Q1 2023 Acuity Brands Inc Earnings Call
Speaker 1: You.
Speaker 2: There will be an opportunity for Q&A at the end of this call. For those participating, please limit your remarks to one question and one follow-up if necessary.
Speaker 3: We are webcasting today's conference call live.
Speaker 4: Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ash.
Speaker 5: Thank you, Charlotte. Happy New Year to all of you joining us on the call this morning. We delivered solid results in the first quarter of fiscal 2023, as we continue to demonstrate our ability to drive sales growth through product vitality and service in both our lighting and spaces businesses.
Speaker 6: We expanded adjusted operating profit.
Speaker 7: Substantially grew adjusted diluted earnings per share.
Speaker 8: and generated strong cash flow from operations.
Speaker 9: We again created permanent shareholder value through charity purchases.
Speaker 10: Both our lighting and spaces businesses started the year with strong sales performance.
Speaker 11: First, in the Acuity brand's lighting and lighting control business.
Speaker 12: Our strategy of increasing product vitality and service levels continues to be a key differentiator for our customers.
Speaker 13: Our Contractor Select Portfolio continues to be an excellent example of where these efforts are creating value.
Speaker 14: As a reminder, Contractor Select is a collection of the most important everyday lighting and lighting control products made up of a limited number of products with high product vitality and high service levels.
Speaker 15: This portfolio includes products from Lithonia Lighting, Juno, SensorSwitch, and Iota Brands, and competes effectively in the electrical distributor and retail channels.
Speaker 16: An example of continued product vitality in the contractor select portfolio this quarter was the reintroduction of the upgraded DSX family of outdoor lighting.
Speaker 17: These products are used for commercial outdoor lighting as well as area lighting for schools, retail and other everyday workspaces.
Speaker 18: The refresh focused on improving the design and increasing the control functions, including the ability to embed our Enlight wireless controls.
Speaker 19: It is a significant step forward in enhancing our outdoor offering.
Speaker 20: Our focus on a concentrated offering with high product vitality and high service levels allows us to deliver high end user satisfaction at attractive levels of profitability.
Speaker 21: Our product vitality strategy addresses several of our priorities, including our sustainability efforts.
Speaker 22: This quarter, in our Alight brand, we launched a trio of sustainable products.
Speaker 23: Lean, stitch, and wings.
Speaker 24: that are marketed to office, commercial, and other similar customers.
Speaker 25: These products have a number of innovations, including collapsible designs and the use of new materials.
Speaker 26: For example, the materials in the WINGS product are 100% recyclable.
Speaker 27: Additionally, the collapsible design means the products contain less packaging waste and take up less shipping space, which reduces the amount of fuel consumed during transportation as well as our shipping costs.
Speaker 28: The feedback on these products has been positive across the design and specification community and has been recognized.
Speaker 29: Our Alight brand is leading by focusing on innovative design and sustainability, and I'm pleased to announce that this quarter our Alight team won two Grand Prix design awards that celebrate the work of designers and architects who approve the quality of life in the built environment.
Speaker 30: We are also making progress on our strategy of improving service levels.
Speaker 31: We are beginning to satisfy more of our late backlog and decreased lead times as component availability becomes more stable.
Speaker 32: One of the core reasons our service continues to be differentiated is our manufacturing facilities in Mexico.
Not only are they strategically located, but they are also productive and very innovative.
Our team of associates there is highly engaged and aligned to our values.
I visited in December and I was impressed by the changes that they are making in staffing and employee engagement that will help us adapt to evolving market conditions.
Finally, this quarter, we took the decision to exit our Sun Optics Daylighting business and our Winona custom architectural lighting solutions.
These businesses were no longer strategically relevant and we did not expect them to meet our financial expectations in the future.
We will continuously evaluate which businesses we operate and where we choose to compete.
Karen will talk more about this in her comments.
Now moving to our intelligence basis group.
The Spaces team delivered good sales and operating profit growth this quarter.
Both DisTech and Atrios were successful in winning several new key customers and expanding services to existing customers.
Our DISTEC product portfolio of controls and sensors is winning in the marketplace.
largely in North America and France, and it has broader applicability.
Therefore, we are focusing on increasing the addressable market for DISTEC.
The first step is expanding the geographic markets that we serve.
This effort is off to a promising start in the UK.
We are assembling the right group of independent systems integrators and are already delivering customer wins, including a large, multimillion dollar, multi-year contract.
In October , I was in Europe and had the opportunity to visit a large mixed use construction site in Lyon, which was using a full suite of our DisTech products to control the entire space.
This installation is a great example of the power of a full DISTEC implementation with HVAC lighting and shade control throughout all areas and for all tenets of the space.
We look forward to continuing our market penetration in France while we grow the UK.
Moving to capital allocation, during the quarter, we repurchased just under half a million shares, which brings the total amount repurchased since May of 2020 to just over 20% of our shares outstanding, at an average price of approximately $140.
Our capital allocation priorities remain the same. Our priorities are to invest for growth in our current businesses.
Invest in acquisition.
maintain our dividend, and allocate capital for sharer purchases when we perceive there is an opportunity to create permanent value for shareholders.
Now, looking to the rest of Fiscal 2023, there are two themes that we are focused on.
First, there's obviously uncertainty around the economy, inflation, and interest rates, which we know will affect our business over time.
Second, we believe that as component availability improves, lead times will improve and backlog levels will return to normal. We are beginning to see this in our business.
We are well positioned in a variety of our end markets and our continuing investment in product vitality and service positions us well for these dynamic environments.
Our organization continues to adapt to the changing requirements of our customers, and as a result, we have positioned ourselves not to predict the future perfectly, but rather to adapt to whatever comes our way.
Finally, before I hand over to Karen, I want to congratulate our team on the accomplishments detailed in our 2022 Earthlight report.
Our products and services save our customers energy and reduce their carbon emissions.
And we are proud to announce our commitment to achieving net zero by 2040.
As part of this, we have been working with the Science-Based Targets Initiative to establish new interim targets to further reduce our scopes 1, 2, and 3 carbon emissions.
This is both good for the environment and good for our business.
Now, I'll turn the call over to Karen, who will update you on our first quarter performance and provide a strategic update.
Thank you, Neil.
Our first quarter of 2023 was a solid start to the year.
We delivered good sales growth and strong adjusted diluted EPS growth.
We improved adjusted operating profit, grew cash flow from operations, and continued to allocate capital effectively.
As Neil mentioned, during the first quarter of fiscal 2023, we took the opportunity to strategically review our portfolio and sold our Synoptics business.
This business provided dome skylights and smoke vents to several different types of commercial buildings.
We also announced plans to discontinue our Winona custom architectural lighting solutions by the end of the fiscal year.
As a result, we took non-recurring charges of $22 million, or 52 cents per diluted share, related to impairments, severance, and other
accelerated amortization, and a loss on the sale of the sun optics business.
In the first quarter, we generated net sales of approximately $1 billion, which was 8% higher than the prior year, largely due to price.
Both the ABL and ISG businesses contributed to the growth during the quarter.
Operating profit in the first quarter of $109 million and adjusted operating profit was $140 million.
The higher adjusted operating profit was a result of a good gross profit performance as we continued to manage price and cost.
However, the fall through of the higher sales to adjusted operating profit was lower because of the impact of strategic decisions made for fiscal 2023 around commissions.
Finally, we continue to grow adjusted earnings per share.
Our diluted earnings per share of $2.29 was a decrease of 17 cents or 7% year over year as a result of the 52 cents of non-recurring charges I detailed before.
while our adjusted diluted earnings per share of $3.29 increased 44 cents, or 15%, over the prior year.
The growth in adjusted diluted earnings per share was due to higher operating profits, benefits from foreign currency, and lower shares outstanding due to the share repurchases.
I now want to expand on our segment performance.
Net sales at ABL grew to $947 million, an increase of 7% compared with the prior year.
This increase was driven by higher year-over-year sales in our Independent Sales Network, the Direct Channel, Corporate Accounts, and the Retail Channel.
ABL's operating profit was $118 million, a decrease of $10 million versus the prior year, with ABL adjusted operating profit relatively flat year over year.
The lower fall-through rate was primarily the result of higher commissions, as I mentioned previously.
Now moving to ISG.
The spaces segment had a strong quarter and improved both net sales and operating profits.
Sales in the first quarter of 2023 were $57 million, an increase of $10 million or 22% versus the prior year.
During the quarter, DisTech had strong performance across a variety of projects and was able to work down a significant amount of backlog from the fourth quarter of Fiscal 2022 as component availability improved.
ISG's operating performance also improved due to the higher sales and benefits from the mix of products as we cleared some of that backlog.
Operating profit in the first quarter of 2023 increased to $8 million this quarter.
of 2023 increased to $8 million this quarter.
Now moving to cash flow.
We generated $187 million of cash flow from operating activities for the first 3 months of Fiscal 2023, an increase of $103 million over the prior year's first quarter.
As a reminder, last year we invested in inventory in order to support our growth, as well as insulate our production facilities from inconsistent supply availability, with the intention of working down that inventory over several quarters, which we have done.
We are now down 13 inventory days from the peak in February of 2022.
We also invested $18 million in capital expenditures during the first quarter of Fiscal 2023 and $78 million to repurchase approximately half a million shares during the first quarter.
Before I turn the call to the operator for questions, I want to reiterate the following.
We are pleased with our performance in the first quarter of 2023.
We delivered solid sales growth and strong adjusted diluted EPS.
Our outlook for 2023 remains unchanged and we continue to position ourselves to quickly adapt to changing market conditions and to continue 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. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone.
You will then hear an automated message advising you that your hand is raised. Please stand by while we compile the Q&A roster.
And our first question will come from Tim Woge from Baird. Your line is open.
Hey, everybody. Good morning. Nice job and happy New Year. Happy New Year, Tim. Maybe just on the backlog, Neil, it does sound like you made some progress working that down. Any thoughts on when you think the backlog returns to more of a normalized level?
on the supply chain, could you compare and contrast where the supply chain is performing today, maybe relative to six or nine months ago?
Yeah, sure. So there's a fair amount to unpack there, Tim. Thanks for the question. So big picture, our expectation is that as component availability becomes more consistent, and it is more consistent, although not yet back to normal. I don't think that the industry or we are completely out of the woods yet on that.
but we are starting to see some more consistent availability, then that will enable us to reduce lead times. So that's obviously a positive. Along the way, we'll be working through that backlog. So, you know, as we've said over the last several quarters, and I would say your question implies probably pretty accurate.
off the top of my head probably second or third fiscal quarter of last year was when we peaked on our on our absolute level of backlog. And so we've been working down through that over the course of the last couple quarters and will continue over the next quarter to be working through that.
That should get us to a more normal relationship between order intake and lead times and net sales, which we think is obviously going to be a net positive. We don't know exactly how long that will take, so that's just an estimate, but I think round numbers, that's about right.
Okay, good. And then maybe Karen, just on the commission comment, could you elaborate what exactly that was in the quarter and I guess if that's isolated.
to the fiscal quarter? Is it just going to generally be a high level of commissions for the year?
Yep, thanks, Tim. You know, there's several things going on in commissions this year. And what we're really focused on is investing in future business.
So, for example, we've made some investments and changes to our direct sales force commissions to position them for the upcoming future infrastructure business. And we've also invested to secure certain project business. So I think what you'll see is that this is going to continue through the balance of the year at this level.
Okay, very good. I'll hop back into you. Thanks, everybody.
Thank you, Tim.
Thank you. One moment for our next question, please.
And our next question will come from Chris Snyder from UBS. Your line is open.
Thank you, I wanted to start with one on capital allocation for Neil. In the past, when you've provided your framework, M&A always kind of came in above buybacks, but over the last year or two now, really all the capital has gone towards buybacks. And I think most of the great, with the multiples we've seen compressed in the marketplaces, that was the most important thing.
looking for. Because in the past, you know, you've talked about maybe tech assets to build out the ISG group, but also maybe looking at semi-adjacent industrial verticals to kind of deploy some of the software tech assets across. So thank you.