Q1 2022 Acuity Brands Inc Earnings Call

January 7, 2022

Good morning, and welcome to the acuity brands first quarter earnings call of fiscal 2022.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be the company will conduct a question and answer session. Please be advised that today's conference is being recorded.

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

Please go ahead.

Thank you Liz.

Good morning, and welcome to the acuity brands fiscal 2022 third quarter earnings call.

As a reminder, some of our comments today may be forward looking statements based on management's beliefs 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 yourself. These statements.

Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2022 first quarter earnings release, which is available Investor relations website at Www Dot investors does EQT brand's dotcom.

With me. This morning is Neil Ash, our chairman President and CEO, 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 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 lives.

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

Thank you Charlotte and happy new year to everyone. Joining us this morning to discuss acuity brands.

I'm proud of our performance in the first quarter of fiscal 2022.

Our team delivered sales growth of 17% expanded our operating profit margin by 160 basis points and increased diluted EPS by 57%, Despite global supply chain challenges and unpredictable market conditions.

Our performance demonstrates that by prioritizing customers, we are driving sales growth and turning that into operating income while continuing to invest in the long term growth and transformation of the company.

I want to start today's call by taking a deep dive on the current market conditions.

As you are aware this is a dynamic market with a fair share of paradoxes.

Demand across our end markets remains strong at the same time, the availability and cost of key inputs remained challenging.

In short, it's the best of times and the most challenging of times.

First on demand business is strong both in ABL and its basis within ABL demand is strong across all of our channels to market, except retail, which we expect to improve this calendar year.

And this dynamic pricing environment, we've been prudent and successful passing on price increases while at the same time, providing as much consistency as we can to our customers. So that they can plan and execute their projects effectively.

At the same time input cost and availability remain unpredictable and we expect this to continue.

Obviously, everyone is dealing with this.

Our strategy for managing through this has been consistent prioritize satisfying customer demand and ensuring the health and wellbeing of our associates.

So now let me spend a minute on what we mean by satisfying our customer demand.

First we have chosen to honor pricing on all of our placed orders.

As I've said before it is important to me that we are known in the industry for doing what we say.

There is a gap in time between when we receive orders and when we fulfill them in normal times and that is even greater now.

Therefore, we believe that this position will serve us well in the long term with specific customers and with the industry.

From there we are also doing everything we can to fulfill these orders as quickly as we can.

While we don't disclose backlog what I will say is that is meaningfully higher than during normal periods.

This is the result of higher demand, coupled with changing component availability and the general supply chain and transportation challenges again these are not unique to acuity.

To combat these we have prioritized three key activities.

First we are focused and invested in our strategic relationships with manufacturers and suppliers to procure as much of the available component supply as possible.

We benefit from being the largest and most consistent in the industry.

Second we have empowered our teams to source components in the spot market and we have prioritized speed and access over costs. This allows us to maintain higher levels of production at the expense of some higher cost.

Third our product engineering and manufacturing teams have been continuously redesigning and reengineering existing products based on what components are available to give you an idea of the magnitude of that effort or just take engineers spent over half their time in the last quarter dedicated to this type of redesign.

Our ABL team made the same commitment in addition to changes and improvements in our manufacturing processes to ensure consistent production.

These efforts also extend beyond our company into our broader ecosystem, we have been working with suppliers to help them find necessary components and make engineering changes and the products that they supply to us.

The overall effort has been herculean and our teams continue to remain flexible and to adapt to an ever changing environment.

The changes that we have implemented over the last two years have enhanced our ability to see across our business work across our stakeholders and improve our service levels.

So where are we on our transformation.

One of the points that I stressed or our team is that transformation as a process not a destination and.

In challenging times, sometimes the first reaction is to revert to what you know.

In our case, we are using these times to redouble our transformation efforts, let me start with the ABL business.

Trevor and his team are focused on maintaining high product vitality continued to elevate industry service levels and continuing to use technology to differentiate us.

During the first quarter, we launched several interesting products to drive our portfolio expansion.

Products like the stock pack and stack switch products. These are the next generation of center element led lay in lights for commercial indoor spaces.

The stock has a lower profile and more efficient packaging that stays on transportation costs.

It also has an adjustable lumen output that can be refigured reconfigured at any time through the stack switch. This means that there is no time wasted on the job site, if there needs to be changes to the configuration.

And controls we introduced the clarity link this as part of our in light lighting controls platform that offers remote connectivity capability.

The remote capabilities reduce the need for in person visits offer a quick troubleshooting resolution and a reduction in maintenance costs.

This product fundamentally changes the way we service projects and is an important step forward for our customers.

Now moving to the intelligence space This group.

The mission of ISG is to use technology to solve problems in spaces in order to make them smarter.

Safer and greener.

We do this in two ways, we collect data through hardware for example, the <unk> controller, and then analyze and take action on the data through software applications powered by atria.

Our ISG group had an eventful quarter.

As I mentioned, even though the engineering team at <unk> spent over half their time focused on redesigning. This tech products for the available components, we continue to rollout several important products and product enhancements.

The <unk> Eclipse apex was introduced in the first quarter and is the most advanced version of our controller for HVAC and building automation.

The apex introduced artificial intelligence to the edge and increases compute capacity in buildings, which helps customers manage their energy usage more effectively.

We also further expanded the availability of our atrium building insight service by enabling it for additional languages and local privacy requirements.

Curious building insights is now available in the U K, Ireland, France, Germany, Spain and Norway.

As I turn the call over to Karen I want to take a step back. We are currently and expect to continue to be operating in unpredictable times input prices and availability contempt can sometimes feel like a game of whack a mole.

And we are dealing with omicron, which materialize only a few months ago.

As we face these challenges and new challenges, we will maintain our focus on satisfying customer demand and ensuring the health and wellbeing of our associates.

I remain optimistic about 2022, and our ability to effectively manage in this environment. We have a great team who are executing today. While also remaining focused on our long term growth and transformation of the company.

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

Thank you Neil.

I'll start by thanking our team for their work over the last quarter in this environment.

To be impressed by our team's dedication to our transformational priorities, while we continue to navigate the day to day performance of the business.

We delivered a strong first quarter performance.

Net sales were $926 million, an increase of 17% compared to the prior year.

This performance was driven by our improved service levels and continued recovery in the end markets of both of our business segments and the benefits of recent price increases.

Gross profit was $386 million, an increase of $53 million or 16% over the prior year.

This improvement was driven by revenue growth and by offsetting the significant increase in material and freight costs through price increases and product and productivity improvement.

Gross profit as a percentage of sales was 41, 7% a decrease of 30 basis points from 42% in the prior year.

Significant achievement given the cost environment.

Reported operating profit margin was 12, 4% of net sales for the first quarter of fiscal 2022, an increase of 160 basis points over the prior year.

Adjusted operating profit margin was 14, 4% of net sales an increase of 120 basis points over the prior year.

Majority of that was the result of improved operating leverage as we continued to balance cost management and growth investments.

The effective tax rate for the first quarter of fiscal 2022 with 19, 6%.

In the same period of 2021 the rate was 24, 7%.

The decrease in the effective income tax rate was primarily due to favorable discrete items recognized in the first quarter of fiscal 2022 related to excess tax benefits on share based payments.

We expect our tax rate for the full year of 2022 to normalize to around 23% absent these discrete items.

Finally, we saw significant improvement in diluted earnings per share for the quarter.

Fiscal for the first quarter of fiscal 2022.

Diluted EPS of $2 46 inch.

Increased 89, or <unk>, 57% over the prior year and adjusted diluted earnings per share of $2 85.

<unk> 82.

440, 40% over the prior year.

Our share repurchase program favorably impacted adjusted diluted EPS by <unk> <unk>.

And the tax impact was approximately <unk> 16.

Moving on to our segments.

During the quarter, our lighting and lighting controls segment saw sales increased 17% to $884 million versus the prior year.

This was driven by improvements within our independent sales network, which grew 14% and the direct sales network, which grew about 12%.

These increases were a direct result of our strong go to market effort and an improved demand environment as well as the favorable impact of price increases.

Our corporate accounts channel saw an increase in sales of approximately 62% compared to the prior year as large accounts began previously deferred maintenance and renovation.

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 16% in the current quarter.

ABL operating profit for the first quarter of fiscal 2022 increased 30% to $128 million versus the prior year with operating margin improving 160 basis points to 12, 4%.

Adjusted operating profit of $138 million increase.

Increased 28% versus the prior year with adjusted operating margin, improving 140 basis points to 15, 6%.

Now moving on to the results of our intelligence basis great.

For the first quarter of 2022 sales in spaces increased approximately 14% to $46 million versus the prior year, reflecting continued demand primarily across our building and HVAC control.

<unk> operating profit in the first quarter of 2022 increased approximately $2 million two.

$2 million versus the prior year.

Adjusted operating profit of $6 million increased approximately $2 million versus the prior year as a result of the strong sales growth.

Now turning to cash flow.

We continue to generate solid cash flows.

The net cash from operating activities for the first three months of fiscal 2022 was $84 million. This.

This was a decrease of $40 million or 32% compared to the prior year.

And reflects an increased investment in inventory to drive growth.

Additionally, cash flow was impacted by the timing of income tax payments and the prior year deferral of withholding taxes as a result of the cares Act.

We invested $9 million or 1% of net sales in capital expenditures during the first three months of fiscal 2022.

During the quarter, we continued to execute on our capital allocation strategy and repurchased approximately 300000 shares of common stock for around $53 million at an average price of $176 per share.

We have approximately $3 5 million shares remaining under our current board authorization.

Our capital allocation priorities remain the same.

We will continue to prioritize investments for growth in our current businesses.

To invest in acquisitions.

To maintain our dividend and to allocate capital to share repurchases. When there is an opportunity to create permanent value for our shareholders.

I would now like to spend a few minutes addressing current topics of note.

First on the pricing environment.

As Neil said, we're managing price aggressively while at the same time balancing the relationships with our customers.

We announced another price increase this week effective for orders placed in February we will continue to be deliberate in our strategic approach to pricing.

Next I would like to update you on the OSM integration.

We have made significant progress in our integration of <unk>.

Bought the Ostrom, North American DG business to ensure control over the technology.

To expand our OEM channel and for the benefit it brings through the integration into our supply chain.

The addition of awesome contributed over 300 basis points to our sales growth in this quarter.

There was also a relatively small dilutive impact to gross profit margin, but also with an overall positive contribution to operating profit.

The acquisition is delivering on our expectations and we are very excited that <unk> team is now part of acuity.

Finally, you may have noticed that this quarter, we have added an additional metric to our earnings release.

We have included EBITDA and adjusted EBITDA in our tables of reconciliation to enable easier comparisons and to improve the consistency of round reported adjustment.

As we continue to navigate 2022, we will continue to prioritize our customers to drive sales growth and operating income.

We will also continue to allocate capital in a way that drives long term growth and that creates permanent value for our shareholders.

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

Thank you. Our first question comes from John Walsh with Credit Suisse. Your.

Your line is now open.

Hi, good morning.

Good morning, John.

Great.

Maybe first if we could talk a little bit about the operating profit margin performance I appreciate the comments in the script.

It looks like you were really able to leverage the fixed portion of your SG&A bucket kind of the non freight and commissions wondering if you could just give a little bit more color. There is it kind of just the stronger sales flowing through on that or are you also driving some productivity on that.

Fixed part of your SG&A cost structure.

Thank you.

Yes.

Karen you want me to take that I'll jump in first so.

So John yes, thanks for the question.

A step back the plan as we've said all along has been to.

To drive sales growth and then to turn that sales growth and the operating margin. The first step of that was the product vitality efforts that we did and now the second step of that is leveraging the fixed cost. So there is I'd say the answer to your question is both there is theres, obviously improvement because of the.

Because of the larger absolute dollars of sales and in a smaller growth in the in the fixed operating expenses and within that number there. There are and there will continue to be parts of the transformation that provide additional leverage.

Great and then I guess just a question on.

So you feel very strong about the sales growth going forward, obviously very early in the year, so kind of not surprised to see no change to the guide, but can you maybe talk a little bit about what youre seeing in terms of maybe renovation and retrofit demand from energy efficiency.

<unk> C and D card perspective, and then maybe any color on Holocene and if youre seeing any benefit from the past infrastructure Bill yet.

And then I'll pass it along thank you.

Yes, I'll start Karen fill in if I leave anything out. So so first on the financial framework that we provided at the at the end of the last fiscal year beginning of this fiscal year. It is our intention to not update that on a regular basis, but to rather provide that framework and so.

Obviously, you are familiar with that framework as we look forward to the rest of the year from a from a sales perspective, obviously, we had a really strong performance. This quarter that was driven by a combination of factors first obviously as I mentioned the strong end market demand. So.

Demand is strong and continues to be strong, which is leading to as I indicated of building up a larger amount of lead time in our in our orders. So we're processing those orders as effectively as we can that compares to last year, which is.

Which is normally the first quarter as you know is normally lower seasonal quarter, our fiscal first quarter as well as the generally lower level of demand due.

Due to the pandemic at the time, so it's a combination of those factors as we look forward for the rest of the year. We see sales continue were continuing to process that demand. So as we said that is our primary priority is to satisfy that customer demand that will mute some of the normal but not all of the norm.

<unk> impacts of seasonality so as we as we look forward. So the second quarter. Obviously has has Christmas in a couple of other things so it won't be like the first quarter.

And then we we expect to return to normal to normal levels at some point kind of later this year early next year.

Yes, the only other thing I would call out John Us when you look at that corporate accounts channel. It had a really strong quarter at $60, 62% growth year over year, and so that can be inconsistent quarter to quarter as well.

And then finally on your question about Hall of Fame and the industrial.

<unk> had a had a good quarter.

Candidly not a great quarter, yet, we see lots of opportunity in the future as as those projects start to happen, but it's going to take a minute for them to get back to get designed in to get funded and to get started.

Great I appreciate it pass it along.

Thanks Chuck.

Our next question comes from Ryan Merkel with William Blair. Your line is now open.

Hey, everyone, good morning, and happy new year.

Good morning, and same to you Hey, Ryan.

So Neil I wanted to start with supply chain I guess, a two part question.

Do you think you're taking market share just based on how well you are managing things and then secondly, do you feel like the worst is over or is it too early to say that.

So on your first question.

<unk> said this since I got here, it's frustrating that there isn't more clear information about market. So that we could say in absolute terms, it's it's where we are.

As you see our performance and then Youll see our competitors report.

I think all indications are that we are taking that we are we are taking share and it is on the basis of I really think two key factors, which we've identified which is.

Which is product vitality of the investments we've made over time and making sure. We have the right products and then the supply chain, which is really about having the right products in the right place at the right price and at the right time Ed.

I believe have performed better than that most on that front, which kind of gets to your second question, which is is the is the worst of this over it.

The short answer is we don't know.

<unk>.

We continue to be all surprised as I indicated in my comments earlier, so no one saw omicron coming so we don't know if.

If that will impact our labor and therefore, our production capacity for example over the course of the next several months.

But we're working through that and what I want to highlight is that I believe the dexterity of our supply chain is what has allowed us to perform so well and by dexterity I mean, we source from multiple places we have.

On the one hand, but also our team our team has been incredibly adaptable, they're reinventing how they source products. They are reinventing how they schedule production. They are reinventing the flows through our through our factory and distribution system. So so we continue to dynamically change these things too.

Make us better so we're positioning ourselves Ryan for for uncertainty in the supply chain. So that we can continue to perform whether it gets worse or it gets better and my expectation is that it is going to be this way for a little while longer.

Got it makes sense.

Then on price capture when do you think we'll see the full impact of the price increases that you've put through and then will the realization being knocked the cover of your higher cost.

Karen Yes, let me start with that Ryan as we mentioned in our comments there is a lag between when we have the price increase and when we see that in the results and then also the timing of the costs the costs come in a lot faster than the price does so as you know we've now as of this week had five price increases and.

So youll start to see benefits of that accumulate throughout the course of the year. While we also expect the cost to increase.

And then certainly throughout the course of the year, so that being said I think we'll still see some benefit from price and be able to offset costs, but still a bit uncertain and just monitoring what the costs are going to do and then if we have to take actions in the future to offset some of those and again, we're not just focused on price. We're also focused on <unk>.

And productivity improvements to continue to improve our margins.

Anything else to add Neil Yes, no Ryan I would just say strategically we've.

We've been able to get price whenever we've asked for it and we've made.

As I said in my comments earlier.

And what I think is an important strategic decision, which is that we're going to honor the prices on orders placed and that provides a consistency to the end markets who are trying to execute projects.

And as Karen mentioned, there is a time lag between between when we lock in the pricing on those orders and what the component input cost ended up being but.

But as you can see from the results, it's driving topline and we're turning it into operating profit margin.

Very helpful. Congrats on the quarter I'll pass it on thanks.

Thank you.

Our next question comes from Jeff Sprague of vertical research. Your line is now open.

Thank you good day everyone.

Hey, two from me one maybe it's just kind of housekeeping on the comment on the guide that you don't plan to regularly update it.

Do you plan to though I guess reevaluate if you're outside of kind of.

Some band of materiality or should we expect that regardless of what youre printing through the year here that this framework remains exactly the same.

Well so.

Thanks for the question, Jeff and let me be let me give you my view of this philosophically which is that.

The reason we use the term framework is because thats, what we mean for it to be which is the framework for how we're thinking about the year.

I think it's more important that we provide you how we are thinking about it. So that we then collectively can evaluate how we're doing going forward. So that's why we use the term framework as opposed to guidance and Thats why.

We want to keep it in place.

I also will tell you back to what we said at the time, which is that we expected this year or two to be a higher growth year than our normal expectation for framework. So if you go back to our Investor day. When we gave you kind of the general perspective of our two segments and Thats philosophically, how we want to think about it we want to have a.

A intelligent and qualitative conversation with you about the outlook and then try and deliver the best results that we can.

Great that's helpful given.

The whole framework slash guidance approach with you helpful, but new for all of us given prior practices. So thanks for that insight.

Can we come back to.

The retrofit work.

What kind of backlog of activity do you see there and I understand that might not be in your product backlog per se given the nature of your business and how you how you book orders, but in terms of kind of feet on the street.

People out working projects.

Do you see that sort of work broadly coming back at this point in time and any color on that.

How that the peak of the season as it relates to that type of activity that would be interesting.

Yes, Jeff this is Karen.

We are seeing improvements in several areas related to retrofit and renovation as we've said before industrial continues to be a strong market for us.

We're seeing improved.

Improvements slight improvements in hospital excuse me office space Education is strong and depending on the time of the year. So all of those markets with renovations continue to be strong as we said a lot of the large retailers are coming back and reinvigorating their renovation program. So that is good to see.

Still lagging a bit and markets like hospitality that seems to be a bit slower to come back than others.

So we're seeing that in the orders that we get today and anecdotally our agents and our other channels are seeing similar activity in their market.

Great. Thanks for the color I appreciate it.

Thank you.

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

Thanks, Good morning, everyone.

I had a question about Ags Neil you mentioned several product expansions into range of international arenas.

Curious to hear you talk about.

The prospects outside North America, the different from <unk>, because I think.

<unk> has been sort of.

Happenstance not necessarily strategic you may have some qualifiers, but to that but materially.

<unk> and <unk>.

International outlook for Ags.

Yes, Thanks, Chris.

I appreciate the question and the opportunity to talk about this some more so so before I get into the spaces group, let me spend a second on ABL, which is that.

North American lighting is different for a number of reasons between say European or Asian lighting different standards different electricity, a number and different industry structure. So it makes a lot of sense for us to in our lighting business to continue to focus on North America and try and continue to take share as we have done.

Now switching to the spaces group when you think about both disk tech and the controller and the technology. There. It has broader applicability outside of just North America. So the technology. There is already present in Europe, we're very strong in France for example, with with <unk>. So we see a broader.

<unk>, a broader international opportunity for for the.

The <unk> portion of spaces outside the U S as well.

And let me see.

Spend a second I've talked about atrium building insights earlier, so as we're as we're consolidating atria and making it the software applications, which analyzed and then potentially over time provide the ability to take action on data what that means in this case atreus building insights allows.

Allows any facility to understand exactly what their energy costs were what drove those energy costs and provides them the ability to see that in a consistent way and so what we've done is now localized that for for the European markets that I introduced which gives us a pathway to continue that European expansion of both.

<unk> and <unk> combined with <unk> for the solutions that we envision in the future.

Great. Thanks.

And I was curious about the ABL topline framework for high single digits, just if we kind of tease out normal seasonality in the next couple of quarters, and I think indicated second quarter Mike.

Be on the heavier end of normal seasonality, given the first quarter strength, but kind.

Kind of backs into a flattish.

Fourth quarter to exit the year.

We will attribute that to your guidance.

Explanation, rather than ratification of that implication is that correct.

That's correct.

Okay, great. Thank you.

Our next question comes from Brian Lee of Goldman Sachs. Your line is now open.

Yeah.

Yes, Hello. This is miguel on the line for Brian Thanks for taking the question.

Hi, Miguel.

Hey, I just wanted to start real quick on the on the <unk>.

Price increases you mentioned the price increase announced this week and then on the floor announced two core just curious are all of those I guess.

The impact of all of those fully realized in this quarter's results or is there still to be realized on those four prior injury.

Increases or will those flow through future quarters, along with the fifth one that you just that you just announced.

Yes. Thank you Miguel as we mentioned our backlog is meaningfully higher than what we would typically see so I think in normal times, you might see the price increases come a bit faster, but where we are today. There is still more of the price increases that would come through just in terms of the timing of when they were announced when they were.

<unk> and then how that backlog will flow through as we also pointed out we're not repricing our backlog.

Adjusting it so it only reflects the prices that were implemented at the time. The order was placed so you will see a lag in some of the pricing coming through.

Okay, great. Thanks, and then I had a just a quick follow up too.

It doesn't it doesn't sound like it but how are customers responding to price increases you mentioned that.

You built in a lag for when you announced with prices I mean, I think in a prior call. You mentioned that there is a possibility that even some demand pull forward as customers maybe anticipate further price increases, but do you see any possibility of.

Maybe a decline in customer orders if prices go up to a certain level given.

Material costs and things maybe.

Maybe go up higher than expected.

I'll take that one so first of all no one likes higher prices, we don't like them, our customers don't like them, but everyone recognizes that this is this is a time, where all costs are changing and therefore prices are there was a general expectation that prices are going to go up so.

Our end markets are as I mentioned earlier are taking that all of the price increases that we are.

That we are putting forward.

Part of the but let me spend a second on the strategy of <unk>.

Price, which is.

And a couple of important components to that the first is that we're trying to be prudent and strategic about our pricing because we believe that at the end of the day. It will come back to we need to have the right product, which is product vitality in the right place, which is effective service levels at the right price and so we're.

Part of the investment we're making in honoring our the prices of our orders is the investment in that relationship with our customers in the end market. So that they can see that they can expect and plan their projects accordingly.

So our input prices going to change and will that potentially have an impact on prices over time of course, they will and they could go in either direction, but our strategy is to have the right product in the right place at the right price and we are demonstrating that that strategy is driving growth, which we think is in excess of the market.

And we're leveraging our costs to expand margins at the same time.

I appreciate that and I just had one more if I could squeeze it in real quick it's not us Ram you mentioned, just now 300 basis points sales.

300 basis point contribution to this quarter's.

Our results I think in the past you mentioned that.

That over the course of fiscal 'twenty to be a 200 basis points.

Contribution to the topline so are you still tracking to that 200 basis points.

Sort of framework or.

Maybe are you seeing signs of that.

To accelerate thanks.

Yes, let me take that one for US as we said this quarter is the 300 basis points and the acquisition is going really well. It's on track and we're really pleased to have that as part of our product portfolio and our capability.

What I would say is that just remember we did buy it towards the end of the year. So we have two months of it in our results. So you will see.

Let's say 300 basis points is a reasonable amount to assume for the first few quarters, but then towards the backend it will tail off of that since we did own it in the fourth quarter.

Okay that makes sense I'll pass it on thank you very much.

Our next question comes from Chris Snyder at UBS. Your line is now open.

Thank you I wanted to follow up on the ABL high single digit growth commentary and understand that this is more of a framework there may be hard guidance, but with M&A, adding three to 400 bps of growth.

Company up low teens organically and in the first quarter the guidance Embeds no kind of low single digit organic growth the rest of the year.

Math is correct.

And which seems highly unlikely given elevated backlogs and improving non res activity.

Headwinds here that we should be watching out for.

Yes, Chris as Neil said, it's a framework and that was the framework that we gave kind of as we started the year. This year, we have seen abnormally high growth.

<unk> is not reflective of what we've seen in the past.

And you see that in the <unk>.

16%, 17% sales growth this year.

I think your math you understand the math.

Part of the equation and we just wanted to give you the framework and kind of the paint by numbers.

To look at for the year there.

The first half of the year I would say.

Low comparison to prior year. So you are seeing a bit of that.

And then yes.

So I would say, it's a framework and we don't intend to update that Neil anything.

You wanted to add no nothing to add.

Thank you for that and then for the <unk>.

Follow up.

As you think about the gross margin margin cadence in achieving the full year guidance of 42% plus is it fair to assume that Q2 steps down before a back half recovery and is the latest price increase needed to get back above 42% in the back half or should we view.

This maybe more Cushing.

So Chris let me reiterate what I've said.

Multiple times, so far on this call.

First our framework is a framework that we provided at the beginning of the year and we don't intend to update on a regular basis.

We're doing everything we can to deliver the highest possible results that are consistent with our investment in long term growth and transformation of the company.

Third we've grown sales growth and we've turned that into operating profit margin. So we've demonstrated that we are both taking share we are getting price and we're effectively managing the supply chain to deliver on that operating profit and sales growth.

Thanks.

Our next question comes from Joe O'dea at Wells Fargo. Your line is now open.

Hi, good morning, everyone.

First question is just on the operating environment and if you could talk about what you've seen.

<unk> since you last reported and the degree to which you've seen stabilization and anything that you can call out there.

Changing either better or worse.

And maybe.

I relate that to the most recently announced price increase whether what you saw three months ago kind of gave you indications that youre going to be taking price up again or whether you've seen things that required more pricing actions.

Yes, Thanks for the question, Joe and I appreciate you picking up coverage.

As we as the <unk> view is that we continue to see really strong demand as we said and we've been really dynamic and the management of supply chain based on availability and access to the necessary inputs to manufacture each of the products and so.

It was our expectation when we laid out the framework and we talked to you last that this was going to be a dynamic environment, we have been kind of.

<unk> to talk about that that that prices are changing on a regular basis and therefore, our probably our prices are going to change as well so.

So we are we're not surprised by obviously the fact that the prices have increased and maybe we can provide some anecdotes to give an indication of kind of what we're talking about so when you think about kind of the inputs. Obviously, we're talking about chips. We're talking about steel we're talking about aluminum we are talking about resin and we're talking about things like transportation.

<unk> and one of the kind of interesting examples is that our normal transportation time from for the the components in the finished goods that we source in Asia is normally around say 20 days.

Of time on the water.

Approaching almost 60 days at this point. So so that has an impact on that timing has an impact on cost obviously that timing has an impact on inventory that timing has an impact on a number of things and that's just one anecdote and one example of how we're we're combating this so so the answer to your question is yes, we expect.

<unk> two do we expect cost to change over the course of the year and we expect prices to continue to change over the course of the year.

I appreciate the color.

And then a second question just related to cash and deployment and how we should be thinking about free cash flow conversion on adjusted net income this year given some of the inventory build whether you think that inventory cushion is comfortable at this point, but then when we think about the current cash levels and beyond.

Ongoing kind of cash generation, what's your appetite for buybacks at this point versus a preference to be patient on deals.

Yes.

Hi, This is Karen.

First I wanted to reiterate our capital allocation priorities as we've said before our first priority is to invest in the growth of our current businesses. The second is to invest in them.

And the third is to maintain our dividend and then fourth we will do share repurchases. When we believe there's an opportunity to create permanent value for our shareholders.

So if you look at kind of those four priorities and start with the first in your comment on inventory. Let me just make a few points on inventory really inventory is up for about three reasons three key reasons one to support the increased demand that we're seeing in the environment that we've talked a lot about today.

Second is to secure supply when there is availability when we when we see the opportunity.

By components and secure supply for future orders given the shortages. We are certainly doing that and then third goes to what Neal just referenced with some of the longer lead times on products that are on the water thats already our inventory. So we are investing in inventory for the growth of the business.

Those are our priorities will continue to focus on those and then Tim.

To answer your direct question about share repurchases.

We see value to create that opportunity to create value for shareholders. We will do so.

Got it thank you.

Do you.

Our next question comes from Jeff Osborne of Cowen <unk> Company. Your line is now open.

Great. Good morning, two questions on my end one Karen I was wondering if you could just remind us on what the typical lag is from order to revenue recognition and you mentioned that that is stretching out but can you just put it in perspective, what is the normalized times.

What it is today.

Yes, typically we would have seen.

It depends on the projects that you would have not seen.

Elevated backlog like we're seeing today, so it could be a few weeks it could be a few months that just based on kind of the availability of the components of the supply chain challenges that we've discussed with the lead times. It is stretching beyond that so it can be upwards of.

Six months or so but these are all placed orders they are not speculative orders its really just the timing of when we.

Can ship the orders.

Got it that's helpful.

And then maybe for Neal 18 to 24 months and now could you just give us a sense of the UBC product line you haven't mentioned that in recent earnings calls, but has it been successful or any update on the product momentum and availability would be helpful.

Yes.

Thanks for that.

As we said we built a we have built a robust product line now for <unk>.

On the expectation that that people will buy it consistently we've seen we've seen some traction with.

With larger with larger individual accounts that that recognize the value of kind of the investment.

But I would not say as I said to kind of a several quarters ago. We don't we don't view this as a as a game changer for us, but it's a but rather as an.

Adaptation to a market environment, we will see I think the.

With every additional variant.

It becomes more clear that we're going to have to collectively make longer term investments in and keeping spaces safer and and we've got the best portfolio of <unk> products to do that so so to the extent the market comes our way I think we're well positioned but the market isn't as large as as I think summit.

Hoped it would be.

Got it appreciate it thank you.

Our next question comes from Tim <unk> Baird. Your line is now open.

Hey, good morning, everybody nice nice work on the quarter.

Thanks, Tim maybe maybe just the first one I just want to kind of run back to seasonality.

Q2 is typically your weakest quarter from a gross margin perspective, just kind of structurally I think normally it's down 50 to 100 basis points from Q1 levels and so I know you don't want to give quarterly guidance, but just given how tough the comp as last year.

Would you expect kind of a similar kind of seasonal trend to play out this year kind of Q1 to Q2.

Just to make sure we have that calibrated correctly.

Tim are you talking about on a year on year basis, or a sequential basis sequential.

So.

So let me address the obviously, we had a we had a blowout margin gross margin quarter in last year, and we've talked extensively about kind of what's changed between then and now and why so as we look at sequentially from fiscal first quarter to second first quarter and address the season.

Analogy. So obviously, it's in the second quarter, we have Christmas we have new year's we have we have a lot of the impacts which make the top line the lower in the second quarter than the first quarter, which naturally will depress gross margin on a sequential basis because of the leveraging of the fixed cost in our.

Supply chain. So so that's the kind of the general outline.

And as we said were.

As I've said and Karen reiterated now we're really trying to work through we're prioritizing this customer demand and I gave a framework for how we're doing that which which will ultimately lead to what kind of gross margin is.

Okay. Okay. So it sounds like more seasonal.

More seasonal than last year with maybe the <unk>.

Okay.

And then I guess, maybe just big picture.

When you think about the environment in terms of quoting projects and how those customers think about.

Lighting in general I mean, there has been a lot of deflation in the market over the last four years and Thats clearly slipped to inflation now I mean do you think this phenomenon around how people are kind of thinking about lighting and kind of expecting that in and pricing is kind of a cyclical benefit right now or do you think there is the potential there.

At.

There is a kind of a mindset change in terms of how people are thinking about thinking about lighting on a go forward basis.

No if it makes sense, but hopefully I'm just trying to understand like if there's kind of a conceptual difference in terms of how the end customer is thinking about later today than maybe four or five years ago.

Yes, I mean, I think the I think we're going to be anecdotal as opposed to.

Kind of.

Philosophical I think at this point, Tim because I think the market has changed so fast that people are people are responding to.

Where it is right now.

I will say on the kind of the.

The opportunity for this to be a longer term phenomenon as it relates to us specifically the product vitality the quality of product the breadth of product and the impact of that product in the marketplace is it is a game changer I emphasized the compact CRO high Bay in the past which was.

Which is a game changer from a value and impact perspective, the stack and I referenced today is changing how the end market can interact with our products, which changes the general value chain for the market because it costs less to install it has more flexibility. So those things are permanent increase.

<unk>, which are permanent value changes and so we're accessing other areas of value that that we can deliver and we're participating in that so if for example, you use a lot less labor to install then there is a lot less pressure on the value of the of the of the luminaire or the control solution. So that's kind of <unk>.

Strategically that's why we pushed the product vitality. We've also pushed it on the product as I said of around the right product in the right place at the right price. So that we can be consistent and and.

Ever on those high service level I also think that will continue so.

I think the well the general inflationary environment continue broadly I think thats.

That's up for debate and as I've said in the past Ceos are generally terrible economists. So so I wouldn't believe what I had to say about that anyway, but I do think that the changes that we're making specific to us.

Our positioning us well for both this period and the periods that follow up.

Okay. Okay, great. That's helpful. So thanks for the time and good luck on the rest of the year.

Okay. Thanks, Tim Thank you.

Thank you and I'm showing no further questions in queue at this time I'd like to turn the call back to Neil Ash for any closing remarks.

Thank you before we break I wanted to thank all of you for joining us and again reiterate a happy new years.

I wanted to draw your attention to the publication of our 2021 Earth late report we've made substantial progress on our ESG strategy in 2021, and I'm really pleased to say these efforts are being recognized in December the carbon disclosure project vastly improved our rating over prior periods. It's a testament to the team for prioritizing in driving our <unk>.

<unk> initiatives.

We're really pleased with where we are we're really pleased with where we're going and we appreciate you investing both your time and your capital and acuity brands. So thanks for your interest and we look forward to talking to you again in about three months.

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

Okay.

[music].

Yes.

[music].

Sure.

[music] CEO.

[music].

Good morning, and welcome to the acuity brands first quarter earnings call of fiscal 2022.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be the company, we will conduct a question and answer session. Please be advised that today's conference is being recorded.

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

Thank you Liz.

Good morning, and welcome to the acuity brands fiscal 2022 first quarter earnings call.

As a reminder, some comments today may be forward looking statements based on management's beliefs 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.

We undertake no obligation to update these with these statements.

Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2022 first quarter earnings release, which is available on our Investor Relations website at Www Dot investors got acuity brands Dot com.

With me. This morning is Neil Ash, our chairman President and CEO, who will provide an update on our strategy in detail highlights from the last quarter and 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 live.

Thank you for your interest in activity, Brian I will now turn the call over to Neil Ash.

Thank you Charlotte and happy new year to everyone. Joining us this morning to discuss acuity brands.

I am proud of our performance in the first quarter of fiscal 2022.

Our team delivered sales growth of 17%.

Expanded our operating profit margin by 160 basis points and increased diluted EPS by 57%, Despite global supply chain challenges and unpredictable market conditions.

I want to start today's call by taking a deep dive on the current market conditions.

As you are aware this is a dynamic market with a fair share of paradoxes.

Demand across our end markets remains strong at the same time, the availability and cost of key inputs remained challenging.

In short, it's the best of times and the most challenging of times.

First on demand business is strong both in ABL and then spaces within ABL demand is strong across all of our channels to market, except for retail, which we expect to improve this calendar year.