Q4 2021 Acuity Brands Inc Earnings Call

October 6, 2021

[music].

Good day and thank you for standby welcome to the acuity brands fourth quarter full year 2021 earnings conference call.

At this time this pits are in listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to Charlotte Mclaughlin, Vice President of Investor Relations. Please go ahead.

Thank you Shannon good morning, and welcome to the acuity brands fiscal 2021 fourth quarter and full year 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 beliefs are 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 company's actual results may differ materially from those anticipated and we undertake no obligation to update these statements.

Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2021 fourth quarter earnings release, which is available on our Investor Relations website at Www Dot investors don't 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 in the last 12 months.

As well as Karen <unk>, our senior Vice President and Chief Financial Officer, who will walk us through our earnings performance.

There will be an opportunity for Q&A at the end of the call today's participating please limit your remarks to one question and one follow up if necessary.

We are webcasting today's conference call live.

Thank you for your interest in acuity brands I will now turn the call over to Neil Ash.

Thank you Charlotte and good morning, everyone and thank you for joining us to discuss acuity brands.

I am pleased with our company's performance in the fourth quarter of fiscal 2021, and a challenging global supply chain environment. We grew sales of 11% and expanded our gross profit and operating profit margins.

Our performance demonstrated our focus on product vitality and customer service.

We allocated capital effectively by closing the acquisition of <unk>, North American digital business and have created permanent value for our shareholders through the repurchase of company shares.

2021 was a pivotal year for us as we advanced our corporate transformation and I'd like to take a few minutes to recap some of those achievements.

We returned the company to growth.

<unk> grew sales in the third quarter.

Fourth quarter and the full year and we expect this growth to continue.

We expanded gross profit margins for the full year, despite a challenging global environment.

We realigned our businesses into ABL or acuity brands lighting, and lighting controls business and ISG, our intelligent spaces group.

This alignment creates the necessary.

<unk> on each business and allows us to develop the leadership teams that will deliver on their potential.

We generated strong cash flow and allocated capital in a way that creates permanent value for shareholders.

We held our first ever Investor day.

We built a strong and diverse leadership team and are attracting new talent throughout the organization.

Our continuing improvements around ESG, our central tenets to our strategy, we have made significant progress by reaching carbon neutrality in our operations and by committing to the reduction of a 100 million metric tons of carbon from are put in place products and services by 2030.

We've made progress on diversity equity and inclusion and on governance.

And you can read more about all of this in our upcoming 10-K, our annual report our annual Earth-like report and our proxy.

And finally, we have positioned ourselves well for 2022 and beyond.

Okay.

I now want to update you on our ongoing transformation and each of our businesses and I'll start with ABL.

We've had a good year in ABL or.

Our focus on innovation through product vitality, and increasing our service levels for the benefit of our customers has delivered strong results.

And we are continuing our efforts to drive our product expansion the.

The compact pro High Bay, which we've discussed before continues to look to deliver from both a revenue and margin perspective, and the high growth industrial sector.

Our product vitality efforts include improvements to existing products and the introduction of new ones.

In the fourth quarter, we introduced the home Guard led security Floodlight. It is an exciting addition to our contractor select portfolio.

This new platform offers a technology upgrade higher efficacy greater safety options and ease of installation installation.

Sales have been strong we're off to a great start in a category, where we currently have low share and strong growth opportunities.

We are also continuing to increase our service levels and deliver productivity improvements.

We are using better smarter faster to improve our processes and our technology for better more efficient customer service.

Today I'd like to focus on agile.

Agile is our commerce platform that is used by our channel for all of the key steps that they need to do business in lighting and lighting controls from finding products to creating solutions for large projects to bidding on those projects to placing the orders and finally tracking those orders to completion.

Our team is constantly improving agile one of our key areas of focus has been to improve the quality of the product data that we provide.

This improvement provides many tangible benefits, including ease of use and improved order accuracy.

Another area of focus that I've spoken about before is order status I bring this up again because it has been essential during this complicated period, we were able to provide clearer information to our channel about their order status, which allows us to better meet their needs in the face of the global supply chain challenges.

These examples address significant historical pain points, and our foundational which allow us to improve our service levels today and in the future.

As we enter 2022, the priorities for Trevor and the rest of the ABL team remain the same.

Maintain high product vitality kantar.

Continued to elevate our service levels and continue to use technology to differentiate ourselves.

Okay.

Now moving to the intelligent spaces group.

The mission of ISG is to use technology to solve problems in spaces by making them smarter safer and greener.

We believe that each of these provides ample opportunities for future growth.

This tech controls as a collection of open Paul opened protocol products necessary to effectively operate spaces.

<unk> provides applications, which use data to deliver value in those spaces.

We are having success across Europe, and North America, with our <unk> platform, especially around campuses datacenters and spaces that require a significant amount of control around the operation of the facilities.

We continue to add products to this ISG portfolio.

During the quarter, we added the eclipse connected thermostat and open protocol device that reduces installation costs helps manage energy costs and improves the comfort of spaces.

Now before I turn the call over to Karen I would like to conclude with thoughts on our transformation and the opportunity ahead.

In the face of a challenging global environment, we have demonstrably improved our company and its performance.

We have demonstrated our ability to grow sales through innovation and our ability to service our customers.

We've improved our gross profit margins through product and productivity improvements.

We have improved our operating profit margin by leveraging our costs.

We have allocated capital efficiently through reinvestment in the business acquisitions and share repurchase.

We have the talent and the tools to build upon the operating strength, we have developed over the last 18 months.

Okay.

As we look forward, we expect to continue this performance.

We are strategically positioned at the intersection of sustainability and technology.

We have assembled a world class team.

We have demonstrated the ability to both build and acquire businesses.

We have strong organic cash generation and we have demonstrated that we know what to do with it to create value.

Now I'll turn the call over to Karen who will take a deeper dive into our performance and outlook for 2022, and then I'll be back for Q&A and closing remarks.

Thank you Neal.

I wanted to start by recognizing the accomplishments of the team this year.

Please no progress on our transformational priorities improve the financial performance of the business and continued to thoughtfully allocate capital.

Our fourth quarter performance was solid net sales were $992 million, an increase of 11% compared to the prior year.

This performance was driven by strong customer demand improved execution across our go to market channels and the addition of the awesome acquisition, which added approximately 200 basis points.

Gross profit margin was 42, 2% for the fourth quarter of fiscal 2021, an increase of 10 basis points over the prior year.

By rising cost from raw materials, electrical components supply chain interruptions, and a significant escalation of freight costs.

We were able to offset the increased cost with higher sales volume product and productivity improvement and a benefit from price increases.

I am extremely pleased with the team's execution around our gross profit margin.

Led to such a great result in a volatile cost environment.

Reported operating profit margin was 13, 4% of net sales for the fourth quarter of fiscal 2021.

An increase of 150 basis points over the prior year.

Adjusted operating profit margin was 15, 8% of net sales for the fourth quarter of fiscal 2021.

An increase of 110 basis points over the prior year.

The majority of this improvement was driven by the higher gross profit margin and leverage of our operating expenses.

The effective tax rate for the fourth quarter of fiscal 2021 was 21, 9% compared with 24, 5% in the prior year due to the impact of several discrete items.

Finally, we saw significant improvement in diluted earnings per share for the fourth quarter of fiscal 2021.

Diluted EPS of $74.0 inch.

Increased 85, or <unk>, 46% over the prior year and adjusted diluted earnings per share of $30.0

Increased 92.

439% over the prior year.

Our share repurchase program favorably impacted diluted EPS by <unk> 24 versus the prior year.

Before I move onto the segment results I want to highlight a few numbers and our full year 2021 operating results.

Net sales were $8.0 billion in.

An increase of 4% compared to the prior year driven by improved sales performance in the second half of 2021.

We delivered a full year gross profit margin of 42, 6% an increase of 40 basis points over the prior year.

Reported operating profit margin was 12, 4% of net sales for fiscal 2021, an increase of 180 basis points over the prior year with adjusted operating profit margin at 14, 6% for fiscal 2021, an increase of 90 basis points over the prior year.

The effective tax rate for fiscal 2021 was 22, 7% compared with 23, 5% in the prior year.

We expect this rate to be approximately 23% for the full year in fiscal 2022, excluding any unusual discreet items.

And assuming no change to the corporate tax rate.

Diluted earnings per share of $46.0, with a 34% increase over the prior year and adjusted diluted earnings per share of $27.0

With a 23% increase over the prior year.

We had $42.0 million diluted shares outstanding outstanding during fiscal 2021, with our share repurchase program favorably impacting diluted EPS by <unk> 57 <unk>.

Versus the prior year.

Moving on to our segments.

During the quarter, the lighting and lighting controls segment delivered a sales increase of 11% versus the prior year.

This was driven by improvements within our independent sales network, which grew approximately 10%.

And the direct sales network, which grew about 15% in the current quarter as a direct result of our strong go to market efforts as well as recovery in the construction market.

Our corporate accounts channel continued the positive momentum and solid increase in sales of 16% compared to the prior year as large retailers move forward with previously deferred renovation spend.

The performance in this channel is dependent upon our customers' renovation cycles and can be uneven quarter to quarter.

Sales in the retail channel declined approximately 20% as compared to the prior year and we will continue to be impacted through the remainder of the calendar year as a result of a customer inventory rebalancing. The retail channel continues to be an attractive channel for acuity.

During the quarter, we closed the acquisition of <unk> business the.

The acquisition contributed around 200 basis points of growth to ABL revenue and we expect a similar level of impact in 2022.

Now moving to ABL operating profit for the fourth quarter of 2021, which increased 23% to $149 million versus the $122 million in the prior year with.

With operating profit margin, improving 150 basis points to 15, 8%.

Adjusted operating profit for the fourth quarter of 2021 improved 21% versus the prior year with adjusted operating profit margin, improving 140 basis points to 16, 8%.

2021 was a year of improvement to summarize the full year. The ABL business saw sales growth of 3% to $6.0 billion versus the prior year and an improvement across profitability metrics.

Operating profit for the full year increased 12% to $476 million versus the prior year with operating profit margin, improving 110 basis points to 14, 5%.

Adjusted operating profit for fiscal 2021 improved 10% to $515 million versus the prior year and adjusted operating profit margin improved 100 basis points to 15, 7%.

Now moving onto the results for our intelligence basis growth.

For the fourth quarter of 2021 sales in spaces increased approximately 24% to $51 million, reflecting continued demand with strength across our building and HVAC controls.

Basis operating profit for the fourth quarter of 2021 increased $9.0 million to $2 million versus the prior year.

Adjusted operating profit for the fourth quarter of 2021 of $6 million was $12.0 million greater than the prior year as a result of continued sales growth.

This space is team had a great year we.

We've recruited an incredible leadership team and broke the business out into a standalone segment.

The team ended fiscal 2021 with sales growth of 21% to $190 million versus the prior year.

Operating profit increased $21.0 million to $18.0 million versus the prior year.

And operating profit margin of five 2% for fiscal 2021 improved.

770 basis points versus the prior year with adjusted operating profit margin, improving 400 basis points to 13, 5%.

Now turning to cash flow.

We continue to generate solid cash flow.

Net cash from operating activities for fiscal 2021 was $409 million.

This was a decrease of $96 million or 19% compared to the prior year largely due to the increase in working capital needed to support the higher level of sales.

We invested $44 million or one 3% of net sales in capital expenditures during fiscal 2021, and we continue to believe that capital expenditures of around one 5% of net sales is an appropriate annual level as we head into 2022.

We continue to allocate capital effectively by prioritizing growth investments.

M&A.

Maintaining our dividend and creating permanent value for shareholders through share repurchases.

During the year, we repurchased approximately three 8 million shares of common stock for $435 million at an average price of $114 per share.

We have around $11.0 million shares still remaining under our current board authorization.

I would now like to spend a few minutes reviewing some of the most important conversations around our company and offer insight into how we are thinking about them.

This is a complicated global environment and input costs have been changing frequently for example freight costs.

Like to use this as a window into how we are managing these challenges.

We balance our long term freight contracts, which are favorable costs with additional capacity at current cost to deliver high levels of service to our customers we.

We have passed along some of these costs through price increases and we're balancing delivering on our margin expectations and delivering on our most important promise, which is to be the company, which our customers can rely upon.

As we head into 2022, we are confident in our businesses and in our team.

We expect ABL to grow net sales in the high single digits for the full year of 2022.

We expect the ISG to deliver net sales growth in the mid teens.

We expect a 42% plus annualized gross profit margin for the full year of 2022.

And we believe we can continue to leverage our operating costs as we increased net sales.

Finally, we will continue to allocate capital effectively.

We are transforming our business and focusing on our customers our investors and our associates.

We enter 2020 to a much stronger company and with clear opportunities.

Thank you for joining us today I will now pass it back to the operator to take your questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Tim <unk> with Baird. Your line is open.

Hey, everybody good morning, and nice job here.

And the physical.

I guess, maybe just to start.

Topic does your is it really the supply chain and it looks to us that maybe you've managed it really well if you can maybe talk through a little bit just some of the key pain points that youre seeing from a supply chain perspective kind of what components are tightest and how you're managing some of the kind of trans Trans Pacific kind of <unk>.

Transportation issues.

I guess, we hear kind of broad chip constraints, but I guess I'm curious how broad that pressure is through the chips that you thought you actually buy.

Yes, Tim Thank you and thank you for the comments and thank you for the question. Obviously. This is this is the topic of the day as you point out this is probably a challenging global environment as any of us have seen.

Certainly and as long as we can remember.

As we think about.

Karen used freight as an example, we have seen we haven't seen a consistent either.

One directional price increase on all of our commodities number one or number two consistent lack of availability on commodities.

So it's been a moving target really throughout the process and we expect that all to continue basically through the next at least 12 to 15 or 18 months.

Our adaptability to that has been key to us delivering most importantly, the ability to ship to customers and then secondarily the ability to deliver on margin as we look through to to what has been most challenging as you point out chip constraints are a broad term.

And obviously, we have a lot of different chips that we use a different products and that too has been a little bit of a moving target.

Got out in front early with some of our suppliers and partners and we've worked hard to be a good partner to them through this process, which is we've tried to give them as clear a direction as to what we need as possible and so what that's allowed us to do is be more predictable for them, which has allowed them to be more.

For US now those challenges have impacted us in different ways. So for example.

We would make a a sensor which has a certain chip and we might be down for a week on the development of that sensor, which holds up some of our orders, but we've been able to sequence those such that we have delivered the results that you've seen now this as I pointed out we don't expect the world to get any better in the foreseeable future. So we are using.

All of the levers we have to continue to prioritize as I said earlier, one to be as Karan use the expression b the customer be the partner that our customers can rely upon and second to to.

To meet our margin expectations, okay. Okay. That's great.

And then maybe just kind of as a follow on on pricing is there any way to provide some context around pricing.

I noted it wasn't really like the primary driver of kind of the offset.

That you.

You had to some of the cost headwinds. So I guess what was the benefit in the fourth quarter and how are you thinking about the contribution from price to revenue growth in fiscal 'twenty two.

So we've been able to get price Tim.

And.

And we're starting to see the benefit of that a little bit in the fourth quarter to impact to mitigate these these cost increases and.

And as you will remember the industry has has gone through a series of collectively has gone through a series of price increases we've done three and we're seeing the benefit of that and obviously those will be cumulative and they will layer in later.

The further along we get so obviously, our channel are placing orders today, which turns into backlog for us which turns into shipments later and finally net sales. So youll see youll see us trying to balance that relationship, but as I said on the last call and I want to emphasize this point is we're trying to be.

The company that our customers can rely upon and that means we ship on a regular basis and we are as predictable as we can be for them around what their costs will be as they plan their projects to to grow. So we are able to get we are getting price. It is having it is having an impact which is mitigating some of the impact.

Of the.

These cost issues and and we're also obviously improving our product and productivity improvements to also contribute to the to that performance.

Okay great.

Congrats again and good luck on fiscal 'twenty two thanks, everybody.

Thank you. Thank you.

Our next question comes from Rigel with William Blair. Your line is open.

Hey, everyone. Thanks for taking the questions.

Good morning, Ryan.

So I guess just to follow up on gross margin what are some of the bigger pluses and minuses for fiscal 'twenty two the aimed at 42% obviously passing along price is one but what are some of the other key key drivers.

Karen you want to take that sure yeah, Brian as we mentioned we do have price is one of our levers that we use to offset the rising costs. It's not the only lever we focus heavily on our product and productivity improvements we've used the compact pro High Bay as an example of things that we do.

To our portfolio to remove cost to make it more efficient to make it easier for the customer to install and that ultimately impact impacts our profitability. We also work with our supply chain to improve productivity of their performance. So there is a lot of different levers that we're using and then finally, we will get some benefit.

From the sales growth as well as we're able to leverage some of the volume across our facilities.

<unk> build on that to put in context kind of where we are in the transformation. So as I got here I focus the company and you on on gross margin to demonstrate that we could manage price cost relationship and I believe that we've done that and in what has obviously been a very challenging environment. We're also now.

As we have returned the company to growth as Karen mentioned, we're demonstrating the ability to leverage costs and increase our operating margins as well so.

Still good with where we are and we will start youll hear us start to talk more and more about.

Operating profit and EBITDA and cash flow as we as we look forward.

Okay.

Very helpful. Okay, and then second question I guess, it's a two part question on China. So can you remind us what percent of sales and what percent of Cogs import from China, and then secondly, do you expect any shortages as China's facing a power crunch and some of the factories just arent running.

Seven days a week.

Yes, that's a good question so.

First of all.

We have a pretty dynamic supply chain so the.

We just we don't breakout specific numbers, but directionally think about like 20% from Asia, 60% in Mexico, and 20% in the U S and Canada. The rest of North America. So we have some dexterity and our supply chain that that we use to our benefit in.

Well really always but especially in times like in times like these part of what we're developing with our new.

Our new product portfolio is as we've increased vitality. We have also increased this dexterity. So that those products can be manufactured some in the same products can be manufactured both in Asia and.

And North America.

At the moment, our key constraint is access to containers and which is why Karen brought up freight I think everybody's everybody's dealing that dealing with that is as she indicated we we've obviously planned in advance for that and so we've locked in both availability and price for certain period to now where we're accelerating some of that.

As we look out.

Let's add this let's say China power issues to the 768 other ways that the supply chain is being impacted by these global challenges and will adapt to that the same way, we're adapting to all the other challenges.

Perfect I'll pass it on thanks next quarter.

Thank you Keith.

Our next question comes from Christopher Glynn with Oppenheimer. Your line is open.

Yes. Thanks, good morning, Congrats on a great year.

Curious.

The.

Demand environment generally appreciate the segment top line guidance is as we looked at.

Linearity.

Moving into the new quarters.

Kind of just use normal seasonality as a guide or any other key prevailing puts and takes.

Yes, Chris Thanks for the thanks for the question.

The level of demand will mildly mitigate the normal seasonal impacts so so I think youll see.

We will see some higher a little bit higher growth in the first part of the year and where we have more clarity and we will see for the back half of the year.

That's part of the reason, we provided outlook for the full year and.

And our expectation is that given kind of where the state of the world number one.

Kind of nothing is normal at this point so.

The number one and number two is we're adapting as as you can see through our performance and so.

While the.

We'll get to a new normal at some point, we are not quite there yet so on the broader demand question. Obviously the outlook, we provided for the lighting and lighting controls business demonstrates that that we feel good about.

Our business and where it's going to be for for the full year and we will work through.

Work through a series of steps along the way to get there in quarters. Some some will be a little bit higher and probably we expect some will be a little bit lower but we will we will get there.

Okay and my follow up is just on <unk>.

Kind of margin puts and takes but clearly things got worse since your third quarter and the.

Macro in particular August September.

<unk> had a little help on the timing of your.

Fiscal year relative to how people will report later in the month. So just curious you do also have ramping price realization do you see the net net of.

Incremental supply chain logistics challenges and incremental price kind of.

Because your best call kind of a neutral on the sequential.

So Chris let me debate your your premise so when we when we presented gross margin in the second quarter. We highlighted that we have the highest margins in the in the industry by buyer margin and we delayed our price increases as a result.

And now Youre, starting to see US do do two things in tandem, which is one realized price and to mitigate the impacts of of cost changes, which as Karen indicated are volatile there not straight line in one in one direction or the other but I don't think our performance is.

Is different based on a month, so so I'm not I'm not sure that that's that's accurate having said that as we look forward we balanced.

The year going forward around the expectations that Karen outlined so ABL will continue it will continue to grow in the high single digits ISG will continue to grow in the mid teens and we will continue to deliver around the 42% greater gross margin, which is the demonstration of us.

Managing that relationship and then finally, we've we've demonstrated we can cash the check is that as the company gets larger so we're turning those net sales into into profits and cash flow and thats ultimately, how we create value will grow net sales, we will turn it into cash and we will grow the balance sheet not as fast so that's.

That's our that's our long term model for value creation.

Thanks for the color.

Thank you. Our next question comes from Snyder with UBS. Your line is open.

Thank you I also wanted to follow up on the gross margin comments.

For next year is 42% plus which is basically in line with <unk>.

Q4 levels.

Can you maybe talk about the quarterly cadence here it feels like over the next couple of quarters.

Cost pressures, increasing and maybe get some back half relief is that.

Is that the cadence that we should expect with gross margin and could we see quarters below 42, and then others above 42 that kind of shake out in that 42% plus.

Yeah, Hey, Chris.

Thank you for joining us today for.

For the full year, we do think a 42% plus is achievable, but as you said there will be some volatility.

Between the quarters with.

With our sales increase we'll get leverage from the higher cost will have timing of the benefits of price increases and then we're continuing to manage through the price the cost increases that we see.

Talked about earlier, we have some benefit from contracts that are locked in over the longer term, but we still have to buy things on the spot market, which can be very volatile. So you will see variability in our focus is really managing for the full year to that 42%.

Appreciate that and then with cost pressure picking up here over the next couple of quarters. It feels like the commodity realizations, probably higher some of these I am assuming some of your long duration freight contracts are likely going to reprice higher.

I guess on the price offset so I know the company did three price increases.

Is it that the one I think the one we saw in July is that not fully shown through yet.

Because I believe the September one was a bit more targeted and I guess is it just that that comes through on a lag even though costs are going higher in subsequent quarters pricing is getting any.

Incrementally better even if you guys don't put it in further price increases so sorry, if thats the case.

No I think I understand what you're asking now as Neil said, we do have a backlog. So some of the backlog will have different impacts of the price increase that we had our first price increase announced in March which was impacting late in the fourth quarter very very little and we saw some of that realization in our results. This time the.

Other two price increases.

If you will sitting in the backlog and then we will then translate into shipments and net sales as we go in to fiscal 2022, So that's where you see a little bit of that timing difference certainly we didn't see the benefit of all the price increases that we've announced in the fourth quarter and do expect that to increase sequentially as we head into next year.

Thank you.

Okay.

Our next question comes from Jeff Sprague vertical research your line is open.

Thank you and good morning, everyone.

I was wondering if you could just speak a little bit.

Can you kind of just the customer conversation and the and the mixed dynamics that youre seeing in the business that it was interesting that the renovation side of the equation and deferred maintenance might be coming back is there something.

Kind of more ongoing to glean from that.

Whats your initial conclusion on that.

Yes, Jeff that's a great question.

As a as an interesting anecdote there is a construction project in the office above US right now that we had to go get shutdown for the Cogs because you wouldn't have been able to hear it. So so it turns out office renovation at least in the Atlanta market is strong.

I would say that the trends that we identified before.

Have continued so the high growth areas around industrial for example, where there is a lot of new investment have.

<unk>.

Have continued.

<unk> seen as Karen indicated through the through the disaggregated revenue, we've seen strength pretty much across the board through our channels, which.

Which means that there is strength in really all of the main categories. So demand has not been an issue for us and we don't think it's going to be an issue for us for the foreseeable future.

Are there any other verticals.

Point out you touched on industrial a couple of times just known in your opening remarks.

What about education health care et cetera is there any other kind of discernible trends emerging.

Yes, it's a good question. Thanks for thanks for following up and let me dive in a little bit deeper there yes.

<unk> has been very strong obviously that will be seasonal now going forward, but we continue we expect that to continue to be strong and we're well positioned for what we expect to be strength in the next season four for education.

Healthcare as it is is a place where we have the opportunity to gain more share. Obviously, there is strength there and we highlighted the <unk>.

Home Guard led light because obviously, that's an area, where we have the opportunity to take share and theirs and we have a relatively low share to begin with so where.

I think one of the key strengths of our business is that we have a broad footprint, which allows us to to participate where there is strength.

And that strength is in the places that you would you would expect the only thing that I would say that we're probably maybe our expectations slightly different is as we indicated earlier.

Where I joked about the office upstairs. The renovation market. We think is going to be there going forward and we're positioned well for that as well.

I'm sorry, just one quick house cleaning one just wondering disaggregated revenues would be awesome revenues pretty much be proportionally running through each one of those maybe perhaps six ex retail how do we think about that.

You see the ostrom retailed in the other channel and the ABL Disaggregated revenue line.

Thank you.

Youre welcome.

And our last question comes from the Walsh with Credit Suisse. Your line is open.

Hi, good morning, everybody and nice quarter.

Thanks, John Thank you.

I guess, maybe the first question is it looks like inventories ticked up sequentially. Obviously, you had good growth this quarter better than we were all modeling youre talking about good growth. The first half of your fiscal 'twenty two.

Could you maybe talk about if you were building some buffer inventory there. So that you get ahead of.

Any kind of incremental change in the supply chain or if that kind of stuff that is going out the door for maybe some of your customers I don't know if that would fall under corporate or or somebody else there and the disaggregated revenue.

Yes, John there's two things going on in inventory one would be exactly what you described we are trying to build a little bit ahead for inventory to service the demand that we see so you see a little bit of impact of that in the quarter, but you also see the addition of the ostrom inventory so that.

That's also coming through in that inventory line is the inventory that we purchased with the acquisition and the components that go into making this product.

Days days are only up because of the ostrom days on the other portion of the business are steady.

Got you, Okay that makes sense and then.

You talked a little bit you've talked a lot about supply chain.

In an earlier question you did highlight how you both have.

Your operations your manufacturing in Mexico and.

States can you talk about kind of your labor availability in those different regions. If you are seeing anything different.

I think most of us might not be as close to the Mexico labor markets, but yes.

Obviously, the U S labor markets are very tight right now.

Love to understand kind of the dynamic there and what youre seeing from your own operations.

Yes, John Let me, let me address that one so first on the U S labor market. The labor market is tight as you as you indicated.

My view is that people.

All people are taking a step back as a result of of the impacts of the pandemic and the general changes in their lives and saying kind of what do I really want to do.

And so we're aggressively working to to be the place where the best people want to come because they can do their best work and that for US is everybody whether youre a maintenance employee at one of our manufacturing facilities that sell operator.

Our focused factory manager distributions employee driver et cetera, So that's tight so.

So availability has been tight and there will be wage inflation over the course of the next year or so.

We're currently working through that but we were paying hypertension to that.

Mexico, we have a larger presence there obviously, we've been a leader in IDEXX, which is the which is the maquiladora group of companies down there around the Covid response around vaccination and around kind of the general experience of of our.

Our associates, there and so we feel really we have a strong.

We have a strong bond with our associates there and we've we've not had the same labor tightness there that we have.

I think everybody has seen in the U S.

Great really appreciate the detailed responses. Thank you.

Thanks, John.

Thank you I would now like to hand, the call back over to Neal asked for closing remarks.

Thank you all again for joining us and thank you for your interest in and acuity, we feel like that that our fiscal year. Just completed in August is is a really important milestone in the transformation of the company.

As we indicated we returned the company to growth we've demonstrated the ability to to deliver margins. We've demonstrated the ability to leverage our expenses as we grow our net sales and we are confident about both of our businesses ABL the lighting lighting controls businesses and ISG the spaces group and so.

We expect this to continue to be a challenging global environment, and where we are pleased with our position in it going forward. So thank you for your time and we'll look forward to catching up with you and in a few months.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by welcome to the acuity brands fourth quarter full year 2021 earnings conference call.

At this time as pets are in listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you apply any further assistance. Please press star zero.

I would now like to hand, the conference over to Charlotte Mclaughlin, Vice President of Investor Relations. Please go ahead.

These beliefs are 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 company's actual results may differ materially from those anticipated and we undertake no obligation to update these statements.

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 for the last quarter in the last 12 months.

As well as Karen <unk>, our senior Vice President and Chief Financial Officer, who will walk us through our earnings performance.

There will be an opportunity for Q&A at the end of the call today's participating please limit your remarks to one question and one follow up if necessary.

Our webcasting todays conference call live.

Thank you for your interest in acuity brands I will now turn the call over to Neil Ash.

Thank you Charlotte and good morning, everyone and thank you for joining us to discuss acuity brands.

I'm pleased with our company's performance in the fourth quarter of fiscal 2021 and.

In a challenging global supply chain environment, we grew sales, 11% and expanded our gross profit and operating profit margins.

Our performance demonstrated our focus on product vitality and customer service.

We allocated capital effectively by closing the acquisition of <unk>, North American digital business and have created permanent value for our shareholders through the repurchase of company shares.

2021 was a pivotal year for us as we advanced our corporate transformation and I'd like to take a few minutes to recap some of those achievements.

We returned the company to growth.

We grew sales in the third quarter, the fourth quarter and the full year and we expect this growth to continue.

We expanded gross profit margins for the full year, despite a challenging global environment.

We realigned our businesses into ABL or acuity brands lighting, and lighting controls business and ISG, our intelligence spaces group.

This alignment creates the necessary focus on each business and allows us to develop the leadership teams that will deliver on their potential.

We generated strong cash flow and allocated capital in a way that creates permanent value for shareholders.

We held our first ever Investor day.

We built a strong and diverse leadership team and are attracting new talent throughout the organization.

Our continuing improvements around ESG, our central tenets to our strategy.

We have made significant progress by reaching carbon neutrality in our operations and by committing to the reduction of 100 million metric tons of carbon from are put in place products and services by 2030.

We've made progress on diversity equity and inclusion and on governance.

And you can read more about all of this in our upcoming 10-K, our annual report our annual Earth-like report and our proxy.

And finally, we have positioned ourselves well for 2022 and beyond.

Okay.

I now want to update you on our ongoing transformation and each of our businesses and I'll start with ABL.

We've had a good year in ABL.

Our focus on innovation through product vitality, and increasing our service levels for the benefit of our customers has delivered strong results.

And we are continuing our efforts to drive our product expansion.

The compact pro High Bay, which we've discussed before continues to look to deliver from both a revenue and margin perspective, and the high growth industrial sector.

Our product vitality efforts include improvements to existing products and the introduction of new ones.

In the fourth quarter, we introduced the home Guard led security Floodlight, It's an exciting addition to our contractor select portfolio.

This new platform offers a technology upgrade higher efficacy greater safety options and ease of installation installation.

Sales have been strong we're off to a great start in a category, where we currently have low share and strong growth opportunities.

We are also continuing to increase our service levels and deliver productivity improvements.

We are using better smarter faster to improve our processes and our technology for better more efficient customer service.

Today I'd like to focus on agile.

Our team is constantly improving agile one of our key areas of focus has been to improve the quality of the product data that we provide.

This improvement provides many tangible benefits, including ease of use and improved order accuracy.

Another area of focus that I have spoken about before is order status.

This up again, because it has been essential during this complicated period, we were able to provide clearer information to our channel about their order status, which allows us to better meet their needs in the face of the global supply chain challenges.

These examples address significant historical pain points, and our foundational which allow us to improve our service levels today and in the future.

As we enter 2022, the priorities for Trevor and the rest of the ABL team remain the same.

Maintain high product vitality.

Continue to elevate our service levels and continue to use technology to differentiate ourselves.

Okay.

Now moving to the intelligence basis group.

The mission of ISG is to use technology to solve problems in spaces by making them smarter safer and greener.

We believe that each of these provides ample opportunities for future growth.

This tech controls as a collection of open Paul opened protocol products necessary to effectively operate spaces.

Atreus provides applications, which use data to deliver value in those spaces.

We continue to add products to this ISG portfolio.

During the quarter, we added the eclipse connected thermostat and open protocol device that reduces installation costs helps manage energy costs and improves the comfort of spaces.

Now before I turn the call over to Karen I would like to conclude with thoughts on our transformation and the opportunity ahead.

In the face of a challenging global environment, we have demonstrably improved our company and its performance.

We have demonstrated our ability to grow sales through innovation and our ability to service our customers.

We have improved our gross profit margins through product and productivity improvements.

We have improved our operating profit margin by leveraging our costs.

We have allocated capital efficiently through reinvestment in the business acquisitions and share repurchase.

We have the talent and the tools to build upon the operating strength, we have developed over the last 18 months.

Okay.

As we look forward, we expect to continue this performance.

We are strategically positioned at the intersection of sustainability and technology.

We have assembled a world class team.

We have demonstrated the ability to both build and acquire businesses.

We have strong organic cash generation and we have demonstrated that we know what to do with it to create value.

Now I'll turn the call over to Karen who will take a deeper dive into our performance and outlook for 2022, and then I'll be back for Q&A and closing remarks.

Thank you Neal I wanted to start by recognizing the accomplishments of the team this year.

We have made progress on our transformational priorities improve the financial performance of the business and continued to thoughtfully allocate capital.

Our fourth quarter performance was solid net sales were $992 million, an increase of 11% compared to the prior year.

This performance was driven by strong customer demand improved execution across our go to market channels and the addition of the awesome acquisition, which added approximately 200 basis points.

Gross profit margin was 42, 2% for the fourth quarter of fiscal 2021, an increase of 10 basis points over the prior year.

Slight rising costs from raw materials, electrical components supply chain interruptions, and a significant escalation of freight costs.

We were able to offset the increased costs with higher sales volume product and productivity improvements and the benefit from price increases.

I am extremely pleased with the team's execution around our gross profit margin.

Led to such a great result in a volatile cost environment.

Reported operating profit margin was 13, 4% of net sales for the fourth quarter of fiscal 2021.

An increase of 150 basis points over the prior year.

Adjusted operating profit margin was 15, 8% of net sales for the fourth quarter of fiscal 2021.

An increase of 110 basis points over the prior year.

The majority of this improvement was driven by the higher gross profit margin and leverage of our operating expenses.

The effective tax rate for the fourth quarter of fiscal 2021 was 21, 9% compared with 24, 5% in the prior year due to the impact of several discrete items.

Finally, we saw significant improvement in diluted earnings per share for the fourth quarter of fiscal 2021.

Diluted EPS of $72.0 to incur.

<unk> increased 85 or.

Or 46% over the prior year and adjusted diluted earnings per share of $30.0 <unk>.

Increased 92.

<unk> hundred 39% over the prior year.

Our share repurchase program favorably impacted diluted EPS by <unk> 24 versus the prior year.

Before I move onto the segment results I want to highlight a few numbers and our full year 2021 operating results.

Net sales were $8.0 billion.

An increase of 4% compared to the prior year driven by improved sales performance in the second half of 2021.

We delivered a full year gross profit margin of 42, 6% an increase of 40 basis points over the prior year.

The effective tax rate for fiscal 2021 was 22, 7% compared with 23, 5% in the prior year.

We expect this rate to be approximately 23% for the full year in fiscal 2022, excluding any unusual discreet items.

And assuming no change to the corporate tax rate.

Diluted earnings per share of $46.0 was a 34% increase over the prior year and adjusted diluted earnings per share was $27.0

It's a 23% increase over the prior year.

We had $42.0 million diluted shares outstanding outstanding during fiscal 2021, with our share repurchase program favorably impacting diluted EPS by <unk> 57.

Versus the prior year.

Moving on to our segments.

During the quarter, the lighting and lighting controls segment delivered a sales increase of 11% versus the prior year.

This was driven by improvements within our independent sales network, which grew approximately 10% and the direct sales network, which grew about 15% in the current quarter as a direct result of our strong go to market efforts as well as recovery in the construction market.

Our corporate accounts channel continued the positive momentum and saw an increase in sales of 16% compared to the prior year as large retailers move forward with previously deferred renovation spend.

The performance in this channel is dependent upon our customers' renovation cycles and can be uneven quarter to quarter.

Sales in the retail channel declined approximately 20% as compared to the prior year and we will continue to be impacted through the remainder of the calendar year.

As a result of a customer inventory rebalancing the retail channel continues to be an attractive channel for acuity.

During the quarter, we closed the acquisition of <unk> business.

The acquisition contributed around 200 basis points of growth to ABL revenue and we expect a similar level of impact in 2022.

Now moving to ABL operating profit for the fourth quarter of 2021, which increased 23% to $149 million.

Versus the $122 million in the prior year.

With operating profit margin, improving 150 basis points to 15, 8%.

Adjusted operating profit for the fourth quarter of 2021 improved 21% versus the prior year with adjusted operating profit margin, improving 140 basis points to 16, 8%.

2021 was a year of improvement to summarize the full year. The ABL business saw sales growth of 3% to $6.0 billion versus the prior year and an improvement across profitability metrics operating.

Profit for the full year increased 12% to $476 million versus the prior year with operating profit margin, improving 110 basis points to 14, 5%.

Adjusted operating profit for fiscal 2021, and <unk>, 10% to $515 million versus the prior year and adjusted operating profit margin improved 100 basis points to 15, 7%.

Now moving on to the results for our intelligence basis growth for.

For the fourth quarter of 2021 sales in spaces increased approximately 24% to $51 million reflecting.

Continued demand with strength across our building and HVAC controls.

Space is operating profit for the fourth quarter of 2021 increased $9.0 million to $2 million versus the prior year.

Adjusted operating profit for the fourth quarter of 2021.

$6 million was $12.0 million greater than the prior year as a result of continued sales growth.

The spaces team had a great year we.

We recruited an incredible leadership team and broke the business out into a standalone segment.