Good morning, and welcome to Acuity Brands’ Fiscal 2018 First Quarter Financial Conference Call. After today’s presentation, there will be a formal question-and-answer session. [Operator Instructions] Today’s conference is being recorded. If you have any objections, please disconnect at this time. Now, I would like to introduce Mr. Dan Smith, Senior Vice President, Treasurer and Secretary. Sir, you may begin.

Thank you, and good morning. With me today to discuss our fiscal 2018 first quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer; and Ricky Reece, our Executive Vice President and Chief Financial Officer. We are webcasting today’s conference call on our website at acuitybrands.com. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our most recent 10-K and 10-Q SEC filings in today’s press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Now, let me turn this call over to Vern Nagel.

Thank you, Dan. Good morning, everyone. Ricky and I would like to make a few comments and then we will answer your questions. While our results for the first quarter were below expectations, we believe we continue to outperform the markets we serve. As we will explain later in the call, our results were driven by a few key factors, including continued weak demand in the U.S. non-residential construction market and more specifically sales declines in certain channels and markets, partially offset by continued productivity improvements in our supply chain. I know many of you have already seen our results, and Ricky will provide more detail later in the call. But I would like to make a few comments on the key highlights for the first quarter of 2018. Net sales for the first quarter were $843 million, a decrease of 1% compared with the year ago period. Reported operating profit was $118.6 million compared to $126.6 million in the year ago period. Reported diluted earnings per share was $1.70 this quarter compared with $1.86 in the year ago period. There were adjustments in both quarters for certain special items, as well as certain other add backs necessary for our results to be comparable between periods, as Ricky will explain later in the call. In adding back these items, one can see adjusted operating profit for the first quarter of 2018 was approximately $134 million compared with adjusted operating profit of $143 million in the year ago period, a decrease of more than 6%. Adjusted operating profit margin was 15.9%, a decrease of 90 basis points compared with the margin reported in the prior year. Adjusted diluted earnings per share was $1.94, down 3% from the year ago period. A positive for the quarter was net cash provided by operating…

Thank you, Vern, and good morning, everyone. I’ll add some further insights into our financial performance for the first quarter. Additionally, I’ll discuss our current expectations of the impact to Acuity of the recently passed U.S. Tax Cuts and Jobs Act of 2017. As Vern mentioned earlier, we had some adjustments to the GAAP results in fiscal 2018 and 2017, which we find useful to add back and order for the results to be comparable. In our earnings release, we provide a detailed reconciliation of non-GAAP measures for the first quarter of both fiscal year 2018 and 2017. Adjusted results exclude the impact of amortization expense for acquired intangible assets, share-based payments expense, special charges for streamlining activities, manufacturing inefficiencies related to the closing of a facility and a gain on the sale of an investment in an unconsolidated affiliate. We believe adjusting for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations. We think, you’ll find this transparency very helpful in your analysis of our performance. In addition, many of our peer companies, especially as we become more of a technology company make similar adjustments, so it will help as you compare our performance to other public companies in our industry. The effective tax rate for the first quarter was 35.5%, essentially flat with 35.3% in the first quarter of last year. We expect the recently passed U.S. Tax Cuts and Jobs Act of 2017 to favorably impact our net income, earnings per share and cash flows in the future, due primarily to the reduction in the federal corporation tax rate from 35% to 21% effective for periods beginning January 1, 2018. We currently estimate that the company’s blended consolidated effective income tax rate, which encompasses federal, state and foreign…

Thank you, Ricky. At Acuity, we are optimistic regarding our long-term future, despite recent market softness, which has impacted our short-term financial performance. We continue to see significant long-term growth opportunities that are ever changing and evolving in a positive direction for our company. We are often asked about the vitality and conditions of the key end markets we serve. Market data suggests that the overall growth rate of the U.S. lighting market over the last two quarters was down low single digits compared with the year ago periods. This was considerably different from the growth rates anticipated by various forecasting organizations at the start of calendar 2017. Many reasons have been cited for this softness, including among others, lack of skilled labor, uncertainty over tax regulations and trade policies and pricing pressures in certain end markets for certain less-featured products. While we believe all of this is true to varying degrees. We continue to pull our vast customer base and from the majority we continue to hear guarded optimism regarding the prospects for future growth. Generally speaking, the trades are busy and backlogs are favorable. As Ricky pointed out earlier, the passage of the new U.S. tax bill will have a meaningfully positive impact on lowering taxes paid by Acuity, thus enhancing our future cash flow. We further believe the benefit of the immediate expensing provision for certain investments contained in the new law could have a favorable and significant impact on end customer demand for energy-efficient lighting fixtures, particularly for renovation projects. As for our market expectations for the balance of 2018, while we have not seen nor heard of any new information from the market or forecasting organizations that would cause us to change the views expressed in our last earnings call, we believe many of these…

Thank you. And at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question today is from Josh Pokrzywinski from Wolfe Research.

Hi. Good morning, guys.

Good morning.

Just, Ricky, maybe a follow-up on some of the cash flow benefits from the lower tax rate. I guess in the context you already have a pretty [tidy] [ph] balance sheet. What’s the – what is the plan around capital allocation? Clearly, the outlook is a little different now from a fundamental perspective. But does this change at all how you guys view capital deployment, particularly buyback coming off of 2017, where you’ve done a little bit, but still have plenty of room to go?

Thank you. Fundamentally, it does not. Our priorities have remained – will remain consistent that our first priority is to grow the business, both organically and inorganically. We will continue to invest in the business CapEx, as we’ve indicated, at 2% and then we’ll invest in some expense categories as well. The other is in acquisitions. We’ve been relatively acquisitive over our last seven or eight years and see that is still a fundamental part of a way to deploy this excess cash flow. But then you do mention stock buyback, so we did buy back 2 million shares last year and we have the authorization from the Board for another 2 million shares. So we have used that as a way to deploy the cash and we’ll continue to look at that opportunistically as a way to deploy cash. And then, of course, no intent to change the dividend at this time, but the Board as well as Management reviews that on a regular basis.

And if I could just make a comment on your comment about the industry forecast. It’s interesting to us as we sit here and both look at our business from a broad standpoint and then listen to our customer base. It’s clear to us that the words in the music don’t necessarily match. We see consumer confidence improving. We see the stock market going up. We see employment rates improving. We see unemployment coming down. We see the Architectural Billing Index improving. In front of me, I have the Dodge Momentum Index, which clearly showed a drop in the 2017 period with a sharp rebound. Our view is that there is pent-up demand out there. We’re just not able as a company to say precisely when is that going to turn. I’m optimistic, but it’s just my personal optimism that the change in the tax law is going to allow people small business owners to look at their businesses in a different way. One of the greatest opportunities for quick return is to go to more energy-efficient lighting solutions. And so when you think about now the opportunity for these things to be immediately expensed, it will have a significant impact on the cash flow of these businesses. So I have optimism. I just can’t say when is it going to turn. We believe strongly that there is pent-up demand out there. But as we said in our prepared remarks, we don’t see that in the next quarter or so. But all of these things are trending in a favorable way. And I would expect there to be a – over the longer-term a meaningful rebound in our industry.

But this doesn’t represent like a key change in your own capital deployment strategy. I guess, for all the changes that has in the market and in your own cash flow, it doesn’t sound like you guys are really pulling any more tools out of the box yet?

No, but again, our expectation is that, as customers see the benefits of this, we are expecting, and I think we’re starting to see broader forecast. Though I expect there to be a wave of new forecast coming out with economists and different groups that do this forecasting to say that they expect the economy to benefit from the tax change. And assuming that happens, it would be our expectations to participate in that surging, if you will, economic growth.

And then just one follow-up on the home center commentary. You mentioned, it might linger a few more quarters. But is this 10% of the business down low double-digit the right cadence, or was there an inventory destock or some other shift that says this quarter was maybe on the higher end of the declines and then the go-forward trajectory is a little more subtle?

No, I think that given what we know now, this is more of a strategic decision by certain customers in the channel to do different things and take different approaches. So what we’re seeing, I think is – it’s a bit more by strategy. It’s not necessarily a destocking. It’s really – it’s a branding strategy being executed by a few folks there that are having an impact. I would expect the impact to continue, but there are a number of actions that we’re taking to help stem the tide of that and actually turn the channel into a growth channel for us.

Thanks. I’ll get back in queue.

Thank you. Our next question is from Brian Lee from Goldman Sachs.

Hey, guys, thanks for taking the questions. Just had a couple here. Maybe first off on the pricing pressure, Vern, you alluded to, is there any way you can kind of take a stab as to how much you would attribute to that coming from Chinese suppliers? And I know you mentioned mostly on the lower end, but can you also comment on the competitive dynamic you’re seeing in Tier 3, Tier 4 solutions? There seem to be a pretty decent derating in growth from the 30% to 40% year-on-year rates you had been doing up until now and the 10% nothing to sneeze at, but seems to be down taking here quite a bit. So if you could put that into some context?

Sure, let me take the latter portion first. As you know, our tier – a large portion of the growth in Tier 3 where it is Atrius IoT-enabled is in the retail space. Retailers are seeing the significant benefits of not only having quality of light energy savings, but the ability to use that ceiling as a sensory network to collect data. And as you all know, retailers essentially say by the end of October, you don’t touch anything to do with their stores, because they’re entering their largest season for selling, and so it was absolutely expected. We still grew significantly the amount of square footage, I think, went from roughly 90 million to 100 million square feet put in place in the fourth quarter of last year. And now we’re up to about 160 million square feet. So it’s our expectation that you’ll continue to see that ramp in our second quarter simply, because many of the retailers are now saying we’re back to investing, if you will, in our stores. So don’t view that as somehow a trend. I – we are very bullish on the opportunities to continue to grow our Tier 3 and Tier 4 solution sets. And the mix were over a longer period of time change when it’s not just retailers or certain airports. It now expands into the commercial space, so we’re seeing that, but at a bit of a slower pace. More broadly on the pricing side, our view is that, if you look at where the competition is coming in, it’s really what we’ll call the more basic, lesser-featured type products. These are, I will call them commodity type products, but they’re just basic, lesser-featured. There are certain channels and it’s not just a single channel of the channels, where they would sell those types of products. And so, when we look at the overall Acuity, if you will, business model, I would guess to say that, probably in the neighborhood of 20% of what we sell is through channels or areas where it might be subject to more of a competitive foreign sourced competition. But I would tell you that while that – those prices leak into the marketplace, most of the customers that we deal with, they’re far more interested in selling branded, quality products even for basic, lesser-featured products. And yes, the price does influence that somewhat in that portion of the market. But when we look at our overall price mix for our entire business, I mean, this quarter, Ricky, it was approximately a point..

Right.

It actually was down slightly from some previous quarters, where the price mix had been in the 1.5% range. So we are – this is – while it’s happening, if you will, in this portion of the LED market, this happened in the more traditional fluorescent market six, seven, eight years ago. And we know well how to do this. It has short-term impacts on some of the things that we’re doing. But what we do is, we reevaluate the products and the products that we have in the marketplace, take cost out, bring new products to market to compete against that. So I don’t see it being – it’s an issue, but not a major issue from my perspective.

Okay, okay. And so just to be clear on Tier 3 and 4, specifically, it wasn’t a competitive issue that impacted the growth rate this quarter?

No.

Okay. And then just my second question, and I know you guys don’t necessarily look at the business this way. But investors increasingly are doing so as you provide more disclosure around the Tier 3 and 4 growth and mix. And if we do try to sort of segment out the LED business between your higher tiered solutions and sort of what we would consider sort of your core LED?. It does imply that the core LED revenues are sort of down into the low single-digit growth category now. I guess, the question would be, is that the right read? And then secondarily, what gives you visibility or confidence that the LED revenues outside Tier 3, Tier 4, where there’s still a lot of growth opportunity you had that you can see growth accelerate in that portion of your business again? Thanks, guys.

Thank you. I believe that in the Tier 1 and 2, if you look at again those certain channels, what’s the percentages and so I gave you that previously. I think the rest of the balance of Tier 1 and Tier 2 and Tier 3 other than say non or non-retail-oriented stuff. I think that that’s always been, if you will, like a big business, but we’re not seeing. We’re – while we’re seeing the ability to differentiate the value of our solution set. It’s still a competitive business, but we’re seeing our ability to do that. Our view is that, it’s more of a volume-related issue. The marketplace has just slowed down. And I can tell you that while I talk to many customers, whether it’s electrical distributors, electrical contractors, architects engineers at different points and different geographies that they have a story. And the story is slow growth for – right now. We have a number of projects that have simply been put on hold and buy places where you wouldn’t expect that. So our expectation is that, you’re going to start to see some of these projects release. I’m encouraged by the tax law, particularly the expensing provision for renovation. So I believe that you’ll see the benefits of that. And again, if you look at the same data that we all do, I mean, this Dodge Momentum Index has really taken a very sharp uptick and one of the sharpest upticks that we have seen really since probably going back to 2004, 2005 and 2006. So anyway, we’ll all figure out together whether this is a longer-term trend. But as I said earlier, the words in the music around the strength of the markets, the optimism of the people and then how that’s translating into the broader electrical industry, where things have been flat. It’s interesting. We keep bringing technology in the marketplace, and I believe that as people move from the sidelines back into the game, you’re going to see an uptick in this, go and expect that to happen next quarter. But I do expect that over the longer-term for it to be positive.

Okay. Great. Thanks for all the color. I appreciate it.

Thank you. Our next question is from Chris Glynn from Oppenheimer.

Thanks. Good morning. Just wondering, when things kind of fell off. I think last quarter you noted pretty steady linearity lack of a plus or minus inflections month-to-month and clearly, that gave way a bit after the first month of the fiscal first quarter. So I’m just wondering what you saw there as things developed?

So, Chris, it’s interesting to me. In front of me, I have from the Census Bureau, the electrical lighting equipment U.S. total, and this is for value of shipments. Four of the last five quarters have been down. The only quarter that was up was Q3, that was 3%, all the rest of them were kind of in the mid-2% down. So I sit there and again I look against the backdrop of broader economic activity and say, this just doesn’t – this doesn’t seem like it’s sustainable. The Dodge Momentum Index, which is an index and I think that it’s reasonably accurate actually showed this downtick really in the 2017 period. And now is that the uptick that it just recently showed has meaningfully outpaced what 2017 gave back. So our optimism, we’re not economists. We’re in front of our customers. We’re asking them how their business is and what they’re doing. Again, we’re starting to see positive comments coming from, what I’ll call, the trades, whether it’s architects, engineers, lighting designers, and now again the electrical contractors. Some markets are impacted by lack of availability of labor for differing reasons. But I just feel like, there’s an opportunity here for improvement. We’ve been in this funk for a while. We as an industry, not necessarily Acuity. We continue to outperform the growth rates of the market. I mean, what this thing shows is that, they were down 2.5%. And yet, when I look at our apples-to-apples business, we were up 2%. So again, it’s probably that 400 to 500 basis points spread that we’ve reasonably and consistently have been doing relative to the market.

Okay. And back to linearity, just to get the context of your full-year or longer-term comments rated help to try to get the second quarter in line with the 80-20 likely scenario there. Since things kind of tailed off in the quarter, it would sort of suggest that fiscal second probably gets worse before you get better in the fiscal second-half rebound, anything wrong with that thought process?

Well, as we said in our prepared remarks, we think that the sluggishness carries into the second quarter. I don’t see – the tax law, I think will have a favorable impact. I just don’t think it will be immediate, but I’m not an economist, so don’t quote me there. I’m expecting some projects and certain portions of the larger project business to release, I think, that will benefit the industry. But now, I think, what we’re expecting is, again, this continued sort of sluggishness and then you add on top of that our expectations, where our business in the home improvement channel will probably still be impacted by the continuing shift of some of these branding strategies before it improves, which is second-half-related, and I don’t know, Ricky, you have $0.02.

I agree with that, Vern.

Okay. And then on Tier 3 chip, I just wanted to reconcile, I think you said near 160 million square feet. Last quarter that was 90 million, but then year-over-year the growth was only 10%. So those relative orders of magnitude, I can’t conceptually reconcile them the square footage versus the percent growth. Clearly, I’m just mixing apples and oranges here.

I know, yes, you can. So we’ll help you do that. The retail portion and where Atrius or the Atrius-enabled square footage is not the only activity that goes through our Tier 3 solutions capabilities. More and more, these solutions that we are selling that first started out with energy savings, right? And now we’re enabling those things to do more than just provide energy savings. So when we talk about the amount of square footage, we’re focused on really only a portion of that market. So the Tier 3 base was larger than just the Atrius space. So the Atrius-enabled base improved correctly noted 160 million square feet from 90 million square feet, but that’s only a portion of the base.

Great. Thanks.

Thank you. Our next question is from Cindy Motz from Williams Capital Group.

Hi, thanks for taking my question. I just wanted to ask about the gross margins. I know that Vern, you said that, you expect them to trend upward over time. I mean, do you think that where we’ll get back maybe not next quarter, but latter part of the year like the 42%, maybe 43% range at one point you’ve spoken about. And then also to just in terms of just following up on the showroom channel a little bit, you’re talking about some customers, strategic branding. What makes that get better? Is – I mean, or what do you think you’re doing some actions you’re taking just in terms of new products or just a little more color there would be great? Thanks.

Sure. So I’ll answer the second part. Ricky, you can answer the first part. In the home improvement showroom channel a lot of the activities, excuse me, a lot of the products that we’re bringing to market, we think will have an influence over how some of the branding strategy changes work, where folks will be more interested in having our branded solutions, because these products will have features and benefits that are interesting to them and that would include some of these more basic, lesser-featured products all the way up through when you think about the resi market and how we want to leverage, if you will, the Juno brand through both the home center and showroom channel. So it’s a product solution mix and there’s a number of products that will be coming out in a pretty robust cadence, we’ve been working on those. And then number two, we believe that the channel is broadly defined. We’ll continue to grow and we want to expand our access into those – through those customers and into that channel. So we believe that that will also have a very favorable impact on our growth rates later in the period. With regard to margin and I’ll let Ricky answer that, which is interesting to us volume was a component of that. And then certainly, that point of price mix flow through, but I think we did some really good work offsetting some of the cost from a productivity standpoint. I’m pleased with where our supply chain is in terms of the improvements that they’ve made very, very significant in that regard. And then Ricky material costs?

Yes, I think, as you look at the current trends, we’ve got material costs going up still be in the primary one, but you’ve got aluminum, you’ve got oil, you’ve got other of the commodities, which we have and as an industry been able to really pass through in a large way. That I think will equal out historically, it has. So that will bode better for us as we look forward volume, as Vern highlighted, will be key the incremental margins that we typically earn off of volume increases as we leverage our fixed cost will give us an opportunity to improve margins. The mix, as we continue to grow Tier 3, Tier 4, generally, those have higher margin percentages than the Tier 1, Tier 2, particularly as we get to Tier 4 and the recurring revenue more SaaS type areas, so that will bode better for us. Again, these are longer-term type trends, not something we’re predicting in the next quarter or so, but we do see opportunities on all of those fronts to help us improve margins going forward.

And, Cindy, I would just add to this for the group out there. When we look at our cost structure and the things that we’re doing to manage the business and while I don’t normally compare the current quarter to some other quarter other than the previous year’s quarter. If I look – if I go back and I compare this quarter’s performance just as it is $843 million of revenue, 15.9% adjusted operating profit, and I compare that to the second quarter of 2017, we increased our revenues about $38 million. Our OP was up about $10 million. So our OP percentage over that quarter was up about 50 bps and our variable contribution margin compared to those two quarters was about 26%. So I’m not pleased that we had a negative comparison to the first quarter of the year ago period. But when I think about where is our business structure and where are we making our investments, and I compare that to a more recent quarter that probably had similar characteristics. We’re still providing, if you will, value add, and we are very focused on our margin dynamics. But it’s really – it’s a bit of a volume-related game. If I look at our supply chain and I compare to our peak in terms of headcount, which would have been July, I mean, we’re down probably about 15% in terms of the headcount, in terms of how we’re managing that. So I think, we’re doing a good job in those things. Our expectation still is that the markets will finally align to where the words in the music match, the enthusiasm of the marketplace and then how it spills into our overall industry and then Acuity’s ability to outperform that, I think, will continue to show through. I do believe that the change in the Dodge Momentum Index is reflective of that opportunity.

Okay. So the 15% headcount reduction, I just was curious, because this was separate, but SD&A was up a little bit, too. So…

Yes.

And you had said that maybe, it was going to trend around. I knew it was low last quarter and then you said it was going to go up. But I mean, would you expect it to still be in this 26%-ish, or actually, it was 27.5% this quarter, but where – any guidance on where that’s going to go?

Sure. So let me be clear on the change in staffing, if you will, that’s all supply chain. So that’s up in the cards area, not down in the SDA area, okay? Just trying to give you all a sense of where we are managing the business to the volume that we have. From an SDA perspective, we have continued to invest in our business. Our headcount on our salaried headcount has been pretty stable here over the last six months, but we haven’t really meaningfully changed that. If I look at it on a year-over-year basis, we have increased our salaried headcount probably in the neighborhood of 7%, 8% on a true apples-to-apples basis. But we’ve had wage inflation and some of the mix of people are now just a bit more expensive. So that 25.7% number probably does get a little bit higher, but it only gets a little bit higher assuming that the volumes are there. And then therefore, if the volumes are there, we expect our gross profit margins to be higher. And the net is the increase – it would be the increase in our adjusted operating profit margin. So you need to have both for that number to, in my view, grow. I hope that makes sense.

Thanks.

Thank you. Our next question is from John Walsh from Vertical Research.

Hi, good morning.

Good morning.

Good morning.

Yes, two quick questions here. So I’m wondering if you could talk a little bit about the price discovery you’re seeing in the Atrius branded platform. I mean, it does sound like the number of pilots is broadening. And this was when we thought about a traditional relight renovation, it was about $3 a square foot. And then I think in the last year, you were out on the road making comments around $3 to $5. How should we think about that growing over time as you had more value and what are the conversations you’ve been having with customers there?

Yes. So the value, if you will, of retrofit renovation work varies widely, right? And so if you have very large big box stores that are renovating, it’s usually a single fixture type. And so the value per square foot is different than if you’re redoing a hospital, or an airport, or a commercial office building. So just know that what we gave you in the $3 to $5 was a range, but it’s an average of a very wide range. So that that’s number one. Number two, the value proposition that whether it’s retailers, whether it’s public spaces, again airports, convention centers and now healthcare facilities, the value is clear around both better quality of lighting and energy saving. So it is paying for the opportunity to now play and use that ceiling as a sensory network in a more robust way. As various customers are becoming more mature and experienced now utilizing this data. They’re seeing other opportunities to use the data to do different things. And so the value and what we’re seeing again Tier 4 is a really small base, it’s not enough to move the needle in the shorter-term. But what we’re seeing is that, more and more people are finding the use cases in their specific examples that are very exciting to them. So it’s causing them to either expand or extend the base that they have and adding more feature sets to it, which is favorable to Acuity, or it’s causing new customers to say, yes, I now see and understand the opportunity. I can see how I could use this capability to enhance my business model. So two things are happening. They’re now saying how do I invest to upgrade my facilities putting in and installing this capability and then how do I get the recurring opportunities of that data. And then thirdly, folks that have – well, have pilots in place are now moving to more broader installations. And so, our view of that is very, very favorable and that’s why we continue to report out square footage. I mean, at some point in time, it becomes really a bit of a nightmare to keep track of all of that. But because we’re in our infancy, we want to convey that to you, so that you understand how others and people are starting to say, this is really a very strong and robust value proposition.

Gotcha. And then, I guess as a follow-up, as we think about this transition to a technology company, I mean, one of the questions I get a lot is, if you look at your R&D right to your absolute dollars have been between, call it, $40 and $50 million, it’s about 0.5% of sales. How do we kind of reconcile that level of investment with what you’re building out here with your platform? And is there other engineering spend that might be embedded somewhere else in the P&L, so we’re not capturing everything when we look at just the pure R&D number?

Sure. So Acuity is really – we’re not in the R&D game. We’re taking, if you will, more or less known technology and we’re applying that known technology in ways that allows us to take advantage, if you will, of this sensory network. I mean, anybody can take a sensor and I guess, put a battery on it. People do it all the time and put it up in the ceiling. The opportunity that Acuity uniquely has is to embed this capability, if you will, technology. We – Acuity did not invent the LED chip, right, it’s been around for 30 years. But how we now deploy, if you will, LED chips into our luminaires, as well as incorporating software and how to use that and optimize its utilization in the most energy-efficient and visual efficacious way, is really our skill set. So that’s a human capital intensive business or a human capability. And most of that spend is embedded, if you will, in our SDA. I mean, frankly, if you were to compare our SDA to other, if you will, lighting companies, you would find that our investment in there is significant and formidable and that is all engineering and human capital capabilities that are there. So again, Acuity is not necessarily out trying to create the next LED chip. What we’re doing is spending a great deal of capital or human capital and understanding how we can deploy those technologies to bring greater value. So if you think about our – that 26% SDA number, a big chunk of that is really for the development of solutions, whether they be lighting, building management or Atrius, but they’re all software-enabled and they’re all – there is all significant technology inside that didn’t exist in this industry even in a short decades ago.

All right. Thank you.

Thank you. And we do have one last final question for today that is from Tim Weiss from Baird.

Hi, good morning. This is Josh Chan filling in for Tim. Thanks for squeezing me in here. So on – my question is on the second-half rebound within the core C&I business, and I guess, we are all reading the similar economic data points. But I’m wondering if have any color on what your agents are telling you in terms of projects in the pipeline, any anecdotes in the business that gives you confidence that the second-half could improve the way you think about?

Yes, I think that there is really a couple of focus is that, our agents are excited about in their local markets. One is the service and product capability of our architectural businesses that give them the opportunity to go and win. Number two, the product portfolio from some of our core products incorporating, if you will, other software technology into projects that are, I’ll call it, medium and larger-term projects. Those folks feel that some of the stuff that is in their backlog should begin to release. It’s been aged a little bit. And I think people are saying, we’re going to do this project. We’re going to do this project. And it’s not that they have money to have really all of the capabilities to do it. I don’t know if some of them were because of labor shortages or whatever, but our agency network is feeling more bullish about the releasing of that. And then thirdly, our stock and flow business. Acuity, we’re the leader, if you will, in the stock and slow business in North America, but we see great opportunity to really drive a differentiated value proposition both from a product portfolio capability, as well as the service capability. So I think, we all have a bit of optimism around our ability to execute irrespective of what the market does. I mean, I personally believe and it’s only a personal belief that the markets are going to see some sort of rebounding here, and I’m using Dodge. I’m using the voice of the customer. I’m not an economist so I don’t have a crystal ball. But I do believe that, we have the opportunity to see an uptick. And then into that uptick, our ability both with our agency network, as well as our partnership with our agency network and our internal ability to execute to make some good things happen.

All right. Thanks. And then my second question is on pricing. The pricing pressure that you’ve seen in some of the basic products, you said you’ve dealt with it before in the conventional side. So just wondering, what Acuity strategy is to combat that and how do you think it will ultimately settle out?

Yes. So I believe that product differentiation, demonstrating the difference, having the service model to do it and then trying that together with how people actually do projects and the ability to support that. Anybody can walk in with a price, but when you start to actually do some of these things in most of the channels that we serve, people are looking for more value add than just a price around a particular luminaire. So our view is that, we will continue to innovate. We will also create solutions set that give us the type of margin profile we are after, that also allows us to be even more price competitive and preserve our margins. So you’ll see some of these types of products continue to come out into the marketplace and then that breadth and that strength of capability is a compelling value proposition to the folks who buy that. Many of these distributors, they’re really not interested in adding more vendors. There are e-mails every day flying all over the place, they don’t need more vendors, so those prices sometimes leak into the marketplace. But the value proposition and how you’re able to serve and leverage that is really what Acuity and others, by the way, not just Acuity, but others who have more established channels to market, access to market. I think, we’ll continue to win the day.

All right. Great. Thank you for your time.

Thank you.

Thank you, and this will conclude the question-and-answer session. I would now like to turn the call back over to Mr. Vernon Nagel for closing remarks.

Thank you, everyone, for your time this morning. We strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that have the potential over the longer-term to deliver strong returns to our key stakeholders. Our future is bright and thank you for your support.

Thank you. And this does conclude today’s conference. You may disconnect at this time.