadership position.

So I think those were the 3 questions. Did I miss anything?

No, you got all 3 parts, so I appreciate the color there. And then just a separate topic on the tariff side of things.

Some news last night on potential for a presidential proclamation that finished products made with imported steel and aluminum could be tariffed at 25% instead of 50% on just the steel and aluminum content. I'm sure things that are in process in terms of working through but how you're thinking about that?

It seems like something that would not have USMCA compliance protection. There's perhaps a 15% threshold below which you'd be exempt. So just big picture, how you're thinking about this development, any potential impact, are most of your products below that 15% steel and aluminum content?

Yes. Obviously, we're reading about this at the same time everyone else is, and we haven't seen whatever the order would be. So this would be speculation. But let me take a step back and talk about tariffs generally because I think it's a topic worth diving in a little bit about.

We have, in our opinion, the most dynamic, well-executed supply chain in the industry. So our ability to manage through the tariffs has largely been attributed to, a, strategy, b, hard work and c, kind of location and direction. So we've been able to manage through the process so far, largely through qualifying new suppliers, identifying appropriate location, reengineering products. In short, a tremendous amount of work by our team here.

And as a result, I think we're in a really strong position versus our opportunity. So when things like this change, we adapt to whatever that change is. And what we've demonstrated is that we can adapt very, very quickly. Big picture, most of our steel and aluminum 232 does go through USMCA. So that would continue.

And a large portion of our products are unaffected -- so because of the thresholds you described. Having said that, we haven't seen it yet. So that remains up for potential change if we see the order and it's somehow different than we expect.

Our next question comes from Chris Snyder with Morgan Stanley.

I wanted to ask on ABL gross margin. I don't think anyone would have expected ABL gross margins to be up 70 basis points year-on-year despite volume declines and a lot of the very clear tariff pressure in the market.

So can you maybe unpack a little bit the drivers there. I would imagine it's a combination of productivity and price cost. Kind of how is the company achieving that in an industry that's known to be so competitive, and then I guess just looking forward, what gives you confidence that ABL gross margin can continue to grow after all the expansion we've seen already in the last 3 years?

Yes, Chris, I'll start, Karen, dive in if I leave anything out. So big picture, kind of this time last year, around this time last year, we talked about the impact of tariffs and our need to basically take a year to work through the productivity necessary to regain kind of where we were.

So the quick summary, Chris, is that we're working through the productivity as we described to catch up the year of tariff impact on our gross profit margin. So sort of similar to the tariff answer I gave a second ago, it's a lot of hard work around product and productivity improvements. So that is the redesigning of products, that's the redesigning of our manufacturing footprint, that's the inclusion of some automation, it's a combination of things which are driving that.

So as we look forward then around our product and productivity improvements, we're confident in our ability to continue down this path. So -- and it's not magic. It's hard work, but there's a lot that goes into that. So it's the impact of some of the technology investments that we're making in the line, it's the better smarter, faster operating system and how we reengineer basically everything that we do. So as we look forward, the combination of product changes of productivity in our facilities, of our material productivity will continue to drive the increases in gross profit margin.

I appreciate that. And I want to follow up on, I guess, it's been going on for a while, this intersection of kind of technology and industrials and it's -- I think it's intensifying now with AI and what that can mean. And I wanted to just ask you, Neil, just given your background, what does this intersection of AI and I guess, specifically building controls, what does it mean for Acuity? Do you view it as more opportunity than risk? And ultimately, why do you think Acuity is positioned to win as AI more increasingly penetrates the building?

Yes, thanks for that question. I think I'll take a big picture perspective on this and then dive into the impact on both AIS and ABL. So as you mentioned, I've been through these transformations before, and they rhyme if they're not always completely consistent. And you've heard the truism that the impact in the short term is generally overestimated and the impact of the long term is underestimated.

And my view is that, that will be true in spades in AI. I would say I and we are AI maximalist. We are incredibly positive on the impact it's going to have on our business. that I do believe, though, that with AI, it will be -- the benefits will be spread across everyone, so everyone will get some benefit and declare victory. There will be a subset, though, that have tremendous benefit. And those are the companies and organizations that have the scale, the resources and, most importantly, the ability to use technology to change their businesses.

And the hard part is changing the business, and that's what we're really good at. So I think that, that positions us extremely well. Then the impact of that technology manifests itself really in 2 ways. It manifests itself in the products that we present to our customers and end users and in how we operate the business.

So specifically to your question around AIS, that would be a good example of where the AI inserts into the products and services that we present to customers and end users. That will drive the data integration between Atrius, Distech and QSC. It will drive the data integration among the different components of each of Distech and QSC, for example. And we're well underway with that process now.

Second, around ABL. This gives us a new tool to your -- the first half of your question to continue to drive the impact on the business through the reengineering of the processes which are core to the execution of the business. And that's a process we're underway with now, we're at the beginning stages of as well.

So if you take the 2 together, then we have the opportunity to impact the -- both the products that -- and services that we provide to customers and users as well as driving the productivity in our business. So we're net very, very positive.

I think the negative cases that are talked about generally, at least as it relates to kind of where we live in the market, put software aside for a second, are built on the premise that AI can do anything. And while that may be true, just because you can doesn't mean you should or you will. And so if we think about where our end users and customers are going to devote their resources, it's probably not going to be figuring out how to dim lights or connect cameras and displays in their corporate conference rooms or in their entertainment parks or in their NFL stadiums.

So we feel really, really good about where we sit, number one, about our ability to capitalize on AI number 2 and number three, the ultimate defensibility of both of those.

Our next question comes from Ryan Merkel with William Blair.

Neil or Karen, can you comment on if you're seeing any cost pressures? And are you considering raising prices in the second half of the year?

Yes, Ryan, let me start with what Neil was talking about with the impact of data centers first. So with the impact of data centers, obviously, that's had some impact on labor availability, which is impacting demand, but it's also impacting memory availability. So when we think about that, we think about it as a supply shock, just like others that we've had in the past.

And here's what we're focused on, similar to what we've done around tariffs. First, we want to make sure we have the right availability of components for our customers. And then second, we will make sure we cover the dollar impact of any of those increases. And then finally, over time, we'll make sure to address any margin impact just like we've done and Neil described with the tariff situation.

So that's really where we're seeing a little bit of the pressure right now, but we will manage through it as we've done before.

All right. Got it. And then my second question is on AIS. Can you just comment on if the outlook has changed and what kind of demand signals you're seeing right now?

Yes, I'll take that one, Ryan. The short answer is no. But the longer answer is we feel really good about how this business is coming together. So we are now anniversarying QSC as part of our organization. So it's kind of hard to believe it's only been a year. But they are fully integrated now as part of AIS. They are -- we are seeing the benefits. They are seeing the benefits of being part of Acuity. We are seeing the benefits of putting Atrius, Distech and QSC together.

So we feel really, really good about where they stand. In terms of kind of long-term opportunity, both in the building space -- well, in the building space, in the integrated AV space and then in the consolidated space, we feel exactly the same as we have before. So the short answer is we feel really good about where we are. If we take the first half they're spot on from a top line perspective where we expect them to be, and we feel good about where they're positioned for the future.

Our next question comes from Christopher Glynn with Oppenheimer.

A lot of interest in ground covered here today. I had a question on the ABL outlook for kind of flat to down now. That arguably suggests the second half shows a little more resilience in the year-over-year versus the second quarter or probably no worse. But it might be intuitive that the data center draw on the rest of the market might be intensifying. So just wanted to put some qualitative on that kind of top line indication you gave for ABL.

Yes, I'll take that one and then Karen, if I leave anything off. So first, I'd say, basically, for the first half of the year, ABL is basically down about 1%, and we have really tough comps from all of the order ahead from this time last year, now that we're starting to anniversary. So that's the synopsis basically of what's going on at ABL.

I think going into the year, it's fair to say we had expectations that then became hopes, which now we don't count on anymore that the market would start to normalize and free up a little bit. So you know everything that's happened between when we made that plan and where we are from a global macro perspective at this point. So that's largely what's going on.

And then we're executing through that. I'd tell you an anecdote to explain kind of the impact of data center. So I was talking to one contractor who is actually a Distech supplier, a mechanical contractor who does a lot of data center work. And what he said to me was, I think, 3 things, which I found really interesting.

The first is that they could devote 100% of their capacity to data centers, and they have twice the margin on data centers that they have on anything else. The second thing he said was they're not going to do that, though, because he recognizes that data centers won't last forever, and he doesn't want to alienate all his existing customers for the next stage. So people are starting to see or to balance for that.

And then finally, he said, basically, all of his controls people, their business at this point is to rip everything else out and replace it with Distech because they think Distech performed so well. And the reference project he gave me was the at Atlanta Hartsfield. So it's the first time in 25 years, anything other than the legacy provider has been in Hartsfield and now Distech is. So that's a quick synopsis and the color of like the texture of how this is playing out on the ground.

Nice anecdote on Distech there. And then I just wanted to follow up on capital allocation. With the stock going down, it might have guessed you buy back more shares. You see really intent on eliminating the Distech debt, but optically, at least the leverage is negligible. So just curious how you're thinking about that. And then the third component that I didn't mention would be the pipeline.

Yes. So spot on. When -- as Karen indicated in her prepared remarks, when we see an opportunity, we attempt to realize it on the share repurchase perspective. So yes, we're -- we've obviously blown through what we had set as our original expectations. And obviously, we will continue to do that as we see the stock where we think it's kind of at attractive levels.

The second on the pay down of debt, that simply is a function of we have that much cash. So there's no reason to have a negative carry while we're there. We would be completely comfortable operating with leverage where we do find the appropriate use for that leverage, which gets me to the third point, which is acquisition pipeline.

So we continue to have strong pipeline opportunities. Our focus continues to be on expanding AIS and making it a continuingly large part of the business. So our priorities remain the same. We'll invest to grow the current businesses. And that kind of through things like CapEx, made me through things like OpEx if we want to accelerate organic product development, number one.

Number two, as you saw, we increased the dividend in January for the year. Number three, we have a strong pipeline for acquisitions. And then number four, when we see ourselves in situations like this where the multiple compresses so dramatically, we see an opportunity to repurchase and we do.

Our next question comes from Brian Lee with Goldman Sachs.

This is Tyler Bisset on for Brian. I guess just first, can you provide any additional commentary on the cross-selling opportunity with QSC? And I guess, what has been the early customer feedback so far? And how are you envisioning the continued rollout of this product?

Yes. So let me start first and foundationally, they are the leading full stack AV provider in the world. So we highlighted the ISE Best & Show Award because that literally the global center of the industry, which basically says they're -- that's the industry saying they're the best in the industry.

So there's a strong foundational opportunity to continue to grow what they currently have. The opportunity for cross-sell is then kind of the cherry on top, if you will. So that is coming through in examples we highlighted in the last call, where, for example, we integrated some Distech products, the recent move with Q-SYS and the broader Q-SYS kit to provide a unique office solution in India.

So second, we have, interestingly, a large overlap of customer base. So I like to -- I used to like to say about Distech and now I can say the same thing about Q-SYS which is that the smartest customers buy our products. So our end-user councils end up being a lot of the same folks. Interestingly, though, even in those, it's not necessarily the same individuals who are making those decisions.

So we believe that the cross-sell opportunity ultimately is end user driven where the companies start to realize the benefit at a more senior level than these individual products have historically been evaluated. And that's what we mean when we talk about driving productivity for the people in the spaces and the people who are providing those spaces.

So that's -- we see good traction on that. And then finally, we also see some traction around AIS and ABL cross-sells, which will be a topic for a later conversation.

Our next question comes from Jeffrey Sprague with Vertical Research Partners.

I wonder if you could just kind of come back to the question of memory, and certainly, the color on data center crowding out contracting is certainly very interesting. I'm kind of more curious just on the kind of core supply side of memory, sort of the nature of memory that you yourself need for your business and whether or not you actually do have a secure source of supply here as things get much tighter.

Yes. Thanks for the question, Jeff. As Karen mentioned, this is a supply shock, and we're starting to see a continuing cadence of supply shock. So I guess pretty soon, we're not going to have to call the shocks anymore, but we'll call them supply something else. In this case, and our playbook for dealing with this is, first, to ensure that we have availability, second, to cover the dollar cost impact through multiple ways. That's productivity and price.

And then finally, regain the margin, and you kind of watched us do that with ABL. We're doing the same thing here.

So yes, we've started by ensuring that we have availability. It's a dynamic market. This is a market that's changing on a monthly basis. But we are generally very well positioned for availability. And that's obviously the primary thing that we're going to be focused on. So our long-term view, I don't know that we have a different long-term view or any greater insight than what you've heard from the general market.

I would say that our general view is that while it's really, really tight right now, it is still very fluid. So it is -- we expect it to be bumpy. So we've done things like extend some purchasing in advance, funding in advance so that we make sure that we have availability. And we're going to ride out a little bit to see where availability and price goes over the next kind of 6 to 12 months.

Is the reduction in your top line forecast specifically tied to not having as much memory as you would have needed to make that other forecast?

No, there's no impact. Most of the memory would be at AIS, not at ABL.

Okay. Great. And then I was just wondering if you could maybe elaborate a little bit more on the restructuring actions. Is this another one of many that might be coming? Or should we view this as sort of a one-off action here? And what kind of payback do you see on the actions that you took here in the quarter?

I'll start, Karen, you clean up. So big picture, I want to emphasize that we've done a lot -- this is all ABL related. We've done a lot over the last 6 years to increase our productivity. That increase in productivity has increased our -- as a result, has increased our capacity. So we have significant capacity.

That positions us well for 2 things. One is to realize some short-term benefits when the market presents us with the need to, and then the second is to meet whatever opportunity is there is going forward. So specifically this time, we started to reduce some of the labor in our manufacturing facilities as a result of this productivity improvements and the current demand levels. That's the primary piece of what we did.

Second, we changed a little bit of how we're operating the sum of parts of the go-to-market as well. which was more minor. So those are -- this was not an isolated action. So we will continue to view how our manufacturing network and our supply chain are positioned given this increase in productivity. But that will take us years, not quarters.

Our next question comes from Robert Schultz with Baird.

I'm on for Tim this morning. Neil, earlier in the call, you referred to the gap between quoting activity and releases. What do you think we really need to see for that gap to close? And just how would you frame current sentiment from agents within your independent sales network today?

So I want to contextualize this and then I'll answer your specific question. So contextually, our conversion rate is basically the same that it's always been. So that's a 15-year observation, not a 2-quarter observation. So having said that, the time between quote and release of the projects is -- has gotten longer through this period than it has been in the past.

So if you deconstruct that, that says, effectively, there's still a lot of projects in the pipeline and they're releasing at a slower rate. Our hypothesis is that this is related to things like labor and crowding out that we talked about earlier and maybe some uncertainties around the policies, tariffs, et cetera. So that's the nuts and bolts of how it happens or how it is happening.

In terms of the independent sales network, their view is generally relatively positive. So we survey them regularly. We talk to them even more regularly. They are still in hiring mode, so they're adding headcount, which they are -- remember, they're independent small-, medium-sized businesses. So that comes out of their pocket. So I would say that their general view is that we will -- this will improve over time.

Got it. And then just as it relates to the ABL guide and the revision in sales there. Is there any changes to what you guys are thinking about SG&A spend in the back half of the year?

Well, obviously, we've already taken some actions around SG&A. And as we indicated, as Karen indicated in our prepared remarks, we are managing SG&A really aggressively through this period. So Karen, would you add anything to that?

Yes. No, I think that's fair. As Neil mentioned, the charges that we took this quarter at ABL will impact a little bit of the SG&A spend as well, and we just continue to manage aggressively in this market.

We also, though, will continue our investment in technology. So just to finish that point, Rob, we will continue our investment in technology. Obviously, I covered that pretty extensively earlier, but we will continue that investment.

Our next question comes from Joe O'Dea with Wells Fargo.

This one is a quick one. But just on the guide, you talked about ABL. Just in terms of AIS revenue, are you still looking for low to mid-teens growth there for the year? And then any change to the EPS guidance range?

Yes, Joe, thanks for asking. Yes, no change to AIS growth still low to mid-teens and no change in EPS as well.

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

Great. Well, thank you all for joining us this morning. I would say that I am pleased and proud of the execution that our company is showing through this dynamic market environment. At ABL, we are clearly the market leader. We are managing gross profit margin despite lower sales. At AIS, we are differentiated and we continue to grow and change the industry. So I feel really good about where we are going forward, and we look forward to talking to you again in another quarter.

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

Good morning, and welcome to the Acuity Fiscal 2026 First Quarter Earnings Call. [Operator Instructions] 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.

Thank you, operator. Good morning, and welcome to the Acuity Fiscal 2026 First Quarter Earnings Call. On the call with me this morning are Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2026 first 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 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2026 first quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investors.acuityinc.com.

Thank you for your interest in Acuity. I will now turn the call over to Neil Ashe.

Thank you, Charlotte, and thank you all for joining us today. We delivered strong performance in our first quarter of fiscal 2026. We grew net sales. We expanded our adjusted operating profit and adjusted operating profit margin, and we increased our adjusted diluted earnings per share. We generated strong cash flow and allocated capital effectively. Acuity Brands Lighting performed well in a tepid lighting market. This is the result of the cumulative effect of 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 to drive productivity.

Our product vitality efforts continue to deliver value for our customers and for us. This quarter, we launched our new EAX Area Luminaire product family by Lithonia, an outdoor luminaire that can be used in any environment, from walkways to large parking spaces. EAX is available in our Design Select portfolio and has over 60 configurable options, including an option to embed our nLight controls. This makes it easier for our agents to choose the right option for our customers and ensures flexibility for multiple types of projects.

ABL is winning in new markets through the combination of our luminaires and electronics. Interestingly, our Nightingale brand won several 2025 Nightingale awards by Healthcare Design Magazine because of our patient-centric approach to product design. Our Nightingale solutions are engineered with the entire patient journey in mind, creating an environment that supports medical teams while ensuring patient and visitor comfort. For example, the Attend sconce and the Assure nightlight deliver functional low-level illumination that supports patient sleep while enabling caregivers to perform essential duties.

In the Refuel segment, we continue to expand and upgrade our lighting solutions. We initially entered the market with the development of our canopy lighting products. In this quarter, we began delivering a comprehensive offering by incorporating AIS products, including our Atrius software and Distech controls into the Refuel solution. By addressing the canopy lights outside to refrigeration controls in the back of the convenience store and everything in between, we are creating value throughout the location.

The industry continues to recognize the strength of our products. This quarter, several products in our portfolio were awarded GRANDS PRIX DU DESIGN Awards and LIT Lighting Design Awards. Two products recognized by both include the Cyclone Lupa, a contemporary outdoor luminaire that focuses on pedestrian safety and security in public spaces like campuses, parks and city streets. And the Eureka segment, a slim minimalist linear LED pendant light designed for a variety of indoor commercial and hospitality environments.

Now switching to Acuity Intelligent Spaces, which continues to deliver strong performance. Through Atrius, Distech and QSC, we have unique and disruptive technologies that are driving productivity for people experiencing spaces and for the people who are providing those spaces. Spaces that range from amusement parks to theaters, university campuses to health care facilities, sports stadiums to your office. Atrius and Distech control the management of the space and QSC manages the experiences in the space. Over time, we will use data from both to enhance productivity outcomes through data interoperability. Taken together, this is how we can make spaces autonomous.

This quarter, we began to change customer outcomes by combining our Distech Resense Move and our Q-SYS platform. Resense Move is a multisensor device that uses thermal, light, sound, air quality, temperature and humidity sensors with AI at the edge to help users understand how their space is being used. The data collected by the Resense Move drives changes in the room, including the ability to adjust the screens, cameras and microphones from our Q-SYS platform. Q-SYS Reflect is then able to monitor outcomes and performances of the devices within the room. We are then able to further layer lighting controls and shade controls into the solution for an autonomous room experience. We demonstrated this solution to a large multinational technology company in our experience center and they chose to implement it throughout their headquarters.

AIS is also being recognized for the strength of their product portfolios. During the quarter, Atrius facilities was named a winner in the smart buildings category of the 2025 Facilities Net Vision Awards. Our Q-SYS Fullstack AV Platform won the National Systems Contractors Association's Excellence in Product Innovation Award in the category of Best Centralized AV Platform for Command and Control. And our Q-SYS Core 24f processor was recognized with the ProAV Best in Market 2025 Award.

Before I turn the call over to Karen, I want to reiterate that both ABL and AIS are performing well in a challenging market. In Acuity Brands Lighting, we continue to experience a tepid lighting market. The market appears to be waiting for clarity around interest rates, inflation and policy. In Acuity Intelligent Spaces, Atrius, Distech and QSC are working well together, both from a customer perspective and an operational perspective. Our AIS business is strategically differentiated and positioned for value creation. We continue to control what we can control, and we are confident in the long-term performance of both the lighting and spaces businesses.

Now I'll turn the call over to Karen, who will update you on our first quarter performance.

Thank you, Neil, and good morning, everyone. We had a strong start to fiscal 2026. We grew net sales, improved adjusted operating profit and adjusted operating profit margin, and increased our adjusted diluted earnings per share. For total Acuity, we generated net sales of $1.1 billion, which was $192 million or 20% above the prior year. This was driven by growth in both business segments and includes 3 months of QSC sales.

During the quarter, our adjusted operating profit was $196 million, up $38 million or 24% from last year. Adjusted operating profit margin during the quarter expanded to 17.2%, an increase of 50 basis points from the prior year. Our adjusted diluted earnings per share was $4.69, which was an increase of $0.72 or 18% over the prior year. ABL delivered sales of $895 million, an increase of $9 million or 1% versus the prior year, primarily as a result of growth in the independent sales network. As we mentioned last quarter, the independent sales network benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in the back half of fiscal 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit increased $6 million to $160 million. This improvement was driven by our efforts to lower operating expenses. We delivered adjusted operating profit margin of 17.9%, which was up 60 basis points compared to the prior year.

Now moving to Acuity Intelligent Spaces. Sales for the first quarter were $257 million, an increase of $184 million with the inclusion of 3 months of QSC. Both Atrius and Distech combined and QSC grew in the mid-teens this quarter. Our AIS business also benefited from an elevated backlog that resulted from orders that were accelerated in advance of price increases in the back half of fiscal 2025. The higher backlog favorably impacted the fourth quarter of last year and the first quarter of this year. Adjusted operating profit in Intelligent Spaces was $57 million with an adjusted operating profit margin of 22%, which was up 100 basis points compared to the prior year.

Now turning to our cash flow performance. In the first 3 months of fiscal 2026, we generated $141 million of cash flow from operations, which was $9 million higher than the same period in fiscal 2025, primarily due to higher profitability. During the quarter, we allocated $28 million to repurchase over 77,000 shares at an average price of around $357. We additionally repaid another $100 million of our term loan during the quarter and have now repaid half of the $600 million of debt used to finance the QSC acquisition.

In summary, we started the year with strong performance. We grew net sales, improved margins and increased adjusted diluted earnings per share. We generated strong cash flow from operations and allocated capital effectively.

Thank you for joining us today. I will now pass you over to the operator to take your questions.

[Operator Instructions] Our first question comes from Chris Snyder with Morgan Stanley.

I wanted to ask on gross margin. Typically, every year, I think gross margin peaks in Q3 and then steps down in Q4 and again sequentially into Q1 on the volume declines. The last couple, those step-downs have been more significant, I guess, on a 6-month basis than typical, which I assume is the result of tariffs coming in and pressuring that margin rate. But I guess as we look forward, and it seems like that's now in the base, do you think the business is positioned to kind of deliver typical gross margin seasonality, including the step-up into the back half of the year? Any color on that would be helpful.

Chris, I'll start, and then Karen, please fill in. So first of all, I think you're really referring to ABL when you talk about that kind of gross margin profile. There is so much noise, I think, in the last, call it, 9 months, and that will work its way through the system over the next several. So I think a couple of things are going on. First of all, obviously, the tariffs, as you mentioned, those have been inconsistent. So I think the headline is they all happen on April 2, but that's not really what's happened. So there's been a series of different, the 232 tariffs, the steel, those sorts of things that have come in and out at different times. So we have then reacted to that by driving and accelerating productivity efforts, number one; and then number two, taking price strategically in different parts of the portfolio. That's what you see kind of cascading through the income statement today.

As we look forward, and I say this not on a quarter basis, but on a longer-term basis, we're confident in our ability to continue to drive the margins at ABL. So as we've said, we're targeting 50 to 100 basis points of operating profit margin improvement per year. We're kind of right in that range now. It just so happened this quarter that we benefited more from OpEx than we did from gross profit margin. But we feel really good about where we're going. It doesn't mean that everything is going to go up every quarter, but we feel good about where we are.

I appreciate that. And then maybe just a follow-up on some of the ABL commentary. I think typically, we would see a pretty material step-down in ABL SG&A from Q4 to Q1 as the volumes drop. I know the OpEx there did come down, but it was pretty muted step down Q4 to Q1. Is that a function of some of these productivity investments you just referenced? Or are there other things that are kind of going on, on the OpEx line within SG&A?

Karen, do you want to take that?

Yes. I think, Chris, overall, when we look at OpEx and you see what ABL did in the third quarter of last year, we started to take costs out. So when you look at the fourth quarter and the third quarter, that really is reflective of a lot of those realigning the work and taking some of the costs out of the business. So that's probably why it was a little bit more muted as we had already taken a good chunk of those costs out. But overall, we were focused on driving that operating profit margin improvement year-over-year, and they improved by 60 basis points despite the decline in gross profit that we talked about. So we feel really good about their performance this quarter.

Our next question comes from Tim Wojs with Baird.

Maybe just my first question, Neil, you talked about some, however you want to call them, cross-sell deployments between ABL and AIS and both the fueling market and in some office markets. As you're kind of going through those types of sales and those types of RFPs and things, are there any sort of gaps in terms of the product portfolio that you're kind of finding that you need? Or do you feel like the products that you have in both of those spaces is kind of good for what you're trying to do in those verticals?

Yes. Great question, Tim. And let me start philosophically first, which is that it's our view, it's my view that cross-sell opportunities should be driven by customer. So if the customer realizes the benefit that we're providing across an entire solution, then that will get pulled through the channel as opposed to us trying to push it. So that's our philosophy. So as a result, when we start to talk about these things, it will be because customers have pulled them through, not because we're aggressively pushing them. So net-net, it might take a little bit longer, but we'll have a much more durable relationship with those customers.

We chose to highlight the 2 that we highlighted. So first, within AIS, the cross-sell opportunity between the Distech portfolio and the Q-SYS portfolio, because it really was the first coming together of the basically inside the space and the management of the space. So that is for the benefit of autonomous room experience. So there are things we can add to that experience for sure, but they're not required to provide the solution that we provided.

I think the Refuel is even at least as interesting in that, that now spans the entire company. So obviously, the Refuel effort was one that was started in the Lighting business. But quickly, you realize that the 2 most important things for the convenience store to get people into the store and then from a cost management perspective inside the store to manage the refrigeration inside the store. So Distech can provide that. I am super-pleased by how our teams have worked together to provide those solutions. So there are other things in that store, for example, that we don't provide, like digital signage, but basically, they're coming together.

Now where we go from here are there are continued opportunities to expand those product lines. So maybe not for those specific examples, but for others that provide us both organic and inorganic opportunities to add to the portfolio of AIS over the next 2 years or so. And we're pretty enthusiastic about what those opportunities are.

Okay. Super. And then I guess just a modeling question. Karen, I guess, in both of the segments, you talked about kind of executing on an elevated backlog over the last 2 quarters. I guess is the insinuation that, that is kind of behind you and maybe there's a little bit of slower growth over the next couple of quarters as you kind of -- the market -- the company kind of grows closer to the market versus the market plus backlog?

Yes, Tim, I think that's right. Historical seasonality is going to be a little bit skewed as we look ahead to Q2 based on those accelerated orders and coming into the first quarter with a little bit of a higher backlog. So as we said in the prepared remarks, both ABL and AIS were favorably impacted from that higher backlog. And so the first half, I would say, is going to be more representative of normal seasonality, but Q2 could be down a little bit more than normal.

Our next question comes from Christopher Glynn with Oppenheimer.

Just wanted to talk about some of the divergence with ISN and DSN. They kind of diverged a little more than normal in the quarter. I know you called out the backlog strength really impacting the ISN space, but maybe some other factors beyond that, it was a pretty wide divergence.

Yes, Chris, I think that's a good call out and thanks for the opportunity to talk about them. When I look at the business, I tend to combine them. So if you look at them on a combined basis, that's basically exactly where we expect it to be. Accounts move between the 2 of them. So that's a little bit of the noise that exists there. But if you take them together, we're kind of exactly where we expect it to be.

Okay. I'll think about that and follow up later, but I appreciate that. And then a lot of talk about the gas station under canopy, the in-store opportunity there today and combining Q-SYS. You also acknowledge some things you don't have like the signage. And there is a player there that's pretty established with that broad channel strategy. So it was interesting you called out some of the differentiating factors and some of the lack. Where are you in terms of meeting your penetration goals there? Is this a bit of a dog fight? Or are you availing some clear runway?

I would say that we're really pleased with our entrance into the market. And taking a step back, this is what I wanted our company to demonstrate, to itself first and to everyone else second, is that we can identify an organic opportunity that has some size, and we can develop the product portfolio, the go-to-market strategy and the entrepreneurial spirit to go attack a new vertical like that. So by all metrics, we're succeeding in that effort. So we're not going to be the only player in that market, and that market is a comparatively small part of our company. It's decidedly not our whole company.

But this is a muscle that we want to build, so that we can apply it here where we're doing really, really well. And in other areas like health care, where we're doing well, like sport lighting, where we're starting to come in, and others as we go along. So I think the real read here is our ability to attack an area that was not initially in our purview or not historically in our purview and to build both the business model, the product portfolio, the go-to-market that's necessary to be successful there, and that's kind of what's happening.

Our next question comes from Michael Francis with William Blair.

This is Mike on for Ryan. I wanted to start with just a cleanup. I saw there wasn't the guidance in the PowerPoint. Is there anything that's changed in the outlook?

Yes. Michael, in the presentation that Charlotte will post after the call, you will see just the same slide with the sales and EPS guidance that we provided in the fourth quarter. So no, nothing changed there.

Okay. Understood. And then I wanted to talk about gross margins on the AIS side. Would 60% were to be considered a ceiling? Or do you think there's more you can do there?

I think we're good -- Mike, I think we feel good about 60%. So as we continue to grow, we will focus on 2 things. One is that the level of margin in that business demonstrates the strategic value of the controls that we provide. So that's a recognition, I think, of the strategic importance of the business there. As we add products to that portfolio, we may choose to add some additional business models that maybe are slightly lower margin, which will balance it out a little bit. But net-net, we feel really good about kind of where that is.

Okay. And then I wanted to hear -- it seems like end markets haven't changed at all. I wanted to hear if anything has changed in the quoting environment with that backdrop? And any color from the channel would be helpful.

Yes. First, on the lighting side, I would say that as we've said for, what, the last, Karen, 3 quarters, it's kind of a tepid lighting environment. We would like the lighting market to be a little bit stronger. All indications we have are that we are at least holding, if not accelerating our position in the market. So it is where it is. And as I'll point out, I'd like to point out, you can't build a space or touch a space without touching the lighting. So kind of lighting is all spaces at this point, and we are obviously the best performing player in those spaces. So yes, would we like the lighting market to be a little bit stronger? We would. And at some point, it will, and we'll benefit from that.

On the AIS side, we've got disruptive businesses there that are effectively growing through market environments because of their ability to take share from others. So there, they continue to perform despite the environment. And that doesn't mean they're going to be up as much as they are this quarter every quarter, but we feel good about kind of the trajectory that we're on in AIS.

Our next question comes from Jeffrey Sprague with Vertical Research.

I wanted to get your thought on tariffs. We have the Supreme Court ruling coming up on Friday, who knows what we get. But if tariffs were somehow ruled illegal, do you think you'd have to roll back price as tariffs came back? How do you think the channel would respond to that? Or is there a possibility to sort of get some spread there if we have a dramatic change in tariff regime?

Yes. Good question, Jeff. So let's take a step back, and I'll tell you what our working kind of hypothesis is and then what I think the practical implications of that are. Our working hypothesis is that things will stay mostly the same. So however it plays out, I'm not a legal expert, so I can't predict what the ruling will be or how they will rule, but it just feels like if there were a completely adverse ruling that there would be some counterbalance that would keep things roughly the same. The administration would have an alternative or that would be written in some way that things are mostly the same.

But let's go down the path of they are ruled, they are disallowed in some way and then we're there. The question then becomes, okay, so as the practical matter, we sell our product to a distributor. The distributor sells that product to the contractor, the contractor effectively sells that to the owner of the project. That's not the sales process, but that is the flow of revenue. So if we were to somehow kind of realize a benefit from a tariff like refund, who would we give it to? So as you push that down the slide, then the distributor -- we would have to assume that if we did, the distributor would give it to the contractor and that the contractor would give it to the building owner. I just don't think that seems reasonable.

So now if you look forward, then the second half of our expectation is that there would be a new market that everyone was adapting to, and we would need to adapt to that market from that point forward just like everybody else was. And we feel good about the dexterity we've demonstrated and our ability to kind of respond to that versus the rest of the industry.

Yes. No, it could be quite interesting if that happens. And then just sort of a quick one back on sort of the backlog normalization. Obviously, not a big backlog business in the grand scheme of things. But are backlog sort of in a normal spot now relative to what your top line guide is? Are we below normal around this kind of tepid outlook that you're talking about?

Yes. I think we're -- Jeff, now, like you and I have been having this conversation for now 5 years. And when I said 5 years ago, I wasn't -- what was normal was not normal, and then we've changed through that. I would say that the industry and we got accustomed to higher backlog levels through the post-COVID period, through kind of tariffs, price increases and whatnot. So we're now at backlog levels which are more consistent with what they were before all of those things happened. And therefore, our order rate is more consistent with our quarterly performance.

And that's what Karen was indicating. So there's still some noise from the price markets in the third quarter and the fourth quarter, which affected this, which is why she said we probably will see more seasonality in the second quarter, especially in the lighting business than we have historically. We're comfortable operating in both environments, but we would like the lighting market to be a little bit stronger.

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

So I think we had a really good first quarter. So both of our businesses continue to perform. ABL is clearly the best-performing lighting business in the world. We've demonstrated through our growth algorithm that we can separate ourselves from the market, and we feel good about kind of the long-term opportunity there to, a, continue to grow; and b, continue to improve margins. With AIS at both Atrius Distech and QSC, we have disruptive technologies, which are taking share in their marketplaces. Over the long term, we have great organic and inorganic opportunities there. So we're excited about those. So thank you for spending time with us this morning, and we'll look forward to talking to you again in another quarter.

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