Acuity Inc.

Good morning and welcome to Acuity Brands' FISCO 2019 First Quarter Financial Conference Call. After today's presentation, there will be a formal question and answer session. To ask a question, press star 1 and record your name. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to introduce Mr. Dan Smith, Senior Vice President, Treasurer and Secretary. Sir, you may begin.

Good morning. With me today to discuss our fiscal 2019 first quarter results are Vern Nagel, our Chairman, President, and Chief Executive Officer, and Ricky Reese, 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 risk and uncertainties, such that actual results may differ materially. Please refer to our most recent 10-K and 10-Q, excuse me, 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. 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. Our results for the first quarter were solid despite continuing inflationary cost pressures. We took several actions in the quarter to address these cost issues, including price increases and productivity improvements. Further, our top line growth this quarter continued our long trend of outperforming the overall growth rates of the markets we serve, while diluted earnings per share grew 17 percent to $1.98, a first quarter record. I know many of you have already seen our results, and Ricky will provide more detail later in the call, but I'd like to make a few comments on the key highlights for the first quarter of 2019. Our net sales for the first quarter were a record $933 million, an increase of 11 percent compared with the year-ago period. Reported operating profit was $116.4 million compared with $120.2 million in the year-ago period. Reported diluted earnings per share was $1.98 compared with $1.70 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 2019 was $134.1 million, compared with adjusted operating profit of $135.5 million in the year-ago period, a slight decrease of 1%. Adjusted operating profit margin was 14.4%, a decrease of 170 basis points compared with the margin reported in the prior year. Adjusted diluted earnings per share was $2.32, a first quarter record, up 20% from the year-ago period. Net cash provided by operating activities was a solid $132 million this quarter, while our cash position at the end of the quarter grew to $215 million, even after repurchasing $25 million of the company's stock during the quarter, leaving us with plenty of liquidity to execute our growth strategies. Looking at some specific details for the quarter, net sales increased almost 11% over the year-ago period. Overall, net sales volume grew approximately 11%, while price mix of products sold was essentially flat this quarter. Acquisitions netted divestitures added about a point to our growth which was essentially offset by the negative impact of changes in foreign currency and the adoption of the new accounting standard ASC606. Our significant growth in net sales this quarter was due in large part because of continued efforts to expand our customer base and the introduction of new products and solutions. We also believe our net sales were favorably impacted somewhat this quarter by customers accelerating orders in advance of the effective dates for announced price increases. Overall, we experienced solid growth in net sales in most channels and geographies, as well as most product categories. The largest contributors to the increase in net sales volume were due to greater demand for our atrius-based luminaires and lighting control solutions as well as our building management solutions created by our DISTAC team, and greater shipments of certain high-volume, more basic, lesser-featured LED fixtures, primarily for applications on smaller and mid-sized commercial projects, as well as our infrastructure and utility products. Solutions sold through our independent sales network, which serves the CNI, utility, and building management channels, grew 10% this quarter compared with the year-ago period, This network comprises approximately 70 percent of our total net sales. This growth was impacted somewhat by continued weak demand for larger non-residential lighting projects, as well as continued product substitution to lower priced alternatives for certain lighting products. During the quarter, we announced two price increases to recover higher costs for both component and other input items due to inflation, as well as the impact of government tariffs enacted on certain Chinese sourced finished goods and components. As noted earlier, we believe some of the increase in net sales this quarter was due in part to customers buying products this quarter in advance of the effective dates of the announced price increases. It is impossible to quantify the exact impact this had on our sales growth this quarter. We expect this to have a small dampening effect on our growth rate in the second quarter, historically our lowest net sales quarter in any given year due to seasonality, though again, it is impossible to quantify the impact. As you all know, changes in price mix have been a headwind each quarter for the last few years, so to experience a very slight favorability, call it neutral, this quarter was a welcome change. While it is not possible to precisely determine the separate impact of changes in the price and mix of products sold, we estimate the neutral impact of price mix this quarter was primarily due to changes in channel mix, mostly offset by both product price and mix, which included substitutions to lower priced alternatives, primarily for more basic, lesser featured LED luminaires sold in certain channels, as well as a modest decline in shipments for larger commercial projects as noted earlier. Lastly, while we believe the price increases we've put in place will be realized, much of the sales in the first quarter were at pre-increased levels due to both the timing of price increases implemented in various channels as well as shipments of orders at pre-increased prices were previously committed projects as part of the company's backlog. Based on the information from various data collection and forecasting organizations, we believe the overall growth rate in the first quarter as measured in dollars for the lighting market in North America was up low single digits, reflecting continued improvement in demand, reversing the sluggish trend over the last several quarters. Our net sales growth rate of approximately 11 percent, even excluding any potential pull forward in sales due to the announced price increases, stands in stark contrast to the overall growth rate of the Luminaire market in North America. We believe our channel and product diversification as well as our strategies to better serve customers with new, more innovative and holistic lighting and building management solutions and the strength of our many sales forces have allowed us to continue to gain overall share in the North American market this quarter. Our profitability measures for the first quarter were solid given overall market conditions. They were impacted mostly by significantly higher costs, particularly for certain commodities and components, as well as freight and wages, which I will address in a moment, and to a lesser degree, continued product substitution to lower-priced alternatives, as well as weakness for larger commercial projects. Our adjusted operating profit for the quarter was $134 million, down approximately 1% compared with the year-ago period while adjusted operating profit margin for the quarter was 14.4%, down about 170 basis points from the adjusted margin in the year-ago period. The decrease in adjusted operating profit margin was primarily due to the decline in adjusted gross profit margin. Adjusted gross profit margin for the first quarter was 39.5%, a decrease of about 200 basis points compared with the year-ago period. It is very important to understand the underlying factors that drove the decline in our margins this quarter and the actions we took to counter those factors, as well as the timing and financial impact of those actions. Adjusted gross profit increased $19 million this quarter over the year-ago period, driven primarily by higher sales volume and productivity improvements, partially offset by higher input costs. Our adjusted gross profit and margin were negatively impacted by higher input costs for certain items, including electronic and oil-based components, freight, and certain other commodity-related items, such as steel. Many of these items experienced dramatic increases in price over the last half of our fiscal 2018 due to several economic factors, including new tariffs and wage inflation caused by tight labor markets. We estimate the inflationary impact of these items reduced our gross profit this quarter by approximately $16 million and lowered our gross profit margin by approximately 170 basis points. As noted earlier, we took significant actions this quarter that we believe both help and will continue to help offset these and other cost increases, including wage inflation, as well as the impact of currently enacted increases in tariffs. These actions included announced price increases and other measures to improve productivity and reduce costs. We believe that due to the timing of price increases, they have limited positive benefit on our first quarter results. We believe these price increases will begin to offset higher input costs, including recently enacted tariffs in our second quarter and beyond. It is important to note that our adjusted gross profit margin increased 60 basis points on a sequential basis this quarter from the fourth quarter of 2018 on lower revenues, primarily due to the improvement in sales channel mix and actions to improve our cost structure. Next, our adjusted SDA expenses were up approximately $20 million compared with the year-ago period. Adjusted SDA expenses of percentage of net sales was 25.2 percent in the first quarter, a decrease of 20 basis points from the year-ago period, demonstrating the leverage of our SDA investment as our net sales volume grows. The increase in adjusted SDA expense was primarily due to higher freight and commission costs to support the increase in net sales, greater employee-related costs, and to a lesser degree, added expenses from recent acquisitions, partially offset by actions taken in prior periods to streamline the organization. Excluding the impact of higher freight and commission expense due to the increase in net sales volume, more than half of the increase in SDA expense compared with the prior periods was due to greater employee-related costs. While our salaries headcount remained essentially flat year over year, even after acquisitions, we expect that employee-related costs will continue to rise in fiscal 2019 as markets for certain skills remain tight contributing to a rise in wage inflation. Our adjusted diluted EPS was a first quarter record of $2.32 compared with the $1.94 reported in the year-ago period, an increase of 20%. The increase was primarily due to the favorable impact of the new tax law and the lower average shares outstanding due to stock repurchases during the past year, partially offset by a slight decline in operating profit in the quarter. As I noted earlier, we believe the year-over-year increases in certain input costs reduced our gross profit by approximately $16 million in the quarter and obviously negatively impacted our diluted earnings per share. Before I turn the call over to Ricky, I would like to comment on a few important accomplishments this past quarter. On the strategic and technology front, we continue to make great strides, setting the stage for what we believe will be strong revenue growth and profitability over the long term. We continue to gain market share in many important product categories and sales channels. Our Tier 3 and 4 solutions were up over 25% this quarter. From a commercial perspective, we continue to accelerate the number of Atrius-enabled deployments and increase active programs with several of the largest U.S.-based retailers. Our Atrius-based IoT luminaires and solutions are becoming the industry standard in the retail segment. Additionally, we continue to expand these solutions into other channels as awareness by customers grows as they come to recognize the full benefits of these solutions, including superior visual comfort and energy savings, as well as the capabilities of our IoT solutions, providing them with the opportunity to transform their spaces from nothing more than an expense item into a strategic asset. As I mentioned in prior earnings calls, it is clear that certain Chinese-based lighting companies, many obviously being subsidized in some form, are influencing pricing for certain basic, lesser-featured fixtures sold in certain channels. We will not yield this space for many strategic reasons. As such, we continue to aggressively expand our contractor select portfolio to profitably compete in this portion of the market. Also, as I mentioned last quarter, we introduced in late 2018 the next generation of our industry-leading lighting control system and light air, a wireless control system with a wide range of options and functionality for which there was strong customer demand this quarter. We believe Acuity has the most comprehensive and feature-rich wired and wireless lighting control systems available in the non-residential construction market, and importantly, they are connected to our growing BMS solutions. Lastly, we initiated many actions last year to further streamline our operations to reduce costs and improve our productivity. We believe these initiatives both enhanced our performance this quarter and will continue to benefit our operating and financial performance in the future, as well as allow us to accelerate investments in areas with higher growth opportunities. Ricky will have additional comments on this in a moment. We have been able to create these capabilities while providing industry-leading results because of the dedication and resolve of our many associates who are maniacally focused on serving, solving, and supporting the needs of our customers. I will talk more about our expectations for the balance of 2019 later in the call. I would like to now turn the call over to Ricky. Ricky?