Q2 2022 Acuity Brands Inc Earnings Call

April 5, 2022

Good morning, and welcome to the acuity brands second quarter.

Earnings call of fiscal 2022 at this time, all participants are in listen only mode.

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

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

Thank you Michelle.

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

As a reminder, some of our comments today may be forward looking statements based on management's beliefs and assumptions and information currently available to management at this time.

These 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 Companys 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 our corresponding GAAP measures are available in our 2022 second quarter earnings release, which is available on our Investor Relations website at Www Dot investors, the Qt brand 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 highlights from the last quarter.

Hawken, our senior Vice President and Chief Financial Officer, who will walk you 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 life.

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

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

Our team delivered another strong performance in the second quarter of fiscal 2022.

For the second consecutive quarter, we delivered net sales growth of 17% and we maintained our gross profit margin at 41, 7% consistent with the first quarter.

And compared to last year, we increased diluted earnings per share by 22%.

Despite the cost challenges, we were able to convert our sales growth into operating profit and net income by effectively leveraging operating expenses.

The world remains complicated.

Although all our demand environment is strong cost continued to be volatile and we are continuously dealing with the ongoing pressures, resulting from the global component shortages and.

In spite of this our team continues to execute well and this is reflected in our performance.

Well, the ABL and spaces are performing admirably.

Our decisions to prioritize shipments by investing in electrical components and transportation are resulting in higher sales and operating profit, albeit at slightly lower margins.

Now I want to move to talk to our progress at both ABL and spaces.

First an ABL I'm happy to report that some things are returning to the way they used to be.

In March we hosted our first in person sales conference in three years next 22.

It was great to be back together with our independent sales network, who have performed exceptionally through the ups and downs in the last two years.

We have the best agents in the industry and it was a great opportunity to talk about our strategic vision for acuity brands lighting share many new products and engage our agency partners around our <unk> initiatives.

This was the first time that many of our associates and agents had seen each other person since the pandemic started.

While we have been incredibly productive working virtually with our channel. It was great to spend some quality time together in person.

It was hard not to be struck by the levels of energy and enthusiasm throughout the event and the consistency of the feedback from our agents. They said acuity is delivery.

Our investments in service have allowed us to prioritize delivering for our customers what others have been unable to.

At the same time, our investments in product vitality have allowed us to continue to create compelling new products that are both innovative and market moving.

As I said last quarter, we have done this by focusing on three main areas.

First by focusing on strategic supplier relationships.

The current environment has reminded us all that it really matters, who you do business with.

Because we are the largest lighting company, we have certain advantages over our direct competitors.

But those same components are also used by larger industries.

Sequentially, we are making investments in people time and resources.

We have recruited a new head of strategic sourcing for ABL.

We are working with our key suppliers on effective planning and allocation management and we are investing in inventory.

Second by empowering our teams to prioritize access and speed over cost on available components, we've been able to ensure continuity of supply across many of our existing product lines. While also supporting our ongoing product vitality efforts across our product portfolio.

Finally, as I said last quarter, our engineering teams continue their herculean efforts to redesign products to the available components.

At the same time. These teams have also managed to introduce around 220, new or significantly upgraded lighting and lighting control products over the last two years.

We expect the challenges around access to and cost of components to continue into the foreseeable future.

Our strategy around product vitality, and the dexterity of our engineering teams inflicting to the changing requirements of the component shortages has been a significant part of why we are leading in this market and we expect to continue these efforts.

Another highlight of the next conference was our focus on Earth light.

First of all it is an important part of our strategy our product vitality efforts are not just about improving the functionality of our products is also about redesigning products to reduce customer energy consumption, reducing packaging and waste and improving transportation efficiency.

This quarter, we announced a new initiative that brings together, both technology and sustainability to significantly reduce paper use by introducing scannable QR code instructions across our products.

At next we also expanded our community outreach by packing 1000 bags of food for a local Atlanta organization together with our agents.

It was one of the highlights of the event.

Now moving to the intelligence space group spaces had another solid quarter of growth in both <unk> and atreus, we have a strong product roadmap to make space, a smarter safer and greener.

This tech continues to win in the building controls market against significant competition.

Through the Eclipse controller products <unk> is at the forefront of the technology curve with a presence in key markets and recognized leadership built on open protocol technology.

In the last quarter. This tech won projects across North America, and Canada and saw significant project wins in key verticals, including in education commercial infrastructure and data centers.

<unk> is now a key supplier to two of the largest cloud providers.

We also continue to develop the <unk> platform, including progress on atrium building insights and we expect to expand the portfolio over time.

We continue to add talent to this team.

Finally, I want to update you on our capital allocation our.

Our capital allocation priorities remain the same.

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

To invest in acquisitions to.

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

This quarter the board of director is the board of directors authorized additional capacity for share repurchases to increase our remaining authorization from 3 million to 5 million shares.

Since may of 2020, we have repurchased approximately 13% of our shares outstanding.

I would also like to announce the appointment of Sachin St. Paul Our senior Vice president of growth and transformation.

Thats joins us to manage our technology organization to deploy our better smarter faster company operating system.

To lead the integration efforts for future acquisitions.

SaaS comes to us with distinguished experience at leading companies, including Trimble and Honeywell.

We're excited to have such on our team.

As I close I once again want to thank our team for their ongoing efforts each.

Each quarter, we are faced with new challenges and our team continues to deliver our continued focus on service and product vitality is allowing us to take advantage of the strong demand environment.

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

Thank you Neil.

I want to start by reiterating thanks to our team for their work over the last quarter.

I'm impressed by their flexibility and ability to drive results.

Delivered strong performance in the second quarter of 2022.

We grew net sales, we managed margins effectively despite a volatile cost environment and we leveraged our operating expenses.

Net sales were $909 million, an increase of 17% compared to the prior year.

This performance was driven by our focus on service levels and product vitality.

Recovery in the end markets in both of our business segments and the benefits of recent price increases and acquisition.

Gross profit was $379 million, an increase of $43 million or 13% over the prior year.

This improvement was driven by revenue growth and by offsetting the significant increase in input costs.

This increases in product and productivity improvement.

Gross profit as a percent of sales was 41, 7%.

<unk> of 170 basis points from 43, 4% in the prior year, but.

Flat sequentially from the first quarter of 2000 to 2022.

I will talk more about the current cost environment later on in the call.

Reported operating profit was $102 million, an increase of $11 million or 12% over the prior year.

Reported operating profit margin was 11, 3% of net sales for the second quarter of fiscal 2022, a decrease of 40 basis points over the prior year.

Adjusted operating profit was $123 million, an increase of $14 million or 13% over the prior year.

Adjusted operating profit margin was 13, 5% of net sales a decrease of 50 basis points against the prior year.

Adjusted operating profit margin was lower than the prior year as a decline in gross profit margin was partially offset by leveraging operating expenses.

Finally, we saw continued improvement in diluted earnings per share for the second quarter of fiscal 2022.

Diluted EPS of $2 13.

Increased 39.

Our 22% over the prior year and adjusted diluted earnings per share of $2 57.

Increased 45 or 21% over the prior year.

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

Now moving on to our segments.

During the quarter, our lighting and lighting controls segment saw sales increased 17% to $863 million over the prior year.

This was driven by the improvements within our independent sales network, which grew approximately 12%.

And an increase of 5% and our direct sales network.

Additionally, sales in the corporate account channel increased approximately 105% over the prior year.

Recall that last year customers, who paused their renovations due to the pandemic.

Activity has now restarted as you can see from the growth this quarter.

We also had growth in our other channel of 83% over the prior year due primarily to the acquisition of <unk>.

Sales in the retail channel declined approximately 2% in the current quarter.

This was due to some of our inventory being delayed and transit are held up in the quarter, resulting in longer lead times than we anticipated.

Should start to see growth in this channel in the upcoming quarters.

<unk> operating profit for the second quarter of 2022 was $117 million, an increase of 14% versus the prior year with operating margin declining 30 basis points to 13, 5%.

Adjusted operating profit of $127 million.

13% versus the prior year with adjusted operating profit margin declined 50 basis points to 14, 7%.

ABL has demonstrated the ability to grow sales, while leveraging their operating expenses.

Moving on to the results for our intelligence space is great.

For the second quarter of 2022 sales in spaces increased approximately 16% to $50 million, reflecting growth in both detect and atria.

Space is operating profit in the second quarter of 2022 increased approximately $400000 to $1 2 million.

Adjusted operating profit of $6 million increased approximately $1 million versus the prior year as a result of the strong sales growth and continued investment in the business.

Our business model continues to be highly productive generating $127 million of net cash flow from operating activities in the first half of fiscal 2022.

This was a decrease of $85 million compared to the prior year.

Due primarily to an increased investment in working capital primarily related to inventory.

Inventory days are up over the end of our fiscal year with approximately half of the increase due to increased lead times on source finished goods and to a slightly lesser extent increased purchases of electronic components.

We are managing our inventory levels to support our growth as well as insulate our production facilities from inconsistent supply availability.

We also invested $24 million or one 3% of net sales in capital expenditures during the first six months of fiscal 2022.

Finally, we have continued to repurchase shares in the second quarter as.

As a result since May of 2020, we have bought back approximately 13% of our company shares at an average price of approximately $120 per share.

I would now like to spend a few minutes focusing on the remainder of the year.

David We expect the current environment to continue for the foreseeable future with strong demand, while access and cost of components will remain a challenge our focus throughout will continue to be on growing sales and leveraging our operating expenses.

In relation to the recent instability in Europe , we have no direct sales exposure either to Russia or Ukraine.

However, the conflict does add to the existing supply chain pressures.

Additionally, we are experiencing increases in transportation costs, driven by expected increases in oil prices in the last 15 months, we have strategically introduced six price increases in addition to driving product and productivity improvements.

Before I hand, you over to the operator I want to leave you with our key takeaways.

Continued to demonstrate strong sales growth and effective management of gross margin and a volatile cost environment.

We have leveraged our operating expenses.

Finally, we have continued to allocate capital effectively.

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 Christopher Glynn.

With Oppenheimer. Your line is open.

Hey, good morning.

Thank you.

Nice quarter curious if youre seeing any instances of encountering the elasticity is.

The price increases take full effect.

Commentary on.

Backlog levels versus normal.

Yes, good morning, Chris Thanks for thanks for being with Us.

As Karen indicated in her commentary.

We've been able to strategically introduced six price increases over the course of this year.

Way more than we expected obviously in the.

And the reaction has been kind of relatively accepting of those price increases so you've seen you've.

<unk> seen a pedal have success, obviously in the top line performance is as a result of that.

Demand remains strong so as we as we look at backlogs in terms of committed orders. They are obviously significantly higher than they than they usually are at this point, which is which is a reflection both of the strong demand as well as the.

Availability of components et cetera that Karen alluded to so we're trying to work through that.

As effectively as effectively as we can and we expect that dynamic to be to continue through at least the rest of the calendar year, which is demand is strong and supply chain as tight.

Okay, Thanks and just.

Follow up for me.

Guidance slide was removed.

Outlook section in the press release do we.

Just retain the prior quarters' disclosure by default.

Yes, so so it's really hard to introduce something new to the world. So our.

So just to reframe kind of our what we what we added tended to do at the beginning of the year was to provide a financial framework, which we.

Which we did not engender too to update through the year. So so that was as Youll remember kind of mid single digits for ABL.

And that implied expanding operating margins, which is which is what we're delivering on.

Our focus during the year is going to be on telling you. What we're doing why we're doing and how we're doing that and and delivering the best results that we can and so.

So as we talked about obviously, there's price increases there is volume and.

Within the ability to realize that we're really focused on these three things the strategic supplier relationships.

Prioritizing access so over cost of some of our components and continuous reengineering, we're doing our products to the available components. So that's how we're doing what we're doing in and the results are kind of obviously speaking for themselves.

Thanks, Neil just a small point of order you just said mid single digit spray BLA. Thank you are standing metric is high single digits high single digits sorry.

Thank you for correcting me, Chris I didn't mean to accidentally give give the wrong numbers.

No you did.

<unk>.

Yes.

Our next question comes from Ryan Merkel.

William Blair Your line is open.

Hey, everyone, good morning, and nice quarter.

Thanks Ryan.

So Neil you mentioned, the fixed price increases and it sounds like realization is pretty good given the backdrop just curious.

When when do you expect to see the full impact just given the backlog there of those six and then can you give us a sense of the range like what price could contribute once you start seeing the full impact.

Yes, so so as we as we kind of talk through those one of the things we highlighted in our last quarter was that we have intentionally not repriced the backlog so.

So just for for those who may not know a project get started whether it's all focused on C&I for it for a second project get started.

We start to make quotes for that project when those when those quotes are accepted we consider that a committed order and we honor that price going forward. So all price increases are from from that effectively from that point forward. So so you see the effectively the cumulative.

Effect of those price increases in the backlog as it starts to.

As it starts to roll forward.

The challenge with managing our matching up price and cost is obviously those are those are moving independently of each other. So so we are we have realized a significant amount of price and we will continue to realize more as the cumulative impact of that kind of rolls out through the rest of the year.

Independent separately from that obviously, we are buying the necessary components to manufacture those goods. So whether it's components when we can get when and where and what we need to pay for them to get them.

And the other key materials like steel aluminum et cetera, which are moving independently of each other.

Some of those obviously is our ability to manage price cost and thats, how we feel like we've done a even though the margins aren't as high as they were last year given the volatility on the cost side, we feel like we've done a really nice job of managing those and it sets us up for continued performance the way and by the same manner in which we have done it.

For the rate for the remainder of the fiscal year.

Got it okay. Thanks for that and then for my follow up just can you comment on the backlog did it grow sequentially just given the supply chain challenges.

Any cancellations or push outs or do you feel pretty good about the next three to six months based on what Youre hearing and seeing from customers.

Yes, so as I said, Karen indicated we've seen strong demand thats there.

Thats continued so.

So backlog has ticked up slightly sequentially. So.

So there is there is plenty of business out there.

And we're just working hard to satisfy it.

Got it thanks.

Our next question comes from Chris Snyder.

Your line is open.

Thank you.

So I certainly understand the strategy and also the drivers of the building inventory levels of the company during.

During this quarter and last but could you speak to any maybe impact. This has on margin whether it be higher fixed cost absorption in the current period or if this inventory level word and maybe normalize or right size lower any potential margin headwinds coming from a result of that.

Yes, Darren you want to start sure yes, Chris excuse me as we've mentioned we have.

Intentionally increased our inventory really related to two reasons one was the longer lead times that we're seeing on the purchased finished goods. It used to take about 20 days to get to us and now it's taking closer to 50. So that has been some build that has happened because of those longer lead time. The second reason has been availability.

Of our electronic components. So we have tried to secure more of those than we would typically do just in light of the shortages. So that we can service the demand that we're seeing so as that rolls through youre not going to see any.

These kind of headwinds as you described other front other than from the increase in cost that we've been talking about and that Neil has described on the call.

Thank you I appreciate that and then for my follow up I wanted to touch on M&A.

In the past the company has spoke to its interest in.

In adding assets to build out this space is group.

If I remember correctly I believe there was some commentary at the Investor day.

Maybe even pushing into a tangential industrial vertical could you just provide some color on the company's M&A strategy as the cash balance remains maybe higher than what we've seen historically.

Yes, I'll take that one Chris so so I can't speak for what the acquisition strategy was before I got here. So we'll focus on kind of what we said on the Investor day, which is that our capital allocation priorities are pretty straightforward. One we want to grow the businesses. We already have two we want to expand the company via acquisition both invest.

<unk> in our current businesses lighting and spaces.

As well as add additional businesses over time.

The third is to maintain our dividend and then the fourth is when we see an opportunity to create permanent value through share repurchase we've done that and when it's been really attractive we've been really aggressive.

So as we look forward to the to the acquisition strategy that is absolutely a part of where we want to how we want to deploy capital going forward and we want to grow the business.

As a point of fact, though we've seen significant opportunity to to generate value through our existing businesses. So that's where we focused our efforts obviously the <unk> acquisition is a great example of adding a strategic asset to an important business for us. So as a reminder, the reason that we did that was three.

Fold one was to control the technology, we have we have in our alumina ours. So.

The analogy I have.

Drove with our team was we were a car company that did manufactured engines and now we view the second was to expand our OEM channels. So that we could participate more fulsome Lee and the broader market and then the third was to listen.

To integrate our supply chain, so that we could scale more more effectively.

That acquisition is performing exceptionally well from a financial perspective.

As we indicated on the last quarter, it's mildly dilutive from a gross margin percentage, but dollar obviously dollar accretive and and we expect that to accelerate over time as we as we integrate it.

We are actively looking at opportunities to expand the.

To expand this basis group both.

The businesses that are more related to detect primarily and then.

And then were work, we're working aggressively to demonstrate organic sales growth with the <unk> products as a first step towards investing further in them.

And then finally that gives us the opportunity over the next couple of years to to add.

To add other businesses to the to the portfolio. So we're positioning the company both from an ability perspective as well as a talent perspective, evidenced the addition of <unk>.

And obviously, we are we're positioning well from a from a financial perspective so.

<unk> will be over the next while we will continue to improve the businesses that we already have and and over time, we'll add businesses, where we can demonstrate what we've done with ABL and spaces.

Other environments, where we can drive high returns for our shareholders.

I appreciate that thank you for the time.

Yes.

Our next question comes from Josh Chan of Baird. Your line is open.

Hi, Good morning, Neil Karen short with a congrats on a good quarter.

Thank you Josh.

My first question is on the supply chain I guess.

Would you update us on kind of how that changed sequentially, if at all and anything getting better or worse.

How do you expect that to trend in the coming months I guess.

Karen I'll take that one I would say Josh good morning.

I would say that the supply chain I can't think of a better a different analogy hasnt kind of whack a mole it just seems to be it's something different.

Each time.

So and I believe that's the <unk>.

You see that flowing through.

And.

And kind of pick your commodity pick your component.

The Big picture.

The big picture trends are pretty obvious.

There is a.

There is more demand than supply for for global chips, So kind of working through allocations and demand planning is the is the challenge they're trying to get our.

To get our unfair share.

Of those excuse me.

<unk> has been a problem that should hopefully get a little bit better.

In the foreseeable future absent kind of any long beach strike issues moving product through the through the West Coast and then commodity prices have changed you can see those as well as we can so whether it's steel or.

With the Ukraine situation aluminum prices, obviously changed so so we're kind of playing whack a mole, which is why we we've talked about.

Kind of how we're trying to manage through this and Karen walked through the pricing and the and the costing that's why I feel like we are we're pleased with these.

Margins on the gross margin level.

A steady state environment, I am confident we'd be delivering higher margins, but.

Even if they hang around at these levels for a while I think we can be pleased with him.

Great I appreciate the color there and then I guess my second question is on market share.

Certainly it seems like Youre, winning in terms of market share.

Given the more transactional nature of some of these projects like what can you do or how are you working to retain the gains that you've secured over this time period.

Yes, Josh I would tell you our focus right now continues to be on service and product vitality, and Thats really where youre seeing us be able to grow our sales.

Net sales network and our direct sales network is really having an impact for our ability to differentiate with service and our product portfolio.

So we're just going to continue that focus as we as we move forward.

The only thing I'd add to that Josh as we've had a lot of success with our contractor select portfolio, which is right product right place right time. So we.

We describe it is the most important everyday lighting products and so.

So that is.

As long as we maintain a high product vitality that's a.

That's an interesting and important part of the portfolio going forward.

That's great. Thank you both for your time.

Thank you.

Our next question comes from Jeff Osborne at Cowen and company. Your line is open.

Hey, good morning, a couple of questions on my end, Karen I think on the last quarter. You had mentioned that you thought <unk> would be the low point for gross margin throughout the year or is that still the case.

I do not recall mentioning that would be the low point for gross margins I think what we talked about is that second quarters are sequentially or are seasonally our lowest topline and so you could expect to see some of that seasonal.

Decrease which you saw I think we were down about $20 million from the first quarter. So you do get a little bit of an impact from leveraging some of your fixed cost and gross profit from that perspective.

And just as we talked about before as we look ahead, the cost and availability of components continue to be a challenge, we will prioritize servicing our customers and speed over cost and we'll continue to manage those costs aggressively.

Got it and then two other quick ones any impact to the backlog from rising interest rates on some of your larger projects and then I was just curious what the initiatives are to try to work through the backlog quicker.

<unk> inventory help you do that.

Yes, so first on the rates.

I don't think we've seen that yet so we're obviously paying close attention to that.

And there's I don't.

I think it's pretty obvious that projects the value of projects will have to change Big project not our projects. The projects were a part of will be impacted at some point by by discount rates.

In terms of managing through through the backlog.

We are we.

We have.

We have initiated a significant number of activities I highlighted the key ones about kind of redesigning products and the strategic supplier relationships and managing.

To cost over two access and speed over cost.

If you were to if you were to walk our halls, you would hear us talk about best wishes backlog elimination strategy and.

That that activity spans from focus factories in Mexico, all the way through our sourcing our product and our go to market teams and so.

We are aggressively ramping capacity.

We've as you can see we've worked well you cant see some things are harder.

Look easier than they are this one has been a challenge as we've managed through components, we've gotten labor in a really good spot over time now. So so we're starting to we're starting to crank through that.

Craig through that backlog. The good news is that orders remained strong so.

Even though we.

We continue to increase our production and our productivity the orders keep coming in.

Thanks for the detailed Neal I appreciate it.

Yeah.

And our next question comes from Brian Lee at Goldman Sachs. Your line is open.

Yeah.

Hey, Neal Hey, Karen this is miguel on for Brian .

Just had a quick.

Just a quick question too.

Talk about inventories again, so you talked about the two impacts.

The increased lead times and then also the increasing purchases is there a.

Is there a shift happening with with how you are managing inventories going forward just as you.

Can you potentially as the lead times come down would you would you expect to continue to hold higher inventories.

The percent of revenue maybe as you.

As you may be think about increasing.

Revenues, just given all of the supply chain challenges going on.

Yes, so thank you Macau.

As I mentioned, the two reasons and you're right.

Tended lead times on the source finished goods and then also the electronic components. So how we're managing those as we're looking ahead. So we're trying not to look in the rearview mirror to manage inventories, but really look ahead understand where we have the demand understand where we have the products that we need to meet our the inventory we need to meet that demand.

And focusing.

Really carefully on that so we don't expect that our days would continue to be this high we do believe that it's necessary right now given the challenges that we're seeing in access to components into inventory, but we are managing by days and very aggressively in the windshield.

Okay. Thank you very much that's it for me I'll pass it on.

Thanks Mikael.

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

Thank you all for joining us. This morning, we really appreciate your interest in acuity brands.

I would say from my perspective, a summary is I believe that our team delivered a really.

A really good quarter in a really challenging environment as we look forward demand.

Demand remains strong supply chain remains tightened challenging and we will continue the hard work to deliver on the results that you've seen.

Going forward. So thank you for your interest in us and thank you to our team and our independent sales network for their hard work delivering these results.

This concludes the program you may now disconnect everyone have a great day.

[music].

Good morning, and welcome to the acuity brands second quarter earnings.

Earnings call of fiscal 2022 at this time, all participants are in listen only mode.

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

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

Thank you Michelle.

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

As a reminder, some of our comments today may be forward looking statements based on management's beliefs and assumptions and information currently available to management at this time.

These 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 2022 second quarter earnings release, which is available on our Investor Relations website at Www Dot investors, the Qt brand Dot com.

With me. This morning is Neil Ash, our chairman President and Chief Executive Officer, who will provide an update on our <unk> and highlights from the last quarter.

Eric Holcomb, 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 life.

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

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

Our team delivered another strong performance in the second quarter of fiscal 2022.

For the second consecutive quarter, we delivered net sales growth of 17% and we maintained our gross profit margin at 41, 7% consistent with the first quarter.

And compared to last year, we increased diluted earnings per share by 22%.

Despite the cost challenges, we were able to convert our sales growth into operating profit and net income by effectively leveraging operating expenses.

The world remains complicated.

All our demand environment is strong cost continued to be volatile and we are continuously dealing with the ongoing pressures, resulting from the global component shortages.

In spite of this our team continues to execute well and this is reflected in our performance.

Well, the ABL and spaces are performing admirably.

Our decisions to prioritize shipments by investing in electrical components and transportation are resulting in higher sales and operating profit, albeit at slightly lower margins.

Now I want to move to talk to our progress at both ABL and spaces.

First an ABL I'm happy to report that some things are returning to the way they used to be.

In March we hosted our first in person sales conference in three years next 'twenty two.

It was great to be back together with our independent sales network, who have performed exceptionally through the ups and downs in the last two years.

This was the first time that many of our associates and agents had seen each other in person since the pandemic started.

While we have been incredibly productive working virtually with our channel. It was great to spend some quality time together in person.

It was hard not to be struck by the levels of energy and enthusiasm throughout the event and the consistency of the feedback from our agents. They said acuity is delivery.

Our investments in service have allowed us to prioritize delivering for our customers when others have been unable to.

At the same time, our investments in product vitality have allowed us to continue to create compelling new products that are both innovative and market moving.

As I said last quarter, we have done this by focusing on three main areas.

First by focusing on strategic supplier relationships.

The current environment has reminded us all that it really matters, who you do business with.

Because we are the largest lighting company, we have certain advantages over our direct competitors.

But those same components are also used by larger industries.

Sequentially, we are making investments in people time and resources.

We have recruited a new head of strategic sourcing for ABL.

We are working with our key suppliers on effective planning and allocation management and we are investing in inventory.

Okay.

Finally, as I said last quarter, our engineering teams continue their herculean efforts to redesign products to the available components.

At the same time. These teams have also managed to introduce around 220, new or significantly upgraded lighting and lighting control products over the last two years.

We expect the challenges around access to and cost of components to continue into the foreseeable future.

Another highlight of the next conference was our focus on Earth life.

At next we also expanded our community outreach by packing 1000 bags of food for a local Atlanta organization together with our agents.

It was one of the highlights of the event.

Now moving to the intelligence space group spaces had another solid quarter of growth in both <unk> and <unk>, we have a strong product roadmap to make space, a smarter safer and greener.

This tech continues to win in the building controls market against significant competition.

Through the Eclipse controller products <unk> is at the forefront of the technology curve with a presence in key markets and recognized leadership built on open protocol technology.

In the last quarter. This tech won projects across North America, and Canada and saw significant project wins in key verticals, including in education commercial infrastructure and data centers.

This deck is now a key supplier to two of the largest cloud providers.

We also continue to develop the <unk> platform, including progress on atrium building insights.

And we expect to expand the portfolio over time.

We continue to add talent to this team.

Finally, I want to update you on our capital allocation.

Our capital allocation priorities remain the same.

We expect to 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.

This quarter the board of director is the board of directors authorized additional capacity for share repurchases to increase our remaining authorization from 3 million to 5 million shares.

Since may of 2020, we have repurchased approximately 13% of our shares outstanding.

I would also like to announce the appointment of Sachin St. Paul Our senior Vice president of growth and transformation.

Thats joins us to manage our technology organization to deploy our better smarter faster company operating system.

And to lead the integration efforts for future acquisitions.

SaaS comes to us with distinguished experience at leading companies, including Trimble and Honeywell.

We're excited to have such on our team.

As I close I once again want to thank our team for their ongoing efforts.

Each quarter, we are faced with new challenges and our team continues to deliver.

Our continued focus on service and product vitality is allowing us to take advantage of the strong demand environment.

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

Thank you Neil.

I'd like to start by reiterating thanks to our team for their work over the last quarter.

So impressed by their flexibility and ability to drive results.

We delivered strong performance in the second quarter of 2022.

We grew net sales, we managed margins and secondly, despite a volatile cost environment and we leveraged our operating expenses.

Net sales were $909 million, an increase of 17% compared to the prior year. This.

This performance was driven by our focus on service levels and product vitality.

<unk> recovery in the end markets in both of our business segments and the benefits of recent price increases and acquisition.

Gross profit was $379 million, an increase of $43 million or 13% over the prior year.

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

Gross profit as a percent of sales was 41, 7% a decrease of 170 basis points from 43, 4% in the prior year, but flat sequentially from the first quarter of 2000 to 2022.

I will talk more about the current cost environment later on in the call.

Reported operating profit was $102 million, an increase of $11 million or 12% over the prior year.

Reported operating profit margin was 11, 3% of net sales for the second quarter of fiscal 2022, a decrease of 40 basis points over the prior year.

Adjusted operating profit was $123 million, an increase of $14 million or 13% over the prior year.

Adjusted operating profit margin was 13, 5% of net sales a decrease of 50 basis points against the prior year.

Adjusted operating profit margin was lower than the prior year as a decline in gross profit margin was partially offset by leveraging operating expenses.

Finally, we saw continued improvement in diluted earnings per share for the second quarter of fiscal 2022.

Diluted EPS of $2 13 inch.

Increased 39.

Our 22% over the prior year and adjusted diluted earnings per share of $2 57.

Increased 45 or 21% over the prior year.

Our share repurchase program favorably impacted adjusted diluted EPS by 6%.

Now moving onto our segment.

During the quarter, our lighting and lighting controls segment saw sales increased 17% to $863 million over the prior year.

This was driven by the improvements within our independent sales network, which grew approximately 12% and an increase of 5% and our direct sales network.

Additionally, sales in the corporate account channel increased approximately 105% over the prior year.

Recall that last year customers in pause their renovations due to the pandemic.

That activity has now restarted as you can see from the growth this quarter.

We also had growth in our other channel of 83% over the prior year due primarily to the acquisition of <unk>.

Sales in the retail channel declined approximately 2% in the current quarter.

This was due to some of our inventory being delayed in transit are held up in the quarter, resulting in longer lead times than we anticipated.

It should start to see growth in this channel in the upcoming quarters.

<unk> operating profit for the second quarter of 2022 was $117 million, an increase of 14% versus the prior year with operating margin declining 30 basis points to 13, 5%.

Adjusted operating profit of $127 million.

13% versus the prior year with adjusted operating profit margin declined 50 basis points to 14, 7%.

<unk> has demonstrated the ability to grow sales, while leveraging their operating expenses.

Moving onto the results for our intelligent spaces group for.

For the second quarter of 2022 sales in spaces increased approximately 16% to $50 million, reflecting growth in both detect and atria.

Space is operating profit in the second quarter of 2022 increased approximately $400000 to $1 2 million.

Adjusted operating profit of $6 million increased approximately $1 million versus the prior year as a result of the strong sales growth and continued investment in the business.

Yeah.

Our business model continues to be highly productive generating $127 million of net cash flow from operating activities in the first half of fiscal 2022.

This was a decrease of $85 million compared to the prior year due primarily to an increased investment in working capital primarily related to inventory.

We are managing our inventory levels to support our growth as well as insulate our production facilities from inconsistent supply availability.

We also invested $24 million or one 3% of net sales in capital expenditures during the first six months of fiscal 2022.

Finally, we have continued to repurchase shares in the second quarter.

As a result since May of 2020, we have bought back approximately 13% of our company shares at an average price of approximately $120 per share.

I would now like to spend a few minutes focusing on the remainder of the year.

Phil stated, we expect the current environment to continue for the foreseeable future with strong demand, while access and cost of components will remain a challenge our focus throughout will continue to be on growing sales and leveraging our operating expenses.

In relation to the recent instability in Europe , we have no direct sales exposure either to Russia or Ukraine.

However, the conflict does add to the existing supply chain pressures.

Before I hand, you over to the operator I want to leave you with our key takeaways.

We have continued to demonstrate strong sales growth and effective management of gross margin and a volatile cost environment. We have leveraged our operating expenses and finally, we have continued to allocate capital effectively.

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

Thank you.

Our next question comes from Christopher Glynn.

With Oppenheimer. Your line is open.

Hey, good morning.

Thank you.

Nice quarter.

Curious if youre seeing any incidences of encountering the elasticity as the price increases take full effect.

Commentary on.

Backlog levels versus normal.

Yes, good morning, Chris Thanks for thanks for being with Us.

As Karen indicated in her commentary, we've we've been able to strategically introduce six price increases over the course of this year.

Way more than we expected obviously and.

And the reaction has been kind of relatively accepting of those price increases so you've seen you've.

<unk> seen a tunnel have success, obviously in the top line performance is as a result of that.

The availability of components et cetera that Karen alluded to so we're trying to work through that.

As effectively as effectively as we can and we expect that dynamic to be to continue through at least the rest of the calendar year, which is demand is strong and supply chain as tight.

Okay, Thanks and just.

Follow up from me.

Guidance slide was removed in the outlook section in the press release do we.

Just retain the prior quarters' disclosure by default.

Yes, so so it's really hard to introduce something new to the world. So our.

So just to reframe kind of our what we what we added tended to do at the beginning of the year was to provide a financial framework, which we.

Which we did not engender too to update through the year. So so that was as Youll remember kind of mid single digits for ABL.

And that implied expanding operating margins, which is which is what we're delivering on.

Our focus during the year is going to be on telling you. What we're doing why we're doing and how we're doing that and and delivering the best results that we can and so.

So as we talked about obviously, there's price increases there is volume and.

Within the ability to realize that we're really focused on these three things the strategic supplier relationships.

Prioritizing access so over cost of of some of our components and continuous reengineering, we're doing our products to the available components. So that's how we're doing what we're doing and the results are kind of obviously speaking for themselves.

Thanks, Neil just a small point of order you just said mid single digit spray BLA. Thank your standing metric is high single digits high single digits sorry.

Thank you for correcting me, Chris I didn't mean to accidentally give give the wrong numbers.

No you didn't.

Okay.

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

Hey, everyone, good morning, and nice quarter. Thanks.

Thanks Ryan.

So Neil you mentioned, the fixed price increases and it sounds like realization is pretty good given the backdrop.

Curious.

When when do you expect to see the full impact just given the backlog there of those six and then can you give us a sense of the range of like what price could contribute once you start seeing the full impact.

Yes, so so as we as we kind of talk through those one of the things we highlighted in our last quarter was that we have intentionally not repriced the backlog so so.

For for those who may not know a project get started whether it's.

I'll focus on C&I for a for a second project that started.

Effect of those price increases in the backlog as it starts to as it starts to roll forward.

And the other key materials like steel aluminum et cetera, which are moving independently of each other so some of those obviously is our ability to manage price cost and thats, how we feel like we've done a even though the margins arent as high as they were last year given the volatility on the cost side, we feel like we've done a really nice job of Mad.

<unk> knows and it sets us up for continued performance the way and by the same manner in which we've done it for the rate for the remainder of the fiscal year.

Okay.

Got it okay. Thanks for that and then for my follow up just can you comment on the backlog did it grow sequentially just given the supply chain challenges in any cancellations or push outs or do you feel pretty good about the next three to six months based on what you are hearing and seeing from customers.

Yes, so as I said, Karen indicated we've seen strong demand Thats Thats continued so.

<unk> backlog has ticked up slightly sequentially. So.

So there is there is plenty of business out there.

And we're just working hard to satisfy it.

Got it thanks.

Our next question comes from Chris Snyder.

Your line is open.

Thank you.

I certainly understand the strategy and also the drivers of the building inventory levels of the company.

Yes, Aaron you want to start sure yes, Chris excuse me as we've mentioned we have.

We intentionally increased our inventory really related to two reasons one was the longer lead times that we're seeing on the purchased finished goods. It used to take about 20 days to get to us and now it's taking closer to 50. So that has been some build that has happened because of those longer lead time. The second reason has been availability.

Of our electronic components. So we have tried to secure more of those than we would typically do just in light of the shortages. So that we can service the demand that we're seeing so.

That rolls through Youre, not going to see any.

Any kind of headwinds as you described other front other than from the increase in costs that we've been talking about and that Neil has described on the call.

Okay.

Thank you I appreciate that and then for my follow up I wanted to touch on M&A.

In the past the company has spoke to its interest in <unk>.

Adding tech assets to build out this space is group.

If I remember correctly I believe there was some commentary at the Investor day.

Around maybe even pushing into a tangential industrial vertical could you just provide some color on the company's M&A strategy as the cash balance remains maybe higher than what we've seen historically.

Yes, I'll take that one Chris so.

I can't speak for what the acquisition strategy was before I got here. So we will focus on kind of what we said on the Investor day, which is that our capital allocation priorities are pretty straightforward. One we want to grow the businesses. We already have two we want to expand the company via acquisition both investments in our current businesses lighting and spaces.

As well as add additional businesses over time.

Third is to maintain our dividend and then the fourth is when we see an opportunity to create permanent value through share repurchase we've done that and when it's been really attractive we've been really aggressive.

So as we look forward to the to the acquisition strategy that is absolutely a part of where we want to how we want to deploy capital going forward and we want to grow the business.

As a point of fact, though we've seen significant opportunity to to generate value through our existing businesses. So that's where we focused our efforts.

Obviously, the <unk> acquisition is a great example of adding a strategic asset to an important business for us. So as a reminder, the reason that we did that was threefold one was to control. The technology. We have we have in our aluminum <unk>. So.

The analogy I have drove with our team was we were a car company that did manufactured engines and now we do the second was to expand our OEM channels. So that we could participate more fulsome Lee in the in the broader market and then the third was to was to integrate our supply chain. So that we can scale more more effect.

<unk>.

That acquisition is is performing exceptionally well from a financial perspective, it's.

We are actively looking at opportunities to expand the two expand the spaces group both in businesses that are more related to detect primarily and then.

And then where we're work we're working aggressively to demonstrate organic sales growth with the <unk> products as a first step towards investing further in them.

And then finally that gives us the opportunity over the next couple of years to to add to.

To add other businesses to the to the portfolio. So we're positioning the company both from an ability perspective as well as a talent perspective, evidenced the addition of <unk>.

And obviously, we are we're positioning well from a from a financial perspective so.

Narrative will be over the next while we will continue to improve the businesses that we already have and and over time, we'll add businesses, where we can demonstrate what we've done with ABL and spaces and <unk>.

Other environments, where we can drive high returns for our shareholders.

I appreciate that thank you for the time.

Yes.

Our next question comes from Josh Chan of Baird. Your line is open.

Hi, Good morning, Neil Karen short with a congrats on a good quarter.

Thank you Josh.

My first question is on the supply chain I guess could you update us on kind of how that changed sequentially if at all.

Is it getting better or worse.

How do you expect that to trend in the coming months I guess.

Karen I'll take that one I would say Josh good morning.

I would say that the supply chain I can't think of a better a different analogy hasn't kind of whack a mole. It just seems to be it's something different.

Each time.

And I believe that you see that flowing through.

And.

And kind of pick your commodity pick your component.

The Big picture.

The big picture trends are pretty obvious.

There is a.

There is more demand than supply for for global chips, So kind of working through allocations and demand planning is the is the challenge they're trying to get our.

To get our unfair share.

Of those excuse me.

<unk> has been a problem that should hopefully get a little bit better.

With the Ukraine situation aluminum prices, obviously changed so so we're kind of playing whack a mole, which is why we we've talked about.

Kind of how we're trying to manage through this.

And Karen walked through the pricing and the and the costing that's why I feel like were delivered.

We're pleased with these these margins on the gross margin level.

In a steady state environment, I am confident we'd be delivering higher margins, but.

Even if they hang around at these levels for a while I think we can be pleased with him.

Okay, Great I appreciate the color there and I guess my second question is on market share.

It seems like Youre, winning in terms of market share.

Given the more transactional nature of some of these projects like what can you do or how are you.

Working to retain the gains that you've secured over this time period.

Yes, Josh I would say our focus right now continues to be on service and product vitality, and Thats really where youre seeing us be able to grow our sales independent sales network and our direct sales network.

Is really having an impact for our ability to differentiate with service and our product portfolio.

So we're just going to continue that focus as we as we move forward.

The only thing I'd add to that Josh as we've had a lot of success with our contractor select portfolio, which is right product right place right time so.

We describe it is the most important everyday lighting products and so so.

So that is.

As long as we maintain a high product vitality that say that.

It's an interesting and important part of the portfolio going forward.

That's great. Thank you both great time.

Thanks.

Our next question comes from Jeff Osborne of Cowen and company. Your line is open.

Hey, good morning, a couple of questions on my end, Karen I think on the last quarter. You had mentioned that you thought <unk> would be the low point for gross margins throughout the year is that still the case.

I do not recall mentioning that would be the low point for gross margins I think what we talked about is the second quarters are sequentially.

Our seasonally our lowest topline and so you could expect to see some of that seasonal decrease which you saw I think we were down about $20 million from the first quarter. So you do get a little bit of an impact from leveraging some of your fixed cost and gross profit from that perspective.

And just as we talked about before as we look ahead.

Cost and availability of components continue to be a challenge, we will prioritize servicing our customers and speed over cost and we'll continue to manage those costs aggressively.

Yes, so first on the rates.

I don't think we've seen that yet so we're obviously paying close attention to that.

And there's I don't.

I think it's pretty obvious that the projects the value of projects will have to change Big project not our projects. The projects were a part of will be impacted at some point by by discount rates.

In terms of managing through through the backlog.

We are we.

We have.

We have initiated a significant number of activities I highlighted the key ones about kind of redesigning products and the strategic supplier relationships and managing.

To costs over or to access and speed over cost.

If you were to if you were to walk our halls, you would hear us talk about that switches backlog elimination strategy and.

The that that activity spans from focus factories in Mexico, all the way through our sourcing our product and our and our go to market teams and so.

We are aggressively ramping capacity.

We've as you can see we've worked well you cant see some things are harder.

Look easier than they are this one has been a challenge as we've managed through components, we've gotten labor in a really good spot over time now. So so we're starting to we're starting to crank.

Crank through that.

Craig through that backlog. The good news is that orders remained strong. So so even though we we continue to increase our production and our productivity the orders keep coming in.

Thanks for the detail I appreciate it.

And our next question comes from Brian Lee at Goldman Sachs. Your line is open.

Hey, Neal Hey, Karen this is miguel on for Brian .

Just kind of quick.

Just a quick question too.

Can you talk about inventories again, so you talked about the two impacts.

The increased lead times and then also the.

The increasing purchases is there a.

Is there a shift happening with with how youre managing inventories going forward just as you.

Do you potentially at the lead times come down would you would you expect to continue to hold higher inventories as a.

The percent of revenue maybe as you.

As you may be think about increasing.

Revenues, just given all of the supply chain challenges going on.

Yes, so thank you Miguel.

As I mentioned, the two reasons and you're right.

<unk> lead times on the source finished goods and then also the electronic components. So how we're managing those as we're looking ahead. So we're trying not to look in the rearview mirror to manage inventories, but really look ahead understand where we have the demand understand where we have the products that we need to meet our the inventory we need to meet that demand.

And focusing.

The windshield.

Okay. Thank you very much that's it for me I'll pass it on.

Thanks Mikael.

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

Thank you all for joining us. This morning, we really appreciate your interest in acuity brands I would say from my perspective, a summary is I believe that our team delivered a really.

A really good quarter in a really challenging environment as we look forward demand.

Demand remains strong supply chain remains tight in challenging and will continue the hard work to deliver on the results that you've seen.

Going forward. So thank you for your interest in us and thank you to our team and our independent sales network for their hard work delivering these results.

This concludes the program you may now disconnect everyone have a great day.

Q2 2022 Acuity Brands Inc Earnings Call

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