Acuity Brands, Inc. (NYSE:AYI) Q3 2023 Earnings Call Transcript

Acuity Brands, Inc. (NYSE:AYI) Q3 2023 Earnings Call Transcript June 29, 2023

Acuity Brands, Inc. misses on earnings expectations. Reported EPS is $3.3 EPS, expectations were $3.71.

Operator: Good morning, and welcome to the Acuity Brands’ Fiscal 2023 Third 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, Liz. Good morning, and welcome to the Acuity Brands’ fiscal 2023 third 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 2023 third 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 our third quarter highlights; and Karen Holcom, our Senior Vice President and Chief Financial Officer, who will walk us through our fiscal third 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 Ashe.

Neil Ashe: Thank you, Charlotte, and welcome to all of you joining us this morning. In the third quarter of fiscal 2023, we expanded adjusted operating profit margin, both sequentially and year-over-year. We continue to grow adjusted diluted EPS, and we generated strong cash flow from operations, despite a decline in net sales. We completed the acquisition of KE2 Therm and we continued to repurchase our shares. We are making meaningful progress in both our Lighting and Spaces businesses. In the Acuity Brands Lighting and Lighting Controls business, our strategy is clear. Increased product vitality; increased service levels, and use technology to improve and differentiate both our products and our services. This quarter we launched Design Select.

We developed Design Select to elevate our service for the specification community by making it easy for them to choose superior solutions with dependable service. Design Select consists of 3,000 configurable products that meet important specification needs from some of our core families of lighting and lighting control brands including Aculux, Gotham, Lithonia Lighting, nLight and SensorSwitch. Design Select is an important addition to our service strategy. ABL Lighting and Lighting Control products are now organized into three clear categories. Contractor Select is 300 of the most important everyday lighting and lighting control products available in-stock at retailers and electrical distributors. Design Select is 3,000 configurable products that meet the key choices of lighting specifiers with dependable service, and the remainder is made to order.

Through the combination of high product vitality and improved service levels with the specification community, distributors and contractors, we continue to differentiate ourselves and challenging existing industry standards. We also continue to introduce new products during the quarter. Our Luminis brand launched the inline family of exterior luminaires for use in plazas and arenas. Each light module can rotate 355 degrees and can be individually controlled, allowing installers to position the luminaire onsite for improved flexibility to create optimal illumination solutions. The recognition of our product vitality efforts is important to our team and our customers. And this quarter, several of our products won prestigious Red Dot Design awards including products from Luminis and Eureka.

The Eureka Tangram-Trace was awarded a Red Dot best of the best distinction for its groundbreaking design. Other winners in this category included products from Apple, IBM and Sonos and span categories from VR headsets to first responder drug. We’re proud to be in this company of innovators. Now, moving to our Intelligent Spaces Group. This was a big quarter for our spaces team both at Distech and Atrius. First on Distech. Our strategic priority is to expand our addressable market which we are doing in two-ways. The first is geographic, which continues to progress, successfully. The second is by increasing what we control in a build space. During the quarter, we announced the completion of the acquisition of KE2 Therm which allows us to expand Distech’s addressable market by entering the commercial refrigeration control space.

By controlling commercial refrigeration, we are able to more effectively sell the entire Distech portfolio in verticals like retail, restaurants and schools. The timing is significant as the refrigeration industry responds to the need for ultra-low global warming potential refrigerant technologies. This has led to growing demand for transcritical CO2 solutions, which require the precision of digital controls to provide safety, efficiency and reliability, while delivering cost savings to the customer. I now want to spend a few minutes on Atrius. Our strategy with Atrius has been to build a data layer that connects the edge to the cloud and use that data to develop applications that make a difference in build spaces. Earlier this month we showcased our products at the IBcon 2023 Conference in Las Vegas.

This is the largest smart building conference for commercial real estate and facilities companies. At IBcon we launched Atrius DataLab, a powerful data layer that supports a portfolio of Atrius applications that is foundational to our ability to automate the environment of a built space. Atrius DataLab captures data from a building management system and organizes it in the cloud. From there, it harmonizes the data for accessibility and usefulness and creates a digital twin. Applications are then built on top of that digital twin, allowing users to analyze historic scenarios, get live updates of the current building environment and model other scenarios. This service is important because every building is different. Our Atrius applications have been built to ensure that our partners achieve their specific energy and sustainability goals through the collection, measurement and management of data in each of their built spaces.

Atrius Sustainability and Atrius Energy are live and were built on the foundation of Atrius Building Insights. Atrius Sustainability is an automation tool that captures, categorizes and reports on carbon emissions within built spaces. Atrius Energy facilitates the reduction of energy and carbon usage by allowing facilities teams to benchmark their usage against science-based target. Later this year, our team will be rolling out Atrius facilities and Atrius resolve. Now, looking to the remainder of fiscal 2023. Our third quarter played out as we expected with sales being impacted by both lead-time normalization and the macro-environment. Entering our fourth quarter, we believe that there will be a continuation of these trends. While our order rates and our shipment rates are returning into closer alignment with each other, we have not yet returned to normal sequential seasonality.

In ABL, we’re going to focus on strategic pricing, continued productivity improvements and managing material costs. In ISG, we’re going to focus on the continued growth of Distech and Atrius and the successful integration of KE2 Therm. We will continue to prioritize managing margin, generating strong cash flow and allocating capital effectively. Now I’ll turn the call over to Karen, who will update you on our third quarter performance.

Karen Holcom: Thank you, Neil, and good morning to everyone on the call. In the third quarter of 2023, we delivered sequential and year-over-year adjusted operating profit margin improvement despite a decline in net sales. We grew adjusted diluted earnings per share and generated strong cash flow from operations. For total AYI, we generated net sales of $1 billion, which was 6% lower than the prior year as a result of the decline in net sales in our ABL business. As Neil described, this was the result of lower volumes, consistent with lead-time normalization trends and the impact of the wider macro-environment. As we made clear on our last call, our focus is on delivering margin and operating cash flow. During the quarter, both operating profit and adjusted operating profit were flat on lower sales.

We expanded adjusted operating profit margin to 16.3%, which was an increase of approximately 100 basis points over the prior year, and an improvement of 230 basis points sequentially, driven by the improvement in gross profit margin. During the quarter, our adjusted diluted earnings per share of $3.75 increased $0.23 or 7% over the prior year. Moving to our segment performance review. ABL net sales were $941 million in the quarter, this decrease of 7% compared with the prior year was largely driven by declines in the independent sales network and lower OEM sales. This was partially offset by infrastructure projects in the direct sales network and continued strong performance in our retail channel. ABL’s operating profit and adjusted operating profit were both flat on lower net sales and we delivered adjusted operating profit margin of 17% a 120 basis point improvement over the prior year and a 200 basis point improvement sequentially as price held and material input cost improves, particularly steel and inbound freight.

The Spaces segment continued to perform well with another good quarter. Sales were $66 million, an increase of 13% as both Distech and Atrius continued to grow. Spaces operating profit was $9 million and adjusted operating profit was $13 million as we continued to invest in the business for longer-term growth. Now, moving to our cash-flow performance. We generated $472 million of cash flow from operating activities for the first nine months of fiscal 2023, an increase of $306 million over the same period in 2022, driven largely by improvements in working capital. We have improved both days of inventory and accounts receivable compared to the end of the year. As we’ve discussed on prior calls, we’ve continued to bring inventory down by 22 inventory days from the peak in February 2022, and we’ve also brought inventory levels down by over $36 million sequentially from the second quarter of fiscal 2023.

Year-to-date, we invested $48 million in capital expenditures and allocated $219 million to repurchase approximately 1.3 million shares. Our capital allocation priorities remain the same. We’ve invested for growth in our current businesses through R&D and CapEx. We’ve expanded our platform through acquisitions as evidenced by the purchase of Optronics in our Lighting business and KE2 Therm in our Spaces business. We’ve maintained our dividends and we’ve created a permanent shareholder value with approximately $1.2 billion of share repurchases since the fourth quarter of fiscal 2020 at an average price of approximately $142 per share, which was funded by organic cash flow. To summarize our performance for the quarter, we delivered strong margin and cash flow despite sales being down year-over-year.

Based on year-to-date results and our expectations for the fourth quarter, we now expect full year net sales to be between $3.9 billion and $4 billion. Our expectations for full-year adjusted diluted earnings per share have not changed. Our focus continues to be on meeting the needs of our customers and delivering margin and cash flow. Thank you for joining us today. I will now pass you over to operator to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Tim Wojs with Baird.

Tim Wojs: Maybe just to start out on the market. I appreciate kind of the color around kind of order rates and shipment rates and kind of how those are normalizing. I was curious if there was any way to kind of break that out by channel or segmentation, whether it’s kind of the project business or what you’re seeing on the stock and flow side, and then maybe some of your more direct accounts?

Neil Ashe: Yes. Good morning, Tim. So, let me start from kind of back to front. So first on the corporate accounts and on the OEM side that’s where – those are obviously going to be volatile and those are down and those order rates are relatively low. There’s lots of reasons for those. The timing of renovations at our big customers on the corporate account side, and then second, on the OEM side, there’s probably some continued destocking going down on the driver market. Then, as you kind of get to our direct sales network and our project business, that’s where the C&I order rate is relatively stable at this point. So, and our direct sales is also consistent. So they are finding a level here where they’re relatively consistent. And then finally, we’ve had continued strong performance in retail. So, when you boil it all back together, I think it’s a continuation of the trends we’ve seen from this quarter and looking out to what we can see right in front of us.

Tim Wojs: Okay. And I guess like is, you mentioned in your prepared remarks that you’re not really quite back to normal revenue seasonality yet. I mean, is there any kind of expectation or thought when you might be back to that kind of normal seasonality?

Neil Ashe: Yes. We’re not ready to call that yet Tim, as we sort our way through this. I mean, we’re looking at the same kind of windshield metrics that you are to try and understand. So, because we haven’t gone through a period that looks like this one, we don’t have a perfect proxy for where that is. So we’re, at this point going to take it one quarter at a time.

Tim Wojs: Okay, makes sense. And then, just a last one and this is maybe more of a bigger picture question. Just – with how you’re bucketing sales which is just under the Contractor Select, Design Select and kind of the MTO products, I mean, I guess could you talk about what’s different with that segmentation versus before? And if you aligning it this way, does that have more of a topline sales impact for you, just easier order or is that more of a benefit to margins because maybe it eliminates a lot of like cats and dogs, on some of the products.

Neil M Ashe: Yes. So I think the delineation – the clarity of the delineation is powerful on a number of levels. First, we’ve had a lot of success for Contractor Select. So building a product of 300 SKU product line that’s built for stocking and resale and retail and electrical distribution provides us the ability to be very – have very high product vitality, have very high service levels and be an important partner to the retail and electrical distribution industry, and it allows us to compete effectively with whoever wants to enter the market through that channel. So that’s been a real success for us. Design Select is then about configurable products for the specification community. And what this allows them to do is choose – basically make good choices among the product families.