Q1 2020 Earnings Call
Brands fiscal 2021st 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 than the one key on your telephone.
Today's conference is being recorded if you have any objections you may disconnect at this time.
Now I'd like to introduce Mr., Peacenik, Vice President Investor Relations and corporate development, Sir you may begin.
Good morning, with me today to discuss our fiscal 2021st quarter results, our burn Nagel, our chairman and Chief Executive Officer, and Karen Holcomb, Our senior Vice President and Chief Financial Officer, We're a webcast of today's conference call at acuity brands Dotcom.
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 at the company such statements involve risks and uncertainties <unk> actual results may differ materially further forward looking statements speak only as to the data they're made and we undertake no obligation to update publicly any.
These statements in light of new information and future events.
Please refer to our most recent Sanjay and 10-Q s T 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 it's called the burden diaper nickel. Thank you be good morning, everyone. We have a great deal to discuss this morning, including our.
Oh succession plan, which while 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 question.
As you will recall from our last earnings call. We expected our net sales to be down this quarter compared with a 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 impacted this pull forward in the year ago period was impossible to determine we felt it was probable our net sales with declined this quarter by mid to upper single digits from last year.
This is declining 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 or enhance gross profit margin profile and strong cash flow from operation.
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 tenant a half percent compared with a year ago period.
Reported operating profit was $83.6 million compared with 116.4 million in a year ago period.
Reported diluted earnings per share it was $1.44 compared with $1.98 and a 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.
And 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 periods.
Adjusted operating profit margin was 14.3% a slight decrease of 10 basis points compared with the margin reported in the prior year.
Even with net sales down 10.5% from the year ago period.
Adjusted diluted earnings per share was $2 in 13 cents compared with $2.32 earned in the year ago period, a decline of 8%.
Net cash provided by operating activities was a solid $130 million this quarter, while our cash position that the ended 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 a 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 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 substitution to lower priced alternatives primarily for basic lesser featured led luminaires sold in certain channels as well as the clients and shipping.
And for larger commercial projects.
Storage will 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 that sales this quarter compared with a year ago curate 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 and Chinese made components in finished products.
In addition, we believed demand in the first quarter for private nonresidential 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 these declines were due in large part because of the continued concerns over global trade an economic issues.
These next few points are important and further explaining the movement in our topline.
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 a year ago period.
Our performance in these two networks compared with a year ago period was impacted by the pull forward quarters just noted.
Continued weak demand primarily for larger commercial projects, where we have particular strength.
And the completion of certain larger project 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 this time, which again performed exceptionally well this.
Quarter.
While shipments were down in these key networks. We believe that are that our performance was reflective of overall market conditions and thats 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 a year ago period.
The the decline in this channel was primarily due to the impact of loadings 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 reduced 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 a 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 degrees slower releases for certain renovation projects.
As we have noted in previous earnings calls, we expect next 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 to the total square footage covered by our connected lighting and our atria space diabetes 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 a 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 performance this quarter.
First our gross our adjusted gross profit margin for the first quarter was 42.8% an increase of 330 basis points compared with a year ago period, a huge improvement and the highest that we've had in the last 12 quarters. Despite the decline in net sales volume.
Adjusted gross profit was $357 million down approximately $12 million from 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 cost for certain inputs and the contribution from the acquisition of GLG.
They are 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 growth 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 EBITDA expenses were up approximately $3 million or a little more than 1% compared with a year ago period.
Adjusted EBITDA expense as 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 Sta expense measured in dollars was relatively modest on 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 in the call.
Our adjusted diluted earnings per share this quarter was $2 in 13 cents 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 a few important to comp accomplishments this past quarter.
On the strategic and technology front, we continued to make positive strides setting the stage for 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 continued our pruning efforts to reduce the sales lower margin products sold primarily in the retail channel, while we invest to bring innovative and cost effect.
Solutions to our preferred customers in this important channel.
From a commercial perspective, we continue to experience success in our connected lighting atria, it's enabled solutions our products and services enjoy strong market acceptance in retail applications now deployed in over 5000 retail stores in North America.
We have several large retailers with our atria is SaaS applications now deployed or a detailed evaluation. Currently those early technology adopters are now activating atria 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 entries 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 lightning aqueous based solutions into other verticals as awareness by these customers of our meaningful points of differentiation and the broad capabilities of our I O. Two solutions increased significantly, particularly as they realize the opportunity to transform their spaces from expense items two strategic asset.
These additional verticals include major airports light industrial facilities, including warehousing and health care.
Net sales of our contractor select portfolio grew again this quarter, particularly in the Cnine market and now makes up slightly more than 10% of our net sales.
Contractor select as 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're 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 and light 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 to.
Certainly our connected to our growing Vms solutions, providing customers with even greater functionality.
Further we initiated many actions this quarter to further streamline our operations to reduce cost and improve our productivity. We believe these initiatives will enhance our future operating and financial performance as well as old 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 locus labs in November .
Luminaires group or T. LG is a leading provider of specification grade luminaires for commercial institutional hospitality and municipal markets, all of which complements and enhances our architectural lighting platform.
Locus labs, as a leading indoor mapping and location platform, who software supports navigation applications used on mobile devices web browsers are digital displays in airports event centers multi floor buildings and campuses.
The combination of locus labs technology with our atria sales platform will provide venues with an enhanced indoor positioning system that can be rapidly deployed and easily maintain enabling visitor and employee way finding asset tracking and business analytics. We're pleased to welcome the associates of the.
Luminaires group and locus labs to the acuity family.
In addition, we made small but important investments into innovative early stage companies to enhance our lighting control platforms for circadian lighting and smart sensing solutions.
Our solid performance. Despite continued economic challenges as a result, and dedication and resolve of our 12000 associates, who are maniacal focus 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 care. There. Thank you burn and good morning, everyone. As Burton mentioned earlier, we had some adjustments to the GAAP results in the first quarter fiscal 2020, and 29 team, which we find useful to add back in order for the.
To be comparable in our earnings release and Form 10-Q , we provide a detailed reconciliation of non-GAAP measures for the first quarter fiscal 2020 and 2019.
Adjusted results exclude the impact of acquisition related items amortization expense for acquired intangible assets share based payment expense and special charges for streamlining activities. We believe adjusting for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations.
We thank you will find this transparency very helpful and your analysis of our performance during the first quarter fiscal 2020, we recognized a pretax special charge of $6.9 million in order to streamline the operations to be more in line with current market demand and to allocate resources to activities with higher pre.
Profitable growth opportunities. These charges consisted primarily of severance cost and lease impairment related to plan facility closures. Additionally, we recognize relocation cost and lease asset impairment associated with the previously announced transfer of activities from plan facility closures, we expect.
We continue to incur additional cost in future periods related to current streamlining actions, primarily attributed to moving costs associated with the closing of certain facilities.
We expect these actions to streamline our business activities will allow us to reduce spending in certain areas, while permitting continued investment in future growth initiatives, such as new products expanded market presence and technology and innovation.
Back to achieve pre tax savings in fiscal 2020 in excess of the special charge with most of the benefit occurring in the second half of the fiscal year.
Fiscal 2021st quarter results were impacted by the adoption of accounting standards codification 842 leases, which requires most leases to be included on the balance sheet. We adopted assay 842, using the modified retrospective methods and applied the standard to all leases existing.
As of September 1st 2019.
Information for prior years presented has not been restated and continues to reflect the standards in effect for those period.
As of September 1st 2019, we recognize total operating lease liabilities of $64.7 million in our consolidated balance sheet. We Additionally, adjusted our consolidated balance sheet to Derecognized 5.1 million of previously reported net deferred rent balances and reported right.
These assets of $59.6 million related to our operating leases.
Please refer to know footwear to our financial statements included in our Form 10-Q filed earlier today for additional details of the impact of the adoption of the new lease accounting standard on the balance sheet.
The effective tax rate for the first quarter fiscal 2020 was 22.9% compared with 25.2% in the prior year quarter. We currently estimate that our blended effective income tax rate before discrete items will approximate 23% for fiscal 2020.
We generated 130 million of net cash flow provided by operating activities. During the first quarter fiscal 2020, which was relatively flat compared with $132 million for the year ago period. During the first quarter fiscal 2020 benefits of the decrease in operating working capital were offset by the lower.
Net income.
At November Thirtyth 2019, we had a cash and cash equivalents balance of $267 million a decrease of $194 million since August 31st 2019.
The decrease was due primarily to fund acquisitions and investments and plant and equipment and to pay dividends, which is partially offset by the cash flow from operation.
During the first quarter fiscal 2020, we spent $302 million related to the acquisitions of both the Luminaires group and Lucas lab.
Our total debt outstanding was $356 million at November Thirtyth 2019, our debt to capitalization at November Thirtyth, 2019, with 15.2% and our net debt to capital was 4.3%.
At November 32019, we had $350 million publicly traded senior unsecured notes outstanding at a 6% interest rate on December 16th 2019, the notes matured and we refinanced with borrowings under our term loan facility, we borrowed the full $400 million available under the term.
In loan facility as the delayed draw mechanism expired at the end of December .
These borrowings are currently based on the short term borrowing rates that are currently approximately half the rate of the public notes the estimated interest savings associated with the refinancing of the public debt is $7 million to $8 million for the remainder of fiscal 2020, assuming no meaningful change in short term interest rate.
Currently we have additional borrowing capacity of approximately 396 million under our bank credit facility. The bank credit facility and term loan matures in June of 2023. Please see note 19, and our Form 10-Q filed today for more information.
We clearly enjoys significant financial strength and flexibility to support our growth opportunities, which may include acquisitions, and we will continue to seek the best use of our strong cash generation to enhance shareholder value. Thank you and I will turn it back to burn Thank you Karen.
While current market conditions in the overall lighting industry continued to be challenging we are optimistic regarding our long term future and that of our markets.
We believe our many actions to improve our market reach enhance our enhance our customer solutions and capabilities and drive companywide productivity will help optimize our financial performance in the future while affording us the opportunity to continue to invest in areas. We believe have high profitable growth potential over the longer term.
That notwithstanding we believe current market demand for lighting will continue to be sluggish and inconsistent so long as concerns over key economic issues, including global trade policies and the potential for future tariffs remain unresolved.
We are hopeful that the recent announcements regarding key global trade issues will remove these uncertainties that have negatively impacted the private non residential construction markets over the last several quarters.
On a positive note we are seeing some early indicators such as the Dodge momentum index turning positive for the first time in a while which could suggest an improvement in the mark and market conditions.
Sees me for lighting and the latter half of calendar 2020.
In addition, we believe there are few other factors that will continue to influence the lighting market, including continued product substitution to lower priced alternatives for certain products sold through certain channels labor slower shortages in certain markets and continued cost increases, particularly for imported electric electrical components in finished goods.
As well as higher freight and wages.
Though announced streamlining actions as well as a decline in certain input costs should help mitigate some of these factors as.
As we mentioned in our last earnings call. We are maniacal focus on executing our plans to grow market share improve our margin profile and to reduce costs, our cost structure to be more consistent with overall market conditions.
As I mentioned on our last earnings call. Those action items include continued introduction of new innovative solutions, including the expansion of our atria, it's enabled lighting solutions into the retail and other key verticals as well as the expansion of our contractor select portfolio to more aggressively gained share in certain market segments and last.
The actions to improve our productivity and cost structure.
These growth and margin improvement initiatives are part of our longer term growth strategy to fulsomely leverage our market leadership position with technology enabled solutions that are differentiated and valued by customers. So we can gain further market share and to appropriately structure, our business to the current opportunities to enhance our profitability and cash.
Hello.
Further the execution of our integrated tiered solution strategy, including the expansion of our tier three and four holistic lighting building management, and our atrium platform and software solutions and our opportunities to participate in the interconnected world is an integral part of our overall longer term profitable growth strategy.
Meaningfully expand our addressable market by adding broad based holistic solutions that will allow our customers to transform their connected intelligent buildings and campuses from cost centers to strategic assets.
Lastly, our goal is to outperform the growth rates of our key markets and channels. We serve while our strategies include further penetration of the renovation markets, particularly for medium to smaller projects, which continued to experience growth. We are still leverage to longer cycle larger commercial projects, which has been most impacted by the.
Global economic issues noted earlier.
Additionally, while we expected to park to participate in the retail sales channel by serving the needs of our customers in a mutually beneficial manner, our efforts to improve our profitability in this important channel could continue to result in lower shipments last evening, we announced that Neil Ashe will become the next president and CEO .
If acuity brands effective January 31st we are extremely excited and pleased to have attracted a leader with neil's background and long track record of entrepreneurial success to lead our Greg company as we continue the transformation of acuity into a global industrial technology company.
Neil as a proven leader, whose knowledge and skill in expanding and transforming businesses and rapidly changing markets will enhance and accelerate acuities ability to leverage its portfolio of technology and solutions to create great value for our key stakeholders in a globally competitive environment.
By way of background. The acuity Board began the process for senior leaders senior leadership succession with the promotion of carrying into the role as CFO on September Onest.
Ricky became president to assist me in running the day to day operations with the company, while continuing to develop our very talented leaders.
The board originally anticipated that the search for my successor would be deliberate open process not be time bound beginning sometime in 2020, most likely taking a full year to complete followed by a normal transition period.
As it happened and I was introduced to Neal almost a year ago.
We began working with Neal to assist us in exploring new avenues to accelerate the adoption of our technologies, including our atria is based on T. solutions during that process I introduce Neal to the acuity board first to consider him as a board candidate and then more recently as a CEO candidate.
As I said, our succession plan for me was not time bound, but when the right person with the right experience and leadership skill as before you I said to our board you should move quickly and we did.
Our succession plan has been designed to ensure that acuity will provide consistent and lasting stability to our customers and associates in an ever changing landscape.
We have attracted a seasoned leader in Neal with a proven track record of great success and rapidly changing and dynamic environment to lead our great company for years to come we are confident Neil will build on our robust platform to create even greater value for our customers associates and shareholders.
On a personal note I'm extremely proud to have led this great company and its associates for the last 15 years, we accomplished a great deal transforming the company into a technology leader in our industry, while enhancing our market leadership position.
Im, particularly proud of the 12000 associates at acuity, including our senior leadership team.
They dealt with economic adversity, including the great recession, they had to embrace change to not only survive, but thrive during one of the greatest technology changes any industry is ever witnessed and along the way they changed the financial profile of this company into a high margin high return on capital and robust cash.
Flow generator well be on many of our industry competitors.
During our time together, we have more than doubled our net sales tripled our operating margins and created created an eight fold increase in shareholder value.
Today, we have a great team of associates and embraced change and use it as a competitive advantage as well as a culture of continuous improvement to bring exceptional value to all of our key stakeholders.
We have a tremendous company with great associates market, leading solutions in a very strong financial profile that will provide neil and team with a strong platform to drive profitable growth in the future I.
Im pleased that Neil in the board of asked me to continue as executive Chairman and Ricky as President of our lighting company and EVP of acuity to ensure a smooth and effective transition.
Thank you and with that we'll entertain any questions that you have.
In order to provide everyone the opportunity to ask questions. The company ask that you limit your questions to two per caller. If you have further question simply reinstate yourself back into the queue and your additional questions will be answered as time permits.
Our first question comes from the line of John Walsh with Credit Suisse. Your line is now open.
Hi, good morning.
Good morning, good morning.
So I guess looking back in the model.
You didn't used to have that much variability around your gross profit margin line within a year looking kind of quarter to quarter, obviously very good start beginning of the year.
We do expect some volume kind of come back towards the back into the year.
Should we be able to kind of hold this level around the gross profit margin and go back to that kind of historical pattern, where one quarter to another quarter there wasn't a lot of variability.
So our focus is to obviously continued to drive improvement in our gross profit margin.
The benefit has been really from a.
Sales channel perspective that mix has shifted a little bit we continue to have very aggressive programs too.
Enhance our cost structure, both from a material perspective, as well as a conversion perspective. So this level of gross profitability, our gross margin profile.
Should be relatively consistent.
As we go forward.
Obviously.
Additional volume rolling through there will also have an incremental benefit on our margin profile. So as we look to the.
Second half if you will have our fiscal 2020, our expectation is that the markets should show some improvement.
I'm I'm personally.
Excited about some of the rhetoric that we're now hearing about how we might resolve some of these tariff issues.
We have our own north American trade discussions that are going on hopefully they'll pass that.
The Dodge momentum Dodge momentum index has started to improve thats. The first time in awhile. So many of those things in my view our positive indicators of.
Potential and the notion of having of value, becoming a little bit more consistent particularly for larger projects would have effect would have a favorable impact on acuities gross profit margin profile.
Thanks for that color and then.
As we've been talking about the streamlining actions you took some actions here in the quarter.
How should we think about what the dollar value opportunity is at acuity as you kind of take these streamlining actions going forward.
Our care and maybe you'd like to address it sure as I addressed in my comments, we do expect to recover the cost of that streamlining actions and start to see benefit, particularly in the second half of the year. So you will see some improvement.
With some of that being reinvested back into the business. So do look for improvement mostly focus in the second half as we recover those costs, but do continue to make investments in the business.
Well I guess, maybe just to clarify the question there it sounds like there's more to do I mean should we think of this is kind of a program that we should see quarter after quarter that you'll be able to find some streamlining and get the associated payback with that going forward.
So we are this is from we're always looking to continuously improve our cost structure drive productivity and do things, but this particular charge was specifically identified around some key actions and when you take the charge you also have to allow for follow on expense under GAAP.
GAAP accounting so we identified these actions we are taking those actions.
And our expectation is that okay. Let's complete those in addition to that we are always looking for ways to improve our cost structure through engineering efforts to reduce material cost engineering efforts to.
Change our how we.
Produced these products worked within our facilities, both our factories as well as our back office operations to improve our productivity. It's part of our ABS process to look for continuous improvement, but those typical continuous improvement items do not result in what we'll call a special charge.
Great. Thank you for the color appreciate it.
Our next question comes from Josh Chan with Baird. Your line is open.
Hi, Good morning, and then as good following the company under your tenure Vern and best wishes and your future endeavors.
Thank you so much really been exciting 15.
Yes, Thats right.
Yeah, maybe maybe we can start off on that we're on Youre kind of obviously on the board and thanks for the color on does succession planning.
Could you talk a little bit more about specifically what the board saw in terms of Nielsen skill set and then also could you also address the timing.
At least from an external perspective, the transition looks kind of quake why not have Neal joined organization and then become CEO maybe at a designated time later can you just kind of go through some of those topics sure.
Sure Fabulous.
I have been talking with the board about just normal succession, we often have.
Not often regularly part of our job as a board to have six succession planning discussions so as we were thinking about both rickys.
Plans and opportunities the development of Karen and other leaders in our business.
The timing was right to begin the process.
There was no as I mentioned in my prepared remarks, there was it was not time bound we said, let's begin the process and we were going to start looking really sometime in 2020, but as fate would have it.
We were introduced to Neil by one of our directors and.
He said burn you really need to meet this guy he's he's fantastic. He understands business models. He understands the opportunities to transform industries and you know with atrium and the way you all have been transforming your company, bringing in new innovation looking at noon.
Markets are atria sales capability, so Rick and I met with Neil almost a year ago and some of our teammates we're involved with Neil in exploring ways.
To take advantage of what Acuities platform is about and so we became.
Quite knowledgeable of Neil and if you look at Neil's background. He is a serious player and he has he has really taken.
Businesses and transform them if you look at where Wal Mart is today it was fantastic.
The CEO Walmart came out and said that their stores are their key points of differentiation. If you look at when Neal did see enabled those capabilities through the development of ecommerce capabilities. So and every instance, as we've gotten to know Neil what he has been able to do.
Is transformed businesses and make their core businesses, even stronger and more robust and so I first introduced Neal to some of the other board members as a potential board candidate and again as Ricky and I got to know Neal more and more we said this is the real deal.
And Neil is a highly highly sought after executive by many many large companies. So wouldn't got Neal excited about acuity is really its platform and its opportunity for great future growth in the marketplaces that we serve and how we may future serve those customers. So it.
Was mutual and.
When you have someone with that kind of talent.
Neal is 52 years old.
Not a selfish person I own a lot of shares and I said. This is the right thing to do while my own personal timeframe could have been something different.
When you have this opportunity you take advantage of it we did Neil is the right leader for the future of our business and Im just could be more excited and I'm pleased that the board and Neil have asked me to continue as executive chair to really help facilitate.
A smooth transition very excited for Ricky to be the president of our lighting business.
He knows it well the people know him well and im looking for really personally.
Solid future growth from from this great team.
That's great. Thanks, so much they've earned.
I could ask one question on the quarter I think you mentioned that the market was down eight and your estimate low to mid single digit.
And it looks like that you are independent channel might be down a little bit more than that if you take out the acquisition. So it.
Simply quarterly fluctuations or anything to think about there in terms of share.
Sure So Josh and for everyone on the call our expectation and it was.
Difficult to know precisely if you go all the way back to last year's first quarter. We knew a pull forward was come was happening it was difficult for us to really get our arms completely wrapped around that so we guesstimated that it was probably mid to upper single digits as the influence my own personal bias based on some analytics is that it was.
Probably in the high single digits that pull forward. So when we looked at our business.
And you look at the total amount. We also felt that what was happening and we do have some good analytics around this is that the market this quarter.
Both the Nonresi private nonresidential construction market was extremely soft lighting, even further particularly for larger projects and then we have noise around some of our stuff Thats why we tried to identify what was happening if you will.
For certain products in our product pruning.
Focus to to lessen.
The.
Sale of products that really don't meet our financial profile. So you had a little bit a noise there and then in our corporate accounts world, which is really.
Servicing some of these larger retailers, we we've always known that it's going to be a lumpy cycle. It depends on releases it depends on their own activities. So I feel when we look at our core business and I made that comment in my prepared remarks that what we saw in those things that were an apple to Apple.
Place or acuity was not.
Overly penalised or not overly advantage, but the market changes right now so I don't.
The noise around the pull forward and then being exacerbated by the softness in the market I think created just a little bit more.
The headwind than what we had originally anticipated.
Yes, again, just to be clear to everybody.
Still think the markets are sluggish and will be until we get some clarity around these things, but I too I do take some comfort that Dodge momentum index is finally starting to.
Turned positive, which it hasn't for awhile.
That makes sense, thanks burn and best wishes against.
Thank you.
Our next question comes from Jeff Sprague with vertical research. Your line is now open.
Thank you good morning, everyone.
Hey, just just two from me.
First just thinking about the distortions that have been caused by the pull forward and in the comps associated with that.
Obviously, there is a big cyclical and economic overlay.
On top of this but are the normal seasonal factors.
In play here for your business as we look forward to Q2 or is there.
Something else, we should be thinking about as we kind of jump off. This this Q1 starting point.
I.
Seasonal patterns will are alive and well our Q2 is traditionally.
The lowest sales number of any of our quarters, we still expect that to happen and you. All know why it's just because of December January February and in construction markets, whether usually impacts those types of things. So we expect that to happen.
We hope to get passed all of this noise around pull forward here pretty soon for sure. It will be in the second half that we won't have this noise there could be still a little bit of noise around that.
For Q2, and then additionally, as I mentioned in my prepared remarks, we still are looking at our portfolio and still pruning a little bit some of the some of these product lifecycles and how we.
Position those need to be managed in an appropriate way, so there's probably still a little bit of.
Headwind around that now having said that.
We continue to focus on ways to drive and enhance share gain in the marketplace.
We mentioned, what we're doing around certain types of renovation and smaller and medium size.
Capability so.
Yes, seasonal noise little bit of pruning.
And then expectation around how can we execute to drive some share gain.
And could you elaborate a little bit more on projects I think we all kind of again at the macro uncertainty just is not helpful. But are you seeing.
Projects.
Kind of taking outright cancellations as a function of things that were you in your front log that actually are not moving forward.
And any particular kind of additional vertical market color.
Sure on the type of projects.
So on those and those larger projects that are traditionally.
They are traditionally specification driven.
Our great agent partners very very focused.
On that portion of the marketplace very skilled at that.
And as I travel around the country and talk with both.
Contractor customers as well as electrical distributor customers with our agent partners their backlogs are robust.
But these projects just are slow and have been slow to release, we hear different reasons why.
And in certain markets, we hear that there are labor shortages for contractors and so our for electric margins and so contractors are picking and choosing jobs are not necessarily growing.
Larger projects people are still wondering what's going to happen with costs. So if I wait while I have a lower cost potential. So we just keep hearing different.
Anecdotal reasons why.
People are slowing down they all seem to make some sense, but here's what we do know our agents have strong backlogs that just aren't release.
Alright, thank you.
Thank you.
Our next question comes from Joseph Osha with JMP Securities. Your line is now open.
Thank you and again.
Let me my voice today, congratulations on your your long tenure.
Thank you two questions for you first I'm wondering if we might get some comments on future plans as regard to use of cash obviously this year thing skewed a little bit, but I'm curious about the balance going forward between acquisitions, our buybacks and whatever else you might do with this very general.
Free cash flow, you're you're generating.
So obviously, we pointed out that Neil will start January 30, Onest. He is working hypothesis around different views of strategy, both for acuity as well as our core lighting in lighting solutions business, our Vms businesses.
So we have a very very healthy financial profile and what I'd like to do is differ.
Two Neil when he visits with you on the next earnings call to articulate more of that one of the things that I believe has attracted Neil to acuity is not only the culture of our people around.
Driving value for our key stakeholders, but the platform that we have as well as the financial strength to really go after an attack.
Markets by serving customers in a different way and.
How he uses the balance sheet to drive his strategy I really think that he should be the wind articulate that I will say on behalf of the board.
Neal's initial thoughts we are we're very excited about his vision.
And what it means for our current 12000 associates, which I expect that number to grow.
So I would just defer to him we've had a.
He is very focused on capital allocation very focused on return on invested capital very focused on road.
Profitable growth so.
If you allow us to deferred him on that to the next call.
Thanks, and that I'm going to change My second question, then because that's that's very interesting obviously without tipping your hand, because you don't know yet.
Is it fair to say that as part of this transition there is kind of a broader review of allocation of capital across different priorities take taking place.
Yes, so again.
I would say that the board is quite excited about.
Neils vision for the future and his vision I think is rooted quite well in this past I think if you look at the things that he has done in his past is transformed different businesses.
And taken advantage of the opportunities in those markets what he sees in acuity in his glimpse into acuity was pretty significant when he was working with some of our our atrium folks as well as some of our lighting folks as a real platform. So I think he sees.
The current if you will platform that we have as well as our financial strength to to get after markets and customers that are consistent with what we do today, but thinking about how he can transform and change their businesses to become better more effective using the capabilities that we have and potentially addition.
Deliveries that we will add acuity has been a very aggressive acquirer.
Over the last I'll call it 15 years.
We've spent over $2 billion done over 20 acquisitions. So you shouldnt be no one should be surprised about the continuation of how do we build our platform and core capabilities and I think that Neil will continue to do that but that is a continuation.
Of what we've been doing.
So I just I'm very excited about the platform that he has the financial strength as a company that he has coupled with his gifted mine is really entrepreneurial spirit to do great things for our shareholders.
Thank you burn go below.
Hello.
Our next question comes from Deepa Raghavan with Wells Fargo Securities. Your line is now open.
Hey, good morning.
When my congratulations to you as well.
Thank you.
Two quick questions from me can you talk generally not just for the quarter, but how the contractors and its initiative has been performing within the retail China channel.
The.
I mean without the loads loading.
And also I don't know if I missed that what was the tier three and four sales performance in the quarter.
So let me answer the second one first our sales in tier three and tier four combined were significantly better fit decline that we had and others because it was the others that were influenced by the pull forward. So we didn't really provide that data, but tier three and.
Tier four actually.
I don't know that you should take one quarter and compare it but our our total share in that area or that percentage of our business is still favorable it's probably north of.
Well, certainly north of 15%, it's probably closer to 17 or 18%. So we did fine there.
That is also driven by larger projects to a degree it's also driven by.
Some of the things that we do in the corporate accounts channel. So.
Give us give us another quarter, where we get passed all this noise to then bring that back to you.
But I just want to say it was it was favorable to pull forward impacted tier one tier two more significantly with respect to contractor select and what's happening. If you will in the retail channel contractor select is a is a portfolio of products that were designed to compete with.
If you will some of the lesser featured more price sensitive portion of the markets a limited skew range, but it's an important element of not only how we serve to be the retail channel, but it's also an important element and how we serve if you will see an eye channel.
So we're pleased with the growth rates.
In that business, even though some of what we're doing in the retail channel with potentially other products is managing that portfolio. If you will down a little bit. So having said that I think contractor select gives us the opportunity to full to further leverage in further penetrate both.
Panels, both retail as well as.
Seeing and I sold primarily through the electrical distributor.
I think we're going to continue to see growth there what I think you should all takeaway as a positive is that our gross profit profile.
Continues to improve even though that portion of the market.
Or our business continues to grow as well.
Got it my follow up is on your portfolio pruning actions should we think about that as the low single digit revenue headwind not just for the upcoming fiscal Q2, but for rest of the year as well.
Yep.
My my view.
Karen Please chime in here my view is that.
Some of those pruning efforts should really start to abate.
As we get kind of.
Through second and maybe a little bit into third quarter.
We've done a good job there and so I would expect that kind of headwind to start to abate, yes, I think it will be consistent in the second quarter.
Hello.
Okay that doesn't mean, all the known headwinds from loaves loading Tony et cetera should all be done with by the time, we get into second half is that a fair assessment.
It may leak into Q3 a little.
But.
I think that we feel like it should it should start to which start to tail off we've we shouldn't be making big comments around this.
Thank you so much for the color.
Thank you.
Our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is now open.
Thanks, Good morning, and Vern congratulations.
Thank you.
So it just wanted to go back to the gross margin.
When you try to understand that a little bit better given the magnitude.
Also in particular, it was up sequentially on 100 million lower sales I mean, some of the factors you talked about we're more year over year, driven so wondering about that sequential resilience given the kind of reflects of thought of how much can change from one month to the next maybe.
A bunch of higher costs work in progress rolled off from the.
What's going on there.
Well.
We have had puts and takes that have been pluses and minuses around these things in of tariffs are still a significant.
Headwind to us.
We think that our pricing strategies of countered some of that.
Counter most all of the tariff.
The channel mix issue and.
Including the pruning if you will have those lower margin type products that are mostly impacted by tariffs has had a favorable impact on the mix. So what it's doing Chris is giving you a reflection into the profitability in the value add that we bring into those other channels. So you're seeing.
That uptick.
We'd love to have more volume and so our our strategies our tactical plans are to become.
Focused in certain portions of the market that maybe we havent traditionally focused on.
That that represent opportunities for growth for acuity. So the volume issues kind of the wildcard I think for me in Q2.
I think from.
Serial inputs were working aggressively to continue to drive cost out of our products through our engineering efforts.
We continue to really do well in our factories in terms of driving productivity our services up quite nicely. So we see opportunities to to try and grow our business in this challenging market by taking share.
Thanks.
Makes sense and then.
Similarly kind of a sequential look at revenue the Seasonalities Ben.
More more pronounced it to the adverse side sequentially the last.
Couple of quarters.
Do you think the big mover there has been as tariff resolution gets closer that people holding on to projects in backlog.
Gets more pronounced because they can see a light at the end of the tunnel or alternatively.
Are you is there more impact from transitioning from larger enterprise retail.
Hey treatise Rollouts.
Taking place.
I think that the tariff. This is just my opinion so be careful here I think that the tariffs and these trade discussions create a just a degree of uncertainty into the marketplaces, and so I think that people's enthusiasm and their money stay on the sidelines for for these larger capital projects.
The economy.
Employment is fantastic. So you would think that with rising rents and rising both industrial commercial.
More people working all of those have traditionally been really positive signals for people coming off the sidelines and investing in real estate.
These rising rents look where you live I mean, the cost of rents and note that market are going up significantly typically that would mean that people would add capacity into those things to haven't done that yet so our view is that.
That money comes back governing factor around that maybe also on some of these labor issues on the trade side, it's not just electricians all the trades.
It's a challenge so even if that money comes back we're going to have to figure out how to do certain things differently and acuity is doing that we are we are aggressively looking to change how we service how we sell how we do certain things to that customer base. So we can make them more productive.
And in turn they buy more of our solutions.
And what about transitions from previous key supports to the revenue run rate from atrium Rollouts.
On the Atria us rollouts.
We are very excited by now our expansion into these other verticals.
I would have to tell the world that I think that some of the technology has taken us just a little bit longer to hone and really make it.
Reliable and I think that we are meaningfully ahead of anyone else in this space and these customers who are now using these solution sets are starting to say while this can this this actually can enhance my business model and so our are applied technology team and our sales forces are starting to go.
It into some of these other verticals with these solutions to experiment on how we can add not just quality of light energy savings for the third element to the value proposition.
And that that's still going to take time, I think Neil will help accelerate that by the way very gifted entrepreneurial. So it will not only make our our customers better solution, but it will give our many salesforce is more solutions to sell changing hit rate changing value proposition and not have.
Turning to subject always to just price as the only point of differentiation.
Thanks, a lot.
Thank you.
Thank you for participating in today's today I would now like to turn the call back over to Mr. Vernon Nagel for closing remarks.
Everyone. Thank you so much Dan and I were trying to compute we think this is like the 72nd or 70, Threerd time that you've heard my boring voice.
It has been truly a pleasure.
Neil and the team group have just great future I'm. So excited about our foundation. So again. Thank you for your time. This morning, our future is bright thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a great day.