It also means that we can fit a lot more on a pallet as we ship those around North America. And then third, it delivers significant value to the installers because of significant patented innovation and how the — it is constructed at the job site. So the ability to use 1 housing basically to put in different lighting. So that’s a great example of a product that delivers real value to the entire value chain. And the combination of all those things has gotten us to the margin levels where we are right now. So — so yes, we feel good about our margin performance. It will go up a little or up or down a little from quarter to quarter, but we feel really good about kind of the structural improvement of our margin performance. And our team has demonstrated significant dexterity and the ability to deliver on that in all kinds of different market conditions.
And so — so we feel like we’re on a journey here. We’re not at a destination, and we’re pleased with our performance.
Bobby Schultz: Got it. And then I wanted to ask on data centers — what is your exposure there today? And kind of what are you seeing in that market right now?
Neil Ashe: So we have 2 exposures to data centers. So on a good news front, data centers have lighting. So one might think that they could operate in the dark, but they don’t. So that’s a very attractive opportunity and continues to be for the lighting business. On the controlled side, we are — Distech is flat spec into some of the largest data scalers. So as their control of choice. There are 2 different kinds of controls in data centers. So we focus on digital controls and so that doesn’t — that means not the entire market is addressable for us, but the market that is addressable for us is growing as we build on those global scalers. We are — we had another win on that front where over the course of quarter where we converted a, a large Asian data center operator to our way of control.
And so that will be a multiyear opportunity for us going forward. So we’re exposed to the data center opportunity in both of our segments, both the lighting segment as well as the Space segment.
Operator: Our next question comes from the line of Chris Snyder with UBS.
Chris Snyder: I wanted to ask about the back half guidance — it seems to me that it calls for gross margin to be kind of similar, maybe slightly lower than what we just saw in fiscal Q2, that 45.5%. So I guess, is that right — the right interpretation? And then — what are some of the puts and takes on that? Because it does seem like there is some volume leverage here from the second quarter to the back half?
Neil Ashe: Yes. Thanks, Chris. Kerry can help you in the after call on building your model, but I’ll talk qualitatively about how we’re thinking about the back half of the year and build on some of my comments earlier. Our lighting business is strong. We are competing effectively in the marketplace. We are demonstrating that the market is valuing what we are selling from a product perspective. We’re demonstrating that we can innovate on a product portfolio and deliver what is — what our innovative products to the marketplace that are more valuable to the marketplace and more profitable for us. And we’ve demonstrated that we’re managing input costs, material costs in a rapidly changing environment, whether it’s electronics or freight or steel or any of the different things.
So if we feel really good about the continued performance of our continued margin performance, excuse me. So as you look to the back half of the year and more importantly to the year after and the year after that and the year after that, we’re on a mission to continue to make this a much more predictable, repeatable, scalable business on the lighting side and a growth business on the intelligence basis side and to use capital then to expand that portfolio. So we feel fine about the — we feel good about the guidance for the remainder of the year and we feel even better about the year after and the year after that.
Chris Snyder: I appreciate that. And maybe just following up on the market competition points. Do you feel like the lighting industry is less competitive from a price standpoint than it was 5 years ago? Or is it that Acuity is being more selective and shying away from the most competitive aspects of the market? And then what you guys have done with Contractor Select is kind of raising the gross margin floor? Just kind of any thoughts on that.
Neil Ashe: Yes. So I wasn’t here 5 years ago, so I can’t address that, but I will address kind of how we’ve performed over the last 4 years, which is I would say that, obviously, we’re the largest in the industry. We have the highest margins in the industry. We have the highest product vitality in the industry. We have raised the floor on margins with Contractor Select. We are innovating with Design Select and our new portfolio. So our performance is objectively very strong. The — that makes us a much more formidable competitor to the marketplace, no matter who you are, whether you’re a large competitor, you’re a small competitor, whether you’re housed in North America or somewhere else, we’re just a significantly stronger competitor than we were 4 years ago.
And so that puts us in a position to have significantly more control over our destiny. And we’re demonstrating that control in our performance. And so — and we think this is a good point to build on. So we will continue to press our advantage on the lighting side. So I would answer your question by saying something that we said when the market was really choppy, which is that we control what we can control, are controlling more of what’s happening in the marketplace as a result of our strategy and the execution of that strategy and the cumulative performance and the impact of that.
Chris Snyder: I appreciate that. And if I could just squeeze 1 last 1 in. And I know it’s hard to call a cycle — but I’d be interested, Neil, and where you think we are in this nonresidential construction cycle. Activity is still pretty healthy. A lot of the leading indicators are, I wouldn’t say terribly negative, but on the more negative side. Do you feel like that cycle pressure on the horizon or that — maybe you already felt that with a lot of the destock? Just any thoughts on it and I appreciate it.
Neil Ashe: Yes, sure, Chris. I think the cycle question is has been a really hard one because we collectively — and by that, I mean the economy industry, et cetera, has been thrown so many curveballs over the course of the last 3 years. So I feel like we’ve lived kind of multiple years in a single year or a single period. So it’s hard to call it as a normal historical cycle. So obviously, we had the shutdown. Then we had the bull whip of projects and activity that was waiting to be executed, which led to increased backlogs, which we accelerated to satisfy which happened last year, and you see a little bit of the hangover impact on our sales growth this year. We’ve been looking at the market on a multiyear basis, though. So when you look at first the market on a multiyear basis, it really does start to normalize.
It doesn’t look like there’s any kind of boom and bust cycle. It looks like there was just a fair amount of business that got executed last year that maybe would have normally been executed this year. And so — as we look forward, we are — and I’ve mentioned this on the call before, we do a fair amount of data analysis, and I think we’re pretty good at it. And we’re outperforming the regression analysis of what we would expect to do. So we are — our performance is a contributor to where we are. As we think about the cycle going forward, we strive for normalcy. We don’t feel like we need a really super-hot environment or — and we’ve demonstrated we can execute in a relatively cool environment. So kind of where are we on the cycle front? I would say that our data indicates that lighting moves earlier than the other parts of the industry — there are a thousand reasons for that to have happened, but that has been borne out in other people’s performance.
And we feel good about kind of where we are from an order rate perspective. We’ve seen that relationship between lighting and other industries between ABL and the Spaces Group with Distech. So in Distech, we’re also outperforming what the market’s expectations are. So we’re outperforming where our SIs expect to be, which means we’re taking share there also. So — so then as we look forward, what we strive for is a more normalized environment. I’m not confident calling a cycle because I don’t think this is a normal cycle or it doesn’t look like cycles that were sleep studies that we’ve had in the past. Taking now 3 steps back. Our Lighting & Lighting Controls business grows consistently over time on a compounded annual growth rate and our Spaces group is taking share, and we’re building something pretty special there.
So net-net, we feel like we can execute in any environment. I don’t want to play kind of Fed governor and try and figure out where we are from a cycle perspective other than to say we’re going to control what we can control. We feel really good about where we are from the lighting and lighting controls business. We feel really good about where we are from the Spaces business, and we’ve got a lot of capital to grow our platform.
Operator: Our next question comes from the line of Jeff Osborne with TD Cowen.
Jeff Osborne: Neil, maybe just a follow-up on the prior question. In terms of — I think the last earnings call, you touched on a rebound in larger projects visible in 2025. I’m just curious what the CRM system showing for the larger projects. And then historically, I think larger projects were considerably more profitable the contractor select and some of the more commoditized projects that you’ve greatly improved the profitability of would you expect as the potential rebound of those larger projects flows through that there’s a disproportionate mix shift in profitability?
Neil Ashe: Yes, thanks. As I said, so if we focus on the kind of large projects is big bucket. So let’s talk about kind of infrastructure on the 1 hand and then we’ll talk about kind of traditional large projects on the other. So on the infrastructure side, there’s obviously still a significant amount of capital that’s going to run through what others are calling the mega projects. And we’re confident we’ll get our fair share of those and hopefully, a disproportionate share. And — from a mix perspective, that is an attractive piece of business, we price fairly there. So we’re delivering value to basically the citizens who are funding those so we feel good about that. At the same time, we can operate in the margin portfolio that we expect.
Then within kind of larger projects, there are a number of other kind of private sector impacts of that also. So impact of the chip back and our ability to light fabs to light data centers to deliver control. Obviously, those are all consistently attractive margin pieces of business for us. We’re scaling in industrial as a lot of reshoring is happening in the U.S. And so — the mix of our portfolio is, however, tighter from a margin perspective. As we indicated earlier, effectively, the floor has been raised on the Contractor Select portfolio — and we will price fairly to the — for citizens that are funding the infrastructure, and we’ll continue to deliver the performance that we’re demonstrating.
Jeff Osborne: Got it. And then just one for Karen. On the Contractor Select and Design Select portfolios, does that, by definition, sort of require more investment in inventory than you might have had in the few years past?
Karen Holcom: So for Contractor Select and Design Select, when we look at the inventory levels, first on Contractor Select, the 300 of the kind of most common everyday lighting products. We stopped those here, but then also our distributors. But given the high turnover with that portfolio, it allows our distributors to carry less inventory and also for us to carry less inventory. So that doesn’t really have a higher requirement. On Design Select, we are able to manage those inventory levels effectively and improve our turns — so neither of those should have a negative impact on our working capital inventory going forward. And in fact, if you look at our inventory days over the course of time, we are — we’ve improved our inventory turns versus last year and versus kind of over — from our high point and certainly over last year when we reduced it and then continue to have room to improve.
