Acuity Inc.

Good morning and welcome to the Acuity Brands Fiscal 2019 Third Quarter Financial Conference Call. After today's presentation, there will be a formal question and answer session. To ask a question, please press the star and the one key on your touchtone telephone. 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.

Thank you and good morning. With me today to discuss our fiscal 2019 third 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 uncertainty, such that actual results may differ materially. Please refer to our most recent 10-K and 10-Q SEC filings and 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. Our results for the third quarter were very solid despite continuing inflationary cost pressures, the impact of tariffs and and further uncertainties caused by U.S. trade policies. We implemented several programs to address these cost issues, including additional price increases, product and freight cost reductions, and further actions to improve productivity. We believe our top-line growth this past quarter was negatively impacted by the pull forward of orders from customers into the first half of the year as they acted to avoid announced price increases, as well as reduced shipments in the retail channel due to efforts initiated this year to eliminate products within our portfolio that do not meet our profitability hurdles, primarily in the retail channel. I will provide greater detail on our sales mix later in the call. Additionally, we are pleased that our adjusted gross profit margin exceeded 40% for the first time in a year and improved sequentially for the third quarter in a row. Our adjusted diluted earnings per share of $2.53 was a third quarter record. 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 third quarter of 2019. Net sales were $948 million, a slight increase over the year-ago period. Reported operating profit was $120.3 million compared with $107.4 million in the year-ago period. Reported diluted earnings per share was $2.22 compared with $1.80 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 third quarter of 2019 was $135.5 million, or 14.3% of the net sales, compared with adjusted operating profit of $137.3 million in the year-ago period of 14.5% of net sales. Adjusted diluting earnings per share was $2.53, a third-quarter record up 7% from the year-ago period. Results this period were benefited by a lower effective tax rate, as Ricky will explain later in the call. Net cash... provided by operating activities was a strong $312 million for the first nine months of the year, up nicely over the year-ago period. And our cash position at the end of the quarter grew to $334 million, leaving us with plenty of liquidity to execute our growth strategies. Looking at some specific details for the quarter, net sales were essentially flat when compared with the year-ago period. Overall, net sales volume grew more than 1%, which was mostly offset by unfavorable foreign exchange rates and the adoption of ACS 606. Changes in product prices and the mix of products sold were essentially flat compared with the prior year, as higher pricing was offset by changes in the mix of products sold and customer mix within certain channels. We estimate the realization from recent price increases contributed low single-digit growth to overall net sales for the quarter. From a channel perspective, the increase in net sales in our independent sales network was largely offset by lower net sales in the retail channel compared with the year-ago period. The decline in net sales in the retail channel was primarily due to the impact of efforts initiated this year to eliminate certain product categories that do not meet our expected profit margin profile. We believe our growth in net sales this quarter was also muted by the impact of customers, primarily in the independent sales network channel, pulling forward orders into the first half of the year in advance of announced price increases. While we noted this activity in our previous two earnings calls, we were unable to determine the precise impact of the sales shift between quarters. Looking more closely at the details of our net sales this quarter, Net sales to our independent sales network were up almost 3%. Our growth in this channel was benefited by implemented price increases, market share gains in certain lighting categories, particularly for lighting controls, and growth of our building management solutions platform at DISTEC, which again performed exceptionally well this quarter. We believe the growth rate of our CNI business within the independent sales network channel was more than double the overall rate of growth for this particular market. Our growth in CNI was primarily due to greater shipments of certain high-volume, more basic, lesser-featured LED fixtures, primarily for applications on smaller and mid-sized commercial projects, significant growth of our lighting controls platform and light, and the benefit from our implemented price increases, all partially offset by prolonged delays for larger non-residential lighting projects, as well as continued product substitution to lower-priced alternatives for certain lighting products. Additionally, net sales in our corporate accounts and direct sales channels were down slightly compared with the year-ago period, primarily due to the completion of certain large projects in the year-ago period, and to a lesser degree, slower releases for certain renovation projects. Net sales in the retail channel declined approximately $12 million this quarter compared with the year-ago period. As I noted earlier, the decline was primarily due to the elimination this year of certain products sold primarily through the retail channel as part of a comprehensive review of our product portfolio for those products that do not meet our margin profile expectations. While we expect these efforts to result in lower net sales in this channel over the next few quarters, we ultimately expect that these actions will be margin accretive as operating profit dollars are expected to remain fairly constant. With regard to the impact on net sales for changes in the price and mix of products sold, the overall net impact was essentially flat this quarter. While it is not possible to precisely determine the separate impact of changes in the price and mix of products sold, we estimate the impact of price increases contributed low single digits to our overall growth in the quarter. This positive price capture was offset by changes in channel and product mix. The change in channel and product mix this quarter was mostly influenced by changes in sales to certain customers within certain channels and to a much lesser degree the extent of product substitution 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. Our profitability measures for the third quarter were solid given these overall market conditions. Our adjusted operating profit for the quarter was $136 million, down ever so slightly compared with the year-ago period, while adjusted operating profit margin for the quarter was 14.3 percent, down 20 basis points from the year-ago period. If one were to reconcile our adjusted operating profit and margin in both periods for the U.S. GAAP-mandated accounting changes for ACS 606 and the pension accounting pronouncement in 2018, our adjusted operating profit this quarter would have exceeded the year-ago period by approximately $1.3 million, and adjusted operating profit margin would have been the same compared with the year-ago period. Our adjusted gross profit margin for the third quarter was 40.5%, a decrease of about 110 basis points compared with the year-ago period. Adjusted gross profit was $384 million, down $9 million from the year-ago period. The decline in gross margin was primarily due to a shift in net sales among key customers within the retail channel and the significant impact from the underabsorption of manufacturing operating costs as a consequence of our inventory reduction efforts this year compared with an increase in inventory in the year-ago period. Inventory build in the year-ago period was necessary to service certain very large orders that were required to be shipped in the fourth quarter in both corporate accounts and retail channels. As we mentioned last quarter, our adjusted gross profit and margin were negatively impacted by a shift in net sales between key customers within our retail channel. Each of our key customers in this channel have different service requirements, which impact how we account for these differences under generally accepted accounting principles. We believe the impact of this customer shift within this channel accounted for approximately a third of the decline in overall adjusted gross profit margin as a percentage of net sales in the third quarter compared with a year ago. However, it is important to note we believe much of this decline was largely offset with lower SDA expense. Next, our adjusted SDA expenses were down approximately $7 million compared with the year-ago period. Adjusted SDA expenses, a percentage of net sales, was 26.2% in the third quarter, a decrease of 90 basis points from the year-ago period. Again, the decline in adjusted SDA expense was primarily due to lower freight costs, caused primarily by the customer shift within the retail channel. Our adjusted diluted EPS was a third quarter record of $2.53, compared with $2.37 reported in the year-ago period, an increase of 7%. The increase was primarily due to higher adjusted net income, which was benefited primarily by a lower effective tax rate this quarter, as well as lower average shares outstanding. 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 significant strides, setting the stage for what we believe will be solid growth in revenue 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 continue to expand and now make up more than 20% of our net sales. Our new product introductions continue to be well received by the market, some winning various awards for innovation. From a commercial perspective, we continue to accelerate the number of Atrius-enabled deployments and increased 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 big box retail segment. We believe that over 20% of the floor space of big box retailers in the U.S. is now Atrius enabled. Additionally, we continue to expand these differentiated solutions into other verticals 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 expense items into strategic assets. 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 have continued to expand our contractor select portfolio and further enhance our service platforms to profitably compete in this portion of the market. We believe our lighting and BMS controls capabilities continue to expand at more than double the overall estimated market growth rate for these solutions. We believe Acuity has the most comprehensive and feature-rich wired and wireless lighting control systems available in the non-residential market, and importantly, they are connected to our growing BMS solutions, providing customers with even more functionality. Lastly, this year we initiated comprehensive reviews in two key areas of our company – Compensation, and Environmental, Social, and Governance, or ESG. These reviews, which included feedback and insights from our shareholder base, resulted in modification and enhancements to both programs. Specifically, with regard to ESG, we believe these factors are important to the long-term success of Acuity Brands and our stakeholders. We are very pleased to announce that we have updated our Earthlight website, which highlights some of the significant efforts and results we have achieved to date that lessen our impact on the earth and benefit our business, associates, customers, and communities. I encourage all of you to visit our website at www.acuitybrands.com slash about us slash sustainability to view these impressive results. We have been able to create these capabilities while providing industry-leading results because of the dedication and resolve of our 12,000 associates who are maniacally focused on serving, solving, and supporting the needs of our key stakeholders. 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?