Q4 2022 Acuity Brands Inc Earnings Call

October 4, 2022

The conference will begin shortly to raise your hand during Q&A.

You can dial star one one.

[music].

Good morning, and welcome to the acuity brands fiscal 2022 fourth quarter and full year earnings call.

At this time all participants are in a 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 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 fourth quarter and full year earnings call.

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

These beliefs are subject to known and unknown risks and uncertainties, many of which maybe beyond our control, including those detailed in our periodic SEC filings.

Please note that our company's actual results may differ materially from those anticipated.

Undertake no obligation to update these statements.

Reconciliations of certain non-GAAP financial metrics with our corresponding GAAP measures are available in our 2022 fourth quarter and full year earnings release.

Which is available on our website at www dot invested that acuity brands dotcom.

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

We will provide an update on our strategy and highlights from the last quarter and full year.

<unk>, our senior Vice President and CFO , who will walk us through our fourth quarter and full year performance as.

As well as provide an outlook for our full fiscal year 2023.

There will be an opportunity for Q&A at the end of this call for their participation. 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 thank you to everyone joining us on the call.

We continued to deliver strong results in the fourth quarter, concluding what has been a very good fiscal 2022.

We had strong demand across our end markets and we demonstrated the ability to capture price and drive volume through product vitality and service in both our lighting and space businesses throughout this fiscal year.

We delivered solid operating profit and EPS growth and.

And we again create a permanent shareholder value through share repurchases.

Both our lighting and spaces businesses have delivered strong results throughout 2022.

Starting with ABL.

Our team made good progress on our product vitality and service initiatives.

Our product vitality efforts are the combination of new product introductions and improvements to our existing portfolio to ensure that our products are more valuable to our customers and more profitable for us.

These product vitality efforts are being recognized.

We won awards across our portfolio for design and innovation, including several Red Dot design awards for architectural lighting.

ECM magazine recognized our contractor select stock pack as a category award winner for product of the year.

And we received a bright Star award for software and controls from LCD magazine.

Our service initiatives are also being recognized by the industry.

We were named supplier of the year by each of the two largest buying groups in the industry Hi, Mark.

Yes.

Throughout 2022, we've been focused on satisfying customer demand.

To do that through the global supply chain conditions, we have continued to prioritize three key activities.

First investing in supplier relationships.

Second empowering our teams to secure components in the open market and third reengineering products to available components.

While these challenges have continued our focus has remained the same.

In the fourth quarter, what our ABL business encountered sourcing interruptions with a few electronic components, we were able to leverage our strong supplier relationships to finished the quarter with a strong August .

Okay.

I would now like to highlight two other important aspects of our business.

The first is contractor select.

Contractor select is a collection of the most important everyday lighting and lighting control products.

We have done and we continue to do significant work on product vitality in this portfolio.

This work allows us to be competitive from a value perspective, and the results have been impressive.

Contractor select is growing faster than our broader portfolio and provides a consistent foundational relationship with electrical distributors.

Second as we passed the one year anniversary of our acquisition of the <unk> business I want to update you on our progress.

We have successfully integrated the business with our go to market product and supply chain efforts.

We have rebranded the product portfolio to <unk> as part of our <unk> product family.

We have begun to integrate more after tronic drivers in our luminaire portfolio.

We have grown our OEM sales and we have successfully integrated the production facility into our Mexico operations.

The acquisition is delivering on our expectations toward more of the technology in our alumina ers.

Expand our OEM channel.

Take greater control of our electronic supply chain.

Now moving to our intelligence basis group.

The spaces team also had a very solid quarter, delivering net sales growth and expanding profit as we continue to make space, a smarter safer and greener.

<unk> had strong sales in the fourth quarter, notably in the sales of our Eclipse controller, which uses open protocol technology to control and monitor systems in buildings, including heating ventilation lighting and other functions essentially acting like the brain of the building.

The data generated is then used to optimize energy consumption and occupancy comfort in a building or space.

<unk> continues to rollout new and approved applications.

In the fourth quarter, we launched product improvements to our atreus locator, which enables customers to attract high value assets within their spaces and atreus vision that can improve customer experiences by managing traffic in our space.

Now I want to spend a minute on capital allocation.

Our capital allocation priorities remain the same.

Our priorities are to invest for growth in our current businesses.

Invest in acquisitions.

We maintain our dividend.

And allocate capital for share repurchases when we perceive there is an opportunity to create permanent value for shareholders.

Earlier this month, we announced Felipe <unk> as senior Vice President of corporate development and strategy.

Phillipe reports to me and will be responsible for evaluating mergers and acquisitions and building strategic relationships.

As I reflect on our fiscal 2022, we've had a good year.

We have successfully repositioned the company at the intersection of sustainability and technology.

Our business has developed a technology that saves our customers energy and reduces their carbon emissions.

We are positioned for long term growth by taking advantage of two of the most important megatrends.

Minimizing the impacts of climate change and maximizing the impacts of technology.

Acuity brands lighting is the largest lighting and lighting control company in North America.

We have dramatically improved our product vitality and we have demonstrated that we could serve business when others could not.

Our intelligence spaces group has differentiated technology and building controls and management systems with this tech.

And with Atreus, we are beginning to effectively demonstrate the benefits of connecting the edge to the cloud.

We've changed how the company works with the introduction of our better smarter faster operating Smith system.

Better smarter faster is the combination of processes tools and ways of working that spans from strategy to people to operating rhythms to problem solving.

It is unique to our organization and allows us to drive strategic alignment.

Manage change and deliver results.

At the same time, we are purposely have transitioned the company to be a values driven organization.

We have seven shared values.

Some of our values like integrity owner's mindset and community are fairly common.

Others like time, and curiosity are more distinctive to acuity.

Collectively they serve as the decision making framework that empowers our associates.

The combination of better smarter faster and our shared values allows us to operate more efficiently with greater distribution of responsibility and accountability throughout the company.

It is how we will continue to improve our businesses.

Respond quickly and effectively and changing economic environments.

Successfully operate additional businesses in the future.

Yeah.

Our organization is clear on how we create value.

We create value by growing net sales.

Turning those sales into cash and not growing the balance sheet as fast.

We have overall, our total rewards framework, so that everyone in the organization is aligned with us.

We've also demonstrated that we are effective capital allocators.

We have made investments in our current businesses we.

We have successfully made and integrated acquisitions.

And we have repurchased almost 20% of our company, creating permanent shareholder value.

Now looking to our fiscal 2023 and beyond we're excited about how far we've come and our prospects for the future.

While we expect 2023 to continue to be a dynamic environment, we are confident in our ability to execute.

We are well positioned in a variety of end markets.

We are continuing to invest in product vitality and service.

And we have developed a culture that supports change and is committed to improving.

Now I'll turn the call over to Karen who will update you on our 2022 performance and provide a more specific outlook for 2023.

Thank you Neil 2022 was a strong year for acuity.

For the first time, we crossed over $4 billion in annual net sales our gross.

Gross profit margin was 41, 8% our operating profit increased by $82 million year over year, and we grew diluted EPS, 32% to $11 eight terms for fiscal 2022.

We continue to allocate capital effectively through the repurchase of approximately $3 million of our outstanding shares.

In the fourth quarter, we continued to have strong net sales growth.

Net sales of $1 $1 billion were 12% higher than the prior year with both the ABL in ISG business segments contributing to the growth.

As Neil mentioned that we've now had <unk> for a full year and the incremental sales impact of that acquisition was only 1% in the fourth quarter.

We delivered gross profit margin of 41, 7% despite the lower production levels at the beginning of the fourth quarter.

Operating profit in the fourth quarter was $150 million on adjusted operating profit was $170 million.

Finally, we continued to grow earnings per share.

Our diluted earnings per share of $3 48.

With an increase of 76% or 28% year over year.

Adjusted diluted earnings per share of $3 95.

Increased 68.

Or 21% over the prior year.

Share repurchases made throughout fiscal 2022 favorably impacted adjusted diluted EPS by <unk> <unk> during the fourth quarter.

I would now like to expand on our segment performance.

Net sales in ABL increased to just over $1 billion.

An increase of 11% compared with the prior year driven largely by strong performance within the independent sales network, which grew 11% and the direct sales network, which grew 13%.

<unk> operating profit was $151 million, an increase of $2 million versus the prior year.

This quarter operating profit was impacted by three key factors.

Higher cost of inventory.

Second increased costs for transportation to deliver our products to the customer and finally higher commission rates for certain project business.

Now moving on to ISG.

The spaces segment also had a very strong year and improve both net sales and operating profit.

Sales in the fourth quarter of 2022 were $61 million, an increase of $11 million or 22% versus the prior year.

Isg's operating performance also improved while we continued to invest in the business.

Operating profit in the fourth quarter of 2022 increased <unk> 8 million to $10 million.

Moving to cash flow.

We generated $316 million of cash flow from operating activities for the full year of fiscal 2022.

This was down $92 million from the prior year, primarily because we invested in working capital, particularly inventory to support our growth.

I am pleased by our progress in the fourth quarter during which we decreased inventory by $95 million.

We invested $57 million or one 4% of net sales in capital expenditures during the full year fiscal 2022.

Finally, we invested $107 million to repurchase approximately 600000 shares during the fourth quarter, which means that for the full year of fiscal 2022, we have invested around $512 million in repurchasing approximately 3 million shares.

Yes.

I would now like to spend a few minutes to talk through our 2023 outlook. After the call you will find this outlook in the supplemental deck that will be available on our website.

We're going to provide annual guidance anchored around net sales and adjusted diluted EPS.

We will also provide other assumptions to help you with the construction of your model.

For full year fiscal 2023, our expectation is that net sales will be within the range of $4 1 billion and $4 3 billion for total NOI.

This is based on the assumptions that ABL will generate sales growth in the low to mid single digits and ISG will generate sales growth in the low to mid teens.

As Neil mentioned, we expect that fiscal 2023, we will continue to be a dynamic environment.

As we move from 2022 to 2023, our level of sales growth is returning to more normal levels.

We're focused on any changes in the economic outlook and we are prepared to react as necessary in the future.

Our expectation is that annual adjusted diluted earnings per share will be within the range of $13 and $14 50 for total YY.

You will recall that last year, we focused our framework on net sale and also on gross margin as we focused on product vitality and demonstrating our ability to manage the price cost relationship.

We are pleased with our performance on these metrics and for fiscal 2023, our outlook will use the more traditional metrics of net sales and adjusted diluted EPS as I've described.

The supplementary deck I mentioned will detail other key assumptions that should help you get to adjusted operating profit and adjusted EBITDA.

We will not be providing quarterly guidance.

I also want to provide you with some qualitative context for these numbers.

As you know our quarters have historically been subject to seasonality and we expect that we will be largely consistent during fiscal 2023.

We are continuing to deal with the global supply chain challenges, particularly around component shortages and we are continuing to work through some of the higher cost inventory.

This could result in margins are a little lower in the first part of the year as compared to later in the year.

Our capital allocation strategy in 2023 is unchanged we.

We will continue to generate cash and allocate capital effectively.

Prioritizing investments for growth in our current businesses.

Vesting in acquisition, maintaining our dividend and allocating capital for share repurchases.

Just before I turn the call to the operator for questions I want to leave you with that.

We are very pleased with our performance in fiscal 2022.

We exceeded $4 billion in net sales, we made improvements to the business and we increased our profitability.

We continue to allocate capital effectively and deliver 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 and good luck.

To ask a question at this time that is star one one.

Okay.

Our first question comes from the line of Tim <unk> with Baird.

Your line is now open.

Hey, good morning, I think it's I think it's me.

Nice job guys.

Thanks, Jeff.

Maybe just I have one credit question on the business and then.

A bigger picture question, but I guess, if we get into it environment.

Where acuity.

In an environment, where maybe we had less inflation.

Does that change how acuity goes to market at all.

Yes, I guess in other words.

Are you going to kind of change how you kind of react to ground product vitality surface those types of things.

But inflationary environment.

Yes, Tim.

Good question and thanks for asking the short answer is no we feel like those product vitality and increasing the service levels are foundational to our long term performance.

And they've they've driven they've obviously served us well in a an inflationary environment environment, and I think theyre going to be equally as important in a in a more normalized environment.

The ability to have products, which deliver value to customers and higher profits to us as essential and so.

We've really pushed that on the product vitality front and we're we've made a lot of progress there.

And on the service front I still think we have a lot of room for improvement.

As we come as we all continue to work our way through these these component challenges and try to get to more normalized normalized lead times and such.

Those are foundational to how I think we remain differentiated from the rest of the lighting industry.

Okay. Okay is there any way to kind of put numbers around vitality I don't know if its percentage of sales or.

How are you kind of frame that maybe what the margins kind of general then it looked like on a new product versus what it's replacing.

Yes, so I want to emphasize a couple of things on product vitality.

That we that we mentioned in the prepared remarks, which is when we say product vitality. We mean that is the combination of new product introductions and improvements to our existing portfolio. So we're doing both of those in and we are generally going to touch 28% to 30% of our product portfolio per year with those efforts, which.

<unk>.

The combination of which are what's driving the benefit.

And that's that's up materially from where we would have been three or four or five years ago.

Okay. Good and then maybe just bigger picture question on the agent channel. So so over the last six months, we've seen just kind of higher agent consolidation in the industry.

Changes I guess, it's it's probably driven by some of the OEM consolidation that we've seen but I guess as you look at the agent channel do you see a trend towards more consolidation and if that is the trend is that positive for the industry in acuity.

Yes, so we feel we feel really good about our our independent sales network and our collection of agents.

We are we are in the process of of kind of working through those agents and improving some of our representatives in different markets, which which we which we feel really good about what I say to our agents is that we're strategically dependent on each other they need us and we.

We need them and as long as their business is good with US we're good with them and.

But the world is changing and we're going forward and our first choices to take them with us and as a result, we have a natural gravitation of the best agents in each of these local markets wanting to wanting to be aligned with the with the largest and best player and so.

I see that continuing.

As you mentioned there is a fair amount of change that's going on kind of down market on some of the other on some of the other independent sales agents and that that creates frankly, an opportunity for us we think in our in our local agents in each market going forward.

Okay, Great nice nice job on this year and good luck on that.

Thanks, Tim.

Our next question comes from John Walsh with Credit Suisse. Your line is now open.

Hi, good morning, everyone.

Hey, John .

Okay.

A lot of very interesting things happening, but maybe we can just dive into some questions on the guidance.

So just looking at the $4 one to $4 3 billion. Just wondering if you could talk about the visibility into that number I'm thinking if there's price carryover, if theres any kind of stimulus carryover from infrastructure and jobs acts or maybe even the IRI and then.

Obviously, you're not really a backlog business, but you have been carrying.

Some backlog through fiscal 2022.

So just anything around that touching on those things the confidence on that revenue number. Thank you.

Yeah. Thanks, John So as we as we indicated in the prepared remarks, we expect fiscal 2023 to be a dynamic environment and so.

One of the things that that I've told our team is that our plan shouldn't be predicated on our ability to predict predict the economic environment better than everyone else can and so a lot of the work that we have done and are doing is to is to try and make our organization as dynamic as possible to respond to to what we see going forward. So.

<unk> as we as we look to the.

The net sales guidance that we gave you Karen gave you kind of the breakdown between ABL and ISG.

So first on the on the ABL side as you indicated we continue to carry higher than normal backlog and we continue to see as I said at the last quarter things are are more the same than they are different right now.

So that's the that's kind of what's baked into those assumptions for for ABL.

On ISG.

Assumptions there are that we.

We continue to grow in the low to mid teens as as we continue to take share in the.

In controls and we and we begin to accelerate the software it at atreus.

So net net.

We don't have a perfect crystal ball, but we are we're confident in our ability to execute and and this is our best estimate of where we think we're going to be for the year.

Great and then maybe.

Another one for you Aneel.

You highlighted your business development higher obviously your balance sheets very strong you've bought back shares during fiscal 2022.

Obviously, the market is very choppy right now, but kind of as you look at the world. What are the expectations you would set for us around balance sheet deployment and usage over I don't know the next six to 12 months.

Yes, so so let me expand the aperture a little bit please John beyond six months to 12 months and think kind of over the next couple of years, we purposely been very very consistent about our priorities, we're going to invest in our current businesses, we're going to invest in M&A, we're going to maintain our dividend and we're going to use capital for share.

Purchase when the opportunity presents itself.

Framework remains the same on the acquisition front.

Believe that as we look forward over the next year or two years, we're better positioned to to integrate execute integrate and manage additional businesses based on all the work that we've done around better smarter faster.

And the rest of the company.

And as you mentioned that the markets are choppy. So the world is coming back to us a little bit from from a valuation perspective. So.

So we would expect over the next couple of years that that M&A will become a more important component of our.

Of our capital allocation.

Great well good good end to the year and good luck on 23. Thank you.

Chuck.

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

Thank you. So I also wanted to ask about the guide.

Just kind of some back of the envelope math.

If I take the midpoint. It seems like margins next year are down year on year at the midpoint of EPS on sales so.

I guess correct me if that thinking is wrong, but if its right can you just maybe talk about what are the margin headwinds next year is it on the price cost side is it more on the SG&A investment in the spaces group any color there would be helpful. Thank you.

Yes, Chris Good morning, Karen and Charlotte will follow up with you and help you build the model after the call.

<unk> and these obviously EPS is growing year on year.

And we talked about we talked through the through the through the net sales guidance. So as you Cascade down no it doesn't.

It doesn't imply margin degradation as Karen indicated we expect to work through the first part of next year with.

With.

Continued inconsistency in some component availability, which impacts our ability to level load the factories, one into some some higher cost inventory related to the.

Thats in inventory right now related to higher container cost historically, but but we feel we feel pretty solid about where were going for for next year.

Thank you I appreciate that and then I guess also does the guide.

The company has done a lot of buybacks the past couple.

Our quarters.

Does the guide assume.

<unk> buybacks next year or anything on the M&A side that we should be thinking about as we kind of build into that framework. Thank you.

Yeah, Chris when you see the deck that we will post to our website. After the call you'll see we're giving an estimate of share repurchases for next year in the range of $125 million to $150 million. So that's assumed in our assumptions for 2023, but we've not built anything in for M&A.

Thank you I appreciate that.

Thank you.

Okay.

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

Good morning, Karen nail Charlotte.

So it's kind of interesting.

A little more emphasis on a curious this quarter.

So it's been largely defined by this tech.

But.

I think with <unk>, you mentioned, a couple functionality improvements and I think it's been a story of active piloting the last few years. So.

Wondering what sort of.

Transition and inflections you are anticipating for the ability to scale the software piece there.

Yes, thanks for that.

Question.

On Atreus Youre exactly accurate.

We've really been focused on.

On improving the product and and adding additional functionality to it.

Largely with an emphasis on the impact on buildings.

So so so so youll see us that's why we've been talking about building insights and Youll see some of the work that the new product introduction that we talked about an improvement that we talked about with locator and and vision are really all about those those spaces. We don't feel like we are yet at an inflection.

Point with Atria, and we don't assume that but we're confident in and the work that we've been doing.

And it's worth taking a second to.

Talk about the.

<unk> edge to cloud opportunities so.

So when we talk about the edge. That's obviously with <unk>. We have we have powerful edge computing inside spaces that control those spaces to generate the data that that can be used as we mentioned too.

To control everything that happens in that in that space and then the data creates options to increase additional functionality in those spaces some of which currently exists and some of which we are building for towards the future.

So no I don't think we've turned to an inflection point, yet on an atrium, but but.

But we are excited about the possibility of edge to cloud and we're excited about our ability to compete effectively in the developing market around edge to cloud.

Great Thanks and.

The other one was on the ABL margins in the quarter down a bit sequentially, a little more year over year pressure than in the earlier quarters you did mention.

Discrete kind of call out in some supplier relationship for which relationships in the quarter and some make good in August but those two connected.

Yeah, Chris there's a couple of things going on in the ABL margins that we've highlighted so first as Neil mentioned, we are working through some of that higher cost inventory related to the increased container costs from earlier in the year that was one factor that impacted it definitely the component shortages that we've.

Experienced had some impact on our ability to level load our facilities, particularly earlier in the first couple of months of the quarter and then we did see cost for freight to our customers. So the outbound freight to the customers also increase in addition to the higher commissions that I mentioned, so that really kind of impacted the margins at ABL.

In this quarter.

Okay. The commission rate is stable right or did the rate adjust.

The commission rate went up slightly because of the project work and some of the higher rates on that project business.

Great. Thank you guys.

Thank you.

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

Hi, Good morning, just wanted to expand on the ABL question for the quarter. If you could can you size, what the what the revenue and margin impact was from some some sourcing interruptions.

And then when you talk about higher cost of inventory can you give any sense of how much of that still needs to kind of flush out through the P&L, what kind of a margin headwind we're looking at there.

Yes, Joe so looking at the sizing impact of the ABL.

Not going to predict.

Kind of.

Break out the different pieces of how much that impact was.

Talked about the <unk> had a 1% impact. So you can look at the rest of that and know that in the quarter because of the seven price increases that we've had we were a little bit more price this quarter than what we've historically seen earlier in the year just to give you some idea.

The ABL size impact and then on the question for the margins.

We talked about working through some of the higher cost inventory at the beginning of the year as well as some of the component shortages. So for the balance of the year, you'd probably see a little bit lighter in the first part then you would in the second part of the year.

Okay.

And then I guess, we'll see when the slides come out but.

But I wanted to ask on kind of how to think about segment margins.

So it looks to me like based on kind of mid points you'd be implying.

Similar types of margins in 'twenty three versus 22.

Im not sure about kind of mix between gross margin and <unk>.

DNA, what that contributes but trying to kind of think through the segment pieces of it. After we've seen really strong margins in ISG over the last couple of quarters.

And whether or not that's moving up or whether kind of what we've seen in 2022.

Segment level is sort of a pretty good indication of what we should be seeing in 23 of their respective segments.

Yes, Joe I'll take that in and answer it at a strategic and qualitative level. So so big picture with.

With ABL, we as I mentioned earlier, we feel like our product vitality efforts.

And our service level efforts have positioned us in a better place in the in the industry. So that would allow us to two.

To maintain these margins and hopefully increase them over time.

As we look at.

Obviously, they had a really good quarter in performance that's a.

That.

That demonstrates what what's.

<unk> there.

Our expectation is that we'll continue to invest as necessary.

That growth and for that growth to continue for a longer period of time.

So this isn't a margin point, but for example, where it's where we're investing in capacity for <unk>. So that we can increase their their manufacturing capacity for four additional controllers. So so the short term answer is yes, we are expecting similar margins for for <unk>.

Next year, and and we're positioning ourselves for the opportunity to expand those margins over time.

That's helpful. If I could sneak one more in I'm curious about the pricing power that goes with product vitality and then how that flows through in hyper inflationary environment. So are you getting what you think is sort of properly compensated for that vitality in this environment or it sounds like if we see deflation there's continued pricing opportunity.

Because of the value we're delivering.

Yes, that's a really good question and obviously, we we spent a lot of time kind of debating that.

On the entire industry perspective, and I'll use us.

Representatives, we've made seven price increases in and our last fiscal year, that's more than obviously I haven't been in the industry that long, but thats more than anyone in our company can can remember so it's dramatically kind of changed the dynamic of the pricing environment and so I would observe its not as <unk>.

<unk> as the question would would imply that we introduced new product. Therefore, we can charge more for it.

It really is a little bit more dynamic than that.

<unk> has been consistent though is that between the combination of our product vitality, our ability to serve and our and our channel positions in the marketplace, we've been able to realize more of that volume and and more of that.

That price obviously the input costs in this year moved more than we had anticipated and so we got we found ourselves chasing that a little bit, but I think that's true pretty much everybody. So.

So then as we look forward to a to a.

More normalized environment, that's where I think our product vitality and service will actually be that much more important so while it allowed us to take volume in this kind of in this in this choppy market of 2020, our 2022.

As we look forward I think what we're doing is building a more consistent position in the marketplace where.

Where.

Contractors distributors lighting specifier to know that we have the highest quality and highest value products for them.

And we can service them on a consistent basis, which I believe will will bode well for us from a from a from a share and margin perspective going forward.

Sure.

All helpful detail I appreciate it.

Thanks Chip.

Our next question comes from Jeffrey Sprague with vertical research partners. Your line is now open.

Jeffrey Your line is now open.

Great. Thanks, you really broke up there was unclear who you're recalling thanks good morning, everyone.

Hey, Neal the answer to that question plays a little bit and kind of what was on my mind.

Obviously with kind of FIFO inventory, we would expect some higher cost stuff coming through with a lag but.

Given all of the price that you've got.

I would've thought.

The price cost equation was getting better and at least in this quarter I guess it got worse right.

And so I'm just wondering if you could kind of address that and maybe just tie it to the kind of the second question I had.

It sounds like you're quite pleased with our contractor select is performing but I wonder if you are seeing a clear.

Mix down in the business.

In light of kind of the inflationary pressures. So it sounds like you are you are pleased you can offer that offering but do you see actually.

Some kind of pain in the market where prices, forcing people to mix down into other products.

Yes, Jeff there is theres a couple of good questions in there so.

So first.

On the lag.

It is just math, so container costs were what 16 to $18000.

Two months ago, and they're more in the six to $8000 range now just for context and those those spikes. So those are going to work them themselves.

Through I would say big picture, what we're pleased about is that we could deliver the blended.

The blended margin based on based on all of the factors on.

Volume on price and on mix so.

Strategically with our contractor select portfolio.

We feel very very good about where we are and where we're going and we think it's really important because it does provide that foundational relationship with the the distribution industry the electrical distributors that I.

I mentioned earlier.

And it does become a.

A solid and core piece of where we're going forward and we've obviously demonstrated with these margin levels that that we can both be competitive from a value perspective in the marketplace.

And deliver margin at the same time.

As it relates to kind of trade downs in the in the inflationary environment.

That is.

Is something that obviously is always happening, but I would tell you anecdotally that the performance of our architectural portfolio. So the things, which are I think we would all generally consider more at the top of our product portfolio has been stronger this year than in <unk>.

Certainly at any time since I've been at the company so.

So it's really healthy.

A really healthy across the portfolio were significantly more healthy across the portfolio our portfolio at the high the middle end and the more value components, which is is how we've delivered kind of the volume the margin and the mix says as you see it and that's what we feel good about going forward.

Great. Thanks, and maybe just a follow up on.

On the capital deployment strategy.

It does seem like Youre sort of on schedule like if I. If I go back to the July 21, 21 meeting right and it was kind of like we're focused on bolt ons in 18 months from now we'll be thinking about bigger things and you make this higher and it sounds like youre starting to cultivate our pipeline I was just wondering if you could provide a little bit of color of.

Kind of the nature.

Of the sort of things you would consider adding to the portfolio.

I would think we're talking adjacencies, but are you talking more than that or could we actually see.

Outright diversification in the portfolio as you pursue this strategy.

Yes, Jeff good questions and I don't want to get too far out in front of ourselves. Obviously, we will always consider bolt ons. So.

<unk>.

And one person's definition of adjacency, maybe different than a different persons that definition of adjacencies. So we'll obviously be we continue to look at.

Things, which are kind of in the sweet spot of the things that we are currently doing or very close there too.

We are obviously, we had the <unk> acquisition, which has performed really well for us.

And was good for our organization to go through a meaningful integration process like that.

We see very interesting adjacencies currently in the pipeline around around our spaces group.

Are both on the on the <unk> side and on the Atria side.

And then we need to earn our.

I wouldn't call it outright diversification, but we've we've said consistently that we're positioned in front of Mega trends specifically.

Minimizing the impact of climate change and maximizing the impact of technology, obviously, those things those two megatrends affect everything so that can be a relatively liberal definition, but but we think they are going to be long term growth opportunities inside that that realm that we're focused on.

Alright, thank you.

Okay.

Our next question comes from Ryan Merkel with William Blair.

Brian Your line is now open.

Hey, everyone. Good morning. My first question was just a clarifying question on the gross margin cadence. So it sounds like and tell me if I'm wrong, but it sounds like the second half gross margins will improve due to better access to components, which will help factory productivity and then also lower costs and I'm wondering do you have line.

Site to better access to components, and then which one of those is more important or are they equally important.

Yes, I'll take it Karen.

First of all on an.

On line of sight.

One of the things that we emphasize is that we've we've invested significantly our supplier relationships. We are we are establishing.

Long term multi year relationships with some of the key component suppliers on the electronics side. So.

We expect that too to over time be to provide provide more consistency.

Specifically what were what we were working through in the first half of the fourth quarter and the first half of the year is is knowing when exactly those those components will come so that we can schedule everything else around them. So obviously you can't build a luminary without a driver of capital to driver without certain chips and so.

So if we end up with.

Short on certain pacemaker items, then we need to adjust so we're working to be better planners on the demand side and on the supply side. So that we can smooth that and that should we should expect some benefits for that towards the towards the middle or later part of next year.

That's the majority of it secondarily as we've.

We won't kind of beat this one to death, but the container prices that we're working through will work through that inventory will work through in the first half of this year.

Yes.

Okay. That's helpful. And then I just had a follow up on the deflation question because it's a question I get from investors.

You've obviously seen freight rates coming down quite a bit raw material prices have come down. So the question is will the lighting industry have to reduce prices or are you going to keep the extra profits.

What is your view there it sounds like you expect to keep the extra profit.

Well I would note that even though those prices have come down off their high they're larger they're higher than they were before so on a relative basis. There still is there still are kind of the general market is.

Is an inflationary is an inflationary market.

We believe as I've said before that the combination of our product vitality and our service levels allows us to earn a different place at the table maybe than we have had before with.

With our collection of channels and so the key to longer term success will be our ability to continue to drive the product vitality. So that we can deliver value to customers and make more margin for ourselves and the process and and then to be able to service business more.

Distantly and therefore be lower cost to do business with than than any of our customers. So another element of delivering value and we feel like the more value. We can deliver the more that we can we can share.

Got it.

Okay last one for me.

Just back to the assumptions for the sales guidance and I. Appreciate you don't have a crystal ball, but could you help with maybe what are you assuming for lighting industry growth or maybe even non res and then for volume and price I don't know if you want to give a number but as one contributing more than the other.

Yes so.

I don't want to imply.

A level of precision that we didn't meet that we don't want to imply so big picture on the ABL side, we have taken share. We continue to we expect to continue taking share.

So.

Number one number two is.

As Karen has indicated we we do have a fair amount of price too that we are working through in volume right. Now unit volume is largely dependent on our ability to manufacture. It. So so those are.

Those two things are highly consistent.

But I would.

Our our ABL sales expectations are that we will outperform the market and that is resident in these assumptions.

Very good thank you.

Our next question comes from Jeff Osborne with Cowen. Your line is now open.

Thank you and good morning, just two quick ones on my side Neill I was wondering if you could walk us through the nature of the supply chain challenges is it something on the analog chip side or.

Power supplies can you just elaborate on what the challenges were in the early part of the quarter.

Yes.

As I said it was it was related to specific pacemaker make her items in our drivers that than we used to manufacture the luminaire. So.

As I as I indicated in the earlier answer we do have line of sight to to those components over time.

They didn't come when they were supposed to in June and July So that was the that was the holdup.

Maybe just a quick follow up on that then.

Post <unk> what percentage of your luminaries that you're manufacturing broadly speaking would have an internal acuity <unk> driver in it.

Okay.

I'm trying to get a perspective.

Yes, no it is not yet quite half so were.

So we are still a both a large consumer of external drivers and obviously, a large OEM provider of external drivers now.

Got it and then the last one I had just quickly is on the project business. You mentioned the heightened commissions I was just curious what the pipeline is on the project business.

Projects are still kind of hanging out in there or if those are moving forward and being released with what's your expectation for 2023.

So as I said we.

I guess the.

The Unfortunately, the simplest answer is things currently are more of the same than they are different so.

No.

Our agents have are still successful bidding businesses. There is still a lot of project work that is that is in the work that they are they are doing and we maintain currently maintain.

Higher than normal backlog so.

We don't as I said earlier in the call. We don't have a crystal ball for 6369, 12 months 16, 18 months whatever months out, but but as of right now things are more of the same than they are different.

Got it that's all I had thank you.

Thanks.

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

Hey, everyone. Thanks for squeezing us in I have two questions I'll try to get in here quickly.

It definitely sounds like there's price tailwind into 2023.

Would you characterize those as kind of similar to what you saw in 'twenty two.

Maybe kind of level set us on a year on year. It seems like the pricing strategy is a lot more fluid than maybe what you've done in the past just based on your comments. So just wondering if theres any way to think about what price impact as being embedded in your views for for 'twenty three.

Yes, Brian Youre right with seven price increases over the course of the year. It is a bit more dynamic than it has been historically so as Neil mentioned, we do expect to see a little bit heavier mix of price, but also as we regain footing with the component supply we expect volume to be.

There as well, but pricing will have an impact year over year.

Okay Fair enough and then on the margin guidance I know theres been a number of questions around this but.

The margin is lower than the first half and then picking up in the second half you kind of walk us through the different.

Pieces around supply chain and utilization.

Any way you can kind of quantify this first half second half dynamic I assume this is stu.

Still in the context of your 42% gross margin target range, you've outlined in the past, but sort of how big is that delta expect it to be as we move through the cadence for the next several quarters.

Yes, So big picture, Brian what we're trying to do is is is provide a and annual outlook about kind of where we think we're going to go strategically and what that will mean from a from a from a.

A top line perspective, and then ultimate productivity perspective, as I said.

Organization is focused on how we create value which is to grow net sales turning into cash and don't grow the balance sheet as fast and so thats. What you would see here everyone. Here focused on if you were kind of walking the walk in the halls. So.

We wanted to provide the additional color within the year or two just to highlight kind of what we're working through as as we as we go through that but we think long term is as I said that that our goal is to is to maintain and increase margins and and so that's why we wanted to provide.

The transparency I'm sure Karen.

Karen and Charlotte can help you on the on the model construct and there'll also be additional information in the presentation, which will help with that as well.

Okay I appreciate it I'll take it offline. Thanks.

Thank you.

I am showing no further questions in queue at this time I would like to turn the call back to Neil Ash for any closing remarks.

Thank you Liz and thank you all for joining us this morning.

We're pleased with our strong results in the fourth quarter and throughout 2022, and we're excited about how far we've come and and our prospects for the future. While we expect 2023 as we've said through the <unk>.

Questions in the construct of our expectations to be a dynamic environment, we're really confident about our ability to execute we're well positioned in a variety of end markets.

We're continuing to invest in product vitality and in service and we developed most importantly, a culture that supports change and is committed to improving so thank you for your interest in our company and we look forward to talking to you again real soon.

This concludes today's conference call.

Thank you for participating you may now disconnect.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good morning, and welcome to the acuity brands fiscal 2022 fourth quarter and full year earnings call.

At this time all participants are in a 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 would now like to hand, the conference all participant Mclaughlin Vice President of Investor Relations Charlotte. Please go ahead.

Thank you Liz.

Good morning, and welcome to the acuity brands fiscal 2022 fourth quarter and full year earnings call.

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

These beliefs, and then 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 our 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 our corresponding GAAP measures are available in our 2022 fourth quarter and full year earnings release.

Which is available on our website at www dot invested that acuity brands Dot com.

With me. This morning is Neil Ash of Chairman President and CEO .

We will provide an update on our strategy and highlights from the last quarter and full year and CAD Hilton Senior Vice President and CFO , who will walk us through our fourth quarter and full year performance as.

As well as provide an outlook for our full fiscal year 2023.

There will be an opportunity for Q&A at the end of this call for their participation. Please limit your remarks to one question and one follow up if necessary.

We are webcasting today's conference call live.

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

Thank you Charlotte good.

And thank you to everyone joining us on the call.

We continued to deliver strong results in the fourth quarter, concluding what has been a very good fiscal 2022.

We delivered solid operating profit and EPS growth and.

And we again created permanent shareholder value through share repurchases.

Both our lighting and spaces businesses have delivered strong results throughout 2022.

Starting with ABL.

Our team made good progress on product vitality and service initiatives.

These product vitality efforts are being recognized.

We won awards across our portfolio for design and innovation, including several Red Dot design awards for architectural lighting.

ECM magazine recognized our contractor select stack pack as a category award winner for product of the year.

And we received a bright Star award for software and controls for led magazine.

Our service initiatives are also being recognized by the industry.

We were named supplier of the year by each of the two largest buying groups in the industry I'm Mark.

Yes.

Throughout 2022, we've been focused on satisfying customer demand.

To do that through the global supply chain conditions, we have continued to prioritize three key activities.

First investing in supplier relationships.

Empowering our teams to secure components in the open market and third reengineering products to available components.

While these challenges have continued our focus has remained the same.

I would now like to highlight two other important aspects of our business.

The first is contractor select.

Contractor select is a collection of the most important everyday lighting and lighting control products.

We have done and we continue to do significant work on product vitality in this portfolio.

This work allows us to be competitive from a value perspective, and the results have been impressive.

Contractor select is growing faster than our broader portfolio and provides a consistent foundational relationship with electrical distributors.

Second as we passed the one year anniversary of our acquisition of the <unk> business I want to update you on our progress.

We have successfully integrated the business with our go to market product and supply chain efforts.

We have rebranded the product portfolio to <unk> as part of our <unk> product family.

We have begun to integrate more off the truck drivers and our luminaire portfolio.

We have grown our OEM sales and we have successfully integrated the production facility into our Mexico operations.

The acquisition is delivering on our expectations for more of the technology in our alumina Arris.

Expand our OEM channel.

And take greater control of our electronic supply chain.

Now moving to our intelligence basis group.

This basis team also had a very solid quarter, delivering net sales growth and expanding profit as we continue to make spaces smarter safer and greener.

<unk> had strong sales in the fourth quarter, notably in the sales of our Eclipse controller, which uses opened protocol technology to control and monitor systems in buildings, including heating ventilation lighting and other functions essentially acting like the brain of the building.

The data generated is then used to optimize energy consumption and occupancy comfort in a building or space.

<unk> continues to rollout new and approved applications.

Now I want to spend a minute on capital allocation.

Our capital allocation priorities remain the same.

Our priorities are to invest for growth in our current businesses.

Invest in acquisitions.

<unk> maintained our dividend.

And allocate capital for share repurchases when we perceive there is an opportunity to create permanent value for shareholders.

Earlier this month, we announced the leap <unk> as senior Vice President of corporate development and strategy.

Phillipe reports to me and will be responsible for evaluating mergers and acquisitions and building strategic relationships.

As I reflect on our fiscal 'twenty to 'twenty, two we've had a good year.

We have successfully repositioned the company at the intersection of sustainability and technology.

Our business has developed a technology that saves our customers energy and reduces their carbon emissions.

We are positioned for long term growth by taking advantage of two of the most important megatrends.

Minimizing the impacts of climate change and maximizing the impacts of technology.

Acuity brands lighting is the largest lighting and lighting control company in North America.

We have dramatically improved our product vitality and we have demonstrated that we could serve business when others could not.

Our intelligent spaces group has differentiated technology and building controls and management systems with this tech.

And with Atreus, we are beginning to effectively demonstrate the benefits of connecting the edge to the cloud.

We've changed how the company works with the introduction of our better smarter faster operating Smith system.

Better smarter faster is the combination of processes tools and ways of working that spans from strategy to people to operating rhythms to problem solving.

It is unique to our organization and allows us to drive strategic alignment.

Manage change and deliver results.

At the same time, we are purposely we've transitioned the company to be a values driven organization.

We have seven shared values.

Some of our values like integrity owner's mindset and community are fairly common.

Others like time, and curiosity are more distinctive to acuity.

Collectively they serve as the decision making framework that empowers our associates.

The combination of better smarter faster and our shared values allows us to operate more efficiently with greater distribution of responsibility and accountability throughout the company.

It is how we will continue to improve our businesses.

Respond quickly and effectively and changing economic environments.

And successfully operate additional businesses in the future.

Our organization is clear on how we create value.

We create value by growing net sales.

Turning those sales into cash and not growing the balance sheet as fast.

We have overall, our total rewards framework, so that everyone in the organization is aligned with us.

We've also demonstrated that were effective capital allocators.

We have made investments in our current businesses we.

We have successfully made and integrated acquisitions.

And we have repurchased almost 20% of our company, creating permanent shareholder value.

Now looking to our fiscal 2023 and beyond we're excited about how far we've come and our prospects for the future.

While we expect 2023 to continue to be a dynamic environment, we are confident in our ability to execute.

We are well positioned in a variety of end markets.

We are continuing to invest in product vitality and service.

And we have developed a culture that supports change and is committed to improving.

Now I'll turn the call over to Karen who will update you on our 2022 performance and provide a more specific outlook for 2023.

Thank you Neil 2022 was a strong year for acuity.

For the first time, we crossed over $4 billion in annual net sales. Our gross profit margin was 41, 8% our operating profit increased by $82 million year over year, and we grew diluted EPS of <unk>, 32% to $11 eight terms for fiscal 2022.

We continue to allocate capital effectively through the repurchase of approximately $3 million of our outstanding shares.

In the fourth quarter, we continued to have strong net sales growth.

Net sales of $1 $1 billion were 12% higher than the prior year with both the ABL in ISG business segments contributing to the growth.

As Neil mentioned, we've now had optronics for a full year and the incremental sales impact of that acquisition was only 1% in the fourth quarter.

We delivered gross profit margin of 41, 7% despite the lower production levels at the beginning of the fourth quarter.

Operating profit in the fourth quarter was $150 million on adjusted operating profit was $170 million.

Finally, we continued to grow earnings per share.

Our diluted earnings per share of $3 48.

It was an increase of 76% or 28% year over year.

Adjusted diluted earnings per share of $3 95.

Increased 68 or.

21% over the prior year.

Share repurchases made throughout fiscal 2022 favorably impacted adjusted diluted EPS by <unk> <unk> during the fourth quarter.

I would now like to expand on our segment performance.

Net sales in ABL increased to just over $1 billion.

An increase of 11% compared with the prior year driven largely by strong performance within the independent sales network, which grew 11% and the direct sales network, which grew 13%.

<unk> operating profit was $151 million, an increase of $2 million versus the prior year.

This quarter operating profit was impacted by three key factors.

Higher cost of inventory.

Second increased costs for transportation to deliver our products to the customer and finally higher commission rates for certain project business.

Now moving on to ISG.

This segment also had a very strong year and improve both net sales and operating profit.

Sales in the fourth quarter of 2022 were $61 million.

An increase of $11 million or 22% versus the prior year.

ISG is operating performance also improved while we continued to invest in the business.

Operating profit in the fourth quarter of 2022 increased <unk> 8 million to.

<unk> $10 million.

Moving to cash flow.

We generated $316 million of cash flow from operating activities for the full year of fiscal 2022.

This was down $92 million from the prior year, primarily because we invested in working capital, particularly inventory to support our growth.

I'm pleased by our progress in the fourth quarter during which we decreased inventory by $95 million.

We invested $57 million or one 4% of net sales in capital expenditures during the full year fiscal 2022.

Okay.

I would now like to spend a few minutes to talk through our 2023 outlook. After the call you will find this outlook in the supplemental deck that will be available on our website.

We're going to provide annual guidance anchored around net sales and adjusted diluted EPS.

We will also provide other assumptions to help you with the construction of your model.

For full year fiscal 2023, our expectation is that net sales will be within the range of $4 1 billion and $4 3 billion for total NOI.

This is based on the assumption that ABL will generate sales growth in the low to mid single digits and ISG will generate sales growth in the low to mid teens.

As Neil mentioned, we expect that fiscal 2023 will continue to be a dynamic environment.

As we move from 2022 to 'twenty 'twenty three our level of sales growth is returning to more normal levels.

We're focused on any changes in the economic outlook and we are prepared to react as necessary in the future.

Our expectation is that annual adjusted diluted earnings per share will be within the range of $13 and $14 50 per total a yi.

You will recall that last year, we focused our framework on that sale and also on gross margin as we focus on product vitality and demonstrating our ability to manage the price cost relationship.

We are pleased with our performance on these metrics and for fiscal 2023, our outlook will use the more traditional metrics of net sales and adjusted diluted EPS as I've described.

The supplementary deck I mentioned will detail other key assumptions that should help you get to adjusted operating profit and adjusted EBITDA.

We will not be providing quarterly guidance.

I also want to provide you with some qualitative context for these numbers.

As you know our quarters have historically been subject to seasonality and we expect that we will be largely consistent during fiscal 2023.

We are continuing to deal with the global supply chain challenges, particularly around component shortages and we are continuing to work through some of the higher cost inventory.

This could result in margins that are a little lower in the first part of the year as compared to later in the year.

Our capital allocation strategy in 2023 is unchanged we.

We will continue to generate cash and allocate capital effectively.

Prioritizing investments for growth in our current businesses.

Vesting in acquisition, maintaining our dividend and allocating capital for share repurchases.

Just before I turn the call to the operator for questions I want to leave you with that.

We are very pleased with our performance in fiscal 2022.

We exceeded $4 billion in net sales, we made improvements to the business and we increased our profitability.

We continue to allocate capital effectively and deliver 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 if you'd like to ask a question at this time that is star one one.

Okay.

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

Hey, Good morning, I think I think it's me.

Nice job guys.

Thanks, Dan.

Yes.

Maybe just I have one kind of question on the business and then and then kind of bigger picture question, but I guess, if we get into an environment.

Where acuity I guess, an environment, where maybe we had less inflation.

Does that change how acuity goes to market at all.

Yes, I guess in other words.

Are you going to kind of change how you kind of react to ground product vitality surface those types of things are.

Different inflationary environment.

Tim that's a.

Good question and thanks for asking the short answer is no we feel like those product vitality and increasing the service levels are foundational to our long term performance.

And they've they've driven they've obviously served us well in a an inflationary environment environment, and I think theyre going to be equally as important in a in a more normalized environment.

The ability to have products, which deliver value to customers and higher profits to us as is essential and so we've we've really pushed that on the product vitality front and we're we've made a lot of progress there.

And on the service front I still think we have a lot of room for improvement.

As we come as we all continue to work our way through these these component challenges in and try to get to more normalized normalized lead times and such.

Those are foundational to how I think we remain differentiated from the rest of the lighting industry.

Okay. Okay is there any way to kind of put numbers around vitality I don't know if its percentage of sales or how.

How are you kind of frame that maybe what the margins kind of general then it looked like on a new product versus where it's replacing.

Yes, so I want to emphasize a couple of things on product vitality.

That we that we mentioned in the prepared remarks, which is when we say product vitality. We mean that is the combination of new product introductions and improvements to our existing portfolio. So we're doing both of those and we are generally going to touch 28% to 30% of our product portfolio per year with those efforts, which.

<unk>.

Is the combination of which are what's driving the benefit.

And Thats thats up materially from where we would have been three or four or five years ago.

Okay. Good and then maybe just bigger picture question on the agent channel. So so over the last I'd say six months, we've seen just kind of higher agent consolidation in the industry.

Yes, so we feel we feel really good about our our independent sales network and our collection of agents.

We need them and as long as their business is good with US we're good with them and.

The world's changing and we're going forward and our first choices to take them with us and as a result, we have a natural gravitation of the best agents in each of these local markets wanting to wanting to be aligned with the with the largest and best player and so I see that continuing.

<unk> and our local agents in each market going forward.

Okay, Great nice nice job on this year and good luck on that.

Thanks, Tim.

Our next question comes from John Walsh with Credit Suisse. Your line is now open.

Hi, good morning, everyone.

Hey, John .

Hey.

A lot of very interesting things happening, but maybe we can just dive into some questions on the guidance.

So just looking at the four one to $4 3 billion. Just wondering if you could talk about the visibility into that number I'm thinking if there's price carryover, if theres any kind of stimulus carryover from infrastructure and jobs acts or maybe even the iras.

And then obviously, you're not really a backlog business, but you have been carrying.

Some backlog through fiscal 2022.

So just anything around that touching on those things the confidence on that revenue number. Thank you.

Yeah. Thanks, John So as we as we indicated in the prepared remarks, we expect fiscal 2023 to be a dynamic environment and so on.

Efficiently as we as we look to the.

The net sales guidance that we gave you Karen gave you kind of the breakdown between ABL and ISG.

So first on the on the ABL side as you indicated we continue to carry higher than normal backlog and we continue to see as I said at the last quarter things are are more of the same than they are different right now.

So that's the that's kind of what's baked into those assumptions for for ABL.

On ISG.

Assumptions there are that we.

We continue to grow in the low to mid teens as as we continue to take share in the.

In controls and we and we begin to accelerate the software it at atreus.

So net net.

We don't have a perfect crystal ball, but we are we're confident in our ability to execute and and this is our best estimate of where we think we're going to be for the year.

Great and then maybe.

Another one for you Aneel.

You highlighted your business development higher obviously your balance sheets very strong you've bought back shares during fiscal 2022.

Yes, so so let me expand the aperture a little bit please John beyond six to 12 months and think kind of over the next couple of years, we purposely been very very consistent about our priorities, we're going to invest in our current businesses, we're going to invest in M&A, we're going to maintain our dividend and we're going to use capital for share.

Purchase when the opportunity presents itself.

Framework remains the same on the acquisition front.

Believe that as we look forward over the next year or two years, we're better positioned to to.

Execute integrate and manage additional businesses based on all the work that we've done around better smarter faster.

And the rest of the company.

And as you mentioned that the market will choppy. So the world is coming back to us a little bit from from a valuation perspective. So.

So we would expect over the next couple of years that that M&A will become a more important component of our.

Of our capital allocation.

Great well good good end to the year and good luck on 23. Thank you.

Chuck.

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

Thank you. So I also wanted to ask about the guide.

Just kind of some back of the envelope math.

If I take the midpoint. It seems like margins next year are down year on year at the midpoint of EPS on sales so I.

I guess correct me if that thinking is wrong, but if it is right can you just maybe talk about what are the margin headwinds next year is it on the price cost side is it more on the SG&A investment in the spaces group any color there would be helpful. Thank you.

Yes, Chris Good morning, Karen and Charlotte will follow up with you and help you build the model after the call resident in these obviously EPS is growing year on year.

And we talked about we talked through the through the through the net sales guidance. So as you Cascade down no it doesn't.

It doesn't imply margin degradation as Karen indicated we expect to work through the first part of next year with.

With that.

Continued inconsistency in some component availability, which impacts our ability to level load the factories one in to some some higher cost inventory related to.

That's in inventory right now related to higher container cost historically, but but we feel we feel pretty solid about where were going for for next year.

Thank you I appreciate that and then I guess also does the guide.

The company has done a lot of buybacks the past couple.

Our quarters.

Does the guide assume incremental buybacks next year or anything on the M&A side that we should be thinking about as we kind of build into that framework. Thank you.

Yeah, Chris when you see the deck that we.

We will post to our website after the call you'll see we're giving an estimate of share repurchases for next year in the range of $125 million to $150 million. So that's assumed in our assumptions for 2023, but we've not built anything in for M&A.

Thank you I appreciate that.

Thank you.

Our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is now open yes. Thanks good.

Good morning, Karen nail Charlotte.

So it's kind of interesting you spent a little more emphasis on eight curious this quarter Ags has been largely defined by this tech.

But.

I think with <unk>, you mentioned, a couple functionality improvements and I think it's been a story of active piloting the last few years. So.

Wondering what sort of.

Transition and inflections you are anticipating for the ability to scale the software piece there.

Yes, thanks for that.

Question.

On Atreus Youre exactly accurate, we have we've really been focused on.

On improving the product and and adding additional functionality to it.

Largely with an emphasis on the impact on buildings.

So.

So so youll see us that's why we've been talking about building insights and Youll see some of the work that the new product introduction that we talked about an improvement that we talked about with locator and and vision are really all about those those spaces. We don't feel like we are yet at an inflection point with atria.

And we don't assume that but we're confident in and the work that we've been doing.

And it's worth taking a second to.

Talk about.

The edge to cloud opportunities so when.

When we talk about the edge, that's obviously with <unk>, we have we have powerful edge computing inside spaces that control those spaces to generate the data that that can be used as we mentioned two to control everything that happens in that in that space and then the data creates options to increase <unk>.

Additional functionality in those spaces, some of which currently exists and some of which we are building a four towards the future.

So no I don't think we've turned to an inflection point, yet on an atrium, but but.

But we are excited about the possibility of edge to cloud and we're excited about our ability to compete effectively in the developing market around edge to cloud.

Great. Thanks.

The other one was on the ABL margins in the quarter down a bit sequentially, a little more year over year pressure than in the earlier quarters you did mention.

Discrete kind of call out in some supplier relationship for which relationships in the quarter and some make good in August but those two connected.

Experienced had some impact on our ability to level load our facilities, particularly earlier in the first couple months of the quarter and then we did see cost for freight to our customers. So the outbound freight to the customers also increase in addition to the higher commissions that I mentioned, so that really kind of impacted the margins at ABL.

This quarter.

Okay. The commission rate is stable right or did the rate adjust.

The commission rate went up slightly because of the project work and from the higher rates on that project business.

Great. Thank you guys.

Yes. Thank you.

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

Hi, good morning, just.

Just wanted to expand on the ABL question for the quarter. If you could can you size, what the what the revenue and margin impact was from some some sourcing interruptions.

And then when you talk about higher cost of inventory can you give any sense of how much of that still needs to kind of flush out through the P&L kind of on.

Margin headwind, we're looking at there.

Yes, Joe so looking at the size and impact of the ABL.

Not going to kick it.

Kind of.

Break out the different pieces of how much that impact was.

<unk> talked about the <unk> had a 1% impact. So you can look at the rest of that and know that in the quarter because of the sub and price increases that we've had we were a little bit more price.

This quarter than what we've historically seen earlier in the year just to give you. Some idea of the ABL size impact and then on the question for the margins.

Okay.

And then I guess, we will see when the slides come out but.

But I wanted to ask on kind of how to think about.

Segment margins.

So it looks to me like based on kind of mid points you'd be implying.

Similar types of margins in 'twenty three versus 22.

Im not sure about kind of mix between gross margin and <unk>.

SG&A, what that contributes but trying to kind of think through the segment pieces of it. After we've seen really strong margins in ISG over the last couple of quarters.

And whether or not that's moving up or whether kind of what we've seen in 2022 at the segment level as sort of a pretty good indication of what we should be seeing in 23 of the respective segments.

Yes, Joe I'll take that in and answer it at a strategic and qualitative level. So so big picture with.

With ABL, we as I mentioned earlier, we feel like our product vitality efforts and our service level efforts have have positioned us in a better place in the in the industry. So that would allow us to two.

To maintain these margins and hopefully increase them over time as we look at ISC, obviously, they had a really good quarter in performance that say.

That that demonstrates what what's possible there.

Our expectation is that we'll continue to invest as necessary.

That growth and for that growth to continue for a longer period of time.

So this isn't a margin point, but for example, where it's where we're investing in capacity for for disc tax. So that we can increase their their manufacturing capacity for four additional controllers. So.

Short term answer is yes, we are expecting similar margins for for next year, and and we're positioning ourselves for the opportunity to expand those margins over time.

That's helpful. If I could sneak one more in I'm curious about the pricing power that goes with product vitality and then how that flows through in hyper inflationary environment are you getting what you think is sort of properly compensated for that vitality in this environment or it sounds like if we see deflation there's continued pricing opportunity.

Because the value you're delivering.

Yes, that's it.

Really good question and obviously, we we spent a lot of time kind of debating that.

On the entire industry perspective, and I'll use US representative we've made seven price increases in and our last fiscal year, that's more than obviously I haven't been in the industry that long, but thats more than anyone in our company can can remember so it's dramatically kind of change to the.

The dynamic of the pricing environment, and so I would observe it is not as linear as the question would would imply that we introduced new product. Therefore, we can charge more for it.

It really is a little bit more dynamic than that.

What has been consistent though is that between the combination of our product vitality, our ability to serve and our and our channel positions in the marketplace, we've been able to realize more of that volume and <unk>.

<unk> more of that price obviously the input costs in this year moved more than we had anticipated and so we got we found ourselves chasing that a little bit, but I think that's true pretty much everybody.

So then as we look forward to a to a more normalized environment, that's where I think our product vitality and service will actually be that much more important so while it allowed us to take volume in this kind of.

This choppy market of 2020 or 2022.

We look forward I think what we're doing is building a more consistent position in the marketplace where.

Where.

Contractors distributors lighting specifier to know that we have the highest quality and highest value products for them.

And we can service them on a consistent basis, which I believe will will bode well for us from a from a from a share and margin perspective going forward.

<unk>.

All helpful detail I appreciate it.

Thanks, Jeff.

Our next question comes from Jeffrey Sprague with vertical research partners. Your line is now open.

Yes.

Jeffrey Your line is now open.

Great. Thanks, you really broke up that was unclear who you recalling thanks good morning, everyone.

Hey, Neal the answer to that question plays a little bit in the kind of what was on my mind.

Obviously with kind of FIFO inventory, we would expect some higher cost stuff coming through with a lag but.

Given all the price that you got.

I would've thought.

The price cost equation was getting better and at least in this quarter I guess it got worse right.

And so I'm just wondering if you could kind of address that and maybe just tie it to kind of the second question I had.

It sounds like you're quite pleased with our contractor select is performing but I wonder if you are seeing a clear.

Mixed down in the business.

In light of kind of the inflationary pressures. So it sounds like you're you are pleased you can offer that offering but do you see actually.

Some kind of pain in the market where prices, forcing people to mix down into other products.

Yes, Jeff there is theres a couple of good questions in there so.

So first on the lag it's just math so container costs were what $618000 a few months ago and they're more in the six to $8000 range now just for context and those those spikes. So those are going to work them themselves.

Through I would say big picture, what we're pleased about is that we could deliver the blended.

Blended margin based on based on all of the factors on on volume on price and on mix.

Strategically with our contractor select portfolio.

Mentioned earlier.

And it does become a.

A solid and core piece of where we're going forward and we've obviously demonstrated with these margin levels that that we can both be competitive from a value perspective in the marketplace and.

And deliver margin at the same time.

As it relates to kind of trade downs in the in the inflationary environment.

That is.

Certainly at any time since I've been at the company so.

So it's really healthy.

Were really healthy across the portfolio significantly more healthy across the portfolio our portfolio at the high the middle end and the more value components, which is is how we've delivered kind of the volume the margin and the mix says as you see it and that's what we feel good about going forward.

Great. Thanks, and maybe just to follow up on.

On the capital deployment strategy.

Kind of the nature.

Of the sort of things you would consider adding to the portfolio.

I would think we're talking adjacencies, but are you talking more than that or could we actually see.

Outright diversification in the portfolio as you pursue this strategy.

Yes, Jeff good questions and I don't want to get too far out in front of ourselves. Obviously, we will always consider bolt ons. So.

<unk>.

And one person's definition of adjacency may be different than a different persons that definition of adjacencies. So we'll obviously be we continue to look at.

Things, which are kind of in the sweet spot of the things that we are currently doing or very close there too.

We are obviously, we had the <unk> acquisition, which has performed really well for us.

<unk> and was good for our organization to go through a meaningful integration process like that.

We see very interesting adjacencies currently in the pipeline around around our spaces group, which.

Are both on the on the <unk> side and on the Atria side.

And then we need to earn our.

I wouldn't call it outright diversification, but we've we've said consistently that we're positioned in front of Megatrends specifically <unk>.

Great. Thank you.

Okay.

Our next question comes from Ryan Merkel with William Blair.

Ryan Your line is now open.

Site to better access to components, and then which one of those is more important or are they equally important.

Yes, I'll take it Karen.

First of all on on.

On line of sight.

One of the things that we emphasize is that we've we've invested significantly our supplier relationships. We are we are establishing.

Long term multi year relationships with some of the key component suppliers on the electronics side. So so.

We expect that too to over time be to provide provide more consistency.

Specifically what were what we were working through and in the first half of the fourth quarter and the first half of the year is is knowing when exactly those those components will come so that we can schedule everything else around them. So.

You can't build a luminaire without a driver of capital to driver without certain chips and so if we end up with.

That's the majority of it secondarily as we.

We won't kind of beat this one to death, but the container prices that we're working through will work through that inventory will work through in the first half of this year.

Yes.

Okay. That's helpful. And then I just had a follow up on the deflation question because it's a question I get from investors.

Obviously seen freight rates coming down quite a bit raw material prices have come down. So the question is will the lighting industry have to reduce prices or are you going to keep the extra profits.

What is your view there it sounds like you expect to keep the extra profit.

Is an inflationary is an inflationary market.

We believe as I've said before that the combination of our product vitality and our service levels allows us to earn a different place at the table maybe than we have had before with.

<unk> and therefore be lower cost to do business with than than any of our customers. So another element of delivering value and we feel like the more value. We can deliver the more of that we can we can share.

Got it okay.

Okay last one for me.

Yes, so so I don't want to imply.

Level of precision that we didn't meet that we don't want to imply so big picture on the ABL side, we have taken share. We continue to we expect to continue taking share.

So.

Number one number two is.

Karen has indicated we do have a fair amount of price too that we are working through in volume right. Now unit volume is largely dependent on our ability to manufacture. It. So so those are those two things are highly consistent.

But I would.

Our our ABL sales expectations are that we will outperform the market and that's resident in these assumptions.

Very good thank you.

Our next question comes from Jeff Osborne with Cowen. Your line is now open.

Thank you and good morning, just two quick ones on my side Neill I was wondering if you could walk us through the nature of the supply chain challenges is it something on the analog chip side or.

Power supplies can you just elaborate on what the challenges were in the early part of the quarter.

Yes.

As I said it was it was related to specific pacemaker maker items in our drivers that then we use to manufacture the luminary. So.

No.

As I as I indicated in the earlier answer we do have line of sight to those components over time.

They didn't come when they were supposed to in June and July So that was the that was a holdup.

Maybe just a quick follow up on that then.

Post <unk> what percentage of your luminaries that you're manufacturing broadly speaking would have an internal acuity outlet or ask Ram driver in it.

I'm, just trying to get a perspective.

No. It is not yet quite half so were so.

So we are still a both a large consumer of external drivers and obviously, a large OEM provider of external drivers now.

Got it and then the last one I had just quickly is on the project business. You mentioned the heightened commissions I was just curious what the pipeline is on the project business.

Projects are still kind of hanging out in there or if those are moving forward and being released what's your expectation for 2023.

So as I said we.

I guess the.

The Unfortunately, the simplest answer is things currently are more of the same than they are different so.

Our our agents have are still successful bidding businesses. There is still a lot of project work that is that is in the work that they are they are doing and we maintain currently maintain.

Higher than normal backlog so.

So we don't as I said earlier in the call. We don't have a crystal ball for 6369, 12 months 16, 18 months whatever months out, but but as of right now things are more of the same than they are different.

Got it that's all I had thank you.

Thanks.

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

Hey, everyone. Thanks for squeezing us in I have two questions I'll try to get in here quickly.

It definitely sounds like there's price tailwind into 2023.

Would you characterize those as kind of similar to what you saw in 'twenty two.

Or maybe kind of level set us on a year on year. It seems like the pricing strategy is a lot more fluid than maybe what you've done in the past just based on your comments. So just wondering if theres any way to think about what price impact as being embedded in your views for 'twenty three.

Yes, Brian Youre right with seven price increases over the course of the year. It is a bit more dynamic than it has been historically so as Neil mentioned, we do expect to see a little bit heavier mix of price, but also as we regain kind of footing with the component supply we expect volume.

To be there as well, but but pricing will have an impact year over year.

Okay Fair enough and then on the margin guidance I know theres been a number of questions around this but.

The margin is lower than the first half and then picking up in the second half you kind of walk us through the different.

Pieces around supply chain and utilization.

Any way you can kind of quantify this first half second half dynamic I assume this is Steve.

Still in the context of your 42% gross margin target range, you've outlined in the past, but sort of how big is that delta expect it to be as we move through the cadence over the next several quarters.

Yes, So big picture, Brian what we're trying to do is is is provide a and annual outlook about kind of where we think we're going to go strategically and what that will mean from a from a from a.

Both the top line perspective, and then ultimate productivity perspective, as I said.

Organization is focused on how we create value which is to grow net sales turning into cash and don't grow the balance sheet as fast and so that's what you'd see here everyone. Here focused on if you were kind of walking the walk into halls. So.

We wanted to provide the additional color within the year or two just to highlight kind of what we're working through as as we as we go through that but we think long term as I as I said that that our goal is to is to maintain and increase margins and and so that's why we wanted to provide.

The transparency I'm sure.

Karen and Charlotte can help you on the on the model construct and there'll also be additional information in the presentation, which will help with that as well.

Okay I appreciate it I'll take it offline. Thanks.

Thank you.

And I am 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 Liz and thank you all for joining us this morning.

We are we're pleased with our strong results in the fourth quarter and throughout 2022, and we're excited about how far we've come and and our prospects for the future. While we expect 2023 as we've said through the <unk>.

Questions in the construct of our expectations to be a dynamic environment, we're really confident about our ability to execute we're well positioned in a variety of end markets.

We're continuing to invest in product vitality and in service.

And we developed most importantly, a culture that supports change and is committed to improving so thank you for your interest in our company and we look forward to talking to you again real soon.

This concludes today's conference call. Thank.

Thank you for disconnect.

Q4 2022 Acuity Brands Inc Earnings Call

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