Acuity Brands Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 29, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Acuity Brands Fiscal 2023 Third Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, the company will conduct a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Charlotte McLaughlin, Vice President of Investor Relations.

Operator

Charlotte, please go ahead.

Speaker 1

Thank you, Liz. Good morning, and welcome to the Acuity Brands Fiscal 2023 Third Quarter 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 undertake no obligation to update these statements.

Speaker 1

Reconciliations of certain non GAAP financial metrics with their corresponding GAAP measures Are available in our 2023 Third Quarter Earnings Release, which is available on our Investor Relations website atwww.investors. Qtbrands.com. With me this morning is Neil Ash, Our Chairman, President and Chief Executive Officer, who will provide an update on our strategy and our Q3 highlights And Karen Holcomb, our Senior Vice President and Chief Financial Officer, who will walk us through our fiscal Q3 financial performance. There will be an opportunity for Q and A at the end of this call. For those participating, please limit your remarks to one question and one follow-up if necessary.

Speaker 1

We are webcasting today's conference call live. Thank you for your interest in Acuity Brands. I will now turn the call over to Neel Ash.

Speaker 2

Thank you, Charlotte, and welcome to all of you joining us this morning. In the Q3 of fiscal 2023, we expanded adjusted operating profit margin both sequentially and year over year. We continue to grow adjusted diluted EPS and we generated strong cash flow from operations Despite a decline in net sales, we completed the acquisition of KEYTRUTHERM and we continue to repurchase our shares. We are making meaningful progress in both our Lighting and Spaces businesses. In the Acuity Brands Lighting and Lighting Controls business, Our strategy is clear, increase product vitality, increase service levels and use technology to improve and differentiate both our products And our services.

Speaker 2

This quarter, we launched Design Select. We developed Design Select to elevate our service for the specification community by making it easy for them to choose superior solutions with dependable service. Design Select consists of 3,000 configurable products that meet important specification needs from some of our core families of lighting and lighting control brands, including Aculux, Gotham, Liconia Lighting, nLIGHT and Sensor Switch. Design Select is an important addition to our service strategy. ABL lighting and lighting control products are now organized into 3 clear categories.

Speaker 2

Contractor Select is 300 of the most important everyday lighting and lighting control products available in stock at retailers and electrical distributors. Design Select is 3,000 configurable products that meet the key choices of lighting specifiers with dependable service and the remainder is made to order. Through the combination of high product vitality and improved service levels with the specification community, Distributors and contractors, we continue to differentiate ourselves and challenge the existing industry standards. We also continue to introduce new products during the quarter. Our Luminus brand launched the inline family of exterior luminaires For use in plazas and arenas, each light module can rotate 355 degrees and can be individually controlled, Allowing installers to position the luminaire on-site for improved flexibility to create optimal illumination solutions.

Speaker 2

The recognition of our product vitality efforts is important to our team and our customers. And this quarter, Several of our products won prestigious Red Dot Design Awards, including products from Luminess and Eureka. The Eureka! Tangram Trace was awarded a Red Dot Best of the Best distinction for its groundbreaking design. Other winners in this category included products from Apple, IBM and Sonos and span categories from VR headsets to 1st responder drones.

Speaker 2

We're proud to be in this company of innovators. Now moving to our Intelligent Spaces Group. This was a big quarter for our Spaces team, both at Distech and at Atrius. First, on Distech, our The second is by increasing what we control in a built space. During the quarter, we announced the completion of the acquisition of T2 Therm, which allows us to expand Distech's addressable market by entering the commercial refrigeration control space.

Speaker 2

By controlling commercial refrigeration, we are able to more effectively sell the entire distech portfolio in verticals like retail, restaurants and schools. The timing is significant as the refrigeration industry responds to the need for ultra low global warming potential refrigerant technologies. This has led to growing demand for transcritical CO2 solutions, which require the precision of digital controls To provide safety, efficiency and reliability, while delivering cost savings to the customer. I now want to spend a few minutes on Atrius. Our strategy with Atrius has been to build a data layer that connects the edge to the cloud and use that data to develop applications that make a difference in built spaces.

Speaker 2

Earlier this month, we showcased our products at the IvyCon 2023 Conference in Las Vegas. This is the largest smart building conference for commercial real estate and facilities companies. At Ibicon, we launched Atrius Datalab, A powerful data layer that supports a portfolio of Atrius applications that is foundational to our ability to automate the environment of a built space. Atrius Data Lab captures data from a building management system and organizes it in the cloud. From there, It harmonizes the data for accessibility and usefulness and creates a digital twin.

Speaker 2

Applications are built on top of that digital twin, Allowing users to analyze historic scenarios, get live updates of the current building environment and model other scenarios. This service is important because every building is different. Our HVAC applications have been built to ensure that our partners achieve their Atrius Sustainability and Atrius Energy are live and were built on the foundation of Atrius Building Insights. Atrius Sustainability is an automation tool that captures, categorizes and reports on carbon emissions within built spaces. Atrius Energy facilitates the reduction of energy and carbon usage by allowing facilities teams to benchmark their usage against science based targets.

Speaker 2

Later this year, our team will be rolling out Atrius Facilities and Atrius Resolve. Now looking to the remainder of fiscal 2023. Our Q3 played out as we expected with sales being impacted by both lead time normalization and the macro environment. Entering our Q4, we believe that there will be a continuation of these trends. While our order rates and our shipment rates are returning into closer alignment with each other, we have not yet returned to normal sequential seasonality.

Speaker 2

In ABL, we're going to focus on strategic pricing, continued productivity improvements and managing material costs. In ISG, we're going to focus on the continued growth of Distech and Atrius and the successful integration of Keytrutherm. We will continue to prioritize managing margin, generating strong cash flow and allocating capital effectively. Now, I'll turn the call over to Karen, who will update you on our Q3 performance.

Speaker 3

Thank you, Neil, and good morning to everyone on the call. In the Q3 of 2023, we delivered sequential and year over year adjusted operating profit margin improvement Despite a decline in net sales, we grew adjusted diluted earnings per share and generated strong cash flow from operations. For total AYI, we generated net sales of $1,000,000,000 which was 6% lower than the prior year As a result of the decline in net sales in our ABL business, as Neil described, this was a result of lower volumes consistent with lead time normalization trends and the impact of the wider macro environment. As we made clear on our last call, Our focus is on delivering margin and operating cash flow. During the quarter, both operating profit and adjusted operating profit were flat on lower sales.

Speaker 3

We expanded adjusted operating profit margin to 16.3%, which was an increase of approximately 100 basis points over the prior year, an improvement of 2.30 basis points sequentially, driven by the improvement in gross profit margin. During the quarter, our adjusted diluted earnings per share of $3.75 increased $0.23 or 7% over the prior year. Moving to our segment performance review. ABL net Sales were $941,000,000 in the quarter. This decrease of 7% compared with the prior year Was largely driven by declines in the independent sales network and lower OEM sales.

Speaker 3

This was partially offset by infrastructure projects in the direct Sales network and continued strong performance in our retail channel. ABL's operating profit And adjusted operating profit were both flat on lower net sales, and we delivered adjusted operating profit margin of 17%, A 120 basis point improvement over the prior year and a 200 basis point improvement sequentially as price held And material input cost improved, particularly steel and inbound freight. The Spaces segment continued to perform well with another good quarter. Sales were $66,000,000 an increase of 13% as both Distech and Atrius continued to grow. Space's operating profit was $9,000,000 and adjusted operating profit was $13,000,000 as we continue to invest in the business for longer term growth.

Speaker 3

Now moving to our cash flow performance. We generated $472,000,000 of cash flow from operating activities for the 1st 9 months of fiscal 2023, An increase of $306,000,000 over the same period in 2022, driven largely by improvements in working capital. We have improved both days of inventory and accounts receivable compared to the end of the year. As we've discussed on prior calls, We've continued to bring inventory down by 22 inventory days from the peak in February 2022, And we've also brought inventory levels down by over $36,000,000 sequentially from the Q2 of fiscal 2023. Year to date, we invested $48,000,000 in capital expenditures and allocated $219,000,000 To repurchase approximately 1,300,000 shares, our capital allocation priorities remain the same.

Speaker 3

We have invested for growth in our current businesses through R and D and CapEx. We've expanded our platform through acquisitions as evidenced by the purchase of Optitronics in our lighting business and KEYTRUTHERM in our spaces business. We've maintained our dividend and we've created permanent Shareholder value with approximately $1,200,000,000 of share repurchases since the Q4 of fiscal 2020 At an average price of approximately $142 per share, which was funded by organic cash flow. To summarize our performance for the quarter, we delivered strong margin and cash flow despite sales being down year over year. Based on year to date results and our expectations for the Q4, we now expect full year net sales To be between $3,900,000,000 $4,000,000,000 our expectations for full year Adjusted diluted earnings per share have not changed.

Speaker 3

Our focus continues to be on meeting the needs of our customers and delivering margin and cash flow. 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 Tim Wojs with Baird.

Speaker 4

Maybe just to start out on the market, I appreciate kind of the color around kind of order rates and shipment rates and kind of how those are normalizing. I was curious if there was any way to kind of break that out by Channel or segmentation, whether it's kind of the project business or what you're seeing on the stock and flow side and then maybe some of your more direct accounts?

Speaker 2

Yes. Good morning, Tim. So let me start from kind of back to front. So first On the corporate accounts and on the OEM side, that's where those are obviously going to be volatile and Those are down and those order rates are relatively low. There's lots of reasons for those.

Speaker 2

The timing of renovations at our big customers on the corporate account side and then second on the OEM side, there's Probably some continued destocking going down in the driver market. Then as you kind of get to our direct sales network and our Project business, that's where the C and I order rate is relatively stable at this point. So, and our direct sales It's also consistent. So, they're finding a level here where they're relatively consistent. And then finally, we've had continued strong performance in retail.

Speaker 2

So, when you blow it all back together, I think it's a continuation of the trends we've seen From this quarter and looking out to what we can see right in front of us.

Speaker 4

Okay. Okay. And I guess like is You mentioned in your prepared remarks that you're not really quite back to normal revenue seasonality yet. I mean, is there any kind of expectation or thought When you might be back to that kind of normal seasonality?

Speaker 2

Yes. We're not ready to call that yet, Tim, as we sort our way through this. I mean, we're looking at the same kind of windshield metrics that you are to try and understand. So, because we haven't gone through a period that looks like this one, we don't have a perfect proxy for where that is. So we're at this point going to take it 1 quarter at a time.

Speaker 4

Okay. Okay, makes sense. And then just the last one, and this is maybe more of a bigger picture question. Just with how you're bucketing Sales with just kind of the Contractor Select, the Design Select and kind of the MTO products. I mean, I guess, could you talk about what's different with that segmentation versus And if you're aligning it this way, does that have more of a top line sales impact for you, it's just easier to order?

Speaker 4

Or Is that more of a benefit to margins because maybe it eliminates a lot of like cats and dogs on some of the products?

Speaker 2

Yes. So, I think the delineation the clarity of the delineation is powerful on a number of levels. First, It's as you know, we've had a lot of success with Contractor Select. So building a product, 300 SKU product Lime that's built for stocking and resale and retail and electrical distribution provides us the ability to be very Have very high product vitality, have very high service level and be an important partner to the retail and electrical distribution industry. And it allows us to compete effectively with whoever wants to enter the market through that channel.

Speaker 2

So that's been a real success for us. Design Select is then about configurable products for the specification community. And what this allows them to do is Choose basically make good choices among the product families. So this is the next step in that process. So Our expectations aren't that this creates a new line of revenue, but it is our expectations are that we'll create a lot more efficiency for them As well as for us.

Speaker 2

And then finally, we can isolate made to order. So, when we isolate made to order, then we can treat it As such, which is made to order and we can price it accordingly, we can and we can service it accordingly. So that's The import of creating those different buckets is ultimately that we're trying to make the lighting, lighting control business more predictable, repeatable and scalable.

Speaker 4

Okay. Okay. Very good. Appreciate the commentary. Thanks guys.

Speaker 4

Good luck on a nice new year.

Speaker 2

Thanks Tim.

Operator

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

Speaker 5

Hi, good morning. Thanks for taking my questions. Wanted to start on the margin front, really strong gross margins during the quarter. I think just Sort of if you could unpack a little bit on the price cost dynamic and maybe if we go back a couple of years, you were talking about a gross margin target Of around 42%. It looks like you should be north of 43% this year.

Speaker 5

So how we think about the sustainability of that? And then what you might be seeing on the price side, any sort of incoming pressure you're seeing there?

Speaker 3

Hey, Joe. Thanks for the question this morning. I'll start and then I'll pass it over to Neil to add on. So as we talked about on the call at ABL, We're really focused on strategic pricing, continued productivity improvement and managing material costs. So we've demonstrated discipline in all these areas this year, which is Resulting in the strong gross margin that you see in the Q3 and that's going to continue to be our focus.

Speaker 3

The other thing I would add is that we're having continued growth at ISG And so that's helping us as well.

Speaker 2

Yes. And I would only build on that a little bit, Karen. I think you summarized it well to say that, Joe, I think we have made an improvement from where we were when we were targeting the 42%. So clearly, we've improved the business since then. And I would just pick up on 2 things that Karen pointed out there.

Speaker 2

First, around strategic pricing. So that's where on the And we can choose which projects we want to participate in based on pricing. So we're significantly more strategic about how we're pricing. 2nd is that we are really working hard and our teams have done a nice job on the combination of productivity improvements and Material cost savings, that's a combination of our product vitality efforts and the work that we're doing in our supply to level load. And then finally, I'd emphasize that the continued growth of ISG Is growth accretive, margin accretive and returns accretive?

Speaker 5

Thank you. And then just a question related To outlook both this year and next, I think this year that the earnings outlook sounds like maintaining that, but it's a $1.50 range. And so anything that you would talk to in terms of what's most likely within a narrowing of that band? And then as you think about a 2024 guide in a few months, Neil, just what are sort of the most important Watch items for you over the next few months to sort of inform how you'll be thinking about that outlook?

Speaker 2

Yes. So let me textualize first and then I'll dig in to answer the specifics of your question. As we've said consistently, our plan is to provide annual guidance and not update that guidance through the year. We felt it important to identify for you that we weren't going to meet the lower end of our net sales guidance For the year, but we still are in the adjusted EPS range that we gave at the beginning of the year. And to be transparent, we're proud of that.

Speaker 2

So this has been a our teams have done really hard work to deliver the results that we're delivering this year To maintain dollar profit margin on lower sales, to increase margins, etcetera. So, we feel really good about that. As we look forward to 2024, as I said, we're going to take this 1 quarter at a time for right now. So, we're not going to get Too far ahead of ourselves on predicting 2024. Our general indications are that the rest of this calendar year feels like It's going to be similar trends that we're having now.

Speaker 2

That could change. And we're confident in our ability to continue to grow the ISG Key business and then some of the growth initiatives that we're planning for ABL going forward. So, our priority, as we've said Through this environment is to layer in margin, which we've demonstrated that we're doing. Whether or not we have sales growth, we're trying to layer in margin. We're trying to continue to deliver free cash flow and we've delivered a ton of it And we're going to continue to grow the Intelligence Basis Group.

Speaker 4

Thank you. Thanks.

Operator

Our next question comes from Ryan Merkel with William Blair.

Speaker 6

Hey, thanks. Good morning, everyone. I wanted to pick up on the orders again. Just so we're clear, it sounds like orders are tracking Sort of down mid single digits and you mentioned lead times and the macro. Can you just unpack those a little bit more?

Speaker 6

Is it distributor destocking? Is it tighter credit? What are some of the factors that are impacting the order rate decelerating a little bit here?

Speaker 2

Yes. I will Take a shot at that and Karen fill in any gaps that I leave in the explanation. So first, just to reiterate, The bigger picture here. So looking back to last year, we had a combination of Longer lead times and a price increase environment, which basically pulled forward a lot of orders. So we had a swell backlog and we've been working through that backlog through this year and through this quarter, it's starting to be back to about normal.

Speaker 2

So, which means that, in any period, we will basically ship what's ordered. So, over the long arc of time, obviously, we will. But In a normal quarter, we will shift generally what's ordered in that quarter and a little bit from the quarter before. So we're starting to get to kind of more Normalized level there. The on a positive side, those numbers are relatively consistent, absent the volatility The corporate accounts and the OEM, which I discussed in the first question.

Speaker 2

So that we feel good about Where we are on that front. So as you look forward off of that, then the Quarter is the next one and this is why we're saying we're taking this 1 quarter at a time, will be impacted by kind of normal macroeconomic trends. And I don't think we're looking at the same data you are and we don't pretend to have a crystal ball. So, our focus there is then we're going to can continue to get every piece of business we can get. All indications are from all of our data sources that we're either holding or taking share And we'll continue to try and layer in margin and deliver free cash flow in this environment.

Speaker 6

Got it. That's helpful. And then another question I had was on project releases. I was hearing that tighter credit and shortage of Switchgear was delaying the releases of projects. Are you guys seeing that?

Speaker 6

And any visibility as to when maybe that gets a little bit better?

Speaker 2

Yes. So I'll take Switchgear and then projects. 1st on Switchgear, the lead times, as we understand it, have not yet I have not compressed for a switchgear. So, just to put that in context, they were in the kind of 50 week range, so not days, weeks Range, so they have been the bottleneck on many of the already funded projects. So that's switch gear thing, those will all those projects will continue to happen.

Speaker 2

And now that our lead times are basically normal, our expectation is that They will order their lighting for those projects on a more normal schedule. So that should play out over a while. In terms of new projects, that's really from our perspective, that's the macro environment. So, with higher rates, I think everyone's going to relook at their projects. And so anecdotally, we have projects that are we have a fair number of projects in our independent sales network that are in queue, But they're being changed, modified, kind of reevaluated, those sorts of things, which is frankly normal.

Speaker 2

It's not abnormal. But it doesn't make it clear exactly what the market size is going to be, which is why again, we're taking it taking it quarter by quarter and we're focused on kind of layering in margins delivering cash flow.

Speaker 6

Got it. Very helpful. Thank you.

Operator

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

Speaker 7

Hello?

Speaker 2

Hi, Chris.

Speaker 7

Hey, sorry about that. I had a little phone trouble. So The last couple of quarters, we've seen very significant 300 basis points gross margin expansion, but also pretty steep volume declines. And I know there's destocking headwinds, but is there a negative volume impact in response to the company's Increased focus on margins. And Neil, I would just be interested in hearing about how you think about that trade off and why the focus on margins is the right one for acuity?

Speaker 7

Thank you.

Speaker 2

Yes. So, I'll happily address that. And From our perspective, we're very clear with our company on how we create value. We grow net sales, we turn profits into cash and we don't grow the balance sheet as fast. So as we look out strategically around price, volume, etcetera, Our objective with the Lighting and Lighting Control business is to be predictable, repeatable and scalable and we're delivering on that.

Speaker 2

So, in the current environment, you're right and Karen has indicated this on other calls that We have had more price than volume over the course of kind of this year. So, and that's a combination of kind of All of the factors we've talked about before. And that is delivering the results that we are seeing. We are also have all indications from our external sources that we're either maintaining or taking share in the process. So we're trying to guide the company to or steer the company to, as I said, this ability to be more predictable, repeatable and scalable in this business.

Speaker 2

So, we do think these are the right choices. That is how we will create value. We'll grow net sales, we'll turn profits into cash and we won't grow the balance sheet as fast. And we're demonstrating that we can do that in a number of different market environments. We succeeded through the challenge of the pandemic when it was When things fell off, we succeeded when they shot up.

Speaker 2

And now, I believe we're succeeding as we Try and return to some normalized marketing or market environment.

Speaker 7

I appreciate that. Thank you. And I want to follow-up on the commentary Around share gains, which is very impressive considering raising gross margin and taking share. I guess what gives you confidence that the company is taking share? Because I think investors see construction markets up 20% on the non res side and obviously ABL down 7.

Speaker 7

So how do we obviously, a big lag there. How should we think about or how do you guys think about the impact from the destock within that Versus the potential share shifts, which are maybe more structural in nature? Thank you.

Speaker 2

Yes, sure. And so this is a this could be a soliloquy a long kind of PhD level soliloquy, but let me just kind of Summarizing to as much as that, that with the benefit of a lot of the data work that we've done, there is not a like for like Correlation between the lighting industry and a specific same quarter External macro number that we can point to. There requires a basket to have any kind of A correlation and the correlations we've gotten are kind of R squareds of like 0.8. So We're in the good, not great range on the predictability of that. It takes multiples of those.

Speaker 2

The second is that, our research has shown that generally we are performing ahead of the general macroeconomic Cycle both for the good and for the not as good. So, we're working through that now. So, The direct answer to your question is, there is it is not a surprise to us that those numbers Would diverge the way you described it. Second thing that I would highlight there is the difference between nominal and real On the construction data, so that also to the last question is consistent With our performance as well. So there is I wish there were a more algebraic Kind of tie to external market data that would predict our results, but there isn't.

Speaker 2

It's a basket and we're not surprised by

Operator

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

Speaker 8

Hey, everyone. Good morning. Thanks for taking the questions.

Speaker 3

Hey, Brian.

Speaker 8

I might have missed this, but and I hate to kind of beat a dead horse, but the lead time issue, could you I'll elaborate a bit more maybe in quantitative terms just sort of where they are, where you want them to be, the sort of trajectory from here. And is it The destocking issue at the moment, just maybe give us a frame of reference with some of the quantification, that would be helpful.

Speaker 2

Yes. Brian, we covered this in some detail in the last quarter call. So I'll summarize it now, which is that Kind of at the end of last fiscal year, our lead times and days were in the 50s range and now they're in the 20s range. So Basically, we've reduced lead times by about 30 days. So that resulted in a buildup of backlog Kind of towards the end of last fiscal year that we've been working through this year, and correspondingly, Obviously, a little bit of an order drought as projects have been and needs have been pulled forward.

Speaker 2

So that's the big picture view of that. And why and also why we've identified that we're starting to come back into balance and that basically we ship what's ordered over kind of a basically a 60 day period.

Speaker 3

Yes. Brian, the only thing I would add is that last year, if you recall, we had several price increases as well, and that resulted in some of that pull forward that Neil

Speaker 8

Okay, fair enough. Yes, I appreciate that clarification. And then I guess Second question I had, and thanks for bringing it up Karen, just around the price. I know you guys have gone away from talking Specifics on price, but as you alluded to last year, price was a meaningful tailwind. Historically, Price has generally been, I think, maybe, plus or minus kind of low single digit type of number for you all.

Speaker 8

Is that Kind of where we are in terms of back to being toward a more normal. And then, in relation to that, you've had a decent amount of You can provide us to the impact on mix and price, just as you're introducing a lot of these new products as well? Thank you.

Speaker 3

Yes. Brian, I would just go back to our posture on strategic pricing that we talked about earlier. We have really focused on this discipline over the past couple of years. We talked about it with our Contractors Select portfolio, which is really a combination of 300 everyday lighting products That we're able to compete with the right product, the right place at the right price. So that gives us the ability to compete in a certain part of the market that While ago, we weren't able to compete in.

Speaker 3

And then if you look on the project side of the business, our strategic approach there is that we're able to pick the projects that we want And just be more disciplined about our pricing overall. So that's really what's driving the pricing that we're seeing today.

Speaker 8

All right, fair enough. I'll take the rest offline. Thank you.

Operator

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

Speaker 9

Thank you. Good morning, everyone.

Speaker 2

Hey, Jeff.

Speaker 9

Hey, good morning. Hey, a lot of ground covered. I want to go a little Further back, just into what you're seeing in kind of the renovation markets in general, you obviously address Got it what you're seeing corporate account level, but anything you could kind of add there on kind of the vertical markets within that? You think this is mostly kind of a function of rates squeezing out marginal projects or any other color there would be interesting?

Speaker 3

Sure, Jeff. At ABL, the sales decreases by vertical are really what you would expect to see. We had declines in industrial. If you recall last year, we had a lot warehouse and logistics projects that were taking place. And then also we're seeing declines in healthcare and commercial office due to the impact of the wider macro environment.

Speaker 3

So really nothing, kind of nothing surprising on the vertical front.

Speaker 2

And on the renovation Front, Jeff, I would say that change for us is good. So, we've gotten a lot of questions about Kind of what happens if the in the commercial office space or the commercial around the broader lending environment valuations, etcetera. And so I would just use I think everybody saw the Wall Street Journal article about the building on Market Street in San Francisco that Had a $300,000,000 valuation in 2019 and then was sold for $60,000,000 recently. So, Well, it's unpleasant experience for the capital side of that trade. The reality with that building is that It will now be reset at different rates.

Speaker 2

New tenants will move in and they will need to customize the space to what they want. And so they're going to need lighting and lighting controls. So that's kind of that so that's anecdotally how renovation will play out for us over the next foreseeable future.

Speaker 9

Yes. And I guess that could be a 2 or 3 year process though, right, as kind of work from home and everything resettles. No great visibility on that, I would think. Could you just address a little bit more Also just on the price side, Neil, you were pretty explicit about managing the algorithm, right? And you've said it a couple of times, Growth margin, lagging growth in the balance sheet to kind of leverage the capital base.

Speaker 9

But do you see an environment Emerging where it in fact would make sense in that algorithm to just kind of overtly seed share in the name of Margins and cash flow, I mean, do you see that sort of competitive pressure brewing or starting to emerge anywhere?

Speaker 2

Yes, Jeff, the part of the reason we talk a lot about Contractor Select is that We have fundamentally changed our posture on product vitality. So, we now have a product portfolio on a relatively consistent basis That is able to compete with all comers and it allows us to deliver a margin at a price That's competitive in the marketplace. So, that's a I think about the strategy around Contractors Select As really like what Kirkland is to Costco, Contractor Select is to the electrical distribution industry. In other words, Doesn't necessarily have to be the lowest price product out there, but it is the highest value price and is competitive, very competitive. That's allowed us to be in a very interesting position.

Speaker 2

And so we've tested this on price and whether We drive volume with price, and we've had really good results on that. So a little bit can go a long way there, which allows us to manage that. And to your ultimate question about which one which would we choose, I don't think we will unnecessarily chase share, if it if we think it's going to impact us negatively on our value creation algorithm. So, we are very competitive. We're comfortable with our position on in the marketplace from a competitive Because of all the vitality and productivity improvements we've demonstrated.

Speaker 2

And so now we really want to make The lighting and lighting control business as predictable and repeatable and scalable as we can for a longer period of time, Which will deliver value for a lot of us. And then I don't want to answer this question without also Highlighting the importance of the Intelligent Spaces Group in our portfolio. So as you saw this Quarter, we continue to grow at Distech. We continue to grow at Atrius. We continue to find we're finding ways where we can put capital to work to make that business better.

Speaker 2

So then the whole company hopefully looks different going forward. The lighting business is more predictable, repeatable and scalable with an obvious value creation algorithm And we're growing the technology business at ISG.

Speaker 9

Great. Thanks for that very complete answer. I appreciate it.

Speaker 4

Thanks, Jeff.

Operator

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

Speaker 2

Thank you, Liz. I'd like to thank all of you for joining us today. We appreciate the engagement and the questions. We had a solid quarter. We delivered margin And cash flow despite a decline in sales, we allocated capital effectively and we continue to improve our underlying businesses.

Speaker 2

So, thank you for your interest in Acuity Brands and we'll look forward to seeing you again next quarter.

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Key Takeaways

  • Despite a 6% decline in net sales to $1.0 billion, Acuity Brands expanded its adjusted operating profit margin to 16.3%, grew adjusted diluted EPS by 7% to $3.75, and generated $472 million of operating cash flow year-to-date.
  • In the Lighting & Lighting Controls segment, the company launched Design Select—3,000 configurable products for specifiers—while organizing its portfolio into Contractor Select, Design Select and made-to-order SKUs to boost product vitality and service.
  • The Intelligent Spaces Group completed the acquisition of T2 Therm to enter commercial refrigeration controls, and rolled out Atrius DataLab plus Sustainability and Energy applications to create a digital twin and automate built environments.
  • ABL net sales fell 7% to $941 million but delivered a 17% adjusted operating margin (up 120 bps YoY), while the Spaces segment grew 13% to $66 million in sales, reflecting ongoing investment for longer-term growth.
  • Inventory days have been cut by 22 days since February 2022, share repurchases total $219 million YTD, and full-year net sales are now expected at $3.9–4.0 billion with EPS guidance unchanged.
A.I. generated. May contain errors.
Earnings Conference Call
Acuity Brands Q3 2023
00:00 / 00:00