Q2 2021 Acuity Brands Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the acuity brands second quarter 2021 earnings Conference call.
At this time all participant lines are in listen only mode. So if you require operator assistance. Please press star.
Our <unk> zero.
After the presentation, there will be a question and answer session.
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At the.
Please be advised the today's conference maybe recorded.
I'd now like to hand, the conference over to your host today, Charlotte Mclaughlin, Vice President of Investor Relations.
<unk>. Please go ahead.
Thank you Liz.
Good morning, and welcome to the acuity brands 2021 second quarter earnings call.
As a reminder, some of our comments today may be forward looking statements based on management's beliefs and assumptions and information currently available to management at this time.
These lease the subject to known and unknown risks and uncertainties, many of which maybe beyond our control, including those detailed in our periodic SEC filings.
Please note that the Companys actual results may differ materially from those anticipated and we undertake no obligation to update these statements.
Reconciliations of certain.
Certain non-GAAP financial metrics with the corresponding GAAP measures are available in our 2021 second quarter earnings release, which is available on our Investor Relations website at Www Dot investors Dot acuity brands Dot com.
With me this morning is Neil Ash, our chairman.
President and Chief Executive Officer, who will provide an update on our strategy and detailed highlights from the last quarter and Karen <unk>, Our senior Vice President and Chief Financial Officer, who will walk us through this quarter's earnings performance.
There will be an opportunity for Q&A at the end of the call for those participating please.
This limit your remarks to one question and one follow up if necessary.
We are webcasting today's conference call live.
Thank you for your interest in acuity brands I will now turn the call over to Neil Ash.
Thank you Charlotte the good.
Morning, everyone. Thank you for joining us to discuss acuity brands.
Im pleased with our company.
<unk> formats in the second quarter of fiscal 2021, we have delivered solid results, while continuing to make progress on our strategy.
We've improved the way in which we serve our customers.
Expanding margin and allocated capital effectively.
As you know the pandemic has created real challenges over the.
<unk> for for the past several quarters, and we have yet to return to a steady state.
The slowdown last year had of global impact on supply chain and logistics and we continue to feel the impact of this in the economy and our and in our operations that we have continued to have consistent and strong performance. During this time.
As.
Although we are facing some new and existing challenges as demand begins to rebound global logistics. For example continues to encounter issues. New challenges include the global chip shortages and the rising cost of some components.
To be clear these are good problems to have.
We are managing these challenges aggressively.
We look forward and our entire team will work tirelessly to deliver the best possible outcomes for our customers and continued high quality results.
So moving on to the second quarter highlights our team delivered great results this quarter sales.
Sales were down five 8%. However, we saw gross profit margin of 43 four.
<unk> expand the 170 basis points and reported operating profit margin expanded 180 basis points against the prior year the.
For the expansion was largely the result of product and productivity improvements throughout the business and we are very happy with the results of <unk>.
I will speak in more detail about this later on the call.
<unk> as we highlighted in our earnings release, we continue to allocate capital effectively and as of February 28, 2021 had repurchased nearly 10% of our shares outstanding since last may.
Finally in our message to our associates earlier. This month, we announced that we were carbon neutral on our operations I will talk.
For around this later on the call, but I'm delighted that we were able to announce this milestone as quickly as we did.
I know, what's the update you on our ongoing transformation.
I have been at acuity brands for a little over 12 months and what I continue to see every day is the team that is striving for success that is not shy about changing.
And that believes in acuity and where we're going.
It is no secret that I came to acuity because I saw the opportunity for our company to be more than our lighting business, our core lighting and lighting controls business was and is way more durable than the market gives of credit for as evidenced by our performance over the past several quarters.
<unk> and we will continue to transform our business and the broader industry.
We have the best go to market network in the industry and the broadest product line that serve a wide variety of end markets.
We continue to improve the effectiveness of our products and the efficiency of our supply chain through the implementation of new technologies.
We have a valuable.
<unk> growing business in <unk> and in <unk>, we have the potential to build a very valuable technology business. Finally, we have the ability to growth through acquisitions, both on our current businesses as well as the new ones.
And our lighting and lighting controls business, we announced an exciting evolution in the leadership of that business.
Trevor Palmer has.
<unk> <unk> <unk> president.
Most recently Trevor was leading our controls business. He joined the company through the <unk> acquisition, nearly five years ago and he exemplifies the talent that already exist within our organization.
Trevor brings 27 years of industry experience to the role.
Im excited for what Trevor and his team will do with this business going forward.
Has taken during the quarter, we continued to invest in product development, we have introduced new lighting and controls products and improved and evolve parts of our product and solutions portfolio.
And our contractor select portfolio, we saw significant demand for the compact pro high Bay of <unk>.
First of all high Bay that has been of demand as a result of the increase.
The renovations driven by the shift to online retail and the expansion of logistics networks across North America.
The <unk> is a breakthrough product that was designed to deliver improved performance in a smaller size to ensure ease and installation the.
The product uses fewer inputs is more efficient to transport.
In warehouses growth globally sourced and manufactured in our facilities to ensure supply chain flexibility.
Within our <unk> category, we introduced <unk> air with UV technology with you the Angel of technology excuse me.
This product uses onboard $2 54 nanometer technology and circulation.
And of the fixture to locally disinfect air and occupied and unoccupied spaces.
We have installed this product in multiple acuity locations and have specifications being developed with this product and education office and health care applications.
It is worth pointing out that our controls capabilities are a key differentiator for.
<unk> of bustle <unk> lighting solutions.
Our hall of Fame products continue to win bids and infrastructure projects.
We were awarded the order for the re lighting of the Big dig project in Massachusetts that will begin in the second half of our fiscal year <unk>.
Part of the scope of this mandate was to replace existing low cost fixtures.
The success had been installed several years ago, and we're not performing as expected.
All of <unk> is known for its quality and durability and I am pleased we are in the we are the partner of choice to make the necessary improvements.
Throughout the pandemic, we have continued to invest in product vitality, we have maintained the pace and quality of product.
The loss this year, which positions us well for the market recovery.
I continue to be impressed by the agility of our team.
Transitioning to go to market, we are committed to our independent sales network the.
This quarter, we announced the realignment in the northeast that will benefit our customers in the region and nationwide.
<unk> will create a new agency through the consolidation of what were formerly the acuity owned agency in New York, The New Jersey territory and the independent agency in Philadelphia.
This transaction demonstrates our commitment to the independent sales network, which we which we believe to be the strongest in the industry.
By creating this new agency.
We are better positioned to participate in designs and specifications that start in New York and travel around the country.
We are also better positioned to serve contractors, who work in New York, New Jersey and Philadelphia.
Okay.
We continue to make progress with <unk> and atreus.
<unk> is uniquely positioned in the.
We management space built on open protocols and distributed through a network of independent systems integrators.
It has continued to grow throughout the COVID-19 pandemic.
We're also making progress around the product roadmap for <unk>, we are recruiting best in class talent to drive the capabilities in that business.
In early January.
The building.
Sandeep what body of joined the business as Vice President of product development Sandy comes to us from Google Cloud, where he was responsible for the product development team building vertical solutions for the manufacturing industrial automotive power and transportation industries.
We will continue to add talent, the atrium and make progress building unique and.
On valuable technology solutions.
Now I would like to take a few minutes the highlight our progress on the ESG front.
ESG is directly aligned with our values and our business strategy, we care about the environment, our people and our communities.
Our company has been built on products technology.
<unk> and services that deliver sustainability and energy efficiency.
Over the last year, we are focused on our own operations.
Our recent accomplishment of achieving carbon neutrality across scope, one and two emissions in our operations is the result of this work and demonstrates our commitment to continually improving our communities.
We.
Of carbon neutrality, as the result of reducing environmental impacts and our facilities and through investing in carbon offset projects.
Some of the energy efficient improvements made in our facilities can be highlighted highlighted by our crawfordsville, Indiana facility, where we optimized the air compressors installed more efficient belts and added switches to reduce.
Energy consumption.
And by our Conyers, Georgia, and disclaims, Illinois facilities, where we installed our new IBM <unk> and hall of Fame food. The on highway lights and used our atrium building of <unk> technology to conserve energy and improve the quality of life of space.
And in our facility in Newark, Ohio, and which we rebuilt.
Built the glass furnace to improve overall efficiency and which has now completely converted to renewable electricity of win for the environment and the cost savings.
Our priority is the reduction of energy usage in our facilities and for our customers.
We were able to realize the full impact of our energy efficiency improvements we.
We are supplementing with an offset program that is focused on helping the communities where we operate.
We are investing in a series of carbon offset projects in Mexico, Indiana, and California, all communities, where we have a presence.
These projects support energy efficiency and renewable energy options at colleges and universities landfills.
And agricultural sites.
These programs allow us to remove carbon from the atmosphere and balance of our carbon footprint from operations.
While the focus of our recent accomplishment has been environmental we're giving equal prominent to the S and the G parts of ESG simply stated we want to be the place.
We're the best people come to do their best work.
To do this we are continuing to focus on improving the lives of our associates by strengthening our culture and removing the barrier of the barriers to success.
Acuity is proud to be an inclusive company, where we all succeed together.
Finally, we have addressed several issues of.
The governance over the last year by among other things diversifying and restructuring our board of directors and overhauling, our total rewards program, including improving our long term incentive plans.
Moving on to capital allocation as I previously mentioned, we have now repurchased nearly 10% of our outstanding.
The shares since May 2020.
Effectively allocating capital is an important part of how we will create value for our company.
To reiterate our capital allocation priorities are clear.
First to grow our current businesses.
Second to grow our company through acquisitions.
Third to maintain our dividend.
And fourth to create value through share repurchases.
We were able to capitalize on the dislocation in our share price and have been very effective repurchasing shares over the last year.
As we look forward and barring another significant market dislocation, we do not.
Anticipate maintaining this rate of share repurchases.
We will return to our priority of using capital to grow the business.
As we look ahead, we see improvements in the end markets. We serve and we are cautiously optimistic about the outlook for the remainder of fiscal year 'twenty one.
We intend to use the.
<unk> of our product portfolio and the strength of our go to market teams to deliver a solid top line performance.
While there will be global challenges ramping back up we are aggressively addressing them.
We will continue to invest in our business with the intention of becoming a larger more dynamic company.
With that I'll turn the call over to Karen <unk>.
And be back for Q&A and for some closing remarks Caron.
Thank you Neil.
I want to start by echoing Neil's initial comments regarding this quarter's performance our associates pulled together to deliver a solid performance in the fourth consecutive quarter of gross profit margin over 42%.
I am proud of the changes.
And progress we continue to make.
Moving to our second quarter results.
Net sales were $777 million, a decrease of five 8% compared to the prior year, which we believe with the very good performance in this market.
Notably within our sales performance.
Our independent sales network and direct sales network were approximately flat with the prior year as we continued to see strength in medium to large projects offsetting some of the pressure in the commercial office space, which continues to be impacted by the COVID-19 pandemic.
Retail channel sales declined approximately.
24% as compared to the prior year as a result of strong year over year pre pandemic comparison.
This was exacerbated by one of our large customers carrying out an inventory rebalancing, which we believe to be of one off impact.
We expect to see sequential growth in this channel in our fiscal third quarter.
<unk> of 2021.
Finally sales in corporate account declined just over 50% as compared to the prior year. We continued to see large retailers deferred renovation spend as a result of safety concerns resulted from the COVID-19 pandemic.
In the last few weeks there has been.
Indications that these concerns are slowly lifting and we expect to see continued sequential recovery through the balance of the year.
Moving on to the rest of the income statement.
Gross profit margin was 43, 4% for the second quarter of fiscal 2021, an increase of 170 basis.
Over the prior year.
This was an outstanding achievement the.
This outperformance was the result of product and productivity improvements that yielded returns and we believe that this will position us well for any unforeseen challenges.
Given the gross profit margin improvement, we believe attaining a gross profit margin.
The <unk>, 42% is reasonable on an annualized basis.
Reported operating profit margin was 11, 7% of net sales for the second quarter of fiscal 2021, an increase of 180 basis points over the prior year.
Adjusted operating profit margin was 14.
Above percent of net sales for the second quarter of fiscal 2021, an increase of 170 basis points over the prior year.
The majority of this improvement was driven by the higher gross profit margin and continued cost containment efforts, particularly around travel expenses and sales and marketing costs.
<unk> from less in person activity due to the pandemic.
As we continue to demonstrate our ability to drive margin, we will begin to reassess our reinvestment strategy prioritizing systems and software and development as we focus on executing our digital transformation.
As the economy continues to open.
We expect to see travel and other marketing expenses increase throughout the balance of the year.
We are working with our associates to ensure that only essential travel and marketing expenses are being incurred and do not expect to return to pre pandemic expense levels in fiscal 2021.
As previously.
Results. This quarter, we were able to share with our associates that we achieved 100% carbon neutrality within our operations by prioritizing efficiency improvements in operations and some offsetting measures. This is not just an initiative for the management team both Neil and I believe this is the core to the ongoing.
Discuss of the business of the company as.
As part of the offsetting measures, we expect that the of modest SDA investment, but this will not be material.
The effective tax rate for the second quarter of fiscal 2021 was 23, 5% compared with 23, 4% in the prior year quarter.
Success, we currently estimate that our blended effective income tax rate will be around 24% for the full year fiscal 2021.
Finally, we saw significant improvement in diluted earnings per share for the second quarter of fiscal 2021.
Diluted EPS of $1 74.
Increased 30 or 28% over the prior year and adjusted diluted earnings per share of $2 on 12 inch.
The increased 28 or 15, 2% over the prior year.
Moving on to cash flow.
Net cash from operating activities for the first half.
For 2021 was relatively flat at approximately $213 million compared to the prior year.
We invested $21 million of one 4% of net sales in capital expenditures during the first half of fiscal 2021, and currently expect to invest approximately one five.
The fifth sales and capital expenditures.
In the full year of fiscal 2021.
On February 28, 2021, we had cash and cash equivalent balance of $499 million.
I am pleased with the continued solid cash generation over the last 12 months, we have been extreme.
Extremely judicious around the capital allocation decisions.
We continue to prioritize long term growth and believe that reinvestment into the future of the company is core to our success.
We have further committed to maintaining our dividend and being opportunistic around our allocating capital to buybacks.
As a result, we have repurchased three.
<unk> of nine 2 million shares of common stock during the first half of fiscal 2021 for a total of 300 $338 3 million at an average price of $104 per share with $4 4 million shares still remaining under our current board authorization.
Before I turn to.
The replay I would like to introduce the new section of our earnings call going forward I will spend a few minutes reviewing some of the most important conversations around our company and industry and offer insight into how we're thinking about them.
There are three discussions that have been top of mind.
How are we seeing the price increases play out what.
The Q essential impact of commodity price increases throughout the balance of the year.
And one of our plan to deal with the electrical component shortage.
Price increases did not affect our fiscal second quarter earnings. We had previously announced the price increases would go into effect March 15th 2021 across the portfolio.
It is the <unk>, which is the beginning of our third quarter with any of potential effect not being felt until April.
To date, we do not anticipate any drop off in demand as the result of the price increases.
Similarly, our first our fiscal second quarter was not impacted by escalating input pricing.
On.
Portfolio, the first quarter 2021 earnings call and throughout the second quarter, we have been deliberate about changing the conversation around the impact of price and cost as we highlighted last quarter of prior discussion ignored that we as the company control.
The control of several levers within our cost of goods sold structure, our associates understand that it.
All of our obligations to be in control of the relationship between our price and cost.
But from weather raw material prices go up or go down.
The continuous improvement in our gross profit margin demonstrates that the move away from the price next conversation is appropriate and that the discussion around operating the company towards a gross profit.
As Allergan target is the correct lens in which to view our margin performance.
The ongoing improvements had been a result of product and productivity improvement essentially we are reengineering our products to meet the needs of our customers. While also meeting our margin obligations.
Whether commodity prices increase or decline, we believe we can hold.
<unk> profit margin above 42% by controlling what we can control and through the ongoing improvements throughout our business.
Finally, the electrical component shortage is starting to make its way through the supply chain, which will create challenges for the entire industry. We have seen indications that some of our products may experience procurement issues.
Growth, we are working diligently to service our customers.
To wrap up we have seen encouraging signs of improvement in our end markets. Although some challenges still remain and I continue to be proud of our dedicated team.
We are committed to instilling discipline across the organization to ensure the long term stability and predictability.
And with the company and we are to date satisfied with the progress we are making.
Thank you for joining us today I would now like to turn the call over to the operator for questions.
Sure.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question.
The ability for us the pound key.
Our first question comes from John Walsh with Credit Suisse.
Hi, good morning, everyone.
Good morning, John.
Alright.
The first appreciate the extra detail you're now providing in the prepared.
Script.
On that very helpful.
Wanted to kind of use that as a springboard for.
For the first question here.
So I guess one of your competitors.
Was out with additional price increases.
You talked about how the raws really.
Question of it flowed through yet, but do you have both this product and productivity benefit.
You called out can you provide a little bit more color around if you need to get more pricing if you need to kind of pull of the product value engineering lever more or maybe the.
Really activity lever more I mean, where where will that offset come from as you see those raws flowing through.
Yes, John Thanks for the question, obviously <unk> was pretty deliberate about pointing out the team is focused on the relationship between price and cost so.
We are extremely pleased.
Product the with the the benefits that we've seen from the improvements in our products and in productivity and obviously that will continue as we as we go forward. So you saw the benefit of that in the second quarter and that will continue on into the third quarter. An example of that is the compact grow high Bay, where that I mentioned.
<unk>, which which uses less material delivers a higher quality customer experience and an output. So that's what we mean when we say there are multiple levers.
No.
The problem that product is not going to require more steel in the third or fourth quarter. For example, so we will continue to see that as it relates to.
Mentioned, we are our focus right now is on the on.
On the successful implementation of the price increase we already announced so as we as we look forward, we think that relationship and price of cost as Karen indicated on an annualized basis gets us comfortable over the 42% gross margin, which it's worth.
The price, noting is significantly higher on a consistent basis and the company has been in the past so.
So we like where we like where we are going into this process, but as the as we both mentioned this is the ramp up is going to have its challenges. There are there are going to we are the entire industry is going to be working through the.
I would say the.
The supply chain challenges and cost and we feel really good about our team, but it's going to be this is hard work and the team is up for it.
Great and then as of <unk>.
A follow up to that I was just wondering if you could talk a little bit about the.
Competitive nature in the quarter.
The supply we can all see the supply chain bottlenecks and higher freight that maybe some of the Asian imports or importers will feel coming into the U S. But have you been able to use delivery times or other things to actually take market share and is that actually of correct premise.
Or maybe some of the importers haven't been able to fulfill demand.
Well I mean of course, we're going to use John every advantage, we have in the marketplace too.
To deliver the highest customer experience on that is our priority. So is.
That mix too as it relates to service levels, Yes, we have consistently throughout the pandemic. When there were other challenge has been able to to smoothed those challenges to the benefit of our customers and we believe that that is crude to increase market share for us and we will continue to do that.
We will continue to do that going forward and it's worth just.
As it relates to ending one second on the balance in our supply chain. So we have as you know we have about 20% imported from from Asian finished goods.
About 60% manufactured in our facilities in Mexico, and the remaining 20% manufactured in our facilities in the U S.
Just did in Canada, so that gives us more dexterity often than than many of our competitors and we're definitely using that to our advantage.
Great I appreciate all of the color. Thank you.
Thanks, John.
Our next question comes from Ryan Merkel with William Blair.
And then everyone congrats on the quarter.
Thank you Ryan.
So I guess first off can you dig a little bit more into your comments about end markets improving I've heard in some of my checks that agents and distributors of heat backlog of quoting build of the past couple of months. So are you seeing the same thing and what you think of the main drivers.
Sure.
Sure Ryan we've continued to be impressed with how our agents had performed really early on in the pandemic and also as we continue to see improvements on our end markets.
The first quarter, we mentioned that we saw on consistency across geographies and we continue to see that same.
<unk> performance today, just can be very inconsistent across the different geographies that we serve.
We've seen some improvements due to the activity for warehouses and logistics is a really strong areas for us as where as well as K through 12 performance and that's helping us kind of manage where we see some softness in the market.
Per Boe.
We still see some optimism and we're just cautiously optimistic about the ramp up that we're seeing currently.
Okay, Perfect and then Neill can you articulate why you see of growth story in intelligent buildings, just talk about what's changed versus a few years ago and then what are the main use.
Yes.
Yes, Ryan so so.
Let's kind of frame. This first first with <unk> and I mentioned this in my comments, we have an attractive asset thats uniquely positioned in the market from a technology perspective. It is built on open protocols and from a distribution perspective, it's distributed.
The case of independent systems integrators that gives it that gives the take the opportunity to really have present building owners with the opportunity to adapt to a number of different scenarios going forward with atreus. We've pivoted to focus then to really be about the applications largely in the cloud, which deliver real business.
With the two.
Two around buildings around people and around in the independent use cases, which are different than really we can see anybody in the marketplace doing right now for a long time Iot has been a solution in search of a problem in my opinion and what we're really focused on are what are the.
Value locations that can deliver demonstrable value for for our customers. So we're in the cash where in the course of building that out and so over time, what Youll see with this group is youll see a high quality product business in <unk> and of high quality technology application solutions business.
These <unk>, which should deliver continuous.
<unk> recurring revenue and <unk> growth, but as I said <unk> is still an option at this point, we are obviously recruiting for a very impressive talent to two to take this where we're pivoting it to go but it's still early so.
That.
With the April so, but when you summarize that <unk> will continue to grow and Youll see that more later in the year as we provide more transparency and atreus. We believe can can grow to be of meaningful recurring revenue business.
Very helpful I'll pass it on thanks.
Thank you Rod.
Our next question.
That will from Chris Snyder with UBS.
Thank you first on gross margin from can you just provide a bit more color on the sequential improvement in the quarter.
The company called out productivity improvement.
The sharp kind of sequential improvement from and then what level.
Level of pricing improvement, if any is embedded into the 42% plus target going forward.
Alright, Hi, Chris how are you.
Good day.
If we look over the past several quarters for the past eight quarters, we delivered gross profit margins above 40%.
And six of those eight quarters have been above 42%. So you are right. This was a sequentially strong.
Quarter at $43 for but you know as we mentioned we continued to work on price product and productivity improvements and some of those did yield results a bit faster than we expected which really positions.
Thus well for what we see ahead.
Given our current gross profit margin improvement.
We think that we can achieve the gross profit of above 42% for the balance of the of fiscal year.
But I guess on that is there any.
That's for the 42% plus for the balance of the year does that embed.
Or what level of pricing improvement is kind of bad.
Sure.
We announced the price increase and it'll be effective it was effective in March and we will feel the benefits of that probably later in the third quarter. We are focused on full cash.
Capture of the price increase and just taking advantage of the price increase to offset some of the costs that we see ahead of us.
Neil anything you want to add Chris It's just worth noting that we consistently have the highest gross margin in the industry. So this positions us well competitively as we as we look forward. So.
<unk>.
As we've been saying for really every quarter since I've gotten here. We are working on these products and productivity improvements to make this company more predictable and reliable number one and this goes back to the earlier question about the supply chain number one two of customers and in the marketplace. We want we want the entire.
Tire marketplace to know that they can rely on acuity brands to solve their needs and in so doing we've been able to increase the quality and the and the margin profile of our products.
And the how we make them and deliver them, which is delivering these productivity improvement. So as we said there is the ramp back up is going to be bumpy for the entire.
Entire industry frankly for the entire economy. So we don't want to get out in front of ourselves, which is why we've done so much hard work to position ourselves for for where we're going to be for the remainder of the year.
Appreciate that and then.
Yes for the second question.
For the thinking about non res new construction.
<unk> business.
Could you provide some color on when you think.
Revenues there could bottom.
Assuming we have on already.
Just because of when we look at the start data.
The comps returning easier.
It's definitely getting better but.
Given the lighting lag just be helpful for where we're trying to model that out too.
When you guys think that could bottom.
Yes, Karen Karen addressed this in her comments, but.
As we said in the last call. It is helpful to see the disaggregated revenue in our lighting explanation.
Asian, and the the C&I independent sales network has been incredibly consistent at a level through the through the.
Through the pandemic, obviously thats starting to increase and.
Chris that's a that's a combination of a number of different a number of different verticals and.
The products and as Karen mentioned, some inconsistency in round regions across the country. So we think that return will be a little bit bumpy as a result.
The result of that but there is there is no question that there is demand as we look to external kind of indicators, which are kind of spot on.
We've talked.
About this in the past it really is around.
It really is around total construction and as you as you look forward and think about kind of where we're going to be over the next several years.
I just want to emphasize a a really simple yet pretty obvious point, which is that you can't build anything or renovate anything without lights.
So whether it's the highway Abuilding, a warehouse of school hospital and office et cetera of home nothing you can't build anything or change anything without life. So we feel we feel like we have a we have a place to play in in the economy over the foreseeable future.
I appreciate that thanks for the time guys.
Thanks, Chris.
Our next question comes from Jeff Sprague with vertical research.
Thank you and good morning, everyone.
I guess.
If we could just talk about supply chain a little bit more.
Neal so the semiconductor the thing is.
It's pretty well understood.
And this may be obvious and enough of the challenge for everyone. But is there are there any particular other areas where.
You see constraints that youre trying to get ahead of.
And.
Is there.
We don't know knows what the future brings in terms of end demand, but do.
You actually see kind of supply governing.
Your revenue trajectory here as call. It the next two to four quarters.
Yes, Jeff that's a really good question so the the.
Global Chip shortage goes all the way back to the Fabs. So this is this is a visit of problem which spans.
Everyone that impacts largely our controls business. So we're we're we're working our way through that obviously, we're the largest.
<unk> in the lighting business. So we can we can use that to our advantage, but we're small when you compare us to say if the auto industry. For example, so there is.
We will do the best we can and I am confident.
Confident our team is working incredibly hard to and they will do better than than.
Better than most.
As you think about kind of other challenges there are kind of discrete there are some discrete items, which are maybe unique to some of our products, but there isn't this there won't be.
A systemic kind of impact to everything that we do so yes. It will it may create some bumping this in our in our shipments over the course of the next.
Several quarters.
But we are as I said earlier, we're doing the best we can and we've demonstrated we're working really hard on.
We've demonstrated through the pandemic debt will be will be better than most and our team is primarily focused on how can we be as consistent and predictable as possible to two of our customers and end users. So that overtime, we continue to drive preference to acuity.
Great and could you just elaborate a little bit more on this.
The sales agency change.
In the northeast a little more color on what you are.
Attempt to accomplish with this change and is this something that would be happening across the country. If you can get the storms do align how it might impact just kind of the front end of your business would be interesting.
Yes, Jeff its a really good question, so it's worth a little bit of background here the.
New York market was a bit of an odd duck in our go to market strategy and that it was an owned agency.
The only other place we have that is in Toronto and everywhere else, we rely on on on independent sales agents the.
So we saw.
Two things that happened as a result of that first we were constrained in the New York City market on our ability to serve to serve projects where.
Where designers and specifies may want I don't know why they would but may want a product that wasn't made by acuity. So.
So the logic of the.
The independent sales agents is that they can they can they can curate a collection of products that allows us to have a higher success ratio when it comes to bid day and and we can win more projects and as a result of grow market share. So we were pretty hamstrung in the New York market at the same.
The time, we saw that debt we needed to provide some consistency to contractors that did business across New York, New Jersey, and Philadelphia So the.
Effectively from their perspective is the single market and it was ineffective for them to be doing business with multiple of our different agencies. So we see.
We see the consolidation of these agencies as a way for us to better serve the New York design and specification community, which we hope will carry specifications across the country number one and then number two better serve and more consistently serve.
These contractors that are working in New York, New Jersey, and Philadelphia So.
So we feel really good about this it doesn't necessarily portend similar changes across the country, because we don't own any agencies in other in other markets but.
We have been underperforming in the largest market in North America. As a result of this owned agencies. So it was a pretty important for us to get the sorted out.
And then finally I do.
I want to emphasize that this is this is demonstrating our commitment to this independent sales network, which we believe to be the strongest in the industry. We will continue to to to work with the independent sales network to improve their performance and and we will continue to drive for better outcomes for for both of them and for us.
<unk> and.
In other markets across the country.
Great. Thank you.
Our next question comes from Christopher Glynn with Oppenheimer.
Thanks, Good morning, Congrats on the results.
I was curious about capital.
On the repurchase sounds like the.
The.
A high level of purchases kind of done you are quite asset.
Have no net debt cash.
Cash so.
And of shines a light on on.
The pipeline question what are you seeing what of your intense for deals over.
The next day of the year five or so.
Yes. Thanks for the question and your observations are spot on and are a large part of the reason why I'm here in the first place. So so if we kind of do a check in.
We talked about the durability.
Of our lighting and lighting.
Business and the opportunity to transform that business I feel really good about where we are going there we talked about the opportunity and the option to build of technology business with atria and as I indicated earlier, it's still early stages, but we're assembling a rockstar team. There that we believe can can make a real difference which gives us the opportunity then.
And to focus on how can we the company is in a position to process and how can we focus on how to continue to grow the company through acquisition.
That'll that'll flow into two big camps, the first would be bolt on acquisitions to our existing businesses.
So we have a healthy pipeline now of opportunities.
<unk> that are relatively small but.
But we feel like we can do in the foreseeable future around our existing businesses.
And then we will start to turn our attention and it's very early and we don't have a lots of share on this on what other areas, we would invest in post that but our objective as I said earlier was to be at.
The technology company that solves problems in the spaces in light.
And we see the opportunity to expand to additional areas over time, and so I would expect kind of bolt ons for the in the immediate future and then we will start to focus on larger things after that.
Great.
I was curious a lot of border topics in the news lately.
Sure.
The word chaos comes to mind, a little bit I'm not sure of how the maquiladora regions intersect some of the border issues, but.
Could you update us on the security the.
Visibility in.
Factor of.
Just sustaining all your output out of Mexico.
Yes, that's of Great question so.
Let me start at the border and obviously there as we move a lot of product from Mexico to the U S.
We actually.
Risks, we havent seen challenges as a result of some of the stuff that you are referencing in the news we did see them in the when the storms went through that region and Texas Shutoff Natura.
Natural gas to Mexico, which cost US a couple of days of production in Mexico, which was on.
I personally.
We didn't see that one coming but the as we think about the maquiladora is there obviously incredibly important to the economic infrastructure of really all of Mexico and so on.
Our leadership team in.
In Monterrey is is highly visible and highly relevant to the industry group of.
The doors, we meet regularly with.
With the key members of the government there to ensure that there is continuity and we have been for example, really helpful. Excuse me on the <unk>.
Throughout the pandemic on health and safety issues, we've developed them on our facilities shared them with the other.
Of the maquiladora shared them back with the health of Labor Secretary's as we've as we've progressed there. So so I would say that we worked very hard at making that that area of the world as stable as possible for so that we can continue and we feel pretty good about where that stands right now.
Thanks, the answer thank you.
Our next question comes from Tim Wolf with Baird.
Yes.
Hey, everybody good morning, nice net.
Sure.
I guess my first question just on cash.
Productivity.
Could you just I guess give us a little.
Little bit more color of detail about maybe what's really changed on the productivity side, because it sounds like things have and it's always been a lever that's been available of acuity for a long time. So just are you doing just more on the productivity front than before.
Is there more structure or maybe some internal incentives around it internally just just trying to understand.
It does seem like there is more emphasis on that I'm, just trying to understand if there's anything that sort of changed behind the scenes.
Yes, Tim so.
A lot has changed so we've been able to we've been able to optimize our productivity around specific.
Facilities so.
So.
We've consolidated one facility.
We've changed the flow through several of our facilities on the manufacturing side.
It transparently is the result of Covid, we were forced to rethink many many things and so we re architected the cell.
Sales structure to keep people distanced.
And we were able to process the.
Frankly, the same amount of output as <unk> seen with the with a smaller base and and the.
The kind of never missed the opportunity presented in a crisis to improve our to improve our operations and then on the on the distribution side.
Through we've increased the throughput of our of our distribution facilities. So we can process more through on.
On our agent finished goods, we've we've changed how we distribute those so in addition to we've spread the distribution out throughout the country. So that we are.
<unk>.
We're delivering materials from Asia to the east coast as well as to the West Coast. So it's a series of its accumulative series of things and I.
I'd say a lot about transformation around here.
Tim is oftentimes, we think of that they are really things, but the really.
A really large things, but the cumulative impact of small things can be.
Really meaningful and differentiated and I would say that this this.
Both product and productivity improvement point to the accumulation of a number of small things, which have been really impactful.
Okay. Okay. Okay, great. That's really helpful. Thanks for that and then and then maybe on a go forward basis.
Talk about.
The 42% plus gross margin target.
How are you thinking about SG&A and just leverage because the.
That's been a source of opportunity over time kind of pre pandemic you were in the kind of 26 or so percent of revenue as a percentage of sales.
For SG&A and Thats, obviously migrated higher.
With the pandemic.
The 26% still a car.
Obtainable interest through the end markets recover and you don't have to put as much SG&A back into the business.
Yes, Tim that's of Great question, we have been managing costs very closely during the pandemic as you know some of these costs came down naturally as.
We traveled less we held less in person events and as the market comes back we see that starting to increase the bet, but we really are going to manage this carefully and not invest ahead of the market recovery. So we will continue to work with our associates to make sure when they are travelling and when we're doing these marketing events.
That they are the right ones and are delivering a return for us, but I could see a sequentially start to increase just a little bit throughout the balance of the year.
Probably not to the full level of dollar spend that we were pre pandemic.
Okay and from a dollar perspective.
Sorry go ahead.
Yes, Tim I, just wanted to add in to Karen's point, there and we want to prioritize our reinvestment going forward, because and I want to make sure. We put a marker out there that we are going to reinvest going forward and we're going to prioritize a lot of that reinvestment around.
Things, which we consider investments as opposed to expenses predominant.
Dominantly around the.
The software development and other changes that we want to make as part of the transformation. So so we will be adding back some expenses expenses going forward, but we believe those are investments as opposed to spend dollars.
Okay, Okay, great well nice job again and.
Good luck on the rest of the year guys.
Thanks, Tim.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that Star then one.
Our next question comes from Brian Lee with Goldman Sachs.
Hey team thanks for taking the questions good morning.
Most of my questions.
<unk> have been answered, but maybe just could you give us a sense on the.
The new I know you came in with a big for you on the digitalization opportunity here for the company.
Tier three for Atreus type solutions, you sort of alluded to.
Building that out here as well and can you also kind of.
Put that into the context of the corporate channel here, how does the mix shift you guys had been struggling kind of in that channel here through the.
The pandemic, but even before the pandemic it seemed like that channel is.
Was struggling to grow is it fair to assume that a lot of the digitalization opportunities through that channel and just trying to understand.
And where where it shows up in and your New Dakota sort of segment breakouts.
Yes, Brian we have a we've addressed this in the past and so let me just spend a second on on.
On generally what enterprise accounts are obviously the largest accounts we have there are retail accounts the.
We are.
And we've had a lot of success with some of the most important retailers in North America.
The results have been we've said consistently that those results will be inconsistent based on the need for those customers to manage access to their buildings.
And you've seen that throughout the pandemic so a lot.
Of the drop off you've seen and if you look at it on a sequential basis, it's literally a drop off its not a its not a declining curve is the result of the the reality that throughout the pandemic their priority was only having their associates and their customers in their facilities, but as you know these entities.
Can't go on forever without renovation so of retailers are generally on a seven to 10 year ish kind of renovation schedule. So so this will come back and and we are and we will participate in it when it does I think the best positioned in the industry for for that segment the.
The second part.
Of that question that we've said are I've said consistently since I got here is that what's interesting about the luminaire and lighting is that it's a capital efficient way to introduce technology to spaces.
And by that it's the the incremental cost of the technology is relatively low and the real cost is is around the installation.
<unk> of that technology, and the changes necessary in that process. So when you are renovating it is a very efficient time to introduce new technology into spaces, which we have done and we will continue to do going forward.
And then so you will see the manifestation of that to your question as we think about the lines of business through.
Through sales of Atreus enabled <unk>.
Luminaire and lighting control products through and products through the ABL channel as we start to develop applications, which drive business value you will see those applications show up in atreus and see those in our spaces and the.
Conversation about our space It's group so.
So the synopsis of that is that lighting and luminaries in the renovation opportunities around them provide of capital efficient way to introduce net new technology to spaces will benefit from that by having the highest quality technology and then second we will use.
Of that technology to power as a part of the powering of applications, which which deliver.
The business value to our customers through atreus.
Okay, Great. That's helpful. And then maybe just a quick one I know the ink is not even dry on this but have you guys had a chance to sort of sift through.
Through the.
President of <unk> infrastructure agenda, I think he is out this afternoon.
Outlining in the speech, but the white house has put out some.
High level of markers around different parts of the package here any impact of tailwind that you'd be anticipating from what you've seen thus far.
Yes. Unfortunately, we haven't had the time to dig through it.
Obviously, the if that were to happen it would be of benefit for the for the economy and as I mentioned earlier, it's impossible to the impossible to build anything without lights, so whether it's the highway or school were a.
VA hospital as the tree tops view I saw earlier. This morning, all of those things will will need license. So.
We will continue to use this.
As an opportunity to drive our product and productivity improvement so that we're best positioned for for whatever that ends up being.
Alright.
Thanks, a lot of I'll pass the line.
Okay.
Our next question comes from Jeff Osborne with Cowen.
Yes. Good morning, just one question on my end I was curious if you could update us on what the status of the UV lights any momentum there with the acquisitions you've done in new product introductions.
Yes.
Thanks, Jeff.
We are now officially in the market with those as I mentioned earlier around the $2 54 nanometer.
And lights.
<unk>, which are interesting and I didnt explain the perfectly but they include the $2 54 nanometer technology they circulate.
The late are above the fixture too so that they work in a situation where people are present or not present, which is unique for the $2 54 nanometer technology.
That's now in the marketplace.
We've obviously as I mentioned, we're we're eating our own cooking, so we've installed that throughout our.
Our supply chain facilities and.
And it is having a positive impact so we expect kind of revenues in the third and fourth quarter from from that going forward and then.
The layer and the rest of the the rest of the products that we that you've heard us mentioned before.
Perfect Thats all I had thank you.
Thanks, Jeff.
That concludes today's question and answer session I would like to turn the call back to Neil for closing remarks.
Thank you Liz we're pleased with our results in the second quarter. Our team is hard at work of dealing with the challenges that we've been discussing of ramping up and our focus will remain on serving the needs of our customers and on delivering quality results. So I'd like.
Thank you all for joining us today as we said, we will be providing deeper insight into our lines of business. Later this year and we intend to host an investor day. So please sign up at the Investor website and be in touch with Charlotte and for updates and we'll announce that date soon so with that thank you for your time and thank you for your interest.
Interest in acuity brands and we hope you have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Of course.
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