Acuity Brands, Inc.

Good morning, and welcome to the Acuity Brands Fiscal 2024 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations. Charlotte, please go ahead.

Thank you. Good morning and welcome to the Acuity Brands Fiscal 2024 First Quarter Earnings Call. As a reminder, some of our comments today may be forward-looking statements, based on our management's beliefs and assumptions, and information currently available to our management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that our company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2024 first quarter earnings release, which is available on our investor relations website at www.investors.acuitybrands.com. With me this morning is Neil Ashe, our Chairman, President, and Chief Executive Officer, who will provide an update on our strategy and give an overview of the quarter. And Karen Holcomb, our Senior Vice President and Chief Financial Officer, who will walk us through our fiscal first quarter financial performance. There will be an opportunity for Q&A at the end of this call. For those participating, please limit your remarks to one question and one follow-up if necessary. We are webcasting today's conference call live. Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ash.

Thank you, Charlotte, and thanks to all of you for joining us this morning. We continue to demonstrate strong execution in our fiscal 2024 first quarter. We increased our adjusted operating profit, our adjusted operating profit margin, and our adjusted diluted earnings per share. We generated significant free cash flow, and we allocated capital effectively to drive value. Both our lighting and our intelligent spaces businesses continued to perform well during the quarter. Particularly in ABL, our performance was excellent. We increased adjusted operating profit by $15 million on $71 million less sales and increased the adjusted operating profit margin 280 basis points to 17.5%. Our strategy is yielding results. We're increasing product vitality, elevating service levels, using technology to improve and differentiate both our products and how we operate the business, and we are driving productivity. Today, our products are perceived as being more valuable in the marketplace at the same time we are lowering costs. Our product vitality efforts are the combination of new product introductions and improvements to our existing portfolio to ensure that our products are more valuable to our customers and more profitable for us. Our contractor select portfolio is about 300 of our most popular products. They are used in common everyday lighting applications and are in stock at retailers and electrical distributors. We continue to invest in product vitality and we have expanded our Lithonia Lighting ESXF floodlight family. This is a better product for distributors because it allows them to carry less inventory and is better for contractors because it is easier to install. This product family was first introduced in 2022 to offer a uniform lighting solution for parking lots, walkways, and outer buildings. It uses switchable technology to provide installers 36 on-site options, including lumen output, color temperature, photocell, and mounting options. Our design select portfolio consists of configurable product options that meet the key choices of lighting specifiers with high levels of service. This quarter, we added additional products in our downlighting, panel, emergency lighting, and outdoor categories. As we expand the options available in this portfolio, our focus is on product vitality and making it easier for the specification community to choose superior solutions. Our efforts to elevate service are having a positive impact on our customers. In October, we were once again recognized by the voters of iMark Electrical as one of the suppliers of the year for 2023. We also continue to invest in productivity improvements in our operations. Earlier this quarter, we traveled with a group of associates to our Mexican manufacturing facilities to open our new state-of-the-art Santa Rosa production facility, which includes our highly efficient new paint line. This facility embraces technology to deliver a better product to our customers and improves the efficiency of the paint line process while also reducing the environmental impact. I'd like to highlight a couple of ways we're doing this. Our paint guns and torque guns in our new facility are powered by a high efficiency air compressor that aims to reduce approximately half of our CO2 generation compared to the air compressor from our previous paint line. High efficiency walls, burners, and booster technology in our ovens require less gas than similar systems and use around 40% less natural gas than our previous infrared ovens. The transition to this facility has been seamless. We relocated an existing facility to the new SPF facility without any service interruption and now have capacity available for future growth. Our combined paint and natural gas savings are delivering on our required financial return for the facility while also meeting our sustainability objectives. You can learn more about this project and other accomplishments in our recently released Earthlight Report, available on our ESG for Investors page on our Investor Relations website. Now, moving to our Spaces Group. Our mission in our Intelligent Spaces business is to make spaces smarter, safer, and greener through our strategy of connecting the edge to the cloud. Distech has the best edge control devices on the market, while Atrius will be the best in cloud applications. At Distech, we are focused on expanding our addressable market in two ways. The first is geographic, and the second is increasing what we control in a built space. This quarter, we continued our geographic expansion, adding several new system integrators in the UK, Asia, and Australia. In one of our original markets, France, our hard work is paying off. The Building Services Research and Information Association called out DISTEC as dominating the French building automation and control systems market in a newly released report. We also continue to increase what we can control in a built space. In October, we launched our DISTEC Resense Move Sensor at several industry conferences in Europe. This is an advanced 7-in-1 ceiling-mounted sensor that is able to detect occupancy in spaces. It counts the number of people using a space, providing feedback on occupancy requirements to the building users. It is AI-powered and can be used to optimize indoor air quality, reduce energy and cleaning costs, and enhance occupancy comfort. It will be revealed to our North American and international customers at the AHR Expo in Chicago later this month. Our expansion into refrigeration controls is also going well, with the integration of Key2Therm on track and performing as we expected. During the quarter, we released the Key2Therm Edge Manager with a BACnet communication stack. This is the same open protocol technology that is used by DISTEC and is an important step to ensure compatibility between both the DISTEC edge controllers and the Key2Therm edge controllers. Now turning to our outlook, the changes that we have made to the business are impactful and long lasting. Our order rates are growing both year over year and sequentially. We're back to typical lead times and absent the excess backlog from last year, we would be experiencing sales growth. We are focused on controlling what we can control and we are confident our execution will continue. In our lighting and lighting controls business, we will continue to focus on delivering margin and cash flow. In our spaces group, we will continue to grow geographically and by adding to what we can control in a built space. We're delivering applications that are making a difference. Now, I'll turn the call over to Karen, who will update you on our first quarter performance.

Thank you, Neil, and good morning to everyone on the call. We started the year with strong performance. We increased our adjusted operating profit by $14 million year-over-year, improved our adjusted operating profit margin by 250 basis points over the prior year and by 40 basis points sequentially. We increased our adjusted diluted earnings per share by 43 cents year-over-year and generated cash flow from operations of $190 million. We continued to improve our businesses and allocated capital effectively. For total AYI, we generated net sales in the first quarter of $935 million, which was $63 million or 6% lower than the prior year as a result of the lower net sales in our ABL business. This was partially offset by continued growth in the ISG business of 13% in the quarter. We continued to deliver year-over-year margin improvement. During the quarter, our adjusted operating profit increased by $14 million on lower sales, while we expanded adjusted operating profit margin to 16.5%, an increase of approximately 250 basis points from the prior year. This increase was driven largely by the significant year-over-year improvement in our gross profit margin as we continued to execute and drive margin through product vitality, the management of price and cost, and productivity improvements. During the quarter, our adjusted diluted earnings per share of $3.72 increased 43 cents, or 13%, over the prior year, primarily as a result of higher net income and, to a lesser extent, lower shares outstanding due to the share repurchases. In ABL, net sales were $876 million in the quarter, a decrease of around 7% compared with the prior year, driven by declines across most of our channels, offset slightly by continued strong performance in our retail channel. Sales growth in ABL this quarter had a challenging year-over-year comparison, as the results in the first quarter of fiscal 2023 benefited from working down an elevated level of backlog. ABL's adjusted operating profit increased 11% to $154 million on lower net sales, and we delivered adjusted operating profit margin of 17.5%, a 280 basis point improvement over the prior year. ISG's net sales for the first quarter were $64 million, an increase of 13%, as DISTEC continued to grow and Key2Therm performed as we expected. ISG's adjusted operating profit was $10 million. Now, turning to our cash flow performance. We generated $190 million of cash flow from operating activities for the first quarter of fiscal 2024, an increase of $3 million over the prior year, primarily due to an improvement in net income, partially offset by a decrease in cash flow from working capital. During the first quarter of fiscal 2024, we continued to allocate capital consistent with our priorities. We invested $15 million in capital expenditures and allocated approximately $50 million to repurchase around 300,000 shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased over 9 million shares at an average price of about $143 per share, which was funded by organic cash flow. To wrap up, we had a strong quarter, particularly in ABL. We continued to deliver strong margin and cash flow performance. We grew adjusted operating profit and improved adjusted operating profit margin. We increased adjusted diluted earnings per share, generated strong cash flow from operations, and allocated capital effectively. We are pleased with our performance and we will reevaluate the outlook at the midpoint of the year. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment please for our first question. Our first question comes from the line of Joe O'Day with Wells Fargo. Your line is now open.

Hi, good morning. Can you hear me? Yeah, good morning, Joe. Hi. So, really impressive gross margin, obviously, this quarter. I think just any additional detail unpacking that, you talked kind of high level on vitality, productivity, price cost, but Anything in terms of kind of quantifying that bridge when we think about sequentially gross profit down kind of less than what we saw out of the revenue decline and trying to appreciate sort of what some of the moving pieces are there. And then bigger picture, just the sustainability of a 45.8% gross margins.

Yeah, thank you, Joe. Good morning to all of you. So as we unpack the margin performance, a couple of things to talk about. First of all, obviously our year is off to a really good start. We're taking the companies to levels of performance that it has never seen before. And these margins are the result of the impacts of the strategy and the work that our team has been doing to implement that around product vitality, around service, around technology, and around productivity. that has culminated in this performance. Specifically in this quarter, we're recognizing that our products, as I said in the prepared remarks, are being valued for their impact in the marketplace, which affords us the opportunity to manage price strategically. We continue to take costs out of the production of the products, so the output is the margin that you see. This quarter was mildly impacted by some mix. Our controls business was strong. Our ISG is obviously growth accretive, margin accretive, and return accretive, so that had some impact. But when you boil it all down, this quarter is a result, and the margin performance in this quarter is a result of the strategy and the work that we've been doing around product vitality, around service, around technology, and around productivity.

And just a quick clarification because you did make the point in prepared remarks and just kind of reiterated there where products perceived as more valuable in the marketplace today. I've thought about sort of the pricing dynamic over the last couple of years as being price in response to cost. But is it fair to sort of deduce that this quarter you're actually in the market sort of taking price up because it's the value that you're delivering and so you're still able to achieve price up?

So, I believe that's a fair conclusion. Yes, we are realizing the benefits in the first quarter of price. We talked about in the last call and in the second quarter, we also implemented a price increase. So, we're demonstrating to the market that we will continue to manage price. So, that's obviously in the second quarter, so it has no impact on these numbers. But as I've said consistently, We're moving to strategically manage price, and by that we mean that number one, our products need to be valued in the marketplace because they need to deserve to be valued. We're in a good position on that front. The second around our product vitality efforts is that we need to demonstrate that we can make more money with profit as a result of those prices, which is what we're doing from a cost perspective. So, I believe this is a good foundation. Now, obviously, these are extraordinary margins, so we don't need to continue to perform at this level for the rest of the year to deliver outstanding results, but we feel very good about the how in these margins.

I appreciate it. Thanks very much. Thanks.

Thank you. Our next question. comes from the line of Tim Woj with Baird. Your line is open.

Hey, everybody. Good morning. Hey, good morning, Tim. Good morning. Maybe just my first question. You know, Neil, you had kind of talked about in the prepared remarks, you know, that order rates had kind of improved sequentially and that they were up year over year. I know it's probably hard, but I'll ask the question anyways. I mean, how much of that do you think is, just the year-over-year comparisons kind of lapping some of the backlog depletion and the lead time improvement versus, you know, maybe what's going on in the underlying end market.

Yeah. Thanks for the question, Tim. Let me unpack that because I think this is really important. So our net sales is obviously a result of our shipments in the period. The shipments in the period are a result of the orders that led up to it times the lead time, basically. So we are now in a position where our lead times have more normalized. In other words, the order and the shipment rates are relatively consistent with each other. And so it's important that on both a sequential basis and on a year-over-year basis, our order rates are modestly up. In other words, without last year's comparable, sales would be growing. Last year was the net sales were the beneficiary of backlog reduction from orders which had been placed earlier. So when we talk about this order rate being up modestly, that's versus the daily order rate of last year's first quarter and last year's fourth quarter. So So, the best way that we've come to think about this is that there was more of a pull forward last year industry-wide than there was a cycle. So, in effect, we processed a lot more business last year than existed. When you smooth the line over time, and we've talked about this consistently, when you smooth the line over time, the lighting and lighting control business will be a consistent grower.

And I guess, have you seen any sort of underlying improvement in the end market? I mean, obviously, rates have kind of moved back with what the Fed's done. I'm just kind of curious if you've seen that in your order rates at all.

Yeah, so obviously we're seeing, if it's year-over-year improvement and sequential improvement, there is improvement in our order rates. As we look forward to our view on the macro, as I've been consistent with this, We don't have a better crystal ball than you do. We are confident in the current levels of the order rate and the performance of the order rate. As I said last quarter, we're comfortable operating in this environment, and as we look forward, we feel pretty good about where things are. our outlook doesn't expect things to get materially better or materially worse, basically. So, you know, as Karen said, we'll reevaluate at the middle of the year where we are for the rest of the year.

Okay, perfect. And then maybe just the second question, just on maybe margin, you know, just given where the gross margins, you know, have kind of landed over the last couple quarters, I mean, has that changed how you think about kind of the reinvestment that you'd want to make or need to make in the business to drive above market growth? Or do you think it's just kind of a higher base level of margin for the business kind of going forward?

It's a little bit of both and. I would say on that front, Tim, we don't believe that these margins are a result of harvesting. So we believe that they're the outcome of The strategy, as I've said, kind of, and I won't continue to be redundant on it, but I believe they're an outcome. So we believe this is a point in time At the same time, we also are beginning to focus on verticals and areas where we haven't, on the lighting side, either been strong or participated at all. A very small example, we made a tiny investment in horticulture. Why? Because we think over the next period of time, that will be an opportunity. And so we're positioning for that now. So we'll start to make those kind of investments, Tim, so that we can continue to hopefully expand the addressable market on the lighting side. And then, you know, I don't want to miss the opportunity to talk about spaces. And Karen can address the specifics of the quarter, the financials in the quarter, if necessary, later. But In the big picture, the Spaces group is growth accretive, margin accretive, and returns accretive. And we feel really good about what we're doing there and their ability to continue to impact the company going forward.

Very good. We'll talk about the rest of the year, guys. Thank you. Thank you.

Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Thank you. I wanted to follow up on the gross margin. Up 410 basis points year on year, despite the sales decline, which is, you know, really impressive. It seems to us that the driver there is one price cost. You guys have held price as costs have moderated due to the technology, the vitality, all the stuff you mentioned, Neil, but also some level of selectivity, which you've talked to over the past couple quarters. When we think about that 410 basis points, Could you kind of break down the build between selectivity and price-cost improvement over the last year? Thank you.

Yeah, I'll start. Karen, you fill in for us. We have not built a walk directly to break down the 410, so I'm going to do this more off the top of my head, Chris, than I am kind of read on a walk. Big picture, let's start with price. So as we've said consistently, we manage price to where we think we need to be in the marketplace. So obviously we have real strength in contractor select. You can see the retail channel was up this quarter. It's the growth spot, despite the fact that net sales were down. So obviously we're meeting the market at that level of the market. On the project side, we have the ability to choose which projects we

we take obviously. So in our, in our, in our pricing.