Q2 2020 Earnings Call
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Good morning, and welcome to acuity brands fiscal 2022nd 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 then one keep on your telephone.
Today's conference is being recorded.
Do you have any objections you may disconnect at this time.
No I would like to introduce Mr. Piccinini, Vice President Investor Relations in corporate development, Sir you may begin.
Good morning, with me today to discuss our fiscal 2022nd quarter results are Neil Ashe, Our President and Chief Executive Officer, Darren Welcome, our senior Vice President and Chief Financial Officer, and Ricky Reece, Our executive Vice President and President of acuity brands flooding. We are webcasting todays 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 second quarter press release, and thank you actually see filing.
I like to remind everyone that during this call we may make projections or forward looking statements regarding future events or future financial performance of the company such statements involve risks and uncertainties such that actual results may differ materially further forward looking statements speak only as of today. They are made and we undertake no obligation to update publicly.
Any of these statements in light of new information or future events.
Please refer to our most recent 10-K insights you actually see filings in today's press release, which identify important factors that could cause actual results could differ materially from those contained in our projections or forward looking statements now ill turn this over the last.
Thank you.
Good morning, everyone.
I'm pleased to be with you today to talk about acuity.
Obviously, we all wish the global context for different right now.
We are embarking on the next generation of acuity.
We started out journey, we're dealing with the Sox followed by the Cobot Nike pandemic.
As we mentioned the current situation and begin to change our company for the future, we do something with a strong financial footing.
For the Mark market, leading position in our core business.
And with a strong team to navigate the company through this.
Given that were new together I want to outline what can cover today.
First I would give you some perspective on our second quarter performance.
I will go into more detail about them financials.
And I will cover how we prepared for and how we're handling the sox related to cope with Nike.
So my initial observations of the company.
Asked you about digital transformation and give an outline of who I think acuity is it can become.
For consistency, we will continue disgusted business and present metrics that you are traditionally seen for at least the remainder of this fiscal year.
Following our opening comments, Ricky Reece will join us at Accudate period.
Our second quarter performance wasn't mixed bag, a continuing trends with several signs of improvement.
We are very weak December business picked up in January and February and we began to see real traction.
Specifically in our independent sales network channel, which represents over two thirds personnel and was up over 4% to the quarter inclusive of GLG.
Some of the business in product pilots included success with our contractor select products.
Sales were 30% this quarter.
Definitely launch modulus technology modulus is a proprietary and integrate a blue books, it's distributed power and control system for only good luminaires, enabling design flexibility greater connectivity options and lower installation costs.
And the integration of GLG is progressing as expected and is accretive to our performance.
No what some of the same dynamics. They hurt you have heard from acuity in the past we continue to face year over year revenue declines in retail as a result for changed home center strategy any corporate accounts as a result of the timing of read like projects several large retailers.
We expect these dynamics to continue.
We also saw revenue declines in direct sales in industrial and infrastructure accounts, primarily due to large projects in the prior year it did not repeat.
Despite the revenue performance, we were able to expand gross margins year over year end to generate strong cash flow both of which demonstrates the adaptability and durability of our core lighting business.
With that I'll turn it over the cared for more details on the financials.
Sure.
Thank you Neil and good morning, everyone. I know many of you have already seen our result, but I would like to make a few comments on the key highlights for the second quarter of 2020.
Net sales for the second quarter for $824 million decrease of 3.5% compared with a year ago period.
Overall net sales volume declined approximately 7%, while the price mix of products sold was favorable this quarter by approximately 1%.
We have to make price mix was impacted by a favorable shift in channel mix, partially offset by an unfavorable mix of products. So I.
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 more basic featured lesser featured LCD luminaires Holden certain channels as well.
So with declines in shipments for larger commercial projects historical strength of the company.
Positions added about 3% to our growth.
In addition, we believe the command in the second quarter for private nonresidential construction in general and more specifically lighting was down in the low single digit year over year percentage range. We believe these declines were due in part because of the continued concerned over global trade and economic issues, we do not believes that the cobot 19th.
Pandemic had a significant impact on our second quarter Russell.
I'm a channel perspective, there were a for a few key areas its significance.
First net sales through our independent sales network, which makes up approximately 72% of our total net sales increased 4% over the prior year.
Our performance compared with a year ago period was impacted by the contribution from acquisitions market share gains in certain lighting and controls categories and growth in our contractor select portfolio.
Additionally, a building management solutions platform at this time perform well again this quarter.
Impacted these items was partially offset by continued weak demand primarily for larger commercial products projects.
Net sales through our direct sales network, we're down 16% over the prior year second quarter due primarily to the completion a certain larger infrastructure projects in the year ago period.
Third lower shipments on the retail channel resulted in a decline of 23% in this channel as compared to the prior year second quarter.
The decline in this channel was primarily due to the impact of previously announced actions taken by the company to exit in phase out out on certain products is profitability was most negatively impacted by the additional chair.
We mentioned in previous earnings calls we expected. These efforts to result in lower net sales and more favorable gross profit margins.
Lastly, net sales in our corporate accounts channel work down almost $20 million this quarter compared with a year ago period, primarily due to the completion of certain projects on a year ago period that did not repeat this quarter and to a lesser degree slower releases for certain innovation projects.
As we have noted in previous earnings call. We expect net sales through this channel to be inconsistent based on the nature of the construction cycle and the customer served primarily big box retailers.
In the second quarter fiscal 2020, and 2019, we had some adjustments to the GAAP results, which we find useful to add back in order for the results to be comparable.
In our earnings release and form 10-Q, we provided a detailed reconciliation of these non-GAAP measures.
Adjusted results exclude the impact of manufacturing inefficiencies 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 non-GAAP measures provide greater comparability and enhanced visibility into our results of operations. We think you will find this transparency very helpful. In your analysis of our performance.
Gross profit was $344 million up approximately $10 million spent a year ago period.
Our gross profit margin for the second quarter was 41.7% an increase of 260 basis points compared with a year ago period.
Increases in gross profit and margin were primarily due to the benefit of acquisition favorable channel mix and lower cost for certain input partially offset by the impact of lower net sales as well as the higher cost due to be enacted tariff.
Reported operating profit was $81 million compared with $96 million in a year ago period, while adjusted operating profit for the second quarter of 2020 with $102 million compared with adjusted operating profit of $112 million in a year ago period.
Reported operating profit margin with 9.9% a decrease of 130 basis points compared to the prior year.
Adjusted operating profit margin was 12.3% a decrease of 90 basis points compared with the margin reported in the prior year.
Yes, DNA expenses increased approximately $23 million compared to the year ago period. The increase in S. DNA expense was primarily due to the addition of cost from acquired businesses, including higher employee costs and amortization of intangibles increased commissions higher professional fees and higher variable incentive comp and.
Patients.
Our adjusted EPS DNA expenses were up approximately $20 million for almost 9% compared with a year ago period.
The effective tax rate for the second quarter fiscal 2020 was 23.4% compared with 23.1% in the prior year quarter. We currently estimate that our blended effective income tax rate before discrete items will approximate 23% for fiscal 2020.
Our diluted EPS for the second quarter of $1.44 was 23 cents lower than the prior year, our adjusted diluted EPS. This quarter <unk> dollar 84, compared with $1.99 reported a year ago period. The decrease was primarily due to lower pretax income.
We continued to have a positive cash flow from operations and ended the quarter with a strong balance sheet.
We generated $250 million of net cash flow from operating activities. During the first half of fiscal 2020, which was up $26 million or 14% compared to the prior year.
At February 29, 2020, we had cash and cash equivalents balance of $381 million decrease of $80 million since August 31st 2019.
Our total debt outstanding was $406 million at February 29 to 2020, we currently have additional borrowing availability of approximately $396 million under our bank credit facility.
Bank credit facility in term loans mature in June 2023.
We clearly are pleased with our financial strength as we enter this uncertain time due to the called the 19 pandemic. Thank you and I will turn it back to Neil.
Thanks very.
Obviously, the quit Peroni Barack said Dentek I've turned the world on it said Oh.
I'll spend a few minutes updating you on what has happened and what we've been doing about it.
I'll begin to say by saying how pleased I am with the company's resilience beginning with the supply shock when China went on Lucked out.
It's trying to begin to shutdown, we were able to use our firm for condition in the industry to gather additional supply.
Other than some specific finished goods inventory products, we so far have been able to largely buffer for customers from the effects of the supply channel.
As companies are forced to reevaluate their supply chains, we can report that our diversified supply chain that's performed well.
[laughter] touch worldwide ramification started to become clear we began work work to prepare our people facilities and operations for what would come back.
Our priorities were and are the health and wellbeing of our people while addressing both the risks and opportunities that the situation presents.
Beginning in late January we started making changes that are manufacturing and distribution facilities to ensure the health of our Cynthia and the continued operation of our facilities.
We reengineered the people flown are building to create more social distance and to limit the number of people that anyone person could come in contact with.
We also changed and sensation procedures to proactively eradicate as many contaminants that's possible.
At the same time, we've been working at various jurisdictions to respond to their directed to help slow the spread of disease.
In almost all instances, we have been beaten central business and remain open. However, we have scaled back some west and central parts of that business to spread to other operations and to reduce the number of sensors that we haven't ardelyx.
So far the vast majority of our manufacturing and distribution facilities or operating at capacity necessary to meet demand.
We were also able to transition or other functions to completely work from home.
As a newcomer to the company I was amazed at the seamless transition we made the decision to work and woman on Monday and on Tuesday, It was business as usual.
Our product and go to market teams in our enabling functions transitioned overnight from altogether to completely virtual.
We also transitioned our communication with our channel so we could effectively conduct business.
We've been able to continue our important product work and to maintain our communication and aligned with our important independent sales network through this transition.
From a financial perspective, we have to the shock with a solid solid balance sheet that's carried discussed.
We've taken steps to ensure we are prepared for his many scenarios as you can imagine.
Our priorities have been to ensure on liquidity and to use this as an opportunity to make our company stronger after the event that we were going into it.
We are scaling your variable costs to respond to the changes in demand and we are reevaluating are fixed cost investments as well.
None of us can predict exactly how this will play out over the coming months without in mind, we are taking responsible actions in light of the current downturn it demands, but they do not inhibit our ability to rebound when things return to normal.
With that I'll talk about what we all expected to be talking about on this call.
I took over as CEO on January 31st I'd first like to thank Brian Regan Outstanding leadership. The company. He led the transformation of the company from an oversupply conglomerates through a market leading lighting business that has led many of the technology transitions in the industry.
I've spent the last eight weeks getting to know the company and our people and working through this crisis.
I have visited all of our largest facilities so multiple times.
I've met and worked with many of our talented associates. The here in my initial thoughts.
Our lighting business is an industry leader.
Or lack luster performance over the last few years obscures the underlying strength of our go to market product development and supply chain operations.
Our lighting business can compete effectively at the top middle and bottom of the market.
The recent revenue trends, however will not fixed themselves.
There has been industry deflation.
We have additional work to do on our business and product portfolio to position us for future growth.
We cannot and will not take for granted our market leadership position as we evaluate future trends than competitors.
Our independent killed network is and will continue to be a strategic differentiator for acuity.
Thank you meeting has led many of the technology transformations in the industry and we need to continue to do so in the future.
Our existing technology businesses, including atria potential, but we have real work to do to realize it.
We have a very talented team of can do we'll do people who work well together they are and will be the foundation of our future success.
Our business model was adaptable and durable we have the ability to generate cash as it continues to deliver consistent returns on our committed capital.
Now, let me spend a minute on digital transformation.
Although digital transformation has become one of the trade over used an older five turns of like the reality is that every company that was not originally digital needs to adopt itself to what is a fundamentally different world.
In a sentence what used to be a push space world, There's no pull based world.
And through this one's acuity is of course based company in a push me industry in April base World.
Acuity is no different from other successful companies.
Everywhere, they better we were and what got US here the harder it is to adapt to this new world order.
We can and will adapt acuity to these new reality.
I had the opportunity to lead digital transformations, but some of the largest and most important companies in the world.
In my experience. This process has four key components all of which applies to acuity.
Transformative customer experiences.
Everyone has new and expanded expectations.
Business model transformations.
We need to understand the whole value chain and adapt their business models accordingly.
Using technology to improve business operations.
Data can simplify and accelerate the business.
And run like a digital company.
We can capitalize on the tools and method the digital companies to be faster and more effective.
As I've gone through these transitions at Walmart CBS Encino, there are two things that have been truth.
First.
In all instances the core business has gotten stronger as a result of the changes.
The second is that by building from and adding to the core business. We have created larger more vibrant company.
You may have noticed that we changed our border played in this release.
This will begin the process of declining acuity for who we plan to be.
We have the opportunity to be a market, leading industrial technology company.
We already have leading we're developing leadership positions in lighting control and building management. In addition to a market leading lighting business.
We have the potential to be a leader in location aware application.
Through the necessary changes of our digital transformation, we can improve our existing businesses and their market competitiveness.
We continue to develop new businesses that are focused on defining the future of the industry.
Those changes will strengthen our core business model.
We will continue to be a strong cash generator.
We have the opportunity to use that cash to grow our company through reinvestment and acquisition.
In conclusion, we have a strong company in a period of great change we are aggressively managing to the uncertainties caused by the cobot 19 crisis.
We had the financial strength and resolve to get through those and also to emerge a stronger company.
Over the long term, we had the opportunity to more broadly adopted company to expanding opportunities in our core businesses and to develop new ones.
We have the market position.
The people and the cash flow to become a larger more dynamic company that delivers for our customers our associates and our shareholders.
With that I'll pause and open it up for questions.
I mentioned, Ricky Reece will be joining us for the Q any period as we transition to question I'd like to both acknowledge and think Ricky for his contributions to acuity and his outstanding work in his new role as president of acuity brands like.
Operator, we're ready for questions.
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 questions. Some degree and start yourself back into the queue and your additional questions will be answered as time permits.
Our first question comes from Ryan Merkel with William Blair. Your line is open.
Hey, Thanks, good morning.
So first off Neil you mentioned opportunities that cobot precise so I'm curious where in your business do you see revenue opportunity and where do you see the biggest challenges.
Thanks, Ryan as I said, we're trying to deal with both the that's the challenges and opportunities so but the challenges are obligated to scale the business appropriately.
We feel like we entered this period, where they were developing momentum around that product portfolio in the core lighting business and we have the opportunity to continue that process as we as we emerge from this so the combination of the strength of our supply chain as we've been able to manage and.
And have consistent supply through this process as well as sort of the new product portfolios ever been rolling I'll give us momentum for four or whenever we emerged from that and when we think those are real opportunity.
We also think there's opportunities to do some of the hard work under the covers that we need to do to evolve the company, while we can't solve those and make those changes in month, we can't get a little bit of the headstart Walla Walla well, we have folks that have more time on their hands than they would have otherwise.
Got it Okay, and then maybe just on the bigger challenges that you see you know I think the retail segment.
It is a big big market for you are you seeing push outs cancellations. There is that an area that we should expect pretty weak.
So on the retail side, obviously I've got it.
New set of eyes on on the situation here and we're going to evaluate the retail side for the long term and for the short term and so let me address a long term question first though so we're evaluating the customers that we reach with our products through the channel generally and tried to get a better understanding of who.
Definitely we're serving through that channel and and how effective they feel like they're being served through that channel. So we'll go through that process.
Specifically on the on the short term.
Well, we've seen fairly consistent results, so far but we expect the we expect the demand shots to flow through down as well, we just don't know exactly when that's going to happen.
Got it Okay I'll pass it off thanks.
Thanks, Brian.
Our next question comes from Christopher Glynn with Oppenheimer. Your line is open.
Hi, Thank you good morning.
Neil Neil Good to hear you on your first call and [noise].
You discussed improving the existing business and the adaptability I'm just curious in your view or maybe just questions a little early but to what extent might this until a fundamental margin reset overtime and if so what do you use on.
In acting section that application you know quickly are slowly.
Great. That's very good to be with you I <unk>. That's an obvious question that we're in the process.
The weighted we and I do think it's too early to to call.
I would take a step back now and say that one of the things that attracted me to this company wide. The was the strength of our business model and its adaptability.
So as we think about kind of where we want to be two three years from now we obviously want our lighting business to to be beating the market and we want it to be the most efficient a company in the market.
And.
The exact implication ban on how we potentially restructured the income statement a little bit overtime.
Our still to be determined.
We.
We've been I've been pleased with what I've seen so far about our ability to develop products to college engineered them to the appropriate margins to compete at B.
No middleware and my parts of the market.
As a nice to have an outsider I wanted the first things I wanted to understand what's how effective we were competing in each one of those.
Each one of those sections in the market.
And I think our contractor select performance is demonstrating that we can't compete effectively and it's pretty much any.
Product scenario. So then as we think about kind of what our long term revenue makeup is gonna be based on customers. We targeted products. We offer that will be the ultimate determinants of how we of how we manage that income statement going forward and our priorities will be to get to a position, where we can be a market leader with.
With more predictable revenue growth around and appropriate returns on our capital.
Hi, Thanks, that's really helpful. And then just kind of a book keeping question for follow up.
The.
Its adjusted EPS DNA it was up about 20 million year over year guests and maybe five or 7 million from the acquisition. So.
In this demand environment, where your revenues or can track and can you just stuck contextualize the growth in the us Deanna.
Yeah, I'll Oh, three topics and then if you want more specific answers Karen can jump in here, one I've done, but but big picture that you're you're you're right. Most of that was the was the impact of be acquisitions. So both Ah GLG in Memphis labs, which which.
Rolled into this period and then some and then some incentive compensation and other things that that we're a natural as a result of of the second quarter performance.
As we're thinking about kind of the the changes that we're making as a result of the crisis I want to emphasize kind of what I said earlier, which is done we're going to we're managing obviously the variable costs aggressively and it's worth saying out loud the variable cost don't manage themselves. So that that's hard work and went on it we're also.
Taking a look at the distribution of our fixed cost so that so that we're positioned for where we we want to be going forward that and that work is ongoing. So so we'll continue to do to take a look at that through that through the period.
Thank you.
Our next question comes from Brian Lee with Goldman Sachs. Your line is open.
[laughter].
Hey, guys. Thanks for taking the questions I guess.
Kind of stand staying on the topic in the day, the and the recession in about a recessionary environment. We're entering here I know, it's still very fluid Neal, but do you think about.
Framing the potential downside here for the market. If we take 2008 to 2009 as context, there wasn't roughly 20% decline in revenues for acuity during that time downturn.
Why is why not would this downturn be.
Ill less severe and I guess, that's in the context or just a lot of your end markets right now commercial office hospitality me it seems like that what you're seeing the most.
Shuts down and restricted policies from stay at home.
Good day. So just wondering if you could frame for us how how this compares to the last downturn, Oh, eight or nine when when revenues were down 20%.
Yeah, I'll start and then I'll I'll kick it over to you Ricky since you were actually you actually lived through the only downturn and can provide kind of direct comparisons I'd say the way, we're starting to we've been modeling as Brian as we've been trying to think about it in terms of months and and depth and decline.
So this has been sort of <unk>, it's almost like a series of Rolling Brownouts is the way I would describe that demand as we're seeing that across some of the market. Obviously, we've continued to two to two to write orders and to sell and.
A lot of what we've been supplying it's more important things from no from field hospitals to Oh, it's good to government facilities to to other infrastructure projects necessary to get through this.
And so we've seen a range we've modeled the range of outcomes by month, that's dot our could be really deep and but we don't know for for how long and you know the comparison to the 20% is written he's got kick it over to you really depends on how long that the shock last.
And and how we can come back out of that and we we don't have a crystal ball or written you. You know you want pick it up from here work, because we're thinking about folks on but on the topline and how that might evolve.
Yeah, a couple of comments that I I would add that I think are different this time, both for the the pipe or the recession as well so where we are position first on on the type of research the debt maybe his deep no. One knows that is what we saw in 2008 2009, but.
Most people believe it won't be as protracted.
No. That's a big recession, you know lasted for two years or so 18 months two years before you saw recovery most people no one knows but most people believe this one will maybe not be shape, but we will see a rebound watch this a situation passes and hopefully we have.
Opportunities to treat this and vaccines and so for should we see a rebound.
The other differences. This time I believe is <unk> is liquidity in the market. The last 2008 2009, a there was a pretty significant financial crisis, a lot of liquidity lost out of the market and so forth.
And what the federal government is done as well as just the state of the financial markets I think there will be more liquidity this time and the infrastructure.
Spending bills that are being put forward and past seem to be.
More implemental mold and maybe more shovel ready, but we experienced in 2008 2009 tied more to fail, but I do think those are different looking at us as a company in 2008, 2980% of what we so was into new construction and clearly new construction has.
The biggest the potential for the impact and many other sectors. A this time only about half of our revenues would be into new construction were much more or is there room renovation a much more into other aspects than just new construction in those areas.
Joel can read out quicker than new construction My my do and then as Bill said and just a comment though somewhat on the questions earlier for Brian while retail stores and all maybe down we are seeing good activity and distribution centers and logistics centers and.
So forth as people now or buying more and more on like the libert. So we're seeing good opportunities and aspects of the business beyond Oh front facing retail store so.
Still hard to know where it's going to play out not this would suggest by any means we're not gonna see.
A negative demand shock, we certainly think we will and we're planning to aggressively for that but I do see some a stark differences and potentially positive from this one versus 2008 2009, Brian Great question.
All right no appreciate that that's a that's super helpful context second one from me and I'll pass it on.
Just on tier three tier four sales did I might've missed it but did you break out what the percent of sales in the quarter loan growth in that category of products was [laughter] year on year, and then I guess, just as a segue into the into the question.
Neil I know a big part of why you've joined the firm is around sort of digital transformation opportunity and given your background. You. Obviously have a lot of experience with that as you think about well beyond covert 19 in sort of.
As we as we move into more of a normalized environment whatever that may be coming out years do you see kind of at a high level.
Due to sort of pivot the strategy around [laughter] nation, given you know what might be the fall out in the retail environment.
A lot of the initial rollouts have been with that community of customers, but there are you thinking about it any differently I know, we're only about three or four weeks into this pandemic, but it seems like the retail and markets would see the most amount of transformation potentially coming out of this and wondering how that might impact the strategy around your.
You know your digitalize approach and your screen tier four specifically.
Yeah, Brian that alone all chew on on some of that and then chairman or we can jump in here at the end would involve with any specifics that you feel like I left out so I, Brian just to start where are you finished I.
I think it's I think it's undeniable that this will be wanted those events that after which nothing will be exactly like it was before so we are as we imagine kind of the strategy for the company going forward. We are we're mindful that that we expect there to be pretty major changes Uh huh.
The out of this.
Two off to spend the second again on digital transformation I think one of doing the things that.
People often do think that digital transformation is is somehow using technology in the organization, which is why I went through the fourth thing, but it's really what we do and how we do it so.
You picked up on the strategic part as we think about kind of what services, we can provide with our technology to a two other.
Other endpoints, both retail and otherwise it really falls into two to two buckets, which is we can either be in the business of market moving marketshare, where we can be in the business. Our in our data can be in the business up we'd be marketshare or delivering efficiencies for our for our partners.
So so as you think about 10 of the technology that we've obviously rolled out of retail first there are real opportunities to do both in those in those categories and those needs will probably be more prescient. After this than they were before this.
The efficiencies necessary also will translate into other into other examples Ricky mentioned the impact in in industrial facilities and the opportunities that that presented I wasn't aren't just planes, a distribution and manufacturing facility and we run a tree is in that facility to.
Due to manage all of the materials in that so so we have any we have on side and then ask that we use there that manages where evaluates the productivity of forklifts. It's on the face of it if the small thing, but it's a window into the different ways that that this technology can be used.
So so I think it's a truism of technology that the impact is overestimated in the short term and underestimated in the long term than I think our location aware applications that were describing here.
We'll continue to we'll take a longer than we expected to realize but the the plus potential opportunity may even be larger than we originally expected.
And then second on just kind of a general technology evolution, I would say that like and all parts of the business. Both the lighting part of the business and then the the controls and and other tunnel and ultimate and location where applications will continue to walk themselves out make technology curve. So.
So the I often describe technology companies is there is really not about ones and zeros worry about technology products, but about really does the length of the product lifecycle and so as we shortened those product lifecycles, we can be continually moving customers and products up the curve of technology. So that'll help happened.
I expect we all expect that continue to happen in our in our core businesses, both lighting businesses and the and the controls businesses that we historically you know lumped into into tiers. So big picture I think that it's going to take awhile and it might be slightly different parts of the b on there.
You know kind of location, where applications, but big picture there about their about data that you'd lose market share fourth creates efficiencies for customers to companies and they have applicability at multiple different verticals overtime or feel pretty confident about that and that our controls business can and will continue to be a grower handy and has.
Real market opportunity richer, Karen do you want to add and to any of those specific answers.
Just a couple of comments for me and secure and you may want to provide some of the specifics on.
The percentage of sales have grown for tier three tier four but I will say tier three tier four continues to be a focus the solutions were building.
That are much more than just the athree as we do have.
The net worked energy focus type solutions that we sell the unified system is getting traction and so forth. So actually bridge excited or on the development and all side, a tier three and tier four obviously to.
Current situation may slow down sales are those products, but real going forward launching some new solutions into that tier three tier four world leveraging some of the technology, we're going out with recent acquisitions.
But also a further integrating.
The businesses the in the technologies that we have a examples as a single room control won't be launching here later this year, a very exciting products that I think will be well accepted as a way to a very efficiently Commission.
A single room control they would be called compliant and provides the energy saving so a lot of activity continues in tier three tier four and we see it is a good growth engine for us.
Yeah, and specifically our tier three tier four sales are consistent with what we've reported before they're about the 15% to 20% range of our revenues.
Okay. Thanks, so much everyone.
Thanks Brent.
Our next question comes from Deepa Raghavan with Wells Fargo. Your line is now open.
Yeah. Good morning, all Niels Hello, welcome and look forward to your leadership.
A couple of questions from me can you talk about the order book for farm and Stuart March and and how that compares she wishes to February or even Jordan I get to send person volume growth this quarter I'm, what I'm more I'm looking for is any sensitivity is around how to think about upcoming.
Walter just given the job sides being closed <unk> could mean that even renovation projects are being impacted.
Yeah, Ricky I'll, let you Oh, you picked up enough.
Absolutely, yes, it's it's interesting we are seeing a probably all the different things you might expect we are seeing some some markets where the construction sites or shut down. So obviously, we're not shipping product into though we have other parts, where we're seeing project could be an accelerated so we are.
We're shipping a ahead of when we might have otherwise as they're trying to get product in.
He held up in a a disruption that may occur in the supply chain.
We were seen business as usual in some parts of their country all to say that the impact in March has not been significant yes, we've seen a bit of a slowdown but it hasn't been significant and I think the strong performance and I want to give my thank you do our supply chain team and our supply.
Ladies and vendors that we've been able to continue to provide that supply and continue on we though certainly expect is more construction sites it slowed down.
And as this goes further we will see a drop in demand and as Neal mentioned earlier are planning accordingly.
Exactly when that hits and how do you could hit so no one knows but we are aggressively managing or.
Variable cost would be prepared for that as well as looking at the fixed cost, but as of now yes, we've seen a bit of a slowdown, but it's a still going reasonably well.
Got it thanks for the color.
Neil a question for you I, probably little early but alas. It anyway <unk> can you for what does your thoughts on the need for near term capital preservation worsens Youre, maybe initial thoughts on long term basis for capital deployment ideas on buybacks Emoney is a worsens dividends.
Yeah sure the.
As I started to detail in her comments earlier depot, we are we feel really good about the strength of our balance sheet entering this.
And as Weve stress test the B the model for the company through this period. We are obviously building up from from Couch forward and as Karen mentioned, we have access to to a significant additional liquidity. So we feel like a words well positioned kind of going into this.
So as we possibly can be.
As we think about kind of what we're going to do with cash in the intermediate and longer term first I mean, you know kind of intermediate term, obviously, we're going to we need to when you need to mine dining and and take care of ourselves first so we need to make sure that we stay liquid Newsday, we stay as well.
Position as we can.
Then as we as we look forward, where we're obviously going to be paying attention to how this impacts other on your companies and in our business and the ones adjacent to its too early to understand kind of where they are will be mindful of are of our own companies are valued performance.
But our bias for as long term is that is that we believe we have a highly efficient cash generating business, which returns high returns on invested capital and we'd like to use that capital we'd like to bias that used to that capital for growth both through reinvestment in our in our business as well as to to Adam.
Jason businesses to degrade sides of the company.
Got it thanks, very much I'll pass it off.
Thank you.
Our next question comes from Jeff Osborne with Cowen Your line is open.
Hey, good morning, I, just two quick ones on my end I was wondering you know if you could update us on a the situation in Mexico and your manufacturing facilities. There a any reduction in throughput was a social distancing or how the facility in general is doing with some of the approaches that Mexico's taken with a with covert 19.
Yeah sure, Jeff Oh, I've been to have been down the monitoring twice now we started working on people flow and sanitation, starting January 31st and they have implemented a number of different a number of different changes there so far.
Currently all of our facilities are our operating there we are meeting we're meeting demand.
The backlog and Brad and Deactivations, Dan I have been consistent with.
Historical.
Performance, even as we restructured the facilities move people apart implemented everything from temperature checks to to increasing the size of the manufacturing self there so that we can Chad.
Spread people apart, while they're working to change and the people flow so that shells don't come in contact with all the cellphone necessarily so for example, they all go eat at the same table a bunch every day with the same people. So there there's there's no overlap. So so far we continue to operate there as you alluded to in your.
A question the situation in Mexico is evolving in evolving pretty rapidly. So some of the other states in Mexico have implemented more stringent oh kind of stay stay at home or or or sheltering restrictions that has not yet happened and in Monterrey, We're working with.
Would be would be authorities, there too too, obviously would essentially where its central business. Because you can't believe any of the things necessary to get through this without lights. So were we're continuing to work through that and we're we haven't you haven't very constructive positive relationship would be authorities there too and.
Associates to to help them, it's true that we're doing everything that we can and will move forward, but now as you lose the context. There is fluid Ah. It continues to change that as of now we are we're operating at a limited demand that Mexico.
That's great to hear and then my second question was around you know your approach to the monthly modeling insensitivity I'm not looking for what the specific figures are but certainly a regional diversification is imperative to understand you know as it relates to the an outsider understanding what's your exposure is to the extent.
So let's say in April in the first half of May and so can you just give us a sense of context, you know either for the last fiscal year more recently, what's your mixes as it relates to say the state of California, and the northeast an aggregate is it similar to the you know GDP generation of America, two thirds or so I'm just trying to go.
In a sense of your regional diversification certainly seems like Georgia.
I've just implemented measures relative to California, being the first so I'm trying to understand as we think about in particular this upcoming quarter.
But youre scope of a breaches on a diversified diversified geographic perspective.
Yeah, I'll start and then and then I'll pass it to Lucky for us for any additional color. Our modeling has been to be it to be dramatic and to be relatively universal. So as we looked at it from a from a filled the company up perspective, we're we're looking we don't want.
We have not allowed precision to be the enemy of insight as we use del Mar as we've done our modeling. So we've assumed you know kind of the worst cases and worked our way back from from there as Ricky started and I'm about to hand off and but it's Ricky alluded to before our demand. So far has not has not obviously been the way.
First case, and see that kind of roll through different areas of of the country I'm talking about demand is not the demand shock. So Ricky do you want to address kind of how that's happened in how you think about our our regional diversity.
Absolutely.
We are.
Yep.
Pretty consistent as you suggest with the GDP around the country I would say, we maybe a little and I stress and little I'm talking you know percentage point, a little less and maybe the very large urban areas and a little more there for and ER and the rule.
Heartland type area some of that goes back to the legacy of a one of our brands our largest brand like Tony a lighting, a which was the best value in lighting and the does extremely well.
Throughout the country and and our focus has been probably disproportionately there versus some of the more architectural higher end there would be bigger in the urban areas think a New York City Chicago.
And ER and lay and so forth, having said that we've done a lot to build out or architectural capabilities and so forth. So we're pretty close to.
To that in and yes, we Dorsey as you would expect in the geography, where they were having the most impact from this pandemic and are having construction side shut down or a shelter in place and so forth. Those are the areas we're seeing.
A bit more of an impact than where you are and other parts of the country.
That's helpful. I appreciate it thanks.
Our next question comes from John Walsh with Credit Suisse. Your line is now open.
Hi, good morning, and they are welcomed the Neil.
Thanks, Joe.
You're no longer maiden coming or you're kinda, the throughput or some of the variable cost question from a different angle.
Can you talk about how you're managing your inventory levels or how you kind of plan to manage them in the coming barn, we think there.
It'll be kind of a draw down on our inventory I was the demand outlook is a little bit on certain.
Or you know any color you could rise there as we think about you know how it relates to the free cash flow in the coming months as well.
Yeah sure. That's a great question than one we've spent a fair amount of time on so so again I'll start and then Ricky jump in if you I feel like you want to add something but because there are two things going on here. There's the the so there's the the impact of this rolls through first.
Fly shock as as Asia, China, specifically started to shut down and then there's the on the which here some of which the impacts of are continuing and then there's the how long does this last thing and you know how do we smooth our production in touch through that so I take time off maybe three big buckets. There. The first is on.
On Asian finished goods inventory, we have we have been we have been pretty consistent about maintaining that that supplies. So that so that we can.
Make sure we're in the market with those products over the last month and will continue to do that over the next the second is that weve been aggressive about making sure that we have access to necessary components for other products. So so the and where we might have been.
We might have been easing back on inventory in preparation for this we've made sure that we have a we have supplies a they're not in the near responsible way, but in a way that to make sure that were available to the market and we come through that so three listen after this as though as the supplier that the market could count on and then.
Finally, the a the production and management of our production efforts and still manage as you know full based system. So we are we are.
We are building a two demands there so your modulating where the inventory the inventory levels as they as they come through that but basically where we are we are building to demand Ricky anything you want to add to that.
Yeah, I would just stress that Ah, yes, we are pretty port in or lean journey, particularly in the supply chain.
Virtually all of our inventory both components as and finished goods on common bond. So is the meal rightly explained very much oh pull base. So as we see a demand slowed down it will automatically a slowdown or purchasing of components and finished goods to match that demand.
Yes, we do a little bit of over like oversight on that as we know we're pretty projects or or spikes that may come into that.
But it works really well, we're well tied into or supply base. So I'm I'm confident that we will be able to continue to aggressively manage this inventory during this timeframe, but we do as Neal said want to take advantage of or size and scope.
Ill now to be that supplier that people can count on a if the rebound comes back very quickly.
Orders were seeing there's critical demands, whether it's for mobile health care facilities or or Oh infrastructure projects and so forth that we can be a.
Supplier, they can count on to support them.
Thanks, and then you know perfect follow up because that is.
Some of the smaller suppliers when we do work.
Sure they might have a project, but because it gives the customer shipping date.
Is that an opportunity because your supply chains hasn't been as impacted can you were actually going when that business that you might not have already won or is this more than opportunity on the other side, where when you're talking to the customers. They do.
No that you're going to be reliable so I understand on the on the other side of cold there right, but just wondering if there's actually an ability to win business that you're getting previously would because you have the product correct.
Ricky Yep, Yeah, absolutely there is that in fact, we have done some of that.
And that's.
True even without a crisis like is there George times when another supplier for whatever reason isn't able to supply and the customer obviously looks for an alternative but because of our unfortunate situation at least today than I am knocking on wood a there.
Our supply chain and ore production facilities than our distributions facilities or are operating at a level to reach demand meet demand, we have been able to take some opportunistic business that unfortunately, others. Unfortunately for the others not for us for them that they were not able to service.
We have had some of that.
And nimble continue to as I said be that reliable supplier that they can turn to everyone. I agree with you on the back in could be even the greater opportunity. If we could serve them through this then that will give them the confidence to rely on us on the backend as well.
Appreciate the color. Thank you.
Our final question comes from Tim Voice with Baird. Your line is now open.
Yeah, Hey, everybody welcome Neil.
Thanks to.
Just.
Maybe just a joint going back to just you know priorities and maybe potential investments, both you know near and intermediate term.
I guess from where you sit today or do you think you can find any sort of incremental investment through the piano through to kind of existing expense structure or do you think you might have to build some additional capacity for potential investments.
You're talking about in the media tour anymore in the medium term are no longer yeah, I'd say I'd say, probably more the medium term just just given that the overarching macro situation.
Yeah. So so what are the things you'll hear from means a lot is that time is not the only constraint resource there's always more of everything else. Then there is a time and the time of year. Most valuable people in the is the most constrained resource and so you know as we think about kind of reinvestment that ultimately manifests itself.
Results on the PNNT, all we think about how can we use that time of our most valuable engineers, another and other associates as productively as possible. So that's what we're really focused on doing this during this period of uncertainty and as we and as we go forward.
As we think about a point of the medium and longer term I I believe that are more mature businesses. We can hold we can evaluate their their growth in their reinvestment on their ability to to grow and return on invested capital and we will need to obviously pretty.
They're developing businesses a bit and that may require us to to invest and now I'm going to take some so some impact to the piano to do that and if we do that I think we have an obligation to be relatively transparent with you about what our thoughts on that without without.
Now affecting obviously, our competitiveness by doing so, but I think that we have we have the opportunity to to build very attractive businesses and.
And over time, we we want to be in a position, where we are delivering organic revenue growth that we're delivering content continuing to deliver a return on invested capital in any and hopefully a much larger size a enterprise with more lines of business than we currently do so that's what that's the aspiration, that's where we want to.
Got to and and we want to we we're willing to use our our our financial strength to do that both both on the income statement and on the balance sheet and blow overtime, obviously, bringing along with us in our thinking on that so that Ah. So that you can know and hold us to account to our outdoor pool.
Form it's not about it but.
I came here because we all believe that we have a solid foundation, we have a we have a company and a business that is is is more durable down then I think it's currently appreciated and will demonstrate that through this downturn.
We are officially cash generators, we have market access and we have talent, we have opportunity to grow and acquire additional lines of business, which complement our current lines of business. So.
We're we're obviously despite the near term the near term <unk> short term hopefully, but near term a impacts of of the current situation. We're gonna get through that and then we're going to really get hopefully being a good position to grow the the enterprise over time.
Okay. Okay. No. That's that's helpful. Thank you and then just a just a housekeeping question on the S. DNA line is there way to break out for US how much is it's kind of a pure variable cost in terms of like you know shipping and.
You know some of the a you know incentive incentives a incentives you paid DEA agents and then how much of that is really six in terms of just year over year overhead yesterday.
Sure I'll, let Karen and allow them.
Sure Tim we don't you won't see that in our public filings, we don't break that out separately, but one thing you can look at as when you're looking at the desegregated revenue disclosure and you see that mix shift towards more of the independent sales network you will see an increase in the S. DNA because it's a higher commission.
And when that mix shift happens to those channels. So you will see a bit of a shift there.
Okay, I'm trying to think of that volumes would go down how much how much <unk> how much of the yesterday.
Name would just kind of go away from not having to pay a commission or not having to pay for it.
Yeah, Karen I take it in the past we've indicated that's in the 12% range, 12% to 13% range in the aggregate that's that's pretty directly variable in the S DNA cost.
Okay, and just consider that mix shift as well.
Okay. Thanks, Thanks, very much and good luck, a a from a quarter here does.
Excellent. Thank you.
Thank you for participating in today's queuing <unk> I would like to turn the call back over to Mr., Neil Ashe for closing remarks.
As I started its a pleasure to be with you all I wish I know, we all wish the the global context are different but but were excited to be with you and we want to thank you for your interest in our company and so being a part of this a this is journey with US as we started the next generation of acuity. So so thank you for a three year interest and.
And your time and will be a will be in touch against it.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Oh.
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