Acuity Brands, Inc. (NYSE:AYI) Q2 2024 Earnings Call Transcript

Acuity Brands, Inc. (NYSE:AYI) Q2 2024 Earnings Call Transcript April 3, 2024

Acuity Brands, Inc. misses on earnings expectations. Reported EPS is $2.84 EPS, expectations were $3.11. Acuity Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Acuity Brands Fiscal 2024 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's 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.

Charlotte McLaughlin: Good morning, and welcome to the Acuity Brands fiscal 2024 second quarter earnings call. On the call this morning is Neil Ashe, our Chairman, President and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress, and on our fiscal 2024 second quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward looking statements. We intend these forward looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on Slide 2 of the accompanying presentation. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2024 second quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investors.acuitybrands.com.

Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ashe.

Neil Ashe: Thank you, Charlotte, and thank you all for joining us this morning. Our fiscal 2024 second quarter was another quarter of solid execution. We increased our adjusted operating profit, adjusted operating profit margin and adjusted diluted earnings per share. We generated strong free cash flow, and we allocated capital effectively to drive value. Both our lighting and our intelligent spaces businesses delivered strong financial performance. In ABL, we increased adjusted operating profit by $3 million on $47 million less sales and increased the adjusted operating profit margin 120 basis points to 16.2%. This performance is is the cumulative result of the changes that we have made to the business over the last four years.

We have made the business more predictable, repeatable and scalable by executing on our strategy to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business and by driving productivity. During the second quarter, we continue to make progress on our strategy. By focusing on the needs of our customers, we are elevating our service through our differentiated portfolios. Contractor Select is about 300 of our most popular products that are used in common everyday lighting applications. These products are designed to be resold and are in stock at retailers and electrical distributors. Through high levels of product vitality, we have been able to create a portfolio that offers quality products that our customers want at competitive prices, while at the same time, allowing our distributor partners to carry less inventory.

Design Select is comprised of products that are configurable and allow customers to easily select the products needed for their projects. We are less than a year into launching the first wave of Design Select, and we are continuing to expand the product families and configurations available. The reception so far has been positive. A recent project in California is a great example, where a customer needed indoor fixtures, outdoor fixtures and lighting controls. Using options from the Design Select portfolio, we were able to meet the unique product combination of the project, ensure it was there when the customer needed it, and then it was easy for the contractor to install. The remainder of our product portfolio is made to order. These are specialty products or solutions made for specific applications, such as national accounts that satisfy all of the wants and needs of the Lyon design community.

At the same time, we continue to make investments for future growth. In the second quarter, we expanded our horticulture product solutions. We add the Arize family of products to our existing Verjure line in order to take advantage of a growing market. Arize is a collection of professional grade LED horticulture luminaires, that are compatible with our in-line air wireless controls and are used in commercial greenhouses, indoor cultivation and vertical farming. This small investment accelerates our product portfolio efforts in this attractive vertical. This approach to investment in ABL is the right one, as evidenced by the value being realized in our OPTOTRONIC driver and component business. We acquired OPTOTRONIC in 2021 in order to control more of the technology in our luminaires to expand our OEM channel and to take greater control of our electronic supply chain.

Today, we are one of the top driver suppliers to the lighting industry and to ourselves as we manufacture the majority of our drivers for our own products. This control not only offers us a financial benefit but also offers us greater engineering flexibility during the design and development process that is core to our product vitality efforts. This quarter, we introduced the IVO family of shallow recessed downlights from Gotham which is a new platform from a vendor downlights that have a compact design for use in confined spaces that replace the traditional canned recess lighting fixtures. IVO can be used in most nonresidential settings in both new construction and renovation. The compact design and high efficiency options deliver real value for our customers, while the use of less steel, less aluminum and less plastic drives margin for us.

Finally, this quarter, several of our brands were recognized by the industry. Our Aculux, Eureka, Hydrel, Luminis and Peerless brands were awarded 9 good design awards from the Chicago Athenaeum Museum of Architecture and Design. We were awarded 11, 2023 product innovation awards by Architectural Products Magazine for impressive innovation in terms of form, functionality and sustainability. And 14 of our luminaires were selected across multiple product categories by the lift design awards for exemplifying outstanding creativity and innovation. Now moving to our Intelligence Spaces Group. Our mission in our Intelligence Spaces business is to make spaces smarter, safer and greener through our strategy of connecting the edge to the cloud. Distech has the best edge control devices on the market, while Atrius will be the best in cloud applications.

At Distech, we are focused on expanding our addressable market in 2 ways. The first is geographic and the second is increasing what we can control in a build space. As part of our geographic expansion, this quarter we added additional systems integrator capacity in Australia, and we released Atrius Sustainability and Atrius Energy in France. Our independent SIs are key to the organic expansion of our spaces business. We partner with the best SIs in specific geographies to sell our full suite of Distech and Atrius product portfolios. Our Atrius applications are making a difference for our customers. Atrius sustainability is an automation tool that captures, categorizes and reports on carbon emissions, while Atrius Energy facilitates the reduction of energy and carbon usage by allowing facilities teams to benchmark their usage and prepare for upcoming reporting obligations.

Our Atrius energy and sustainability applications are gaining recognition. Commercial Property Executive magazine named Atrius and innovative technology winner in its annual influence awards. And CRE tech selected Atrius as a finalist in its real estate tech awards that on our technology vendors that are advancing solutions for commercial buildings. Now turning to the outlook for the remainder of the year. We are performing well. We are satisfying customers, expanding margins and generating strong free cash flow. The order rates in both our Lighting business and our Spaces business are growing year-over-year. In our lighting business, we are back to typical lead times and absent the impact of sales from excess backlog last year, we would be experiencing sales growth.

In our lighting and lighting controls business, our strategy drives strong execution, and we are focused on returning the business to growth in a normalized environment, while leveraging our fixed costs and generating strong cash flow. In our Spaces business, we will continue to grow geographically and by adding to what we can control in a build space. Karen will outline what that means for our second half outlook after giving you an update on our second quarter performance. Karen?

Karen Holcom: Thank you, Neil, and good morning to everyone on the call. As Neil said, we continue to execute well. In our fiscal second quarter, we increased our adjusted operating profit, improved our adjusted operating profit margin and increased our adjusted diluted earnings per share while generating strong cash flow. We continue to allocate capital effectively while making progress on our strategic priorities. For total AYI, we generated net sales in the second quarter of $906 million, which was $38 million or 4% lower than the prior year as a result of the lower net sales in our ABL business. This was partially offset by continued growth in the ISG business of 17% in the quarter. We continue to deliver year-over-year margin improvement.

During the quarter, our adjusted operating profit increased by $8 million on lower net sales, and we expanded adjusted operating profit margin to 15.5% an increase of approximately 150 basis points from the prior year. This increase was driven largely by the significant year-over-year improvement in our gross profit margin as we continue to execute our strategy and drive margins through product vitality, the management of price and cost and productivity improvements. During the quarter, our adjusted diluted earnings per share of $3.38 increased $0.32 or 11% over the prior year, primarily a result of higher net income and to a lesser extent, lower shares outstanding due to share repurchases. In ABL, net sales were $844 million in the quarter.

A decrease of around 5% compared with the prior year, driven by declines across all of our channels. As Neil mentioned previously, our order rate in ABL continues to grow year-over-year meaning absent the sales last year from the excess backlog, ABL would have experienced sales growth. ABL's adjusted operating profit increased 2% to $136 million on lower net sales. While we delivered adjusted operating profit margin of 16.2%, a 120 basis point improvement over the prior year. ISG's net sales for the second quarter were $68 million, an increase of 17% as Distech continued to grow and KE2 Therm performed as we expected. ISG's adjusted operating profit was $14 million with the adjusted operating profit margin at 21%, a 240 basis point improvement over the prior year.

Now turning to our year-to-date cash flow performance. We generated $293 million of cash flow from operating activities in the first half of the year, down slightly from the same period last year. We continue to allocate capital consistent with our priorities. Year-to-date, we invested $29 million in capital expenditures. We acquired the assets of Arize Horticulture Lighting, we increased our dividend per share 15% and allocated approximately $68 million to repurchase over 370,000 shares. In January, our Board of Directors authorized the additional repurchase of up to 3 million shares of common stock, bringing the outstanding authorization to approximately 4 million shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased approximately 9.5 million shares at an average price of about $145 per share, which was funded by organic cash flow.

This amounts to about 24% of the then shares outstanding. We had a strong first half performance. We delivered improved margins and increased adjusted diluted earnings per share. We generated strong cash flow from operations and continue to allocate capital effectively. While it is not our practice to address our outlook during the year, our performance in the first half was very strong and we are raising our full year expectations for EPS. We now expect our 2024 adjusted diluted earnings per share range to be between $14.75 and $15.50. Thank you for joining us today. I will now pass you over to the operator to take your questions.

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