Acuity Brands, Inc. (NYSE:AYI) Q4 2023 Earnings Call Transcript

Acuity Brands, Inc. (NYSE:AYI) Q4 2023 Earnings Call Transcript October 4, 2023

Acuity Brands, Inc. beats earnings expectations. Reported EPS is $3.97, expectations were $3.57.

Operator: Good morning, and welcome to the Acuity Brands Fiscal 2023 Fourth Quarter and Full Year 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.

Charlotte McLaughlin: Thank you, Liz. Good morning, and welcome to the Acuity Brands fiscal 2023 fourth quarter and full year 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 our corresponding GAAP measures are available in our 2023 fourth quarter and full year 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 our full year highlights, and also Karen Holcom, our Senior Vice President and Chief Financial Officer, who will walk us through our fourth quarter performance and full financial year performance as well as provide an outlook for our full year fiscal 2024. 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 good morning to all of you joining us. Our fiscal fourth quarter performance demonstrated excellent execution. Our focus on margin and cash generation led to increased adjusted operating profit margin and higher adjusted diluted earnings per share despite a decline in sales in the lighting business. This quarter concluded a successful year. We delivered strong financial performance, we continued to improve our businesses, and we allocated capital effectively. Throughout fiscal 2023, both our lighting and spaces teams made meaningful progress driving our business forward. In our Acuity Brands Lighting and Lighting Controls business, our strategy is to increase product vitality, improve service levels, use technology to improve and differentiate both our products and our services and to drive productivity.

In 2023, we realigned our product portfolio through the introduction of Design Select. We now have three defined ways in which we go to market, Contractor Select, Design Select and Made to Order. By combining a high product vitality and improved service levels, Design Select allows us to better serve lighting specifiers, distributors and electrical contractors. The realignment of our portfolio, together with our ongoing product vitality efforts, has allowed us to strategically manage price in a dynamic environment, while the ongoing productivity improvements in our supply chain continue to improve our processes and manage our costs. We also continuously evaluate our portfolio. This year, better valuation resulted in the divestiture of our Sunoptics daylighting business and the decision to exit Winona Custom Architectural Lighting Solutions.

There’s a bit of noise in the numbers this quarter, resulting from a series of actions. The first is the result of our ongoing transformation efforts. We have redefined our work, where and how it is done, resulting in organizational changes that will lead to more efficiencies. The second are charges primarily for impairments of trade names related to prior acquisitions. The third charge resulted from the collectability of a supplier warranty obligation owed to us for components we used in products manufactured and sold between 2017 and 2019. Karen will cover each of these in more detail. This year, our teams have refreshed approximately 20% of our product portfolio and have introduced many new product families. I’d like to highlight our American Electric Lighting brand, where we launched AutoConnect, which is a durable, value-driven solution for outdoor infrastructure lighting that includes connected luminaires for roadway, industrial and commercial applications.

The rollout was targeted to coincide with the anticipated increase of infrastructure investments and positions us well for continued success. In August of this year, the City of Philadelphia announced that it has selected our American Electric Lighting outdoor lighting product as a major supplier for the Philadelphia Streetlight Improvement Project. The citywide project will replace and connect approximately 130,000 street lights into a network of more efficient, longer-lasting, remotely controlled LED lights, which is expected to reduce street lighting energy usage by more than 50% and is expected to reduce municipal carbon emissions by more than 9%. Our team continue to be recognized for our innovation and the value that our products bring to our customers.

In the fourth quarter, six of our lighting solutions were selected for the 2023 Illuminating Engineering Society Progress Report, which showcases the year’s most significant advancements in the art and science of lighting, including our WarmDim technology from Aculux, emergency battery backup cylinders from Gotham, and flame lighting technique from Hydrel. Our marketing team was also announced as a winner of the Best of the Best Marketing Award for 2023 by the Electrical Distributor Magazine. Now, moving to spaces, where we had another great year. The strategy for our Intelligent Spaces business is to make spaces smarter, safer and greener by connecting the edge to the cloud. Distech has the best edge control devices on the market, and Atrius will be the best in cloud applications.

Our strategic priority for Distech is to expand our addressable market in two ways. The first is geographic, and the second is increasing what we control in a built space. In 2023, we continued to drive this strategy forward by establishing a presence in the UK market and through the acquisition of KE2 Therm, which added commercial refrigeration controls to our portfolio. The integration of KE2 Therm is progressing well, and we rounded out a successful year with them being awarded a 2023 Dealer Design Award. Earlier this year, we launched Atrius DataLab, the intersection point between the edge devices and Distech and the applications in the cloud. Atrius DataLab is a foundational to our ability to automate the environment of a built space and help ensure that our partners achieve their specific energy and sustainability goals.

During the quarter, Atrius was named as a Sustainability Leadership Award winner in the 2023 Sustainability Awards program. The program honors people, teams and organizations who have made sustainability an integral part of their business practice or overall mission. I’m pleased with the progress we have made as a team in 2023. We have successfully positioned our company at the intersection of sustainability and technology, setting ourselves up for long-term growth by taking advantage of two of the most important megatrends, minimizing the impacts of climate change and maximizing the impacts of technology. Our ABL business continue to lead as the largest lighting and lighting controls company in North America. And we have made the business more predictable, repeatable and scalable by focusing on product vitality, improving service levels, the use of technology throughout the business and driving productivity.

Our spaces business continued to grow as an attractive technology business that connects the edge to the cloud for built spaces. Distech has a significant technology advantage that we can continue to expand as the mechanical and analog controls of today become digital over time. And Atrius introduced new applications in the cloud that are already making a difference for our customers. We have changed how the company works through our better, smarter, faster operating system. Better, smarter, faster is the combination of processes, tools and ways of working that spans from strategy to people to operating rhythms to problem solving. It is unique to our organization and allows us to drive strategic alignment, manage change and deliver results.

Our values are at the core of our culture and help create a shared purpose for achieving our company’s strategic goals. We make decisions based on our values, and these values impact how we treat each other and how we serve our customers. The combination of better, smarter, faster and our values allows us to operate more efficiently with greater distribution of responsibility and accountability throughout the company. It is how we continue to improve our businesses and respond quickly and effectively to changing economic environments. The alignment of everyone in our organization through our value creation model, through our total rewards framework compounds that responsibility and accountability. Our associates understand how they contribute to our overall strategy.

If you stop people in our company and ask them how we create value, they will answer we grow net sales, we turn those profits into cash, and we don’t grow the balance sheet as fast. This year, we have continued to demonstrate that we are effective capital allocators. We have invested for growth in our current businesses through R&D and capital expenditures. We’ve enhanced our portfolio through the exit of Sunoptics and the acquisition of KE2 Therm. We’ve maintained our dividend, and we’ve created a permanent shareholder value with approximately $1.3 billion in share repurchases since the beginning of the fourth quarter of fiscal 2020, which amounts to about 23% of the then shares outstanding. As we turn to our fiscal 2024, our strategic priorities remain the same.

In our lighting business, we will continue to drive margin and cash flow. We expect roughly the same market conditions in lighting for the remainder of this calendar year, with the potential for some improvement in the next calendar year. We will continue to grow our Intelligence Spaces group in three ways, geographically, by adding control planes and by delivering applications that make a difference in built spaces. We will continue the development of our better, smarter, faster operating system in order to improve our current businesses and those that we acquire in the future, and we will continue to allocate capital consistent with our priorities. Now, I’ll turn the call over to Karen, who will update you on our 2023 performance and provide more details about 2024.

Karen Holcom: Thank you, Neil, and good morning to everyone on the call. We executed well throughout fiscal 2023. In a challenging sales environment in the lighting business, we improved our adjusted operating profit by $9 million year-over-year and generated cash flow from operations of $578 million. We continue to improve our businesses and allocated capital effectively. For total AYI, we generated net sales in the fourth quarter of approximately $1 billion, which was $100 million or 9% lower than the prior year as a result of the decline in net sales in our ABL business. This was partially offset by continued growth in the ISG business of 17% in the quarter. We continued to deliver year-over-year margin improvement. During the quarter, our adjusted operating profit was down year-over-year on lower sales, while we expanded adjusted operating profit margin to 16.1%, an increase of approximately 80 basis points from the prior year.

The increase was driven largely by the significant improvement in our gross profit margin as we continue to strategically manage price and costs. During the quarter, our adjusted diluted earnings per share of $3.97 increased $0.02 or 1% over the prior year. In ABL, net sales were $944 million in the quarter, a decrease of 11% compared with the prior year, driven by declines across most of our channels, offset slightly by continued strong performance in our retail channel. ABL’s adjusted operating profit decreased 2% to $159 million on lower net sales and we delivered adjusted operating profit margin of 16.8%, a 150 basis point improvement over the prior year as we strategically managed price and input costs improved, particularly steel and inbound freight.

As Neil mentioned at the beginning of the call, we also took several charges during the quarter that’s primarily related to ABL. Taken together, these amounted to $35.5 million in non-recurring pretax charges or $0.87 in diluted earnings per share. The first is a result of our ongoing transformation efforts and includes a charge of $6 million in severance as we realigned how we work. The second is a $16.5 million non-cash impairment charge for a small investment and for certain trade names related to prior acquisitions. In addition, we transitioned several of those trade names from indefinite to definite lives to more accurately reflect their value. The third is a $13 million pretax non-cash charge for the impairment of a receivable based on its collectability.

The receivable is from a supplier who owes us a warranty obligation related to the recovery of quality costs we have incurred for certain ABL outdoor lighting products manufactured and sold between 2017 and 2019. We are pursuing recovery from the supplier. ISG’s net sales for the fourth quarter were $72 million, an increase of 17%, as Distech continued to win business across new and existing customers. This quarter, we also had a modest benefit from the acquisition of KE2 Therm. ISG’s adjusted operating profit was $14 million, which was a decline of approximately 3% over the prior year as we continued to invest in the business for long-term growth. Now, turning to our cash flow performance. We generated $578 million of cash flow from operating activities for the full year of fiscal 2023, an increase of $262 million over the prior year, driven largely by improvements in working capital.

We’ve improved both days of inventory and accounts receivable compared to the end of fiscal 2022. In fiscal 2023, we invested $67 million in capital expenditures and allocated $269 million to repurchase approximately 1.6 million shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased over 9 million shares at an average price of approximately $143 per share, which was funded by organic cash flow. I now want to spend a few minutes expanding on our outlook for 2024. Consistent with our 2023 guidance, we are going to provide annual guidance anchored around net sales and adjusted diluted EPS. We will also provide you with certain assumptions, which you can find in the supplemental presentation available on our website after the conclusion of this call.

For full year fiscal 2024, our expectation is that net sales will be within the range of $3.7 billion and $4 billion for total AYI. This is based on the assumptions that ABL will deliver sales down low to mid-single digits as a result of conditions in the lighting macro environment. And ISG will continue to generate sales growth in the mid-teens as we continue to take share and expand geographically and into new control planes. We expect to deliver adjusted diluted earnings per share within the range of $13 to $14.50 for total AYI. Our capital allocation and priority — our capital allocation priorities in 2024 are unchanged, and we will continue to focus on delivering margin and cash flow. In conclusion, we strategically managed price and cost and delivered margin growth at ABL.

We continue to grow the Intelligent Spaces Group. We generated strong cash flow from operations and allocated capital effectively. We continue to improve the business through product and productivity improvements, and we continue to take the steps necessary to drive our transformation forward. Thank you for joining us today. I will now pass you over to the operator to take your questions.

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

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Q&A Session

Tim Wojs: Good morning. Maybe, Neil, just to start, anything from an environment perspective, just any color that you could maybe provide on kind of what you’re seeing kind of in the end market demand environment, maybe the quoting environment today? And your comments maybe about calendar year ’24 maybe being a bit better. Is that just kind of starting to cycle easier comparisons? Or is there something that you’re kind of seeing from a visibility perspective that you’d call out?

Neil Ashe: Yeah, good morning, Tim. Thanks for the question. So first of all, we’re really proud with our performance. We’ve obviously demonstrated that we can execute in this environment. And I wish the economy would line up with our fiscal year, but it doesn’t. So the — as we’re looking forward to kind of our fiscal first quarter and the rest of this year, while the business is relatively consistent, it’s pretty much choppy all over. So we feel good about kind of where we guided for the year given that. And we also feel like there’s still strong kind of volume in each of our networks. So the C&I network, obviously, is about 60% of the business. As Karen pointed out, the retail business has remained strong for us. The direct business has been comparatively strong for us.

And as you can see in our channel, the OEM business is down, which is our sales to other lighting manufacturers. So taken together then, we feel like we’re comfortable operating in this environment and we feel like we’ve got a responsible plan for 2024.

Tim Wojs: Okay. Okay. Good. And then just, Karen, just when you think about guidance, and I guess, high-level, sales down kind of low to mid-single digits. It’s — at least in ABL business, I think it’s down 3% overall. And I think that the midpoint of the EPS range winds up being down 2%. Could you just maybe give us kind of the puts and takes or what to think about in terms of kind of managing maybe a down volume environment versus kind of keeping margins what appears to be pretty stable?

Karen Holcom: Yeah, sure. Thanks, Tim. So the guidance, just to reiterate, the guidance for the net sales range is $3.7 billion to $4 billion, and you’ll see all this in the presentation. That does anticipate that lighting would be down low to mid-single digits as we discussed, kind of the continuation of the trends that Neil talked about just a moment ago. When we look at the margin that we expect to maintain, it’s a solid plan. And we don’t expect to stay kind of at the high levels that we are now, but we still expect to be able to strategically manage our product vitality, our service levels, our technology and productivity to continue to deliver strong performance that would land us in the EPS range of $13 and $14.50 for the year.

I would just call out ISG, we’re still predicting up to mid-teens in that business. So that’s still going to continue to grow next year. The acquisition of KE2 Therm will be a benefit as well. So really, really pleased with the performance overall.

Tim Wojs: Okay, okay, good. I’ll hop back in queue. Good luck on everything, guys.

Neil Ashe: Thanks, Tim.

Operator: Our next question comes from the line of Ryan Merkel with William Blair. Ryan, your line is now open. Our next question will come from Joe O’Dea with Wells Fargo.

Joe O’Dea: Hi, good morning.

Neil Ashe: Hey, Joe. How are you doing?

Joe O’Dea: Doing well, thanks. I guess first question is just the sort of combination of sort of channel inventory management and then the macro. And so what you’ve seen over the course of the past few months, what you’re anticipating through kind of the rest of this year in terms of any additional headwinds related to destock? Or is there a little bit of a transition where macro has gotten a little bit choppier, but destock gets a little bit less challenging.