Acuity Brands Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 4, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Acuity Brands Fiscal 2023 4th 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 McMufflin, Vice President of Investor Relations.

Operator

Charlotte, please go ahead.

Speaker 1

Thank you, Liz. Good morning, and welcome to the Cutie Brands fiscal 2023 4th quarter and full year earnings call. As a reminder, some of our comments today may be forward looking statements based on our management's beliefs and assumptions and information currently available to our management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be 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 We undertake no obligation to update these statements.

Speaker 1

Reconciliations of certain non GAAP financial metrics With that corresponding GAAP measures are available in our 2023 4th Quarter and Full Year Earnings Release, which is available on our Relations website at www.investors. Acuitybrands.com. With me this morning is Neil Ash, Our Chairman, President and Chief Executive Officer, who will provide an update on our strategy and give an overview of our full year highlights And also Karen Holcomb, our Senior Vice President and Chief Financial Officer, who will walk us through our Q4 performance and full financial year performance as well as provide an outlook for our full year fiscal 2024. There will be an opportunity for Q and A at the end of this call. We are webcasting today's conference call live.

Speaker 1

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

Speaker 2

Thank you, Charlotte, and good morning to all of you joining us. Our fiscal 4th quarter performance demonstrated excellent execution. Our focus on margin and cash generation led to increased Adjusted operating profit margin and higher adjusted diluted earnings per share despite a decline in sales in the Lighting business. This quarter concluded a successful year. We delivered strong financial performance.

Speaker 2

We continued to improve our businesses In our Acuity Brands lighting and lighting controls business, our strategy is to increase product vitality, improve service levels, Use technology to improve and differentiate both our products and our services and to drive productivity. In 2023, we realigned our product portfolio the introduction of Design Select, we now have 3 defined ways in which we go to market Contractor Select, Design Select and Made to Order. By combining a high product vitality and improved service levels, Design Select allows us to better serve lighting specifiers, Distributors and Electrical Contractors. The realignment of our portfolio together with our ongoing product vitality efforts Has allowed us to strategically manage price in a dynamic environment, while the ongoing productivity improvements in our supply chain continue to improve our processes and manage our costs. We also continuously evaluate our portfolio.

Speaker 2

This year, that evaluation resulted in the divestiture of our SunOptics Daylighting Business and the decision to exit Winona Custom Architectural Lighting Solutions. There's a bit of noise in the numbers this quarter resulting in organizational changes that will lead to more efficiencies. The second charge is primarily for impairments O2Us for components we used in products manufactured and sold between 2017 2019. Karen will cover each of these in more detail. This year, our teams have refreshed approximately 20% of our product portfolio and have introduced many new product families.

Speaker 2

I'd like to highlight our American Electric Lighting brand, where we launched AutoConnect, which is a durable, value driven solution for outdoor infrastructure lighting That includes Connected Luminaris for Roadway, Industrial and Commercial Applications. The rollout was targeted to coincide with the anticipated The City of Philadelphia announced it has selected our American Electric Lighting Outdoor Lighting product as a major supplier for the Philadelphia Streetlight Improvement Project. The citywide project will replace and connect approximately 130,000 streetlights into a network of more efficient, Longer lasting remotely controlled LED lights, which is expected to reduce street lighting energy usage by more than 50% and is expected to reduce municipal carbon emissions by more than 9%. Our team continue to be recognized for our innovation and the value that our products bring to our customers. In the Q4, 6 of our lighting solutions We're selected for the 2023 Illuminating Engineering Society progress report, which showcases the year's most significant advancements in the art and science of lighting, including our warm dim technology from Acculux, emergency battery backup cylinders from Gotham and flame lighting technique from Hydrell.

Speaker 2

Our marketing team was also announced as a winner of the Best of the Best Marketing Award for 2023 by the Electrical Distributor Magazine. Now moving to spaces where we had another great year. The strategy for our Intelligent Spaces business is to make spaces smarter, Safer and greener by connecting the edge to the cloud. Distech has the best edge control devices on the market and Atrius will be the best in cloud applications. Our strategic priority for Distech is to expand our addressable market in 2 ways.

Speaker 2

The first is geographic And the second is increasing what we control in a built space. In 2023, we continue to drive this strategy forward By establishing a presence in the U. K. Market and through the acquisition of Key2 Therm, which added commercial refrigeration controls to our portfolio. The integration of KEYTRU Therm is progressing well and we rounded out a successful year with them being awarded a 2023 Dealer Design Award.

Speaker 2

Earlier this year, we launched Atrius Datalab, the intersection point between the edge devices in Distech and the applications in the cloud. Atrius DataLab is a foundational to our ability to automate the environment of a built space and help ensure that our partners achieve their specific energy During the quarter, Atrius was named as the Sustainability Leadership Award winner in the 2023 Sustainability Awards Program. The program honors people, teams and organizations who have made sustainability an integral part of their business practice or overall mission. I'm pleased with the progress we've made as a team in 2023. We have successfully positioned our company at the intersection of Sustainability and Technology, setting ourselves up for long term growth by taking advantage of 2 of the most important megatrends, minimizing the impacts of climate change and maximizing the impacts of technology.

Speaker 2

Our ABL business continued to lead as the largest lighting and lighting controls company in North America And we have made the business more predictable, repeatable and scalable by focusing on product vitality, improving service levels, The use of technology throughout the business and driving productivity. Our Spaces business continued to grow as an attractive technology business that connects the edge And Atrius introduced new applications in the cloud that are already making a difference for our customers. We have changed how the company works through our better, smarter, faster operating system. Better, smarter, faster is the combination of processes, tools and ways of working This 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.

Speaker 2

Our values are at the core of our culture and help create a shared purpose for achieving our company's strategic goals. We make decisions based on our values and these values impact how we treat each other and how we serve our customers. The combination of better, smarter, faster and our values allows us to operate more efficiently with greater distribution of responsibility and accountability throughout the company. It is how we continue to improve our businesses and respond quickly and effectively to changing economic environments. The alignment of everyone in our organization to our value creation model through our total rewards framework compounds that responsibility and accountability.

Speaker 2

Our associates understand how they contribute to our overall strategy. If you stop people in our company and ask them how we create value, they will answer we grow net sales, We turn those profits into cash and we don't grow the balance sheet as fast. This year, we have continued to demonstrate that we are effective capital allocators. We have invested for growth in our current businesses through R and D and capital expenditures. We've enhanced our portfolio Through the exit of SunOptics and the acquisition of Key2 Therm, we've maintained our dividend and we've created a permanent shareholder value With approximately $1,300,000,000 in share repurchases since the beginning of Q4 of fiscal 2020, which amounts to about 23% of the then shares outstanding.

Speaker 2

As we turn to our fiscal 2024, our strategic priorities remain the same. In our Lighting business, we will continue to drive margin and cash flow. We expect roughly the same market conditions in Lighting for the remainder of this calendar year with the potential for some improvement in the next calendar year. We will continue to grow our Intelligent Spaces Group in 3 ways: Geographically, by adding control planes and by delivering applications that make us different in built spaces. We will continue the development of our better, smarter, faster operating system in order to improve our current businesses and those that we acquire in the future.

Speaker 2

And we will continue to allocate capital consistent with our priorities. Now, I'll turn the call over to Karen, who will update you on our 2023 performance and provide more details about 2024.

Speaker 3

Thank you, Neil, and good morning to everyone on the call. We executed well throughout fiscal 2023. In a challenging sales environment in the Lighting business, We improved our adjusted operating profit by $9,000,000 year over year and generated cash flow from operations of $578,000,000 We continue to improve our businesses and allocated capital effectively. For total AYI, We generated net sales in the Q4 of approximately $1,000,000,000 which was $100,000,000 or 9% lower than the prior year As a result of the decline in net sales in our ABL business, this was partially offset by continued growth in the ISG business of 17% We continued to deliver year over year margin improvement. During the quarter, our adjusted operating profit was down year over year on lower sales, while we expanded adjusted operating profit margin to 16.1%, an increase of approximately 80 basis points from the prior year.

Speaker 3

The increase was driven largely by the significant improvement in our gross profit margin as we continue to strategically manage price and costs. During the quarter, our adjusted diluted earnings per share of $3.97 Increased $0.02 or 1 percent over the prior year. In ABL, net sales were $944,000,000 in the quarter, A decrease of 11% compared with the prior year, driven by declines across most of our channels, offset slightly by continued strong performance In our retail channel, ABL's adjusted operating profit decreased 2% to $159,000,000 on lower net sales, We delivered adjusted operating profit margin of 16.8%, a 150 basis point improvement over the prior year As we strategically manage price and input costs improved, particularly steel and inbound freight. As Neil mentioned at the beginning of the call, We also took several charges during the quarter that primarily related to ABL. Taken together, these amounted to $35,500,000 and non recurring pre tax charges or $0.87 in diluted earnings per share.

Speaker 3

The first is a result of our ongoing transformation efforts and includes a charge of $6,000,000 in severance as we realigned how we work. The second is a $16,500,000 non cash impairment charge for a small investment and for certain trade names related to prior acquisitions. In addition, we transitioned several of those trade names from indefinite to definite lives to more accurately reflect their value. The third is a $13,000,000 pretax Non cash charge for the impairment of a receivable based on its collectability. The receivable is from a supplier Who owes us a warranty obligation related to the recovery of quality costs we have incurred for certain ABL outdoor lighting products Manufactured and sold between 2017 2019.

Speaker 3

We are pursuing recovery from the supplier. ISG's net sales for the Q4 were $72,000,000 an increase of 17% As Distech continued to win business across new and existing customers. This quarter, we also had a modest benefit from the acquisition of KEYTRUTHERM. ISG's adjusted operating profit was $14,000,000 which was a decline of approximately 3% over the prior year as we continue to invest in the business for long term growth. Now turning to our cash flow performance.

Speaker 3

We generated $578,000,000 of cash flow from operating activities for the full year of fiscal 2023, An increase of $262,000,000 over the prior year, driven largely by improvements in working capital. We've improved both days of inventory and accounts receivable compared to the end of fiscal 2022. In fiscal 2023, we invested $67,000,000 in capital expenditures and allocated $269,000,000 to repurchase Approximately 1,600,000 shares. Since the beginning of Q4 of fiscal 2020, we have repurchased over 9,000,000 shares At an average price of approximately $143 per share, which was funded by organic cash flow. I now want to spend a few minutes expanding on our outlook for 2024.

Speaker 3

Consistent with our 2023 guidance, We are going to provide annual guidance anchored around net sales and adjusted diluted EPS. We will also provide you with certain assumptions, Our expectation is that net sales will be within the range of $3,700,000,000 $4,000,000,000 for total AYI. This is based on the assumptions that ABL will deliver sales down low to mid single digits As a result of conditions in the lighting macro environment, an ISG will continue to generate sales growth in the mid teens as we continue to take share and expand geographically and into new control planes. We expect to deliver adjusted diluted earnings per share within the range of $13 to $14.50 for total AYI. Our capital allocation and priority In conclusion, we strategically managed price and cost and delivered margin growth at ABL.

Speaker 3

We continue to grow the Intelligent Spaces Group. We generated strong cash flow from operations and allocated capital effectively. We continue to improve the business through product and productivity improvements, And we continue to take the steps necessary to drive our transformation forward. Thank you for joining us today. I will now pass you over to the operator to take your questions.

Operator

Our first question comes from the line of Tim Wojs with Baird.

Speaker 4

Good morning. Maybe Neil just to start, anything From an environment perspective, just any color that you can maybe provide on kind of what you're seeing kind of in the end market demand environment, maybe the quoting environment today? And Your comments maybe about calendar year 2024 maybe being a bit better. Is that just kind of starting to cycle easier comparisons? Or is there something that you're kind of seeing from A visibility perspective that

Speaker 2

you'd call out? Yes. Good morning, Tim. Thanks for the question. First of all, we're really proud with our performance.

Speaker 2

We've obviously demonstrated that we can execute in this environment. And I wish the economy would line up with our fiscal year, but it doesn't. So, the as we're looking forward to kind of our Fiscal Q1 and the rest of this year, while the business is relatively consistent, It's pretty much choppy all over. So we feel good about kind of where we guided for the year given that. And we also feel like there's still strong kind of volume in the each of our networks.

Speaker 2

So that the C and I network obviously is 60% of the business, as Karen pointed out, the retail business has remained strong for us. The direct business has been comparatively strong for us. And as you can see in our channel, the OEM business is down, which is our sales to other Lighting manufacturers. So, taken together then, we feel like we're comfortable operating in this environment and We feel like we've got a responsible plan for 2024.

Speaker 4

Okay. Okay, good. And then just, Karen, just when you think about Guidance and I guess high level sales down kind of low to mid single digits. It's at least in the ABL business, I think it's down 3 And I think that the midpoint of EPS range winds up being down 2%. Could you just maybe give us kind of the puts and takes What to think about in terms of kind of managing maybe a down volume environment versus kind of keeping margins what appears to be pretty stable?

Speaker 3

Yes, sure. Thanks, Tim. So the guidance just to reiterate the guidance for the net sales range is $3,700,000,000 to $4,000,000,000 and All this in the presentation. That does anticipate that lighting would be down low to mid single digits as we discussed kind of the continuation of the trends That Neil talked about just a moment ago. When we look at the margin, that we expect to maintain, it's a solid plan And we don't expect to stay kind of at the high levels that we are now, but we still expect to be able to strategically manage, our product vitality, Our service levels, our technology and productivity to continue to deliver strong performance that would land us in the EPS range of $13 And $14.50 for the year.

Speaker 3

I would just call out ISG, we're still predicting up to mid teens In that business, so that's still going to continue to grow next year. The acquisition of KEY2 Therm will be a benefit as well. So really, really pleased with the performance overall.

Speaker 4

Okay. Okay, good. I'll hop back in queue. Good luck on everything, guys.

Speaker 2

Thanks, Tim.

Operator

Our next question comes from the line of Ryan Merkel with William Blair. Ryan, your line is now open. Our next question will come from Joe O'Dea with Wells Fargo.

Speaker 5

Hi, good morning.

Speaker 2

Hey, Joe. How are you doing?

Speaker 5

Doing well. Thanks. I guess, first question is just the sort of combination of sort of channel inventory management and then the macro. And so what you've seen over the Transition where macro has gotten a little bit choppier, but destock gets a little bit less challenging.

Speaker 2

Yes. So just for just a little bit of historical context as we kind of recreate FY20 Obviously, we burned through backlog through the first half of our fiscal twenty twenty three. We talked extensively through the remainder of the year how lead times have compressed and that's led To the destocking you referred to. We're now getting to a more normal relationship between order rate and shipment rate. So we're starting to and that's what I was alluding to in the answer to Tim's question, we still we're comfortable operating in this environment.

Speaker 2

So I think what we are experiencing now are macro lighting trends. And unfortunately, we're in a period where people are just buying less Lighting and lighting controls. I'll also highlight though that as Karen pointed out, the Intelligence Basis Group continues to grow Mid teens. So the portfolio of the business is expanding. At the same time, in both the Lighting business and the Spaces business, We've been able to layer in margin despite the decline in sales at ABL.

Speaker 5

Got it. And then on the cash side, I think another year of solid cash generation, you did less on the buyback You ended with cash in a pretty strong position. And so just any commentary around what you might be seeing on the The M and A pipeline side of things or is it kind of as you're monitoring maybe a little bit choppier environment to buy us to hold a little bit more cash, How we should think about buyback posture in 2024?

Speaker 3

Yes. Thank you, Joe. You'll see in the presentation that we'll post, We've talked about some of the assumptions that reflect our cash priorities for next year. So our cash our capital allocation priority is 1st to invest in our current businesses for growth, 2nd to invest in M and A, 3rd to maintain our dividend and 4th will be share repurchases. So at this point, we've repurchased about 23% of our shares since we started at the beginning of fiscal Q4 of fiscal 2020.

Speaker 3

And so we're looking this upcoming year about $40,000,000 to $60,000,000 in share repurchases is what we would expect and you'll see that in the presentation. And Then Neil, do you want to comment on?

Speaker 2

I'd just add a couple of things, Joe. First is, obviously, we have done, I think, a very an outstanding job of generating cash. So, through layering and margin and aggressive management of our balance sheet and working capital, especially on the Lighting side, we've demonstrated the ability to generate significant amount of cash. Our priorities, as Karen outlined, are remain the same. We want to grow our business.

Speaker 2

And so but when the market presents us with opportunities, we will take advantage of those opportunities to repurchase shares. We've demonstrated since we've been here over the last two and a half years that when the stock goes down, we buy more and when the stock goes up, we buy less. And But our focus and our priorities are in the order and Karen mentioned them. We want to grow our current business and we want to grow the platform through acquisitions. And we feel good about our opportunities in all of those.

Speaker 2

On the acquisition side, our priority is continue to add to our Intelligent Spaces Group. We think that there are very interesting and in some cases meaningful opportunities to expand there. And so that's where we're spending the most of our time, but we are also open for business on the Lighting side to other

Operator

Our next question comes from the line of Chris Snyder with UBS.

Speaker 6

Thank you. I wanted to ask about the ABL guide for 2024. And specifically, what we should expect in first half or second half? So down low to mid single for the year. I think Neil talked about Pressure in the market through the end of this calendar year.

Speaker 6

So I would assume that the declines are steeper in the first half and then moderate in Is there any color about how we should be thinking about the slope of ABL in 2024 as we're kind of working towards that low to mid single digit decline? Thank you.

Speaker 2

Yes. So, Chris, thanks for the question. I would guide you back to kind of historical sequential trends Obviously, on a sequential basis, we drop off from Q4 to Q1 and from Q1 to Q2. And last year in those same periods, we were still at inflated levels of backlog as we were burning through backlog. So then we get you to a more normal and our assumptions get you to a more normal cadence in the back half of the year.

Speaker 6

Thank you. I appreciate that. So it sounds like maybe high single digit type declines in the first half, if I run that seasonality. And certainly, We see how the comps in the back half get easier. And is the uplift in growth really just kind of a function of the comps Getting a lot easier into the back half?

Speaker 6

Or is there also an assumption that the macro will become more supportive into the back half? Thank you.

Speaker 2

So our assumptions aren't relying on significant improvement on the from a macro Environment, as I mentioned, we have returned to a more normal relationship between order intake and shipment rates. So, we are And as I mentioned, we're comfortable executing in this environment. So, I think what we are ultimately suggesting for Fiscal 2024 is that by the back half of the year, we end up kind of clearing all of the legacy impacts So, the increased backlogs and all of the other supply chain things. And so, we end up with a more normal year. I think if you were If the economy matched up with our fiscal year, which it has no interest in what our fiscal year is, then you would say you would notice the 3rd and 4th quarters of fiscal 20 23 and the 1st and second quarters of fiscal 2024 on a calendar basis.

Speaker 2

But that It gets us to where we are, which is kind of where you suggest, which is we'll be down in ABL in the first half of the year and it will normalize a little bit in the back.

Speaker 6

Thank you. Appreciate

Operator

that. Our next question comes from the line of Brian Lee with Goldman Sachs.

Speaker 7

Hi, thanks for taking the question. This is Grace on for Brian. I guess my first question just to follow-up on the last questions. It sounds like you're expecting improvement. You called out the assumptions Clearing up all the legacy impact of the increased backlog.

Speaker 7

Just curious like what gives you the confidence to see that improvement? Are you seeing like sell through Improvement from quarter over quarter?

Speaker 2

Yes. Grace, as I pointed out, we've returned In the Lighting business to a more normal relationship between order intake and shipment rate within the quarter. So We are at normal lead times. So our lead times are in the 20 to 30 day range in our lighting business, which translates to a performance where Our orders and shipments are consistent. As I explained in response to Chris' question, We were at this point in the last year for our fiscal 1st and second quarters in Lighting, we were burning through additional backlog.

Speaker 2

So we obviously are not burning through additional backlog anymore. So we have returned to a more normal correlation between order intake and shipment rate.

Speaker 7

Okay. Thank you. I'll pass it on.

Speaker 2

Thank you.

Operator

Our next question comes from Jeff Osborne with TD Cowen.

Speaker 8

Hey, good morning. Just Neil, you mentioned several times expanding geographically and control planes on the ISG side. Do you have any organic efforts there? You alluded to potentially meaningful M and A activity there. I was just curious how to balance those two comments.

Speaker 2

So that is basically all organic. So, this tech continues to grow. We've called out the UK where we've had success in that market and we'll continue to expand in Asia over the course and Australia over the course of this year and So that is primarily organic growth. The acquisition that added to that would be Key2 Therm, which added refrigeration Controls, so those are added. So we're confident in the organic cash, I mean the organic growth at ISG.

Speaker 2

Any acquisitions we make would then be in addition to that and we see some interesting opportunities there as well.

Speaker 8

Perfect. And then either for you, Neil or Karen, what are the assumptions around price and volume mix as it relates to the revenue guidance for the year?

Speaker 2

Yes, I'll take that one, Jeff. So, as Karen has explained through the course of this year, Volume was we had a healthy mix in fiscal 2023 first half of both volume and price. That was again as we were burning through the backlog. Through the back half of this year, we have delivered performance Largely through price as volumes have moderated. So, on a sequential basis, we feel pretty decent on the relationship between volume and price.

Speaker 2

So we think we're in a healthy balance of both of those for in our lighting guidance For 2024, they are the volume is impacting and we're comfortable with where we are in price.

Speaker 8

Got it. Thank you. That's all I had.

Speaker 2

Thanks, Jeff.

Operator

Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.

Speaker 9

Thank you. Good morning, everyone. If we just follow-up a little bit Back to what you just said on price. So if I understand, you're saying most of the revenue That we see in the quarter is price, is that what you meant? Could you just kind of clarify

Speaker 2

what you said? No. Yes, sorry, if I left with that impression, that was not what I intended to say. So, I was talking about fiscal 2024 in response to other Jeff's question, which was and so how we got to the how we got to our net sales assumptions for the Lighting business next year.

Speaker 9

Got it. And then if I recall, you haven't actually made a major pricing move For the better part of the year, is that correct? And do you have additional pricing actions in the market at this point in time?

Speaker 2

So, as we've mentioned consistently, Jeff, we have The underlying strategy of product vitality, service, technology and productivity has afforded us the opportunity to more strategically manage price. So while there were a number of broad pricing actions through kind of 2022 and 2023, We've become significantly more targeted in those actions now. So, for example, we're in the market now with we just recently announced A price increase around certain controls products and this quarter. We're also strategic about where we choose to invest in price. So that's generally in the Contractor Select portfolio and it's Generally to expand our market share in the electrical distribution channel And it's highly targeted.

Speaker 2

So, it's very low dollars comparative investment on a percentage basis. So, The strategy has empowered us to more strategically manage price. And so, we are no longer really going after broad based Pricing changes like that up and down, but more strategically managing on different categories and for different reasons.

Speaker 9

And then maybe just one last one. So the cash flow was solid in 2023. By my math, the inventory days are actually now Fair amount below normal. Can you do more on inventory or working capital at this point? Maybe just a little some thought on cash outlook for 2024.

Speaker 3

Yes. I think as we look ahead, Jeff, I agree. We had a really good performance this year with our cash flow generation, and we were able to improve our days. I think there's still some opportunity as we look ahead, probably not to the magnitude of what you see in or what we saw in 2023. So for example, if you think about where we were in 2022, we had high levels of inventory because of lead times from our suppliers.

Speaker 3

We were able to bring that down to a little bit better than our normal levels of inventory. But I think as we continue to drive the strategy, particularly at ABL Around product vitality, service, technology and productivity, there is still room for some improvement as we

Speaker 2

And Jeff, I'd love to take this opportunity to summarize kind of where I think we are from a performance perspective. Obviously, it's hard to increase margins when sales are declining and we've demonstrated that we can do that. It's also hard to make the kind of improvements That we've demonstrated and you highlighted from a working capital perspective. We've structurally improved the business. The strategy as Karen outlined Has changed both where we how we operate and how successfully we can operate.

Speaker 2

So that Makes us very comfortable with our continuing performance around margin and cash generation.

Speaker 5

Great. Thank you.

Speaker 2

Thanks.

Operator

Our next question comes from the line of Joe O'Dea with Wells Fargo? Joey, your line is now open.

Speaker 5

Hi. Thanks for taking the follow-up. I just want to circle back to the kind of sequential commentary. So it seems like If we run sort of normal seasonality out of the 4th quarter kind of revenue rate, we get roughly to the midpoint. I guess that also would seem to imply that you're going from an environment where you were dealing with channel inventory rationalization That ends and so arguably there should be an uplift and maybe that the incremental pressure is that the macro is a little bit more challenging.

Speaker 5

So just wanted to sort of touch on that dynamic again a little bit more. And then within that, I think a tremendous amount of focus Sort of verticals within non res and so any additional commentary sort of on thoughts that you have around kind of verticals that would be Stronger where you're maybe paying a little bit closer attention to any potential softness?

Speaker 2

Yes, Joe. Thanks for the follow-up. So again, we would like to provide you as much of a read through the macro as we can, but we can only kind of comment really on our performance. And so, as it relates to that, just to kind of reiterate, in the first half of fiscal twenty twenty three, we were burning through backlog. We have now returned to a more normal order and relationship between order and shipment rates, where order rate is Drives basically the shipments within the quarter and we're at a kind of a 20 to 30 day lead time, so average lead time in the lighting business.

Speaker 2

So, things are relatively back to normal. So, on a sequential basis, that's how you see the more traditional sequential seasonality play out. So, as we look forward, I'd like to say we know more about the macro environment than others. The advantage, but we I don't think we do. The advantage we have is that our portfolio on the lighting side really addresses the wherever there can be growth in the marketplace.

Speaker 2

So, the product vitality efforts that we have undertaken, the service levels we have undertaken Allows us to be strong in retail, strong in electrical distribution, strong in each of the categories, well positioned for infrastructure. So, we are in the places where we can benefit from any changes in the lighting market. In the meantime, we're comfortable operating at these kind of levels of market activity And continuing to deliver the margins and the cash flow that Karen effectively highlighted through the guidance.

Speaker 5

Thanks for those details.

Speaker 8

Yes.

Operator

Our next question comes from the line of Chris, your line is now open.

Speaker 6

Hey, sorry, I was on mute. Thank you guys for letting me hop back in here. I just wanted to ask on gross margin. I don't believe this has come up. Can you just talk about what level of gross margin is implied In the guide next year as we're going from $3,700,000,000 to $4,000,000,000 of revenue to that $13,000,000,000 $14,50,000,000 of earnings?

Speaker 6

Thank you.

Speaker 2

Yes, sure. Chris, I'll take that. As Karen pointed out, all we are guiding to is net sales and adjusted EPS. I'm confident you're math skills, so you'll quickly realize that that implies that we are we don't need to be at the levels of margin we were in the 4th quarter to for the full year next year to deliver that range. What it does say though is that as I was responding to Jeff Sprague earlier, we have structurally improved this business, Which allows us to operate at higher margins than the company has operated in the past.

Speaker 2

It's worth saying that the 4th quarter gross profit margins are the highest in the history of the company. So, we don't have to maintain those levels to continue to deliver what we consider to be outstanding performance. And further, as I have pointed out repeatedly, the on our value creation model is about growing that sales, turning profits into cash and not growing the balance sheet as fast. So we've made structural changes, which allow us to operate at these higher margin levels and to turn those margins into cash. So We feel really good about kind of the permanence of the changes that we've made in the Lighting business and the continued opportunity we have to improve that.

Speaker 2

At the same time, we can continue to grow the portfolio through ISG and then through adding additional businesses to the portfolio.

Speaker 6

I really appreciate that. And if I could follow-up with one more, and it's probably the biggest question that I get When we look at this gross margin, I mean, it's pretty incredible, up 3.40 basis points versus the start of the year. But at the same time, volumes have rolled. I understand that there's the backlog dynamic. I understand maybe the macro is a bit softer.

Speaker 6

But do you guys think that there is any negative volume impact from this big uplift Gross margin and

Operator

how does

Speaker 6

the company think about balancing that? It feels like there's a bit of maybe a sliding scale dynamic. Thank you. I appreciate it.

Speaker 2

Yes. No, I appreciate you asking the question and giving us the opportunity to address it. We talked a bit about this in the Q3 call, but I want to reflect on it Most importantly, our strategy in the Lighting business around product vitality, service, Technology and productivity has put us in a position to manage price and to manage margins In a step function better way than we have in the past. And so we feel really good about that. As we have evaluated volumes and I was addressing this with Jeff's question, we strategically manage price where we choose to, where we think we can drive volume.

Speaker 2

We realize that at these margin levels, we've created a significant amount of value and so we have a lot of incentive to continue to operate At these margin levels, all of the data that we are looking at across verticals says that we are appropriately pricing For the volume that's available in the market and that's our goal over time. So, we will that's why we continue to layer in margin and Cash flow during this low volume period and why we believe we're well positioned for the inevitable return of volume growth at some point in the future.

Speaker 6

Thank you, Neil. Really appreciate that.

Speaker 2

Thanks, Chris.

Operator

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

Speaker 2

all, thank you all for spending some time with us We're really proud of our financial performance as we've talked about through the call. We had a great year. We delivered strong financial performance. We continue to Structurally improved both the lighting business and we continue to grow the Intelligent Spaces Group and we allocated capital effectively. Our priorities for next year remain the same.

Speaker 2

We're going to continue to focus on operating excellence in the lighting business and making it more predictable, repeatable and scalable. We'll continue to grow the Spaces business and we will be consistent with our capital allocation priorities. So we will look forward to being back together with you at the end of the quarter and hope you have a good rest of your day. Thank you for your interest in Acuity Brands.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Despite an 11% decline in Q4 Lighting sales, Acuity Brands raised its adjusted operating margin to 16.8% (up 150 bps) by strategically managing price, input costs and supply-chain productivity, though it took $35.5 million of non-recurring charges.
  • The Intelligent Spaces Group grew net sales 17% in Q4, bolstered by the Key2 Therm acquisition, entry into the U.K. market and the launch of Atrius DataLab for cloud-based building automation.
  • Fiscal 2023 generated $578 million of operating cash flow, improved working-capital metrics, and funded $269 million of share repurchases (1.6 million shares), adding to $1.3 billion bought since Q4 FY 2020.
  • Over the past year Acuity refreshed 20% of its product portfolio, introduced the Design Select go-to-market offering, and completed the divestiture of SunOptics and exit from Winona custom lighting to focus on higher-vitality products.
  • For FY 2024 management guides net sales of $3.7–$4.0 billion (Lighting down low- to mid-single digits, ISG up mid-teens) and adjusted EPS of $13.00–$14.50, with capital allocated to growth investments, M&A, dividends and $40–$60 million of buybacks.
A.I. generated. May contain errors.
Earnings Conference Call
Acuity Brands Q4 2023
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