Acuity Inc.

Good morning, and welcome to Acuity Brands Fiscal 2020 First 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, then the 1 key on your 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. Pete Janine, Vice President, Investor Relations and Corporate Development. Sir, you may begin.

Good morning. Good morning. With me today to discuss our fiscal 2020 first quarter results are Vern Nagel, our Chairman and Chief Executive Officer, and Karen Holcomb, our Senior Vice President and Chief Financial Officer. We are webcasting today's conference call at acutibrands.com. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures can be found in our first quarter press release. I would like to remind everyone that during the 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. Further, forward-looking statements speak only as to the date that they are made, and we undertake no obligation to update publicly any of these statements in light of new information and future events. 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 on forward-looking statements. Now, let me turn this call over to Vern Nagel.

Thank you, Pete. Good morning, everyone. We have a great deal to discuss this morning, including our CEO succession plan, which I will address later in the call. But first, Karen and I would like to make a few comments regarding the quarter, and then after, we will answer your questions. As you will recall from our last earnings call, We expected our net sales to be down this quarter compared with the year-ago period, primarily due to the significant pull forward of orders last year as customers placed orders in advance of two announced price increases, and to a lesser degree, the impact of our efforts to improve the margin profile of our product portfolio. While the precise impact of this pull forward in the year-ago period was impossible to determine, We felt it was probable our net sales would decline this quarter by mid to upper single digits from last year. This decline played out pretty much as we expected. However, we believe the decline in our net sales this quarter was also exacerbated by additional weakness in the overall demand, primarily due to continued concerns over global trade and the economic issues. Nonetheless, our results for the first quarter were solid despite these issues as witnessed by our enhanced gross profit margin profile and strong cash flow from operations. In addition, we took several actions in the quarter to better align the resources of our company to current demand and to further invest in our key strategies to drive profitable growth in the future. Some of these actions resulted in a special charge this quarter, which we will further discuss later in the call. I know many of you have already seen our results, and Karen 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 2020. Net sales for the first quarter were $835 million, a decrease of 10.5% compared with the year-ago period. Reported operating profit was $83.6 million compared with $116.4 million in the year-ago period. Reported diluted earnings per share was $1.44 compared with $1.98 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 Karen will explain later in the call. In adding back these items, one can see adjusted operating profit for the first quarter of 2020 was $119 million compared with adjusted operating profit of $134.1 million in the year-ago period. Adjusted operating profit margin was 14.3 percent, a slight decrease of 10 basis points compared with the margin reported in the prior year, even with net sales down 10.5 percent from the year-ago period. Adjusted diluted earnings per share was $2.13 compared with $2.32 earned in the year-ago period a decline of 8 percent. Net cash provided by operating activities was a solid $130 million this quarter, while our cash position at the end of the quarter was $267 million, even after investing over $300 million for strategic acquisitions and investments made during the quarter, leaving us with plenty of liquidity to execute our growth strategies. Looking at some specific details for the quarter, Net sales decreased 10.5% from the year-ago period. Overall, net sales volume declined approximately 16%, while the price mix of products sold was favorable this quarter by approximately 3%. We estimate price mix was impacted by a favorable shift in channel mix, and to a lesser extent, realization from price increases implemented in fiscal 2019, partially offset by unfavorable mix of products sold. The positive change in sales channel mix was mostly influenced by the decline in net sales of lower margin products sold primarily through the retail channel, partially offset by product substitutions to lower priced alternatives, primarily for basic, lesser featured LED luminaires sold in certain channels, as well as declines in shipments for larger commercial projects, a historical strength of the company. Acquisitions added about 2.5% to our growth, while the impact of changes in foreign currency was immaterial this quarter. As I noted earlier, the decline in net sales this quarter compared with the year-ago period was due in large part to the significant pull forward of orders last year as customers acted to avoid the impact of two announced price increases, one in September to help offset inflationary cost pressures and another in October due to enacted tariff increases on Chinese-made components and finished products. In addition, we believe demand in the first quarter for private non-residential construction in general and more specifically lighting was weaker than most experts originally forecasted with the lighting market being down year over year in the low to mid single digit percentage range. We believe these declines were due in large part because of the continued concerns over global trade and economic issues. These next few points are important in further explaining the movement in our top line. From a channel perspective, while we experienced declines in most channels, there were three key areas of significance. First, net sales through our independent and direct sales networks, which makes up approximately 84% of our total net sales, were off approximately 6% this quarter compared with the year-ago period. Our performance in these two networks compared with the year-ago period was impacted by the pull-forward of orders just noted, continued weak demand, primarily for larger commercial projects where we have particular strength, and the completion of certain larger infrastructure projects in the year-ago period. The impact of these items was partially offset by implemented price increases, the contribution from acquisitions, market share gains in certain lighting categories, including for certain lighting controls and our contractor select portfolio, as well as growth of our building management solutions platform at DISTEC, which again performed exceptionally well this quarter. While shipments were down in these key networks, we believe that our performance was reflective of overall market conditions and not specific to acuity. Second, lower shipments in the retail channel accounted for about one-third of the total decline in net sales this quarter compared with the year-ago period. The decline in this channel was primarily due to the impact of load-ins in the year-ago period for a major customer repeat this year and from the impact of previously announced actions taken by the company to eliminate or significantly reduce shipments of those products whose profitability was most negatively impacted by the additional tariffs. As we mentioned in previous earnings calls, we expected these efforts to result in lower net sales primarily in the retail sales channel, and more favorable gross profit margins. Lastly, net sales in our corporate accounts channel were down almost $18 million this quarter compared with the year-ago period, primarily due to the completion of certain projects in the year-ago period that did not repeat this quarter, and to a lesser degree, slower releases for certain renovation projects. As we have noted in previous earnings calls, We expect net sales through this channel to be very lumpy based on the nature of the construction cycle of customers served, primarily big box retailers. Nonetheless, we continue to add to the total square footage covered by our connected lighting and our Atrius-based IoT solutions. I will speak more about our advancements in this channel later in the call. Our adjusted operating profit for the quarter was $119 million, down approximately $15 million compared with the year-ago period, while adjusted operating profit margin for the quarter was 14.3%, down 10 basis points from the year-ago period. Furthermore, there are some additional points for you to consider as you evaluate our financial performances quarter. First, our adjusted gross profit margin for the first quarter was 42.8 percent, an increase of 330 basis points compared with the year-ago period, a huge improvement, and the highest that we have had in the last 12 quarters, despite the decline in net sales value. Adjusted gross profit was $357 million, down approximately $12 million from the year-ago period. The decline in adjusted gross profit was primarily due to the impact of lower net sales as well as higher costs due to the enacted tariffs. These factors were partially offset by favorable price mix, lower costs for certain inputs, and the contribution from the acquisition of TLG. The really important point here is that our efforts to prune our product portfolio and reduce our channel exposure to those products that do not meet our profit profile and to capture price all had a net positive impact on our adjusted profit margins this quarter while not unduly impacting our profitability. And to be very clear, this is while growing our value-oriented contractor select brand. Further, our adjusted SBA expenses were up approximately $3 million, or a little more than 1% compared with the year-ago period. Adjusted SBA expenses, a percentage of net sales was 28.5% in the first quarter, an increase of 330 basis points, from the year-ago period, primarily due to the decline in net sales. The increase in adjusted SDA expense measured in dollars was relatively modest on a year-over-year basis, but very significant when measured as a percentage of net sales, suggesting our cost structure is too high given current market demand. As a consequence, the company initiated a number of actions to streamline its operations to be more consistent with current market demand to reduce our cost structure and to better allocate resources toward programs with higher profitable growth potential. Karen will provide more details on our special charge later in the call. Our adjusted diluted earnings per share this quarter was $2.13 compared with $2.32 reported in the year-ago period. The decrease was primarily due to lower adjusted pre-tax income, partially offset by a lower effective tax rate this quarter, as well as lower average shares outstanding. Before I turn the call over to Karen, I would like to comment on a few important accomplishments this past quarter. On the strategic and technology front, we continued to make positive strides, setting the stage for what we believe will be solid growth in revenue and profitability over the longer term. This quarter and in December, we continued our torrid pace of introducing innovative and cost-effective solutions that we believe will drive profitable growth for Acuity over the longer term. We also continue our pruning efforts to reduce the sale of lower-margin products sold primarily in the retail channel, while we invest to bring innovative and cost-effective solutions to our preferred customers in this important channel. From a commercial perspective, we continue to experience success in our connected lighting, Atrius-enabled solutions. Our products and services enjoy strong market acceptance in retail applications, now deployed in over 5,000 retail stores in North America. We have several large retailers with our Atrius SaaS applications now deployed or in detailed evaluation. Currently, those early technology adopters are now activating Atrius services as part of their customer engagement, customer insight, and associate productivity enhancement programs. Increasingly, we see data analytics and data science opportunities generated by our connected lighting Atrius platforms as critical areas of investment, allowing retailers and now others to garner valuable insights about their businesses and facilities from our services. Additionally, we expanded our connected lighting, atrius-based solutions into other verticals as awareness by these customers of our meaningful points of differentiation and the broad capabilities of our IoT solutions increased significantly, particularly as they realized the opportunity to transform their spaces from expense items to strategic assets. These additional verticals include major airports, light industrial facilities, including warehousing, and healthcare. Net sales of our Contractor Select portfolio grew again this quarter, particularly in the C&I market, and now makes up slightly more than 10% of our net sales. Contractor Select is our fighter brand in response to those Chinese-based lighting companies, many of which we believe are clearly being subsidized in some form that are influencing pricing pricing for certain basic, lesser-featured fixtures sold in certain channels. Again, we are very pleased with the growth and profitability of this product portfolio, and we will not yield this portion of the market for many strategic reasons. We continue to make positive strides in expanding our industry-leading lighting control platform, Enlite, as well as our building management systems business, Distech, which grew nicely again this quarter. We believe Acuity has the most comprehensive and feature-rich wired and wireless commercial lighting control systems available and, importantly, are connected to our growing BMS solutions, providing customers with even greater functionality. Further, we initiated many actions this quarter to further streamline our operations to reduce costs and improve our productivity. We believe these initiatives will enhance our future operating and financial performance as well as allow us to accelerate investments in areas with higher growth opportunities. And lastly, we continue our efforts to complement our solutions portfolio with strategic acquisitions and investments, including the acquisitions of the Luminaires Group in mid-September and Locust Labs in November. The Luminaires Group, or TLG, is a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complements and enhances our architectural lighting platforms. Locust Labs is a leading indoor mapping and location platform whose software supports navigation applications used on mobile devices, web browsers or digital displays in airports, event centers, multi-floor buildings and campuses. The combination of Locust Labs technology with our Atrius IoT platform will provide venues with an enhanced indoor positioning system that can be rapidly deployed and easily maintained, enabling visitor and employee wayfinding, asset tracking, and business analytics. We are pleased to welcome the associates of the Luminaires Group and Locust Labs to the Acuity family. In addition, we made small but important investments in two innovative early-stage companies to enhance our lighting control platforms for circadian lighting and smart sensing solutions. Our solid performance, despite continued economic challenges, is the result and 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 fiscal year 2020 later in the call. I would like to now turn the call over to Karen.