Q4 2019 Earnings Call
After today's presentation, there will be a formal question answer session.
You asked the question. Please press the Star then one keep on your Touchtone telephone.
Today's conference is being recorded if you have any objections you may disconnect at this time.
Now I would like to introduce Mr., Dan Smith, Senior Vice President Treasurer, and Secretary, Sir you may begin.
Yeah, Thank you and good morning.
With me today to discuss our fiscal 2019 fourth quarter full year results are Nagel, our chairman and Chief Executive Officer, and Karen Holcomb, Our senior Vice President and Chief Financial Officer.
We are webcasting todays conference call it acuity brands Dot com and we'd like to remind everyone that during this call. We may make projections or forward looking statements regarding future events for future financial performance of the company.
Such statements involve risks and uncertainties such <unk> actual results may differ materially. Please refer to our most recent 10-K and thank you actually see filings in today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements now let me turn call over to burn Nagel. Thank you Dan good morning, everyone.
We had a solid fourth quarter given market conditions and look forward to providing you with further analysis of our results in a moment.
But before I start I would like to introduce to you Karen Hoguet as our new Chief Financial Officer Fairness, a 21 year veteran it acuity no type business and strategy exceedingly well.
More importantly, she is focused on helping to execute our strategy to optimize value for our key stakeholders. Please join me in welcoming Karen to her new role.
Karen succeeds Ricky Reece as CFO , who was recently promoted to president of acuity, we will leverage rickys experience and knowledge of our business with his primary focus to drive our commercial growth plans.
So with those announcements complete Karen and I would like to make a few comments and then we'll be happy to answer your questions.
2019 was one of the most challenging years, we've experienced at acuity the markets. We serve weren't a constant state of flux throughout much of the year inflationary pressures at the beginning of the year were exacerbated by a number of market shocks, including the addition of significant tariffs placed on Chinese made components in finished goods.
Its.
Uncertainty created by the threat of further trade actions and labor shortages in key markets.
These issues in more create a great economic uncertainty tempering demand for lighting products in both the residential and nonresidential construction markets.
Further we and our many channel partners had to deal with multiple price increases due to rising costs and tariffs, which further whipsawed demand, creating great stress and uncertainty for our supply chain.
Obviously these issues poses many significant challenges for us to manage yeah, we feel our performance was strong given this environment.
We made the decision early on to focus on those opportunities that were within our control optimizing where we could and reacting quickly with the best of our abilities to those market influences that were beyond our control, including tariff and the continued threats of additional ones.
Our many actions to optimize our performance in this environment and included multiple price increases introduction of new products and solutions and aggressive initiatives to drive companywide productivity.
Part of this effort included eliminating or reducing our exposure to certain products, whose profitability was most negatively impacted by the tariffs and sold primarily through the retail sales channel.
Well these actions resulted in lower net sales they serve to significantly enhance our adjusted profit margins at our free cash flow.
I know many of you have already seen our results and Karen will provide more detail later in the call, but I would like to make a few comments on the key highlights first for the fourth quarter.
Net sales for the quarter were $938 million down almost 12% from year ago period, certainly more than we originally anticipated.
Reported operating profit was 103.3 million.
Dollars compared with $143.7 million in your adult period.
For the diluted earnings per share was $2.42 compared with $2.70 in the year ago period.
There are adjustments in both quarters for certain special items as well a certain other add backs necessary for our results to be comparable between periods as Karen will explain later in the call.
And adding back these items one can see adjusted operating profit for the fourth quarter of 2019 was $146.1 million or 15.6% of net sales compared with adjusted operating profit of $156 million in a year ago period or 14.7% of net sales.
Adjusted diluted earnings per share it was $2.75 a quarterly record up 3% from the year ago period.
Now for the full year net sales in 2019 were $3.7 billion essentially flat from 2018, despite the drop in that sells in the fourth quarter.
Reported operating profit was 406.
Excuse me $463 million compared to $461 million in the year ago. Your adult period, while diluted earnings per share was $8 in 29 cents compared with $8 at 52 cents earned in the year ago period.
Adjusted operating profit was $528 million compared with $534 million reported in the year ago period.
Adjusted operating profit margin in 2019 was 14.4% down 10 basis points from a year earlier.
Adjusted diluted EPS was $9.57 a record 8% from 2018.
In addition, we generated a record $495 million and net cash provided by operating activities. This year as we significantly reduced inventory levels, primarily due to improved supply chain performance Karen will provide more detail on this later in the call.
We closed the year with $461 million in cash on hand, even after repurchasing $82 million of the company shares spending $53 million for capital expenditures and funding $21 million in dividends this year, leaving us with plenty of capacity to execute our growth strategies.
Lastly, I'm pleased to report we estimate that our return on invested capital in 2019 was 800 basis points greater than our average weighted average cost of capital.
We believe that are many return performance metrics our industry, leading your own calculations will highlight these positive returns.
Looking at some specific details for the quarter.
Net sales were down 11.6% when compared with a year ago period.
Overall net sales volume declined slightly more than 16%.
Changes in price mix were favorable by approximately 5% compared with the prior year.
This improvement was primarily due to implemented price increases and changes in channel mix, partially offset by changes in the mix of products sold.
We estimate the realization from recent price increases contribute at low single digits to our positive price mix performance this quarter.
Other items influencing the change in that sales this quarter were not collectively are individually significant.
These next few points are very important explaining the movement in our topline.
From a channel perspective, while we experienced declines in most channels there were three key areas of significance.
First lower shipments to the retail channel accounted for more than half of the total decline and that sales this quarter compared with a year ago period.
The largest portion of the decline in this channel was primarily due to the impact of load ins in the year ago period for certain new customers, which did not repeat this year.
The remaining portion of the decline in this channel was due in part to actions taken by the company to perform a comprehensive review of our product portfolio to eliminate or significantly reduced shipments of those products, whose profitability was most negatively impacted by the additional tariffs.
As we mentioned on previous earnings calls we expected. These efforts to result in lower net sales primarily in the retail sales channel.
Second that's sales through our independent sales network and our direct sales network, we're off by approximately 4% this quarter.
Our performance in these two channels was impacted by some pull forward to borders into the third quarter to avoid an increase in product prices due to additional tariffs continued weak demand primarily for larger commercial projects and the completion of certain larger infrastructure projects in the year ago period, partially.
Offset by implemented price increases market share gains in certain lighting categories, including lighting controls and our contractor select portfolio as well as growth of our building management solutions platform at Distech, which again performed exceptionally well this quarter.
While shipments in the Cnine market included within our independent sales network channel were down slightly we believe that our performance was reflective of overall market conditions and not specific to acuity.
Lastly, net sales in our corporate accounts channel were down 20% this quarter compared with a year ago period, primarily due to the completion of certain projects in the year ago period that did not repeat this quarter and to a lesser degree slower release was for certain renovation projects.
As we have noted in previous earnings calls, while we expect net sales through this channel to be very lumpy based on the nature of the construction cycle. The customers served primarily big box retailers, we continued to add to the total square footage covered by our connected lighting atria space diabetes solutions.
I will speak more about the advancements in this channel later in the call.
With regard to the impact on net sales for changes in price mix. The overall net impact was significantly positive this quarter, while it is not possible to precisely determine the separate impact of changes in price and mix. We estimate the impact of price increases contributed low single digits to our positive price mix performance.
This quarter.
As positive price capture was further enhanced by changes in channel mix, partially offset by the mix of products sold.
The positive change in channel mix. This quarter was mostly influenced by the decline in net sales of lower margin products sold through the retail channel, partially offset by product substitution. So lower priced alternatives primarily for more basic lesser featured led luminaires sold in certain channels as well as a modest decline and shipments.
For larger commercial projects.
Our adjusted operating profit for the quarter was $146 million down approximately $10 million compared with a year ago period.
While adjusted operating profit margin for the quarter was 15.6% up 90 basis points from the year ago period.
This was the highest adjusted operating profit margin posted by the company in the last seven quarters and meaningful improvements on both a sequential and year over year basis.
Furthermore, there are some additional points for you to consider as you evaluate our financial performance in the quarter.
First our adjusted gross profit margin for the fourth quarter was 42.1% an increase of 320 basis points compared with year ago period.
Huge improvement.
Adjusted gross profit was $395 million down approximately $18 million from year ago period.
The decline in adjusted gross profit was primarily due to lower net sales within the independent sales network and corporate accounts.
The impact from the under absorption of manufacturing operating cost as a consequence of our inventory reduction efforts this year compared with year ago period and to a much lesser degree the drop in net sales through the retail sales channel.
We estimate the negative impact on gross profit due to the under absorption of manufacturing operating cost was approximately $10 million this quarter.
Further if one were to compare the change in adjusted operating profit this quarter compared to the year ago period, excluding the impact of under absorption of manufacturing operating costs in both periods. The decline in adjusted operating profit. This year would have been only approximately $5 million on a decline in.
Sales of $123 million.
They are really important point here is that our efforts to prune our product portfolio and reduce our channel exposure to those products that do not meet our profit profile and to capture price as well as improve our supply chain performance all had a positive impact on our adjusted profit margins this quarter.
I will not unduly impacting our profitability.
Also our adjusted Sta expenses were down approximately $9 million compared with the year ago period.
Adjusted Sta expense as a percentage of net sales was 26.5% in the fourth quarter, an increase of 230 basis points from year ago period, primarily due to the decline in that sales.
The decline in Sta expense was primarily due to lower freight expense as a result of to drop in net sales and productivity improvements.
Our adjusted diluted EPS was a quarterly record of $2.75 compared with $2.68 reported in the year ago period, an increase of 3%.
The increase was primarily due to higher adjusted net income, which was benefited primarily by a lower effective tax rate this quarter as well as lower average shares outstanding.
Before I turn the call over to Karen I would like to comment on a few important accomplishments this year.
On the strategic and technology front, we continue to make significant strides setting the stage for what we believe will be solid growth in revenue and profitability over the long term.
In 2019, we introduced almost 100, new product families expanding our industry, leading portfolio, partially offsetting the impact of our pruning efforts to reduce the sale of load lower margin products sold primarily in the retail channel where price capture was a challenge.
Our new product introductions continued to be well received by the market some winning various awards for innovation.
We gained or maintain market share in many important product categories and sales channels.
Two or three and four solutions grew approximately 15% this year and now make up approximately 20% of our total revenues.
From a commercial perspective 2019 brought continued success of our connected lighting Atri has enabled solutions.
Our products and services enjoy strong market acceptance in retail applications now deployed in over 5000 retail stores in North America, netting over 500 million square feet of sales floor space under our connected lighting sensory network.
We have several large retailers with our atria SaaS applications now deployed or and detailed evaluation.
Initially we receive feedback that our retail clients clients found that the energy and maintenance benefits of our intelligent luminaires to be a strong economic value proposition, while also seeing embedded future proof sensors as a nice to have.
Currently those early technology adapters are now activating atria services as part of their customer engagement customer insight and associate productivity enhancement programs.
Increasingly we see data analytics and data science opportunities generated by our connected lighting atrium platforms as critical areas of investment, allowing retailers and now others to garner valuable insights about their businesses from our services.
Additionally, we expanded our connected lighting atria space solutions into other verticals as awareness by these customers of our meaningful points of differentiation and the broad capabilities of our identity solutions increased significantly, particularly as they realize the opportunity to transform their spaces from expense items to strategic.
Gas assets.
Today, we have nearly 10 million square feet of connected lighting Patriots enabled space in passenger terminals at four of the top 10 airports in the United States, including Atlanta, Denver, Las Vegas, and Seattle, which handle approximately 125 million passengers per year with more projects on the way.
Hi.
Net sales of our contractor select portfolio grew nicely in 2019, particularly in the Cnine market and now makes up approximately 10% of our net sales.
Contractor select as our fighter brand in response to those Chinese based lighting companies many of which we believe are clearly being subsidized in some form that are influencing pricing for certain basic lesser featured fixtures sold in certain channels.
Again, we're very pleased with the growth and profitability of this product portfolio and we will not yield this portion of the market for many strategic reasons.
We made significant strides in expanding our industry, leading lighting control platform and light as well as our building management system business Distech. We're both units grew double digits in 2019.
We believe acuity has the most comprehensive and feature rich wired and wireless lighting control systems available and importantly, our connected to our growing BMS solutions, providing customers with even greater functionality.
Further we initiated many actions this year to further streamline our operations to reduce costs and improve our productivity. We believe these initiatives will enhance our future operating and financial performance as well as allow us to accelerate investments in areas with higher growth opportunities.
Also as I noted in our previous earnings call. We initiated comprehensive reviews. This year in two key areas of our company compensation, and environmental social and and governance or SG.
User reviews, which included feedback and insights from our shareholder base resulted in important modifications and enhancements to both programs.
Our SG program is helping us to identify further opportunities to drive efficiencies reduce cost increase our positive impact on the environment and increase associate engagement and satisfaction.
And lastly, we continue our efforts to complement our solutions portfolio with with strategic acquisitions and investments, including the acquisition of the Luminaires group in mid September .
The Luminaires group as a leading provider of specification grade luminaires for commercial institutional hospitality and municipal markets all of which complements our architectural platform. We're pleased to welcome. The 350 associates of the Luminaires group to the acuity family.
Our our solid performance this year as a result of the dedication to resolve our 12000 associates, who are maniacal, we focused on serving solving and supporting the needs of our key stakeholders.
I will talk more about our expectations for fiscal year 2020 later in the call I would like to now turn the call over to Karen Karen. Thank you burn and good morning, everyone Im happy to be on the call with you today.
As Burton mentioned earlier, we had a few adjustments to the GAAP results in the fourth quarter and for the full year fiscal 2019, and 2018, which we find useful to add back in order for the results to be comparable.
Our earnings release, we provide a detailed reconciliation of non-GAAP measures for the fourth quarter and full year of fiscal 2019, and 2018 adjusted results exclude the impact of amortization expense for acquired intangible assets share based payment expense manufacturing inefficiencies and excess inventory.
Estimates directly related to the closure of the facility acquisition related items special charges for streamlining activities again on the sale of our former Spanish lighting business and an income tax benefit for discrete items associated with the tax cuts and job Zack we believe adjusting for these items and providing these non-GAAP .
Measures provide greater comparability and enhanced visibility into our results of operation. We think you will find this transparency very helpful and your analysis of our performance.
Recall that during the fourth quarter of fiscal 2018, we reversed pretax special charges of $5 million a certain previously planned streamlining activities. We're no longer expected to occur primarily because we were successful in selling our former Spanish lighting business for again during the quarter.
During the fourth quarter of this fiscal year, we recorded net pretax special charges of half a million dollars related primarily to certain streamlining activities.
Additionally, in the fourth quarter fiscal 19, 2019, we incurred $1.3 million of expenses related to acquisition and investment activity.
The effective tax rate for the fourth quarter fiscal 2019 was 20.2% compared with 21.1% in the year ago period. The decline in the current fiscal tax rate reflects the lower blended federal statutory tax rate and certain research and development costs tax credits, including claims for prior period.
Recognized during the fourth quarter fiscal 2019 prior years fourth quarter tax rate benefited from $3.4 million discrete income tax benefit resulting from the T.C.J.
We currently estimate that our blended effective income tax rate before discrete items will approximate 23% for fiscal 2020.
Shortly after the end of our fourth quarter on September 17th 2019, we completed the acquisition of the Luminaires group headquartered in Montreal, Canada.
The Luminaires group, which is comprised of five distinct brands is a leading provider of specification grade luminaires for commercial institutional hospitality municipal markets.
Generates annual sales of approximately $100 million and employs over 350 associates located across five locations in the USA and Canada.
Management expects that the acquisition will be immediately accretive to fiscal 2020 adjusted earnings we did not disclose the terms of the acquisition.
We generated a record $495 million of net cash flow provided by operating activities during fiscal 2019, compared with $352 million for the year ago period, an increase of $143 million, we've reduced our inventory by $71 million during Phil.
Well 2019, as a result of our efforts to improve inventory turns which we have accomplished while also improving customer service.
At August 30, Onest 2019, we had a cash position of $461 million, an increase of $332 million. Since August 31, 2018. The increase was due primarily to record net cash flow from operations, partially offset by cash used to repurchase common stock invest in play.
And equipment and pay dividends.
We repurchased 650000 chairs of the company's common stock for $82 million during fiscal 2019, we have approximately 4.6 million shares remaining under our current authorization, our investment and capital expenditures were $53 million for fiscal 2019 or approximately 1.4 per se.
End of net sales.
We currently expect to invest approximately 1.7% of net sales in capital expenditures in fiscal year 2020.
Last year, we executed a new five year unsecured revolving credit facility in term loan with the syndicate of banks that provides us with a total of $800 billion, the borrowing capacity of which $796 million was available at August 30, Onest 2019, our total debt outstanding was 357.
$1 million at August 31st 2019, and our debt to capitalization at August 31st 2019 was 16%.
Our $350 million senior unsecured notes mature in December 2019, we intend to refinance these borrowings using availability under our 400 million dollar unsecured delayed draw a five year term loan facility.
Our record cash flow performance in fiscal 2019 has afforded us with significant financial strength and flexibility to support our growth opportunity, which may include additional acquisition. We will continue to seek the best use of our strong cash generation to enhance shareholder value. Thank you and I will turn it back to burn thanks Jeremy.
So probably the most important portion of this call our outlook and our focus for 2020.
While current market conditions in the overall lighting industry continued to be challenging we are optimistic regarding our long term future and that of our key markets. We believe our many actions to improve our market reach enhance our customer solutions and capabilities and drive company wide productivity will help optimize are.
Permits in the future, while affording us the opportunity to continue to invest in areas. We believe have high profitable growth potential over the long term.
That notwithstanding we believe current market demand for lighting is sluggish we.
We believe the catalyst for these tepid conditions is primarily due to continued concerns over key economic issues, including global trade policies and the potential for future tariffs. We expect these market conditions to continue for the foreseeable future in until such time as there is more clarity and certainty.
Regarding these key economic issues.
In addition, we believe there a few other factors that will continue to influence the lighting market included continued product substitution to lower price alternatives for certain products sold through certain channels labor shortages in certain markets and continued cost increases, particularly for imported electronic electrical components and.
Finished goods freight and wages. So recent pricing action should help to mitigate some of these factors.
Given this market environment, we can only focus on those areas within our control and react to the best of our abilities to those influences beyond our control.
We believe the maniacal focus on a few key areas coupled with Precyse execution of our plans will afford us the best opportunity to produce favorable results for our key stakeholders.
So in 2020, our primary focus will be on two key areas growth through market share gains and margin improvement.
Let's start with our growth initiatives, our focus will be on the filing.
Number one leverage our leading access to market with continued new products and solutions based on our tiered solutions, our tiered strategy approach.
Similar to the last few years, we are again planning to introduce over 100, new product families. In 2020, many with embedded controls technology as well as further leveraging our architectural brands with the acquisition of the Luminaires group.
Number two accelerate the expansion of our connected lighting Atria Society solutions platform. Both in retail, where we continued have great success and into new verticals, including transportation healthcare warehousing and distribution and commercial office.
To do so we are adding additional resources and capabilities with the creation of our applied technology team to focus on these additional verticals and to build on the success, we are having in the retail vertical.
As I noted earlier, our initial efforts into these new verticals is encouraging.
Number three accelerate our efforts to capture additional market share for discretionary renovation projects in multiple channels.
Installed base continues to represent a huge opportunity for profitable growth.
And number four build on the success of our contractor select portfolio to drive further growth for certain basic lesser featured fixtures.
With regard to margin improvement initiatives, our focus in 2020 will be in the following key areas number one capture profit and margin growth through the introduction of new products and solutions number to continue to reduce our product costs through the redesign through redesign efforts.
Number three finalized the consolidation and closure of two distribution locations by the end of the first quarter to reduce our cost base.
Number four drive further companywide productivity gains through our lean deployment processes.
And lastly, manage our fixed operating costs by exploring opportunities to further leverage our supply chain footprint and our Sta investment.
These growth and margin improvement initiatives initiatives in 2020 are part of our long term growth strategy to fulsomely leverage our market leadership position with technology enabled solutions that are differentiated and valued by customers. So we can gain further market share and to appropriately structure our business to the current on.
Opportunities to enhance our profitability and cash flow.
Further we believe the sales of our lighting and BMS control solutions as well as our atria space Luminaires all within our tier three and four categories will continue to expand though and I would like to again emphasize it will be lumpy a times because of the unpredictability and timing of customers renovation and new construction schedules.
As well as the volatility than in demand caused by global trade and political issues.
The next point is very important.
Well as a matter of policy, we don't give earnings guidance, we feel it is important for all investors and analysts to understand that we believe our net sales could be down again, this coming first quarter compared with year ago period.
The primary reason for this is that net net sales last year were significantly benefited by the pull forward of orders from customers attempting to avoid implemented price increases due to inflationary pressures and the impact of terrorists enacted on certain components in finished goods manufactured in China.
And to a lesser degree that continued load in.
To a new customer in the retail sales channel, which resulted in a combined 11% growth in net sales in the year ago period.
At that time, we acknowledge it was impossible for us to quantify the produce precise impact of the pull forward of orders due to the then implemented price increases.
Because we do not expect either of these situations to repeat this quarter. It makes our ability to quantify the changes between the first quarter of 2022, the year ago period, a significant challenge.
The situation is further exacerbated by continued pruning of our product portfolios noted earlier Nonetheless, our best guess is that net sales could be down in the first quarter of 2020 compared with the same period in 2019 in the mid to high single digit percent, partially offset by the addition of the.
Luminaires group.
Additionally, as we noted earlier, we initiated a review in late 2019 of our product portfolio and services offered primarily through the retail channel with the objective of eliminating those items and activities that do not meet our financial objectives. These efforts have and should continue to impact our topline growth rate and could be further or.
Beta by future trade policy changes and potential additional tariffs.
Further the execution of our integrated tiered solution strategy, including the expansion of our tier three tier four holistic lighting building management in our ATRIO T. platform and software solutions and opportunities to participate in interconnected world is an integral part of our overall growth.
Long term profitable growth strategy to meaningfully expand our addressable market by adding broad based holistic holistic solutions that will allow our customers to transform their connected intelligent buildings and campuses from cost centers to strategic assets.
As I noted earlier, we intend to make additional investments in this area in 2020, including potential acquisitions and minority investments to drive our market leading advantage in these emerging growth markets.
Lastly, our goal is to outperform the growth rates of our key markets and channels.
Within the retail sales channel, we expect to participate by servicing the needs of our customers in a mutually beneficial manner. In total we expect to show positive growth in 2020.
While the turmoil in the current environment this on settling and impossible to predict when uncertainty gives way to clarity.
We believe the lighting and lighting related industry as well as the building management systems market have the potential to experienced solid growth over the next decade because of continued opportunities for new construction and more importantly, the conversion of the installed base, which is enormous and size to more efficient and effective solutions.
As the market leader in lighting solutions, and a technology leader in building automation along with our Atria is platform. We believe we are positioned well to fully participate in and leave these exciting growing industries.
Thank you and with that we will entertain any questions that you have.
In order to provide everyone the opportunity to ask a question. The company ask that you limit your questions to two for color. If you have further questions simply we insert yourself back into the queue and your additional questions will be answered as time permits.
Our first question comes from Christopher Glynn Oppenheimer. Your line is now open.
Thank you good morning, and Karen welcome to the Gulf.
So just curious about maybe big picture on some of the structural channel shift shifts varian and the context of the topline pressure reported just curious from a couple of perspectives about.
Base run rates in the channel mix evident in the fourth quarter versus go forward.
Is there any way to kind of define what you and the board are talking about about both the right size of your run rates relative to the volume. This because clearly your trimming some areas of portfolio and in particular is pruning still the right where it are you doing something a little beyond what that where it suggests.
So Chris I think pruning is the right. We're you know when these terrorists came through they really created a great deal of turmoil.
Within global supply chains, and so many of us in the industry had to evaluate where we played and why we put forth price increases to help offset that we took other actions to.
Mitigate.
On a cost increases to mitigate.
Finished good price increases.
But to the extent that we were able or unable to get full capture on pricing in some channels. We've made the decision to review that portfolio and understand where we needed to play in why.
As I pointed out our contractor select portfolio grew very very nicely in Q4 and its targeted directly.
That's what we'll call.
Competition for that basic lesser featured end of the market, which is important market to us, but there are certain channels, where we feel.
We did not.
Realize the type of financial profile that Raptor. So we began to if you will prune those products and assess.
Which products, we could mutually benefit both our customers as well as our shareholders in terms of profit margin. So when we think about our business going forward. The turmoil that has been created in two ways. The price increases have created pull forwards.
Almost to a logical distortions of the market of people trying to avoid those price increases so it's going to make it very difficult. It made a very difficult in 2019 to really understand period over period growth what was truly happening in the markets and we think that 2020 at least for the first half will be exacerbated by the same types of things.
We also have a little bit of noise around the fact that we had a load in of certain customers within the retail channel. So that there's just a lot of noise around this this is why again, we don't normally give guidance we.
Attempted to provide some guidance to divest of our ability.
By saying that we think that our top line will be impacted by mid to upper single digit decline in the first quarter of 2020 compared to 2019 I also said that we expect for the full year to show positive growth.
So we're trying to balance off market dynamics.
With our own ability to drive opportunistic share gain in the marketplace.
I think that the profitability improvement that you saw in the fourth quarter is reflective of the actions that we have taken.
To both protect our business and to grow our business.
So you saw the margin improvement at the.
At the adjusted gross profit level of about 320 basis points.
We were able to leverage that to about 90 basis points.
Adjusted operating profit level. So I think you have some reasonable information and insights around margin profile and I think that some of the commentary that we made around first quarter as well as what we expect for the first year growth.
To also be helpful to you in modeling.
Yeah. Congrats on the gross margin in the free cash flow improvement noted as well just building up the last comments or the margin you to build some momentum through the year on margins, but clearly most pronounced in the fourth quarter here seemingly a springboard as the components of it.
Seem to be from structural shifts as you involved a few things during the year. So is that a pretty clear set up for favorable Terra tailwinds full year.
Margins fiscal 20, comparing to the year just ended.
I think we should we expect that we will see favorable margin comparisons in 2022.
2019, but we expect that to be for the full year.
So if I could encourage everyone to not obsess over each quarter, we expect that the full year will be favorable.
It's also very interesting to note and I just wanted to point out again.
That the under absorption or the under absorption of fixed manufacturing.
This quarter was almost $10 million in the year ago period, the under absorption was almost $5 million. So when we think about how we're structuring our business and how we're managing that.
We did a great job this year in managing our inventory levels down.
Improving our service and you saw that in our tremendous cash flow part of that tremendous cash what was the collection of receivables.
For the load in.
The year ago period.
But we've done a great job managing our balance sheet and I expect that we'll continue to see.
Positive margin improvement.
In 2020 over 2019.
Thank you.
Our next question comes from Deepa Raghavan with Wells Fargo Securities. Your line is now open.
Hey, good morning, when Karen welcome.
It just dovetailing on that margin improvement question. When can you talk about the drivers to the margin improvement in fiscal 2000, Kevin you mentioned, all these actions, which I guess, it's pretty comprehensive but can these actions lead you to say I'm just doing a number out there 41%.
Its margin improvement for the full year irrespective of Walden performance I guess, that's the big question for me, how do we think about you aggressively and weak volume environment and.
On the flip side, how do I think about pricing because that was a big helped to margin. This time.
Absolutely, yes, I mean will import competition pick back up and start to pressure margins again, so yes, two sides of the current sorry, if you will I'd appreciate it.
Sure.
Channel mix was a significant driver to our improvement in margin, so as we ramped up or as as our sales through our.
Our independent sales network.
Primarily the Cnine market that became a larger percentage of the total sales in Q4 relative to.
Total percentage that retail or sales through the retail sales channel worse, so that that shift in channel mix.
Had a meaningful improvement.
The gross profit margin.
I would like to point out and I think it's really important if you over to look at again.
The change in our operating profit between periods excluding.
The Unabsorbed overhead was a decline of $5 million on a drop of almost $123 million of sales.
So I think what shareholders should take from acuity is that we're managing our business in our portfolio well to both optimize our profit, but also to optimize our profitability and to return back that cash if you will in the form of great cash flow.
Because we have de leverage some of our exposure into some of those markets from a growth perspective going forward.
From from a margin perspective, I'm, not going to prognosticate or give guidance around that.
Well I will say is that we expect the mix.
Of our business to continue to a degree as it is.
Or as we reported in Q4.
That should have a favorable impact on gross profit margins the notion of the volume in demand in the marketplace to your question is really important.
We still expect that the first quarter or market conditions, which will impact our first quarter to still be sluggish.
Order rates I think in the near term.
Continued to be a challenge I think theres a lot of economic uncertainty out there. So we're looking to.
Not only have issues that issues, but to have items that will impact our first quarter compared to the year ago period attempting to quantify that we gave you some insights as to what we think the topline is going to be.
And we'll have to manage our sta accordingly, but for the full year, we would expect there.
To see positive improvement I think a number of the forecast that I see out there are calling for growth.
In 2020, but those same forecasters are saying that.
We expect the back half of calendar year 2019 to continue to be flat to maybe even slightly down I find it to be very interesting when I look at a number of indicators as you might imagine we collect all sorts of data.
And that data has historically been has given us insight into the future and just a couple that I would point out to everyone. When we look at.
For example, the industrial market or the commercial office market vacancy rates are at a significant low and you see rising rents in both of these areas typically that would remain that would.
Instigate investment in the area I personally believe that Theres a lot of money sitting on the sidelines waiting to get clarity around some of these economic issues.
That will begin to attack. This I mean these rising rents.
When people look at that given the interest rate environment I think it's a very positive opportunity. So I have a cautiously optimistic view of what the future holds I just think that the shorter term is going to continue to have turmoil because of some of these economic uncertainties.
Okay got it thanks for the color I think a follow up to two the same question.
You're talking about is.
So, let's just say the tax rate case ease a little bit here. When do you expect kind of bulk of these projects that you're talking about that on the sidelines come back on line pretty quickly.
And I mean generally how do we think about.
Election year actually it's all in in some some uncertainty on top of it.
And I appreciate that and that will be my last question for the call. Thank sure. So thank you so.
Our many sales forces continue to see an experience. If you will record backlogs, which has set projects aren't re leasing and I think is because of uncertainty around cost. Many of these projects are.
There are two years in the making they're not one month and so therefore, when they decide that theyre going to build a commercial office building thats going to take two years from start to finish.
To come into place, they're trying to project their cost. So the uncertainty of tariffs has a meaningful impact on when they say go I think as we get clarity around those things you're going to see more of those projects come to fruition.
Architects and engineers, even though the architectural billing index has softened up a little bit here continue to be very busy we don't hear of anyone laying people off so.
We still think that theres good activity out there.
To the extent that our price capture has really gone mostly to offset the tariff increase so to the extent that tariffs start to abate for whatever reason.
I think that you might see some of the pricing readjust, but in our perspective.
It's been a it's been kind of a cost neutral.
So I wouldn't expect us to see.
Any significant profit profile change because of that other than we would expect to see volume growth, which is hugely beneficial for acuity because we have very solid variable contribution margins on an incremental sales dollar of growth.
Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.
Hey, guys. Good morning, welcome Gary.
Thanks for taking the questions.
First one maybe just.
On the volume growth, maybe maybe drilling down a little bit I know, there's a lot of moving parts here heading into 2020 vary but on new construction volumes can you kind of give us a sense of where do you think those are tracking and I know in past quarters seem like you guys had been mentioning sort of down low single digits. So if you could maybe update us as to how that trended.
That particular vertical is looking right now.
Sure so.
Again, we're in we're not economist, but when we look at information I think to use census Bureau does it well on the inflation adjusted basis seasonally adjusted.
The overall.
Market for electrical lighting equipment.
Been down like eight of the last nine quarters on an inflation adjusted basis, when we look at some of the others other items.
Nonresi has is kind of been out on the decline here, where as non residential I'm sorry, I meant to say resi has been down non residential has been flattish to slightly down I think what's been propping up a lot of stuff has been public non residential so we consider we continue to see a and then.
Aramid that that is again I'll call it sluggish with a lot of larger projects remaining on the sidelines in People's backlogs not being released.
One positive thing that I think is important.
Is the fact that.
When we look at the Dodge momentum index, while it was it was declining starting in kind of middle 2018 seems to have flattened out so.
I think that when we look when we look at the overall market. We continue to see new construction on an inflation adjusted basis to be flat to slightly down for those folks in that portion of the industry that have.
Non see deflationary items.
Unlike the lighting industry, they're probably actually showing some growth.
Okay. That's fair enough helpful. And then just the second question and I'll pass it on.
I know you've done this in past quarters as well.
Some company specific issues for you guys are.
You mean, the compare year, but how would you say you compared to the industry growth rate during the quarter and then.
I know you traditionally don't give the guidance that you are giving guidance for fiscal Q on what are you expecting kind of the baseline to be for that quarter and really the reason I ask because there's been a few quarters here now.
Well, you've underperformed the market it would seem so trying to gauge what you baked in.
2020 useful to get back to the.
Trend of being able to outgrow the market.
So.
If I if I look at the overall growth rate of the market as I just commented.
The market for the last Gan seven eight quarters has been down anywhere from one and a half to almost four points on an inflation adjusted basis. So acuities growth during each of those quarters or performance against that still has outperformed the overall growth rate of the market I think we've had a couple of things here that our spin.
Perfect to acuity, when we decided to again.
Look at our portfolio and determine the profitability of those items relative to what our expectations are yes. We did take some actions that were specific to acuity around.
Those products in certain channels.
But when I look at overall fee Eni, which is the non residential portion of our world sold through ratio agents commercial industrial I would say that our performance. There is still positive relative to the market. Some of the lumpiness that we've seen in our corporate.
Accounts World has been more due to the timing of releases.
As you know acuity.
Was the was the.
Vendor of choice to realize all of the target locations and we've completed that and we have expanded our customer base to now add many many additional customers not all of whom have moved as quickly or as large as targets. So we're having if you will some lumpiness, it's what I call it.
But yet our expansion and the amount of footprint that we cover with our connected lighting Hcis enabled solutions continues to grow at a better for mineable rate and now we're expanding that capability into other verticals. So when I look at acuities growth and that compare to the market I'm Lucky.
Looking at various channels and I'm looking at various segments of the market and where we have participated in the same way. We continue to believe that we are either maintaining or growing market share. When we look individually for example at our lighting control solutions. We believe we are gaining significant market share.
There when we look at contractor select.
It went from being really a very small portfolio less than 18 months ago to now almost 10% of our total revenues.
And we like the profit margin capabilities off of that that growth has come in the Cnine channel primarily.
So I think we are well balanced positioned well to continue to outperform the growth rates of the markets, we serve and to the extent that there is business out there.
That.
We feel is not mutually beneficial we're not afraid to.
No.
Look for other channels to serve.
Thank you appreciate the color.
Our next question comes from Joseph Osha with JMP Securities. Your line is now open.
Hello, Thanks, and welcome Karen.
Two questions first when we think about this free cash flow, which is formidable one if we were to.
Look for 12 months and maybe.
Sort of think about how that pies segmented between additional acquisitions and buybacks and I'm wondering how you're thinking about that free cash flow deployment and and secondly, not to harp on I think the point everyone's been harping on but it seems to me that you could have grown this business more.
Taken call over 40% gross margin in the fall through to the operating line probably would have been better.
What point do.
Topline growth begin to become more important than moving this gross margin higher than where it is now.
Sure. So Karen maybe you take the first question on cash flow and then I'll answer the second sure. Historically, we have spent about a third on acquisitions, a third on share repurchases and the third on Capex and dividends. So I think we're always looking for ways to optimize shareholder value and surely share repurchase.
This is an acquisitions and dividends and Capex are part of that so I think that's where you'll see the use of our cash flow over the next year.
No no no change really in terms of the correct no change yes, okay. Thank you and I would I would say that we continued to be opportunistic we have a very robust pipeline of acquisitions. We just completed the acquisition of the Luminaires group continue look at not only traditional lighting businesses.
To complement our portfolio that also really interesting technologies to complement our connected lighting atria. It's enabled solutions just wanted to tell everyone.
We are making really solid progress in implementing.
Our strategy around atria synta connected lighting space.
I wish that the SaaS revenues could start to meaningfully move the topline, but as a $3.7 billion business. It's just it's still in its early stages, but it's really encouraging.
To your second question.
Topline growth and letting the margins flow through.
We think it's important that when you do your analysis of Acuities results that you consider again, the 123 million dollar change in year over year growth or decline in topline and yet adjusted basis, excluding the unabsorbed overhead in both periods it.
Impacted our profitability.
The only $5 million saw I think acuity is really focused on growing its topline too in fact grow its bottom line and improve our profitability.
But but the moves in the actions that we've taken to adjust our portfolio I think are really in the best interest of our shareholders and that free cash flow.
Was really powerful and it shows you the power of acuity.
So we balance off you know how do we have profitable growth and the definition around that and we define profitable growth at acuity based on the returns our return on invested capital.
This year was 18% 800, bips greater than our weighted average cost of capital. We look at other things like cash flow return on investment you know it was almost 35%. This year our returns are robustly huge.
Having said that we are about growth and I think 2020 to get growth, it's going to be about market share gains.
In every channel that we focus on.
Okay. Thank you. Thank you very much.
Thank you.
Our next question comes from John Walsh with Credit Suisse. Your line is open.
Hi, good morning.
Good morning.
Maybe following on that market share gains question. Some of the levers there that that are going to allow you to do that.
Obviously the deal see very important for kind of incentive programs that utilities I think they're coming out now are just talked about higher more stringent.
Qualifications to get those in the terms that are using our control ability and quality of light, which.
Should fit very well with your product portfolio is that that's something that can actually be meaningful is that a helped to kind of the tier one.
Domestic Oems versus the imports coming from overseas.
I think it's a huge.
Impact or can have a huge impact DLC is very important.
And in terms of.
What they require and so companies that are really focused on quality of light who have invested significantly in understanding what controls mean, it's not just saying I can delight, our turn a light on or off its really how does it work in space and too often.
The these lesser quality suppliers people experienced tremendous flicker and so the the experience that one has in that space is not good as DLC points.
There are significant influence towards quality of life as well as competitive cost I think it's going to benefit those manufacturers that have have really invested in.
Quality of life. So, yes, I do I think it will have an impact.
And then maybe just another question around the free cash flow.
And just thinking about the inventory dynamics I mean last year.
Mr. kind of that 100% conversion that we typically used as a benchmark.
This year, you know you kind of over drove that I mean, how should we think about the free cash flow conversion rate going forward and is there still any kind of working capital.
Goodness as we think about our next year free cash flow number.
Yes, it's great question. So our objective is to.
As you point out have free cash flow in excess of net income.
This year coming up maybe a slight challenge I think as Karen pointed out we're expecting to spend between 1.7% to 1.8%.
On Capex, that's slightly higher than our depreciation.
So but that.
Just note that as effect I think from an operating working capital perspective.
We're probably right now I'm doing this for memory about 13% of sales, maybe even slightly higher than that I think our total days, our net days or about 56 or 57 days, we brought our payables down probably a little bit further than what we normally would expect so I would think that our total Dave.
We will come down from an operating working capital perspective.
We're at about 56 or 57 days for inventory.
We have areas to improve their our teams are doing a great job it really depends on what percentage of our business is.
Coming from offshore.
On into North America.
As we look to really drive performance of our supply chain here in the North American market, we see opportunities to improve.
Our inventory days. So I think you should expect from acuity continuation of attempting to meet that goal of 100%.
Conversion of net income.
To cash flow.
Thank you.
Thank you.
Our next question comes from the line of Tim Wojs with Baird. Your line is now open.
Hey, guys good morning.
A quick ones for me.
I guess first on the under absorption Vern would you expect that to continue into the first quarter just given the revenue guidance. That's one and then second how should we think of just leverage of SDMA in fiscal 2000.
Thank you you did leverage SDN, a little bit in fiscal 19.
If you expect modest growth on the topline in 2020 should we expect estimated grow.
Similarly, or or can it actually maybe be flat to down.
So on the absorption issue, we would expect there to be.
Hopefully some negative or under absorption in Q1 versus the year ago period.
Hi, I haven't done any analysis to know how much that will be it really depends on the order rate in our ability.
We know we can service the order rate, but how is that order rate going to manifest itself orders continue to be somewhat sluggish, though we do see some bright spots and we hear encouraging words words don't mean much orders mean everything so we will focus on that but yes, I think it I think you will see a bit of.
On absorbed overhead.
Not to the significance of what was in Q4, where that number was $10 million in the year ago period of Q4. It was 5 million I think you'll see a smaller number less than both those but I don't know that factually.
And your Sta question.
So here's the challenge as you might imagine.
We're trying to manage Sta, and all costs, not just sta, but all costs all of our.
Our spend.
Did that allows us to be consistent with what the demand is in the current period, but also holding out knowing that we have an expectation that there will be future improvements in demand.
So we're trying to balance off all of those things as I mentioned.
We have a couple of warehouses that.
We were able to shut down and consolidate so we could reduce our cost, but we continue to look at all aspects of our business to drive further leverage we prefer to get the leverage because we have topline growth, but we will manage our fixed cost structure and our variable cost structure based on the environment.
That we find ourselves and our headcount is down approximately 9% on a year over year basis. So we've had to manage our business while experiencing these huge spikes.
And then it orders because of people trying to avoid price increases and then boom the the volume or the business falls off so it's been quite a challenge to manage.
But our expectation is to further leverage our sta, our costs are up because wage inflation.
It's.
It's been a tight labor market out there and so we'll continue to experience. Those we have made some investments in some areas, but we've also the invested in some other areas. So.
We will I.
I think Dan we finished the quarter at about 26.5% Sta as a.
I have here some place, yes, correct, so 26.5%, but I think the bigger the more important aspect of is what will the spend dollars fee.
We could see a little bit of an increase it just depends on what the drop off in volumes going to be in Q4 Q1.
Knowing that we have we're carrying a little bit more expense.
From Q4 into this coming Q1 compared to what occurred last year. So.
Probably have a little bit of challenge there in Q1, but I think for the full year. We will you will see leverage in our our total fixed cost opportunities.
Great. Thanks for the color.
Thank you.
I would like to turn the call back over to Mr. Vern Nagel for closing remarks.
Thank you everyone for your time. This morning again, we strongly believe we are focusing on the right objectives deploying the proper strategies and driving the organization to succeed in critical areas that have the potential over the longer term to deliver strong returns to our key stakeholders.
Our future is bright thank you for your support.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.