Q3 2020 Acuity Brands Inc Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Morning, and welcome to acuity brands fiscal 2023rd quarter Financial Conference call.
After today's presentation, there will be a formal question and answer session.
Ask a question. Please press the Star then one key on your telephone.
Today's conference is being recorded.
Do you have any objections you may disconnect at this time.
Now I'd like to introduce Mr. Piccinini, Vice President Investor Relations corporate development, Sir you may begin.
Good morning, with me today to discuss our fiscal 2023rd quarter results are Neil Ashe, Our President Chief Executive Officer, Karen Welcome, our senior Vice President and Chief Financial Officer, and Ricky Reece, Our executive Vice President and President that would you be brands lighting, we are Wittkowske 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 third quarter press release, and 10 Qs T SEC filings.
I'd like to remind everyone that during this call may make projection or forward looking statements regarding future events or future financial performance at 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 these statements considering new information or future events. Please refer to our most recent thinking and thank 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 let me turn call over to watch.
Thanks, Pete Good morning, everyone and thank you for spending time with us today to talk about acuity.
Our company performed well during an incredibly challenging market environment. The combined strength of our go to market channel product portfolio and supply chain allowed us to effectively serve the needs of customers across many categories.
None of us our nor do we ever want to become accustomed to these levels of revenue decline.
Despite lower revenues, we were able to expand gross margin and to generate cash through a combination of actions that we took both during.
And before the pandemic.
Some of the highlights of this quarter included our supply chain performing very well, we took care of the health and wellbeing of our associates, which allow them to continue to effectively serve our customers.
Our facilities remained open and productive and they consistently met customer demand despite fully complying with regulatory work restrictions imposed to reduce the spread of cobot 19.
And working through some component supply issues.
Our product portfolio is increasingly aligned to customer demand and we had several key product highlights this quarter, including new product launches.
A strategic alliance on Germicide will UTI and continued growth in our contractor select portfolio all of which I will talk about in more detail later.
We are adding talent and we have begun to deploy teams focused on executing our digital transformation.
Transformation is beginning and I'll provide additional thoughts later in the call.
Most importantly, our performance this quarter has demonstrated the adaptability and durability of our business.
While our revenue declined 18% largely due to the coven 19 pandemic. We grew our gross profit margins 170 basis points responsibly managed our fixed expenses and generated $150 million a free cash flow during the quarter.
With that I'll turn it over to Karen for more detail on the financials care.
Thank you Neil and good morning, everyone. I know many of you have already seen our results, but I would like to make a few comments on the key highlights for the third quarter fiscal 2020.
Net sales for the third quarter were $776 million decrease at 18% compared with the year ago period.
Overall the decrease in net sales was due primarily to a 20% decrease in volume largely as a result of the negative impact on demand due to the cobot 19 pandemic, partially offset by the benefit from acquisition of about 2%.
From a channel perspective, there are few key areas of significance.
First net sales through our independent sales network, which makes up approximately 75% of our total net sales was down approximately 10% over the prior year.
Our performance compared with a year ago period was impacted by the decreased demand due to kobin and to a lesser extent unfavorable pricing, partially offset by the benefit of acquisitions.
Second net sales through our direct sales network were down 31% over the prior year third quarter due primarily to weakness in large projects that have been postponed due to co bed as well as some large projects in the year ago period that did not repeat this year.
Third lower shipments within the retail channel resulted in a decline of 18% in this channel as compared to the prior year third quarter the.
The decline in this channel was primarily due to the impact of previously announced actions taken by the company to exit and phase out of certain products that have poor financial returns largely due to the impact of additional tariff.
As we mentioned in previous earnings call. We expect these efforts to continue to negatively impact net sales in this channel for several more quarters.
Partially offsetting the net sales decline in the retail channel was growth in several core products in this channel due to enhancements in our product portfolio and increased demand that we believe was due to more do it yourself projects as more people were at home and had the benefit of stimulus checks.
Lastly, net sales in our corporate accounts channel were down 59% this quarter compared with a year ago period, due primarily to the impact of co bid on retail customers. These customers delayed many retrofit opportunities as they were limiting the activity in their stores.
Additionally, as we have noted in previous earnings calls. This is an important part of our business, but we expect net sales to be inconsistent based on the nature of the construction cycle of the customer served primarily big box retailers.
In the third 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 provide a detailed reconciliation of non-GAAP measures adjusted results exclude the impact of acquisition related items amortization expense for inquired a tangent 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 think you will find this transparency very helpful. In your analysis of our performance.
Gross profit was down $328 million down across excuse me gross profit was $328 million down approximately 56 million from the year ago period.
The decrease in gross profit was due primarily to the decline in volume due to the impact of the cobot 19 pandemic, an unfavorable pricing, partially offset by the benefit of acquisitions lower cost for certain input a favorable channel mix and actions taken to reduce labor cost in response to the decreased.
Land.
Gross profit margin for the third quarter was 42.2% an increase of 170 basis points compared with the year ago period as lower cost for certain input.
Contributions from acquisitions and favorable sales channel mix were partially offset by the decline in volume and lower pricing. We thoughtfully managed our variable cost this quarter in response to the lower demand, resulting in favorable gross profit margins.
Our S DNA expenses decreased approximately $22 million compared to the year ago period. The decrease in S. DNA expense was primarily due to.
In response to the lower sales, including freight commissions travel expenses and marketing costs and the benefits of streamlining activities, partially offset by the addition of cost from acquired businesses.
Reported operating profit was $83 million compared with $120 million in the year ago period, while adjusted operating profit for the third quarter fiscal 2020 was $105 million compared with adjusted operating profit of $136 million in the year ago period.
Reported operating profit margin was 10.7% a decrease of 200 basis points compared to the prior year.
Adjusted operating profit margin was 100 was 13.5% a decrease of 80 basis points compared with the margin reported in the prior year.
The effective tax rate for the third quarter of fiscal 2020 was 23.1% compared with 20.9% in the prior year quarter.
The increase in the effective tax rate was due primarily to the recognition in fiscal 2019 of certain research and development costs tax credits, including claims for prior periods that did not recur in the current fiscal year. We currently estimate that our blended effective income tax rate before discrete items will approach.
From a 23% for fiscal 2020.
Our diluted EPS for the third quarter of $1.52 was 70 cents lower than the prior year, our adjusted diluted EPS. This quarter was $1.94 compared with $2.53 reported in the year ago period. The decrease was primarily due to the lower pre.
Next income.
We continue to have positive cash flows from operations. Despite the decline in sales and ended the quarter with a strong balance sheet.
We generated $378 million of cap of net cash flows from operating activities for the nine months ended May 30, Onest, 2020, which was up $66 million or 21% compared to the prior year.
At May 31st 2021 had cash and cash equivalent balance of $521 million, an increase of $60 million since August 31 2019.
Our total debt outstanding was $404 million at May 30, Onest 2020, and we currently have additional borrowing availability of approximately $396 million under our revolving credit facility the revolving credit facility and the term loan mature in June 2023.
We clearly we're pleased with our financial strength and performance. During this first chapter of the Cobot 19 pandemic. Thank you and I will turn it back to Neil.
Thanks, Karen.
We are all dealing with the crooks Corona virus pandemic and its widespread impacts on our people and on the economy.
We have aggressively managed our business to protect the health and wellbeing of our associates to operate effectively an uncertain and rapidly changing market conditions and to compete to win both during the downturn and whatever follows.
Our number one priority has been to ensure our associates are protected from the spread of the virus well in our care.
We have quickly implemented changes to our facilities, including meaningful changes to people flow changes to manufacturing. So additional clini requirements for comments basis mandatory faced coverings handset appetizer stations and social distance works basis.
We have implemented educational programs.
Contact tracing and engagement with our communities to improve the environment, both inside and outside of our facilities.
Early on we reviewed all government orders, where we operate a confirmed that we were designated and essential business.
As a critical step and allowing us to service our customers in a variety of ways during the pandemic.
For example, our team just deployed lighting solutions to temporary alternate care sites.
In less than 48 hours are custom architectural lighting solutions and apply technology solutions teams developed a portable healthcare light stands designed for lighting patient pod per specifications of US Army Corps of engineers.
They were deployed to facilities in Michigan, The Javits Center in New York and Mccormick place in Chicago to support the lifesaving treatment for the most critically ill.
We installed smart lighting and controls for a top rated universities quantitative bio Sciences Institute at the forefront of fighting Cobot 19 through the host and protein identification that the virus uses in the host to replicate itself.
We supplied lighting and building management solutions to data and logistics centers that are supporting the remote work capacity.
Our indoor positioning and heat mapping technology was used to keep shopper safe through social distancing measures in grocery stores in pharmacies, and we worked with our suppliers on health and sanitation best practices to help them, both reopened and stay open two minutes to minimize disruption to our key component supply.
As care described net sales of $776 million were 18% below the prior year.
The effects of the pandemic became more evident in April and May, particularly in the retail and commercial office verticals.
At the same time, we saw more business in the industrial and education sectors and were able to take advantage of these opportunities as we were open and operating effectively.
Our product development activity remains strong in this challenging environment and we continue to invest in innovative product solutions to better position us during this time of market uncertainty.
We launched a new slot fixture for mark lighting that aligned to write product and great quality, and we were able to ship to our customers when others could not.
We recognized by buildings magazine as a product award winner in the building and energy management category for the lower unit waived series of wireless interfaces and remote controls from Distech.
We continue to enhance and grow our portfolio of contractor select products.
Sales of these products were up 7% over the prior year as we were able to take advantage of discretionary opportunities due to the strength of our supply chain and our robust portfolio.
Our June Onest, we announced that we entered into a strategic Alliance agreement with New Show America incorporated the show has agreed to supply acuity brands with its care to 22, UBI disinfection module, which used as filtered excimer labs to generate 220 nanometer far EBC like capable of Inactivating viruses and.
Bacteria on indoor surfaces.
The agreement is exclusive to QD brands for general illumination uses throughout North America.
While we were focused on managing responsibly during the third quarter effects of the Pandemics. We were also focused on coming out of this stronger than we went into it.
We have begun the process of our digital transformation, we have added a new chief Technology officer, and we have deployed teams to begin to Reimagine our business processes.
I'm pleased with the talent that we're able to attract and that we already have within acuity.
As we said last quarter, we expect this to be a journey that will ultimately make us better smarter and faster competitor.
Our focus is on improving customer satisfaction and the time it takes us to perform key activities through improved processes and better technology.
Our core business will get stronger as a result of this transformation and this will better position us for Ics success in our existing business and in future opportunities.
In summary, Im proud of my colleagues and our performance during the third quarter as I said before we are demonstrating the ability of our business and our continued ability to generate cash. However, there is still great uncertainty around demand and the timing of any economic recovery.
In addition, we expect pricing pressure and continued cost related to tariffs in the fourth quarter. As we look forward, we plan to balance the management of our costs with the investment in our transformation and we have a robust new product portfolio that is positioned to benefit from a recovery in demand.
We believe we had the financial strength and the resolve to manage the effects of the pandemic and to emerge stronger.
Over the long term, we had the opportunity to more broadly adapt the company to expanding opportunities in our core business 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 turn it over for questions and we welcome Ricky Reece, our president to join Carrot and me for the question and answer period operator.
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 Jon Wolff with Credit Suisse. Your line is now open.
Hi, good morning, everyone.
Good morning, John.
So just.
About the gross margin performance year to date here.
You know 42% qual.
Is there any reason why that should kind of deviate.
Either in kind of Alaska fiscal quarter were as we think about the business on a go forward basis.
Yes ill start Karen and then if you want to weigh in as well obviously.
We've done a lot of work to achieve that that improvement in gross margin. So as we indicated in the comments, where the beneficiary of of work, we've done to reduce input costs and too aggressively manage our.
Our variable costs through the change in demand.
As we look forward, we obviously want to to continue to achieve high gross margins, but there will be variability in those fixed costs and in other costs such as tariffs that we indicated so.
So while we're pleased with the improvement and and we like where we are we expect there to continue to be a little bit of volatility in that number going forward.
Yes, I think that's that's consistent with what we've said John the other thing I would call out as we are seeing some pricing pressure a bit more so than when we have in the past and we were able to raise prices in response to the tariffs last year. This year, you're seeing pricing come down a bit, but we still have the tariff.
Great. Thank you for that.
I guess, maybe thinking about for the strong cash generation and where you're sitting from or are there.
No liquidity position.
Can you do Copart prioritized.
No the timing of when we might see some deployment either sounds like there's some bolt on M&A opportunity and door.
Share repurchase just because the balance sheet to seems to be in a very strong position.
Yes, John if we go back to kind of what we said last quarter. The our number one priority was to demonstrate the durability of our of our business model and we feel very good about our performance this quarter, even in a tremendously down revenue environment to demonstrate the durability that cash flow, which you highlight.
Has turned into continued strength in our in our balance sheet.
That was our first priority. Our next priority that obviously is to is to continue the transformation of our core lighting lighting controls and components business as we grow our building technology efforts.
We.
As Kevin indicated we don't feel like we're at the middle of this.
Uncertainty of the pandemic. So we're obviously going to continue to be.
To be mindful of managing our.
Our balance sheet and our cash performance through that so that we maintain as much flexibility as we can and so then as we look forward. We'll we'll report back in as we start to see start to see beyond the horizon, a little bit more on on how we will deploy that cash but.
Again, we said, we said last quarter, our priority is to his deploy the cash for for growth opportunities to make us a lot larger stronger and more vibrant company.
Great. Thank you on low pass along.
Our next question comes from Deepa Raghavan with Wells Fargo. Your line is now open.
Hey, good morning AWS.
Neil.
Can you talk to some of the items that surprised you, possibly this quarter versus when you announced so maybe cost actions or you know hunkering down.
The last call.
Gross margins, mostly on did even sales trends do better than your expectations.
Thanks, Steve well I mean, obviously when we when we reported last we were all embarking into this pandemic and none of US knew exactly what was going to happen as we indicated and I'm looking at Ricky across the table, we managed aggressively through this period, both our variable cost and our fixed costs. So that we.
Position ourselves both to thrive in the downturn, which I believe that we've demonstrated that we can do and as I indicated to not be to continue to invest in our product portfolio. So that we would have the products available when the market returns, which obviously it has not yet so.
I don't I wouldn't say that we were surprised by where we end up but I would say that we're very pleased with the discipline with which we executed and I want to start with the foundation of our supply chain.
So the our ability to take care of our associates. So that they could continue to operate effectively was essential to us largely staying open and all of our facilities and being able to meet demand. So I believe we clearly took orders that we that others were unable to serve through this through this downturn and build Tom.
The strength of our of our supply chain.
So I wouldn't call that's surprising, but I would call that very pleasing and then if you take those things as we look forward. We continue to apply the same logic now as we did when we were with you a quarter ago, which is that I don't believe any of US know what the economic outlook is going to be so we're attempting to position ourselves. So.
That we can operate effectively at these kind of market levels that we have a product portfolio that is is poised to benefit from a rebound in end market activity and that we can invest in and execute on the transformation that we've described so.
I would say we are hugely surprised but I would say that we are pleased.
Got it thanks.
How would you characterize June order trends so far are.
Are you seeing any pent up demand of the channel at all as economies of opening up.
And just curious if you can also talk to how March April may be trending sequentially that'll be very helpful as well.
You know Ricky I'll, let you take that one.
Certainly deeper I would say answering your second question first kind of be chronological here.
So March was actually an okay quarter, obviously, a pandemic was late or Didnt here to the US and March was okay and then when it became apparent we saw.
Major projects and so forth wanted to get their products.
As soon as possible concerned about what may occur.
And then we did see a slowdown in April and May sequentially getting worse as construction sites already and closed.
Particularly on the East Coast to you at New York, and New Jersey, and Boston in areas like that that you couldn't even get on the sites and certain locations on the west coast as well.
Here in June we have seen virtually all of the construction sites open back up.
Early in the and the mob and started seeing pick up and the demand for what we call stock and flow as distributors now we're feeling more confident that job sites are open and needed to stock inventory and replenish inventory that may have been use throughout.
The question Mark now is given the spikes that we are seeing and many places around the country and and now starting to close down some of the activities retail primarily at the moment, but we will see whether that expands into construction sites and so forth where that goes.
But.
We are seeing some improvement here later in June.
But the question Mark is where that continue given the spike that unfortunately, the country his experience and and covert cases in many spots around the country.
Great. Thanks for the color I'll pass it on.
Our next question comes from Christopher Glynn with Oppenheimer. Your line is now open.
Hey, good morning.
Just curious on the CEO arrangement is what you could saying about.
With the early indications for market reception.
Look like.
In this thats the only solution on the German seidl side that you think is viable for you staring occupancy.
Ill start Ricky and then if you dive in.
Obviously, we're all looking at the saw the possibility for for Germicide will you be on the it potential positive impact on on kind of helping us all get through this crisis.
As you probably are aware there are a number of different potential solutions to 22 is is appears to be the most effective in.
In the eradication of viruses and bacteria, but there are also other wavelengths to 54 for example that that provide opportunity as well and so Ricky you want to pick up on where we are kind of and you show and for a more broadly yep.
As you point out Chris the benefit a to 22, besides being very effective in clinical testing is that it's not harmful to the skin in the eyes humans. So you can be in the place and therefore, we are seeing a lot of interest.
And Matt capability to 54, which is in the market today, and then there's four or five thats been around for quite awhile do require.
People were four or five is not as effective against viruses and then the to 54 you cannot be in this space. It is harmful to the skin and eyes.
So it's encouraging theres still more clinical task Columbia University, others are doing testing.
So it's not on the market.
Commercially yet is there was more testing going on but the interest that we are hearing is pretty grade and applications that before.
UBI lie wasn't an alternative because you had to be out of the space. So we're encouraged by it hopefully the clinical test will continue to be positive and we like the arrangement, we have with new show in the exclusivity that gives us here in the North American market for ambient light age so very encouraged and optimistic about it.
But.
Still a bit to be determined.
Thanks for that and I'm just curious if we can get an update on where you see the industry progress toward differential.
Stabilization of pricing levels soon.
Industry margin structures I think in response to John Washes question, you indicated that the immediate term you may see more pricing pressure in the fourth quarters, and then third the way thats phasing in but within the broader context of the industries.
Trajectory, if you could kind of link those thoughts together.
Yes ill take that and then Rick if you want to add anything.
As we go through it but.
I would say is obviously I've done a deep dive on the industry is as being new to it and I would say that.
Our comment about the immediate term is our expectation that competitors will try and respond to the downturn by by lowering price to try and gained some share. So I believe as we demonstrated in this in this quarter and Karen indicated even with pricing pressure in this quarter, we were able to.
Deliver and we were able to deliver gross margin in the process.
As we look forward.
I believe that puts us in a position of strength and from a from a pricing perspective and.
And by position of strength I don't mean that we need to increase prices I think that means we are in a position to continue to serve prices and.
And largely our average sales price across all products is relatively consistent over the over the past periods and and we would expect that going forward. So.
I do think that we.
This this this pandemic is obviously going to put some turmoil ended the industry and we intend to compete with our service levels as we have done through this quarter and too and to manage our price. Both so that we are effective in the marketplace.
But we also continue to to catch the check as we've demonstrated in this quarter.
Okay. Thank you for that.
Our next question comes from Timos with Baird. Your line is now open.
Yes, hi, good morning, everybody Nice initiative on margins.
Thanks, Tim.
Maybe just I'm curious as you're talking with your agents.
What are you what are you hearing from them in terms of.
Views on kind of new new construction projects and maybe larger renovation projects that might be more on like the design stages of the developmental stages.
Just trying to think of.
How your agent backlogs are kind of building as you look maybe six 912 months out.
Yes, Tim.
I would say, it's somewhat inconsistent geographically, but generally they are seeing good activity.
Education, as we highlighted and ended us and industrial continues to be strong logistics centers warehouses more and more people are ordering products online and so forth and I think they're going to get accustomed to that and that will continue.
So we're seeing good activity there education has taken advantage of if you will have the schools would be in Mt.
To go forward to the extent that they have funds.
Go ahead and take advantage of cost saving renovation opportunity energy saving opportunities and then they may be someone looking at the other areas.
To be able to function in this new world of the pandemic or how do they need to redesign their space and so forth to have students back whether it's the university's arts.
The K through 12 area. So we're seeing pretty good activity there.
As we entertain indicated retail has been in a big slowdown, but with your be there an area that are very interested in the UBI for for obvious reasons and so a lot of activity. There is our agents are talking to them in different ways of utilizing.
That capability.
So there is good activity in that space infrastructure is beginning to come back again.
So thats was more constant throughout and is going reasonably well also so.
Little bit inconsistent geographically, but I would say the activity is good the backlogs for most of the agents or solid I've talked to distributors as well distributors are seeing.
I'll pick up in the stock in flow. So we're seeing replenishment orders.
Come in at a pretty good pace. So we're seeing that activity picking up so it's encouraging.
Again as I mentioned before a lot of this star wars before some of the spikes. We just saw in the last week or two and the cobot cases, so we'll have to see whether some of the pickup that we've been experiencing and some of the activity.
Will slow down as a result of the increase cases.
Many of the country seen but encouraging activity out there.
Okay. Okay, great I appreciate all the color and then I guess, maybe just just strategically I know you're still working on just kind of the strategy around digital nature is but.
Do you think at this point you'd be able to to fund any incremental investments just from your existing cost base or do you think you need to make kind of incremental cost and the cost investments to to accelerate some of the product development activity, but it's just how do you think about managing it that at this point.
Yes, we have not determined the answer to that question yet because we don't we can't we don't feel like we can effectively predict where the market levels are going to be during the pandemic. So.
As we've demonstrated this quarter, we can make some investment and transformation at the same time that where we're performing at these levels. So.
And obviously that will be our first.
That will be our first course of action, but we reserve the right to to increase that investment over time, hopefully our revenues in the core business will grow at the same pace and so we will cover that but it's just those two art.
Don't peer yet to be correlated.
And so it's I think it's too early for us to say that definitively that we can do that obviously, we're going to try and do that but but it may not.
It's dependent on kind of the market demand for the core business.
Okay, Okay, not going if I can appreciate that but I appreciate that thank you.
Our next question comes from Ryan Merkel William Blair. Your line is open.
Hey, Thanks, just want to go back to gross margins for next quarter, just want to understand the comments I know you said there is going to be variability, but you've got price pressure and you mentioned the tariffs, but is the portfolio pruning and lower raws is that going to continue and do you think that offsets the pricing.
The higher tariffs. So you think gross margins and still rise year over year in the fourth quarter.
Well I'll just you emphasized the elements that are driving the improvement in gross margin. One is product portfolio to is a lower input costs three is the aggressive management of our.
Of our variable costs those are balanced by things outside of our control like tariffs returning for example, so.
So we feel good about where we are there.
No there is a cap to how far we want to drive gross margins, obviously due to competitive reason, so, but but yeah. We feel good pretty good with where we are.
Okay.
And then you mentioned disruption in the supply chain for certain components, how impactful exists and it is their visibility to improvement near term.
Yes.
The disruption we had was earlier in our third quarter.
And it was.
Somewhat limited we were fortunate.
That we had a pretty diverse supply chain and it was very effective at looking at alternative sources of supply and so forth and right now.
If you look weve virtually recovered in area every area so at the moment.
Shortage of components is not a huge issue for us.
Okay, perfect, thanks for that pass or not.
Our next question comes from Jeff Sprague with vertical research. Your line is now open.
Thank you good morning.
First just on back to kind of cost related questions, which I guess dovetail back to the gross margin narrative. Most of US are focused on if we think about kind of the balance of temporary versus fixed.
First I am wondering on the fixed side of.
All the.
On a structural actions you intend to take or those fully reflected in the results here that we see and then may quarter, and then second part of the same question is.
Is there a significant amount of temporary reaction.
In the quarter that just by nature comes back as we move into the next quarter.
Beyond and.
Kind of willing to size that any degree would be helpful.
Yes, I'll start and then.
Then care and obviously we have a.
We have a supply chain footprint that is side to a to a larger business. So we feel like we've got a lot of capacity.
In that.
And that supply chain. So we will we we were already and we will continue to evaluate that and make any adjustments as we as we see fit the second point you mentioned on variable costs. Obviously, we are pleased with the way we were able to manage our our variable costs and as you know Matt variable.
Cost don't manage themselves. So so we were pleased with with our ability to do that so as we sit where we stand right now we're positioned to.
To continue to operate in this size market and volatile market.
Situation with the ability both to scale up if.
If demand returns and to continue to execute at these at these demand levels. So.
So as everybody kind of asking the same question a different way, which is are these gross margins going to stick.
We believe we are kind of where we are right now and and.
And we'll continue to to manage around these levels.
As we as we go forward, but.
Again, what you hear in our in our answers is that none of US know what what demand is going to look like for the next 369 12 months. So we're positioning ourselves to attempt to be successful in whatever market environment presents itself to us.
And then somewhat related on the tariffs side.
What if any opportunity do you have here as a kind of.
Reposition that sourcing kind of avoid that.
I'll use that question as an opportunity to to talk about what Ricky was mentioning on the on the component side, but which I think is we mentioned in the last call, which is that the adaptability of our supply chain both to be able to source from.
Fixed good a fixed good suppliers in Asia as well as to manufacture hear directly in North America and to add value and to make those potentially interchangeable is it's something that we feel is a core strength of the company and we're going to we're going to continue to take advantage of that so.
So that is we may not be able to add to pivot on in inside a quarter on something like that but but overtime. We believe that adaptability gives us the opportunity to continue to be successful.
No matter kind of where the market starts to take us.
Great. Thank you.
Today's final question will come from Brian Lee with Goldman Sachs. Your line is now open.
Hey, guys. Good morning, Thanks for taking the questions.
Maybe just first on the price mix dynamic in fiscal Q4.
Could you guys.
Columbia Gulf, specifically can you quantify.
Kind of what range, we should be expecting this reverting back to sort of the low single digit.
Type arrangement trends in the metric and then.
Just in terms of the gross margins I know, there's been a lot of questions. There, but is your strategy to respond that each price actions or.
Again, you've been prioritizing margins.
We expect that there's some business Q4 guillemots environment.
Repricing in the near term.
Well, let me let me provide the strategic context for why we made the comment about pricing that we did.
We expect as our as our competitors rebound from being shut down and they have a deeper potential hole to dig out of than we have we expect them to be more aggressive in the marketplace.
Where we believe we're out in front of them in that process and the our service levels and our performance. During this period should should to a certain extent insulate us from from a lot of those effects. So.
We're planning for we're planning for that kind of low single digits, but we will see where it shakes out as Karen indicated in this quarter's experience. Obviously, we were able to stay open and keep shipping we were able to key price in this general in this general area and and we were able.
To to.
To shrink an astonishing amount of 18%, but probably less than the industry in that process. So.
Thats, it's it's more of the same in the fourth quarter. We're just highlighting the fact that we expect that competitive intensity to increase and we believe that we're positioned to respond.
Okay Fair enough and then just a second question on volumes and then I'll pass it on the.
Rick you mentioned that.
Particularly in June I think stocking flow you started to see some encouraging signs that pickup.
Can you speak to maybe just on the new construction side, because that's also a pretty big market number for you guys.
You mentioned early in the call that there was a lot of.
Postponed activity delays are you seeing that coming back or.
Have you seen in cancellations or kind of what's the.
Backdrop in terms of how quickly you think and some of the new construction side of the basis for that could trend back here.
Yes, the new construction.
Brian has been slower to come back as we said they pulled forward some early in the third quarter.
So they drained some of the backlog as they pulled some of that forward.
And all but we are seeing a pick up education were right in the heart of the education construction cycle and that we're seeing good activity in that as well as in the industrial as we've talked about but it is a bit slower than what we've seen in the stock and flow side.
Slide we have not seen cancellation. So the slowness have been project delays retail, particularly have been delays because they don't want you in there.
Others instances, where we came in getting the back office to to get product that they are one to rebalance inventory and so forth because they won't allow anyone.
But employees into their distribution centers in back of the house of their retail spaces. So.
Retail is postponing, but we're not hearing cancellations remember we're much more in the big boxes. So were not as impacted by some of the department the Macy's and some of those stores that are having property bigger challenge surviving through this pandemic.
Area, so not a lot of cancellations really none major cancellation that comes to my mind more delays in postponements on the new construction for broad you've seen the architectural billing index that has dropped significantly.
So there clearly is a slowdown in activity in new construction.
As well so that is slower than the stock and flow here later in the quarter.
Okay.
Thank you for participating in today's call today, I would like to turn the call back over to Mr., Neil Ashe for closing remarks.
Yes, so I'd like to summarize a number one we feel like we educate we operated effectively excuse me during a really challenging market environment and we've attempted to position ourselves to be successful at this level.
Of this level of market demand as well as with the product portfolio that positions us to benefit from a rebound that if and when that that rebound occurs so.
I appreciate all of the work that all of the associates of acuity have done there their dedication in the supply chain in the product areas through a challenging environment has positioned us so that we could we could deliver a relatively good quarter in a really bad environment and positions us well hopefully for the future. So thank you for your interest in our company.
And we look forward to talking to you again soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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