Acuity Brands, Inc. (NYSE:AYI) Q1 2023 Earnings Call Transcript

Acuity Brands, Inc. (NYSE:AYI) Q1 2023 Earnings Call Transcript January 9, 2023

Operator: Good morning, and welcome to the Acuity Brands Fiscal 2023 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ 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.

Charlotte McLaughlin: Thank you, Crystal. Good morning, and welcome to the Acuity Brands fiscal 2023 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, include 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 and their corresponding GAAP measures are available in our 2023 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 first quarter highlights, and Karen Holcom, our Senior Vice President and Chief Financial Officer, who will walk us through our 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 Ashe.

Neil Ashe: Thank you, Charlotte. Happy New Year to all of you joining us on the call this morning. We delivered solid results in the first quarter of fiscal 2023, as we continue to demonstrate our ability to drive sales growth through product vitality and service in both our lighting and spaces businesses. We expanded adjusted operating profit, substantially grew adjusted diluted earnings per share, and generated strong cash flow from operations. We again created permanent shareholder value through share repurchases. Both our lighting and spaces businesses started the year with strong sales performance. First, in the Acuity Brands Lighting and Lighting Controls business. Our strategy of increasing product vitality and service levels continued to be a key differentiator for our customers.

Our Contractor Select portfolio continues to be an excellent example of where these efforts are creating value. As a reminder, Contractor Select is a collection of the most important everyday lighting and lighting control products made up of a limited number of products with high product vitality and high service levels. This portfolio includes products from Lithonia Lighting, Juno, SensorSwitch and IOTA brands, and competes effectively in the electrical distributor and retail channels. An example of continued product vitality in the Contractor Select portfolio this quarter was the reintroduction of the upgraded DSX family of outdoor lighting. These products are used for commercial outdoor lighting as well as area lighting for schools, retail, and other everyday workspaces.

The refresh focused on improving the design and increasing the control functions, including the ability to embed our nLight wireless controls. It is a significant step forward in enhancing our outdoor offering. Our focus on a concentrated offering with high product vitality and high service levels allows us to deliver high-end user satisfaction at attractive levels of profitability. Our product vitality strategy addresses several of our priorities, including our sustainability efforts. This quarter, in our A-Light brand, we launched a trio of sustainable products, lean, stitch and wings, that are marketed to office, commercial, and other similar customers. These products have a number of innovations, including collapsible designs and the use of new materials.

For example, the materials in the wings products are 100% recyclable. Additionally, the collapsible design means the products contain less packaging waste and take-up less shipping space, which reduces the amount of fuel consumed during transportation as well as our shipping costs. The feedback on these products has been positive across the design and specification community and has been recognized. Our A-Light brand is leading by focusing on innovative design and sustainability, and I’m pleased to announce that this quarter our A-Light team won two GRANDS PRIX DU DESIGN Awards to celebrate the work of designers and architects who improve the quality of life and the built environment. We’re also making progress on our strategy of improving service levels.

We are beginning to satisfy more of our light backlog and decreased lead times as component availability becomes more stable. One of the core reasons our service continues to be differentiated is our manufacturing facilities in Mexico, not only are they strategically located, but they are also productive and very innovative. Our team of associates there is highly engaged and aligned to our values. I visited in December and I was impressed by the changes that they’re making in staffing and employee engagement that will help us adapt to evolving market conditions. Finally, this quarter we took the decision to exit our Sunoptics Daylighting business, and our Winona custom architectural lighting solutions. These businesses were no longer strategically relevant and we do not expect them to meet our financial expectations in the future.

We will continuously evaluate which businesses we operate and where we choose to compete. Karen will talk more about this in her comments. Now, moving to our Intelligent Spaces Group. The spaces team delivered good sales and operating profit growth this quarter. Both Distech and Atrius were successful in winning several new key customers and expanding services to existing customers. Our Distech product portfolio of controls and sensors is winning in the marketplace, largely in North America and France, and it has broader applicability. Therefore, we are focusing on increasing the addressable market for Distech. The first step is expanding the geographic markets that we serve. This effort is off to a promising start in the U.K. We are assembling the right group of independent systems integrators and are already delivering customer wins, including a large multi-million-dollar multi-year contract.

In October, I was in Europe and had the opportunity to visit a large mixed-use construction site in Lyon, which was using a full suite of our Distech products to control the entire space. This installation is a great example of the power of a full Distech implementation with each VAC, lighting and shade control throughout all areas and for all tenants of the space. We look forward to continuing our market penetration in France, while we grow in the U.K. Moving to capital allocation. During the quarter, we repurchased just under 0.5 million shares, which brings the total amount repurchased since May of 2020 to just over 20% of our shares outstanding at an average price of approximately $140. Our capital allocation priorities remain the same.

Our priorities are to invest for growth in our current businesses, invest in acquisitions, maintain our dividend and allocate capital for share repurchases when we perceive there is an opportunity to create permanent value for shareholders. Now, looking to the rest of fiscal 2023, there are two themes that we’re focused on. First, there is obviously, uncertainty around the economy, inflation and interest rates, which we know will affect our business over-time. Second, we believe that as component availability improves, lead times will improve and backlog levels will return to normal. We are beginning to see this in our business. We are well-positioned in a variety of our end-markets and our continuing investment in-product vitality and service positions us well for these dynamic environments.

Our organization continues to adapt to the changing requirements of our customers, and as a result, we have positioned ourselves not to predict the future perfectly, but rather to adapt to whatever comes our way. Finally, before I hand over to Karen, I want to congratulate our team on the accomplishments detailed in our 2022 EarthLIGHT report. Our products and services save our customers’ energy and reduce their carbon emissions, and we are proud to announce our commitment to achieving net zero by 2040. As part of this, we’ve been working with the Science-Based Targets Initiative to establish new interim targets to further reduce our Scopes 1, 2, and 3 carbon emissions. This is both good for the environment and good for our business. Now, I’ll turn the call over to Karen, who will update you on our first quarter performance and provide a strategic update.

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Karen Holcom: Thank you, Neil. Our first quarter of 2023 was a solid start to the year. We delivered good sales growth and strong adjusted diluted EPS growth. We improved adjusted operating profit, grew cash flow from operations, and continue to allocate capital effectively. As Neil mentioned, during the first quarter of fiscal 2023, we took the opportunity to strategically review our portfolio and sold our Sunoptics business. This business provided dome skylights and smoke vents to several different types of commercial buildings. We also announced plans to discontinue our Winona custom architectural lighting solutions by the end of the fiscal year. As a result, we took non-recurring charges of $22 million or $0.52 per diluted share related to impairments, severance, accelerated amortization, and a loss on the sale of the Sunoptics business.

In the first quarter, we generated net sales of approximately $1 billion, which was 8% higher than the prior year, largely due to price. Both the ABL and ISG businesses contributed to the growth during the quarter. Operating profit in the first quarter of $109 million and adjusted operating profit was $140 million. The higher adjusted operating profit was a result of a good gross profit performance, as we continue to manage price and costs. However, the fall-through of the higher sales to adjusted operating profit was lower because of the impact of strategic decisions made for fiscal 2023 around commissions. Finally, we continue to grow adjusted earnings per share. Our diluted earnings per share of $2.29 was a decrease of $0.17 or 7% year-over-year, as a result of the $0.52 of non-recurring charges I detailed before, while our adjusted diluted earnings per share of $3.29 increased $0.44 or 15% over the prior year.

The growth in adjusted diluted earnings per share was due to higher operating profit, benefits from foreign currency, and lower shares outstanding due to the share repurchases. I now want to expand on our segment performance. Net sales of ABL grew to $947 million, an increase of 7% compared with the prior year. This increase was driven by higher year-over-year sales in our independent sales network, the direct channel, corporate accounts, and the retail channel. ABL’s operating profit was $118 million, a decrease of $10 million versus the prior year with ABL adjusted operating profit relatively flat year-over-year. The lower fall-through rate was primarily the result of higher commissions, as I mentioned previously. Now, moving to ISG. The spaces segment had a strong quarter and improved both net sales and operating profit.

Sales in the first quarter of 2023 were $57 million, an increase of $10 million or 22% versus the prior year. During the quarter, Distech had strong performance across a variety of projects and was able to work down a significant amount of backlog from the fourth quarter of fiscal 2022 as component availability improved. ISG’s operating performance also improved due to the higher sales and benefits from the mix of products as we cleared some of that backlog. Operating profit in the first quarter of 2023 increased to $8 million this quarter. Now, moving to cash flow. We generated $187 million of cash flow from operating activities for the first three months of fiscal 2023, an increase of $103 million over the prior year’s first quarter. As a reminder, last year, we invested in inventory in order to support our growth as well as insulate our production facilities from inconsistent supply availability with the intention of working down that inventory over several quarters, which we have done.

We are now down 13 inventory days from the peak in February of 2022. We also invested $18 million in capital expenditures during the first quarter of fiscal 2023 and $78 million to repurchase approximately 0.5 million shares during the first quarter. Before I turn the call to the operator for questions, I want to reiterate the following. We are pleased with our performance in the first quarter of 2023. We delivered solid sales growth and strong adjusted diluted EPS. Our outlook for 2023 remains unchanged and we continue to position ourselves to quickly adapt to changing market conditions and to continue to allocate capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Q&A Session

Operator: Thank you. And our first question will come from Tim Wojs from Baird. Your line is open.

Tim Wojs: Hi, everybody. Good morning. Nice job, and Happy New Year.

Neil Ashe: Happy New Year, Tim.

Tim Wojs: Maybe just on the backlog, Neil, it does sound like you made some progress kind of working that down. Any thoughts on kind of when you think the backlog returns to more of a normalized level? And I guess, on the supply chain, could you compare and contrast where the supply chain is performing today maybe relative to six to nine months ago?

Neil Ashe: Yes, sure. So there’s a fair amount to unpack there, Tim. Thanks for the question. So big picture, our expectation is that, as component availability becomes more consistent, and it is more consistent, although not yet back to normal, so it’s – I don’t think that the industry or we are completely out of the woods yet on that, but we are starting to see some more consistent availability, then that will enable us to reduce lead times, so that’s a – that’s obviously a positive. Along the way, we’ll be working through that backlog. So as we’ve said over the last several quarters, and I would say the – your question implies probably pretty accurate, off the top of my head, probably second or third fiscal quarter of last year was when we peaked on our absolute level of backlog.

And so we’ve been working down through that over the course of the last couple of quarters and we’ll continue over the next quarter or two to be working through that. That should get us to a more normal relationship between order intake and lead times and net sales, which we think is the net – obviously, going to be a net positive. We don’t know exactly how long that will take, so that’s just an estimate, but that’s – I think round numbers, that’s about right.

Tim Wojs: Okay. Okay, good. And then maybe, Karen, just on the commission comment. Could you elaborate, I guess, what exactly that was in the quarter? And I guess, if that’s isolated to the fiscal quarter or is it just going to generally be a high-level of commissions for the year?

Karen Holcom: Yes, thanks, Tim. There are several things going on in commissions this year, and what we’re really focused on is investing in future business. So for example, we’ve made some investments and changes to our direct sales force commissions to position them for the upcoming future infrastructure business and we’ve also invested to secure certain project business. So I think what you’ll see is that this is going to continue through the balance of the year at this level.

Tim Wojs: Okay. Okay, very good. I’ll hop back in queue. Thanks, everybody.

Karen Holcom: Thank you, Tim.

Operator: Thank you. One moment for our next question, please. And our next question will come from Chris Snyder from UBS. Your line is open.

Chris Snyder: Thank you. I wanted to start with one on capital allocation for Neil. In the past when you provided your framework, M&A always kind of came in above buybacks, but over the last year or two now, really all the capital has gone towards buybacks. And I think most of the great – with the multiples we’ve seen compress in the marketplace, if that was the right use of capital. But as we look forward here, can you talk about, is that starting to shift more in favor of M&A? Could you maybe talk about any sort of M&A pipeline. And then, specifically, the types of assets the Company is looking for. In the past, the Company – you’ve talked about maybe tech assets to build-out the ISG Group, but also may be looking at semi-adjacent industrial verticals to kind of deploy some of the software tech assets across. Thank you.