Good morning, and welcome to the Acuity Brands Second Quarter Earnings Call of Fiscal 2022. 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. Charlotte, please go ahead..

Thank you, Michelle. Good morning, and welcome to the Acuity Brands fiscal 2022 second quarter earnings call. As a reminder, some of our comments today may be forward-looking statements based on management's beliefs and assumptions, and information currently available to 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 the company's actual results may differ materially from those anticipated and we undertake no obligation to update these statements.

Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP metrics are available in our 2022 second quarter earnings release, which is available on our Investor Relations website at www.investors.acuitybrands.com.

With me this morning is Neil Ashe, our Chairman, President and Chief Executive Officer, who will provide an update on our strategy and highlights from the last quarter; and Karen Holcom, our Senior Vice President and Chief Financial Officer, who will walk us through our earnings performance.

There will be an opportunity for Q&A at the end of the call. So those participating, please limit your remarks to one question and one follow-up if necessary. We are webcasting today's conference live. Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ashe..

Thank you, Charlotte, and good morning to everyone joining us to discuss Acuity Brands. Our team delivered another strong performance in the second quarter of fiscal 2022. For the second consecutive quarter, we delivered net sales growth of 17% and we maintained our gross profit margin at 41.7% consistent with the first quarter.

And compared to last year, we increased diluted earnings per share by 22%. Despite the cost challenges, we were able to convert our sales growth into operating profit and net income by effectively leveraging operating expenses. The world remains complicated.

Although our demand environment is strong, costs continue to be volatile, and we are continuously dealing with the ongoing pressures resulting from the global component shortages. In spite of this, our team continues to execute well, and this is reflected in our performance. Both ABL and spaces are performing admirably.

Our decisions to prioritize shipments by investing in electrical components and transportation are resulting in higher sales and operating profits, albeit at slightly lower margins. Now, I want to move to talk to our progress at both ABL and spaces. First, in ABL, I'm happy to report that some things are returning to the way they used to be.

In March, we hosted our first in-person sales conference in three years NEXT 2022. It was great to be back together with our Independent Sales Network, who have performed exceptionally through the ups and downs of the last two years.

We have the best agents in the industry and it was a great opportunity to talk about our strategic vision for Acuity Brands lighting, share many new products and engage our agency partners around EarthLIGHT initiatives. This was the first time that many of our associates and agents had seen each other in person since the pandemic started.

While we have been incredibly productive working virtually with our channel, it was great to spend some quality time together in person. It was hard not to be struck by the levels of energy and enthusiasm throughout the event and the consistency of the feedback from our agents. They said Acuity is delivering.

Our investments in service have allowed us to prioritize delivering for our customers when others have been unable to. At the same time, our investments and product vitality have allowed us to continue to create compelling new products that are both innovative and market moving.

As I said last quarter, we have done this by focusing on three main areas. First, by focusing on strategic supplier relationships, the current environment has reminded us all that it really matters who you do business with.

Because we are the largest lighting company we have certain advantages over our direct competitors, but those same components are also used by larger industries. Consequently, we are making investments in people, time and resources. We have recruited a new head of strategic sourcing for ABL.

We are working with our key suppliers on effective planning and allocation management, and we are investing in inventory.

Second, by empowering our teams to prioritize access and speed over cost on available components, we have been able to ensure continuity of supply across many of our existing product lines, while also supporting our ongoing product vitality efforts across our product portfolio.

Finally, as I said last quarter, our engineering teams continue their Herculean efforts to redesign products to the available components. At the same time, these teams have also managed to introduce around 220 new or significantly upgraded lighting and lighting control products over the last two years.

We expect the challenges around access to and cost of components to continue into the foreseeable future.

Our strategy around product vitality, and the dexterity of our engineering teams and flexing to the changing requirements of the component shortages has been a significant part of why we are leading in this market and we expect to continue these efforts. Another highlight of the next conference with our focus on EarthLIGHT.

EarthLIGHT is an important part of our strategy. Our product vitality efforts are not just about improving the functionality of our products, it's also about redesigning products to reduce customer energy consumption, reducing packaging and waste and improving transportation efficiency.

This quarter, we announced a new initiative that brings together both technology and sustainability to significantly reduce paper use by introducing scannable QR code instructions across our products. At Next, we also expanded our community outreach by packing 1,000 bags of food for a local Atlanta organization together with our agents.

It was one of the highlights of the event. Now moving to the Intelligence Spaces Group. Spaces had another solid quarter of growth. In both Distech and Atrius, we have a strong product roadmap to make spaces smarter, safer and greener. Distech continues to win in the building controls market against significant competition.

Through the Eclipse Controller Products, Distech is at the forefront of the technology curve with the presence in key markets and recognized leadership built on open protocol technology.

In the last quarter, Distech One projects across North America and Canada and saw significant project wins and key verticals including in education, commercial, infrastructure and data centers. Distech is now a key supplier to two of the largest cloud providers.

We also continue to develop the Atrius platform, including progress on Atrius building insights, and we expect to expand the portfolio over time. We continue to add talent to this team. Finally, I want to update you on our capital allocation. Our capital allocation priorities remain the same.

We expect to continue to prioritize investments for growth in our current businesses, to invest in acquisitions, to maintain our dividend and to allocate capital to share repurchases when there is an opportunity to create permanent value for our shareholders.

This quarter, the Board of Directors authorized additional capacity for share repurchases to increase our remaining authorization from 3 million to 5 million shares. Since May of 2020, we have repurchased approximately 13% of our shares outstanding.

I would also like to announce the appointment of Sach Sankpal, our Senior Vice President of Growth and Transformation. Sach joins us to manage our technology organization; to deploy our better, smarter, faster company operating system; and to lead the integration efforts for future acquisitions.

Sach comes to us with distinguished experience at leading companies, including Trimble and Honeywell. We're excited to have Sach on our team. As I close, I once again want to thank our team for their ongoing efforts. Each quarter, we are faced with new challenges and our team continues to deliver.

Our continued focus on service and product vitality is allowing us to take advantage of the strong demand environment. I will now turn the call over to Karen, who will take a deeper dive into our quarter performance, and I'll be back later in the call for Q&A and for some closing remarks..

Thank you, Neil. I want to start by reiterating thanks to our team for their work over the last quarter. I'm so impressed by their flexibility and ability to drive results. We delivered strong performance in the second quarter of 2022.

We grew net sales, we managed margins effectively despite a volatile cost environment and we leveraged our operating expenses. Net sales were $909 million, an increase of 17% compared to the prior year.

This performance was driven by our focus on service levels and product vitality, a continued recovery in the end markets of both of our business segments, and the benefits of recent price increases and acquisitions. Gross profit was $379 million, an increase of $43 million, or 13% over the prior year.

This improvement was driven by revenue growth, and by offsetting the significant increase in input costs through price increases and product and productivity improvements. Gross profit as a percent of sales was 41.7%, a decrease of 170 basis points from 43.4% in the prior year, but flat sequentially from the first quarter of 2022.

I will talk more about the current cost environment later on in the call. Reported operating profit was $102 million, an increase of $11 million or 12% over the prior year. Reported operating profit margin was 11.3% of net sales for the second quarter of fiscal 2022, a decrease of 40 basis points over the prior year.

Adjusted operating profit was $123 million, an increase of $14 million or 13% over the prior year. Adjusted operating profit margin was 13.5% of net sales, a decrease of 50 basis points against the prior year.

Adjusted operating profit margin was lower than the prior year as a decline in gross profit margin was partially offset by leveraging operating expenses. Finally, we saw continued improvement in diluted earnings per share for the second quarter of fiscal 2022.

Diluted EPS $2.13 increased $0.39 or 22% over the prior year, and adjusted diluted earnings per share of $2.57 increased $0.45, or 21% over the prior year. Our share repurchase program favorably impacted adjusted diluted EPS by $0.06. Now moving on to our Segment.

During the quarter, our Lighting and Lighting Control segments saw sales increase 17% to $863 million over the prior year. This was driven by the improvements within our independent sales network, which grew approximately 12% and an increase of 5% in our direct sales network.

Additionally, sales in the corporate account channel increased approximately 105% over the prior year. Recall that last year, customers had paused their renovations due to the pandemic. That activity has now restarted as you can see from the growth this quarter.

We also had growth in our other channel of 83% over the prior year, due primarily to the acquisition of OSRAM. Sales in the retail channel declined approximately 2% in the current quarter. This was due to some of our inventory being delayed in transit or held up in the port, resulting in longer lead times than we anticipated.

We should start to see growth in this channel in the upcoming quarters. ABLs operating profits for the second quarter of 2022 was $117 million, an increase of 14% versus the prior year, with operating margin declining 30 basis points to 13.5%.

Adjusted operating profit of $127 million, improved 13% versus the prior year, with adjusted operating profit margin declining 50 basis points to 14.7%. ABL has demonstrated the ability to grow sales while leveraging their operating expenses. Moving on to the results for our Intelligent Spaces Group.

For the second quarter of 2022, sales in spaces increased approximately 16% to $50 million reflecting growth in both Distech and Atrium. Spaces operating profit in the second quarter of 2022 increased approximately $400,000 to $1.2 million.

Adjusted operating profit of $6 million increased approximately $1 million versus the prior year as a result of the strong sales growth and continued investment in the business. Our business model continues to be highly productive, generating $127 million of net cash flow from operating activities in the first half of fiscal 2022.

This was a decrease of $85 million compared to the prior year, due primarily to an increased investment in working capital primarily related to inventory.

Inventory days are up over the end of our fiscal year, with approximately half of the increase due to increased lead times on source finished goods and to a slightly lesser extent increase purchases of electronic components.

We are managing our inventory levels to support our growth, as well as insulate our production facilities from inconsistent supply availability. We also invested $24 million or 1.3% of net sales in capital expenditures during the first six months of fiscal 2022. Finally, we have continued to repurchase shares in the second quarter.

As a result, since May of 2020 we have bought back approximately 13% of our company shares at an average price of approximately $120 per share. I would now like to spend a few minutes focusing on the remainder of the year.

As Neil stated, we expect the current environment to continue for the foreseeable future with strong demand while access and cost of components will remain a challenge. Our focus throughout will continue to be on growing sales and leveraging our operating expenses.

In relation to the recent instability in Europe, we have no direct sales exposure either to Russia or Ukraine. However, the conflict does add to the existing supply chain pressures. Additionally, we're experiencing increases in transportation costs driven by expected increases in oil prices.

In the last 15 months, we have strategically introduced fixed price increases in addition to driving product and productivity improvements. Before I hand you over to the operator, I want to leave you with our key takeaways. We have continued to demonstrate strong sales growth and effective management of gross margin in a volatile cost environment.

We have leveraged our operating expenses and finally we have continued to allocate capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions..

Thank you. Our first question comes from Christopher Glynn with Oppenheimer. Your line is open..

Hi, good morning. Thank you, and nice quarter. Curious, if you're seeing any instances of encountering elasticity, as you know, the price increases take fuller effect and commentary on backlog levels versus normal..

Yes, good morning, Chris. Thanks for being with us. As Karen indicated in her commentary, we've, been able to strategically introduce fixed price increases over kind of the course of this year, way more than we expected, obviously, and the reaction has been, kind of relatively accepting of those price increases.

So you've seen us have success, obviously, in the top line performance as a result of that. Demand remained strong.

So as we look at backlogs in terms of committed orders, they are obviously significantly higher than they usually are, at this point, which is a reflection, both of the strong demand as well as the availability of components, et cetera, that Karen alluded to. So we're trying to work through that as effectively as we can.

And we expect that dynamic to be - to continue through at least the rest of the calendar year, which is demand is strong and supply chain is tight..

Okay, thanks.

And just follow-up from me, the guidance slide was removed in the Outlook section in the press release, do we just retain the prior quarter’s disclosure by default?.

the strategic supplier relationships; prioritizing access, so over cost of some of our components; and the continuous reengineering we're doing a product to the available components. So that's how we're doing what we're doing. And the results are kind of, obviously speaking for themselves..

Thanks, Neil. Just a small point of order. You just said mid-single digits for ABL, I think you're standing metric is high single digits..

Yes, high single digits. Sorry, thank you for correcting me, Chris. I didn't mean to accidentally give the wrong numbers..

I know you didn't..

Our next question comes from Ryan Merkel at William Blair. Your line is open..

Hey, everyone. Good morning, and nice quarter..

Thanks, Ryan..

So Neil, you mentioned that fixed price increases, and it sounds like realization is pretty good given the backdrop.

Just curious, when do you expect to see the full impact just given a backlog there of those fixed? And then, can you give us a sense of the range of like, what price could contribute once you start seeing the full impact?.

Yes. So as we kind of talk through those, one of the things we highlighted in our last quarter was that we have intentionally not repriced the backlog. So just for those who may not know, a project get started, whether it's all focused on C&I for a second. Project get started. The -- we start to make quotes for that project.

When those quotes are accepted, we consider that a committed order and we honor that price going forward. So all price increases are from that effectively from that point forward. So you see the effectively the cumulative effect of those price increases in the backlog as it starts to roll forward.

The challenge with managing or matching up price and cost is obviously, those are moving independently of each other. So, we are - we have realized a significant amount of price and we will continue to realize more as the cumulative impact of that kind of rolls out through the rest of the year.

Independent separately from that, obviously, we're buying the necessary components to manufacture those goods. So, whether it’s components when we can get the - when and where and what we need to pay for them to get them. And the other key materials like steel, aluminum, et cetera, which are moving independently of each other.

The sum of those obviously is our ability to manage price cost. And that's how we feel like we've done a, even though the margins aren't as high as they were last year, given the volatility on the cost side, we feel like we've done a really nice job of managing those.

And it sets us up for continued performance the way and by the same manner in which we've done it for the remainder of the fiscal year..

Got it. Okay, thanks for that.

And then for my follow-up, just can you comment on the backlog? Did it grow sequentially just given the supply chain challenges and any cancellations or push outs? Or do you feel pretty good about the next three to six months based on what you're hearing and seeing from customers?.

Yes. So as I said, Karen indicated, we've seen strong demand, that's continued. So, backlog is ticked up slightly sequentially. So there's plenty of business out there. We're just working hard to satisfy it..

Got it. Thanks..

Our next question comes from Chris Snyder at UBS. Your line is open..

Thank you. So I certainly understand the strategy, and also the drivers of the building inventory levels at the company.

And during the - I guess this quarter and last, but could you speak to any maybe impact this has on margin, whether it be higher fixed costs absorption in the current period? Or if this inventory level wording may be normalized or right size lower? Any potential margin headwinds coming from a result of that?.

Karen, you want to start?.

Sure. Yes, Chris. As we've mentioned, we have intentionally increased our inventory really related to two reasons. One was the longer lead times that we're seeing on the purchase finished goods. It used to take about 20 days to get to us, and now it's taking closer to 50. So that has been some build that has happened because of those longer lead times.

The second reason has been availability of our electronic components. So we have tried to secure more of those. And we would typically do just in light of the shortages, so that we can service the demand that we're seeing.

So as you know, that rolls through, you're not going to see any, any kind of headwinds, as you described other from - other than from the increasing cost that we've been talking about, and that Neil has described on the call..

Thank you. Appreciate that. And then some follow up; I want to touch on M&A. In the past, the company has spoken to its interest in, in adding tech assets to build out the spaces group.

But if I remember correctly, I also believe there was some commentary at the investor day around maybe even pushing into a tangential industrial vertical, could you just provide some color on the company's M&A strategy as the cast ballots remains maybe higher than what we've seen historically?.

Yes, I'll take that one, Chris. So I can't speak for what the acquisition strategy was before I got here. So we'll focus on kind of what we said on the investor day, which is that, our capital allocation priorities are pretty straightforward.

One, we want to grow the businesses, we already have two, we want to expand the company via acquisition, both investments in our current businesses, lighting and spaces, as well as add additional businesses over time. The third is to maintain our dividend.

And then the fourth is when we see an opportunity to create permanent value through share repurchase. We've done that and when it's been really attractive, we've been really aggressive.

So as we look forward to the to the acquisition strategy, that is absolutely a part of where we want to how we want to deploy capital going forward and we want to grow the business. As a point of fact, though, we've seen significant opportunity to generate value through our existing businesses. So that's where we focused our efforts.

Obviously, the OSRAM acquisition is a great example of adding a strategic asset to an important business for us. So as a reminder, the reason that we did that was threefold; one was to control the technology we have, we have in our luminaires. So, the, the analogy I drove with our team was, we were a car company that didn't manufacture the engines.

And now we do. The second was to expand our OEM channel so that we could participate more fulsomely in the, in the broader market. And then the third was to, was to integrate our supply chain so that we could scale more, more effectively. That acquisition is, is performing exceptionally well.

From a financial perspective, it's, as we indicated on the last quarter, it's mildly diluted from a gross margin percentage, but dollar, obviously dollar accretive and, and we expect that to accelerate over time as we, as we integrate it.

We're actively looking at opportunities to expand the, to expand the spaces group of in businesses that are more related to Distech primarily and then, and then we're, we're working; we're working aggressively to demonstrate organic sales growth with Atrius products as the first step towards investing further in them.

And then finally, that gives us the opportunity over the next couple years to add other businesses to the portfolio. So we're positioning the company both from an ability perspective, as well as talent perspective evidence, the addition of Sach. And obviously, we are, we're positioning well from a financial perspective.

So the narrative will be over the next while we will continue to improve the businesses that we already have. And, and over time, we'll add businesses where we can demonstrate what we've done with ABL and spaces and in other environments where we can drive high returns for our shareholders..

Appreciate that, thank you for the time..

Our next question comes from Josh Chan at Baird. Your line is open..

Hi, good morning, Neil, Karen, Charlotte congrats on a good quarter..

Thank you Josh..

My first question is on the supply chain, I guess.

Could you update us on kind of how it has changed sequentially? If at all, anything getting better or worse? And, how do you expect that to trend data in the coming months I guess?.

Karen, I'll pick that one. I would say Josh, good morning. I would say that the supply chain, I mean, I can't think of a better a different analogy other than kind of whack a mole.

It just seems to be it's something different each time, so and I believe that's the -- you see that flowing through and in kind of, pick your commodity, pick your components. The big picture, the big picture trends are pretty obvious. There is a, there is more demand than supply for global chips.

So kind of working through allocations and demand planning is the challenge they're trying to get our to get our unfair share of those, excuse me, transportation has been a problem that should hopefully get a little bit better in the in the foreseeable future absence, kind of any Long Beach strike issues, moving product through the through the West Coast.

And then commodity prices have changed. You can see those as well as we can. So whether it's steel, or with the with the Ukraine situation, aluminium prices, obviously change so, so we're kind of playing whack a mole, which is why we we've talked about, kind of how we're trying to manage through this.

And Karen walk through the pricing and the and the costing. That's why I feel like we're delivering, we're, we're pleased with these margins and the gross margin level and in a steady state environment, I'm confident we'd be delivering higher margins. But even if they hang around at these levels for a while, I think we can be pleased with them..

Appreciate the color there. And then I guess my second question is on market share.

It certainly seems like you're winning in terms of market share, given the more kind of transactional nature of some of these projects, like what can you do? Or how are you working to retain the gains that you've secured over this time period?.

Yes, Josh, I would say our focus right now continues to be on service and product vitality. And that's really where you're seeing us be able to grow our sales, in the independent sales network, and our direct sales network is really having an impact for our ability to differentiate with service and our product portfolio.

So we're just going to continue that focus as we as we move forward..

The only thing I'd add to that Josh is we've had a lot of success with the contractor select portfolio, which is right product, right place, right time. So we describe it as your most important everyday lighting products.

And so, so that is, as long as we maintain a high product, vitality, that's a that's, that's an interesting and important part of the portfolio going forward..

That's great. Thank you both for your time..

Thanks..

Our next question comes from Jeff Osborne at Cowen & Company. Your line is open..

Hey, good morning. A couple of questions on my end.

Karen, I think on the last quarter, you had mentioned that you thought 2Q would be the low point for gross margins throughout the year, is that still the case?.

I do not recall mentioning that it would be the low point for gross margins. I think what we talked about is that second quarters sequentially are seasonally our lowest top line. And so you could expect to see some of that seasonal decrease, which is I think we were down about $20 million from the first quarter.

So you do get a little bit of an impact from leveraging some of your fixed costs and gross profit from that perspective. And, just as we talked about before, as we look ahead, the cost and availability of components continue to be a challenge, we will prioritize servicing our customers and speed over costs.

And we'll continue to manage those cost aggressively..

Got it.

And then two other quick ones, any impact to the backlog from rising interest rates on some of your larger projects? And then I was just curious what the initiatives are to try to work through the backlog quicker with the increase in inventory help you do that?.

Yes, so first, on the rates. I don't think we've seen that yet. So we're obviously paying close attention to that. And there's, I don't know, I think it's pretty obvious that projects, the value of projects will have to change. Big project, not our projects, the projects were a part of will be impacted at some point by discount rates.

In terms of managing through the backlog, we are, we have, we have initiated a significant number of activities. I highlighted the key ones about kind of redesigning products and the strategic supplier relationships and managing to cost over or to access and speed over costs.

If you were to if you were to walk our halls, you would hear us talk about best which is a backlog, elimination strategy and the that activity spans from focus factories in Mexico all the way through our sourcing our product, and our and our go-to-market teams. And so we're aggressively ramping capacity.

We've, as you can see, we've worked well, you can't see some things are harder than they are look easier than they are. This one has been a challenge as we've managed to components, we've gotten labor in a really good spot over time now. So we're starting to, we're starting to, to crank through that to crank through that backlog.

The good news is that orders remain strong. So even though we continue to increase our production, our productivity, the orders keep coming in..

Thanks for the detail, Neil, appreciate it..

And our next question comes from Brian Lee at Goldman Sachs. Your line is open..

Hey, Neil. Hey, Karen. This is Miguel on for Brian. Just had a quick just a quick question to talk about inventories again.

So you talked about the two impacts the increased lead times and then also the increasing purchases? Is there a is there shift happening with how you're managing inventories going forward, just as potentially at the lead times come down? Would you expect to continue to hold higher inventories as a percent of revenue NAV as you as you may be think about increasing revenues, just given all of the supply chain challenges going on?.

Yes. So thank you, Miguel. As I mentioned, the two reasons and you're right are the extended lead times on the source finished goods and then also the electronic components. So how we're managing those is we're looking ahead.

So we're trying not to look in the rear view mirror to manage inventories, but really look ahead, understand where we have the demand, understand where we have the products that we need to meet or the inventory we need to meet that demand and focusing really carefully on that. So we don't expect that our days would continue to be this high.

We do believe that it's necessary right now, given the challenges that we're seeing and access to components and to inventory, but we are managing by days and very aggressively in the windshield..

Okay, thank you very much. That's it for me. I'll pass it on..

Thanks, Miguel..

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 Ashe for any closing remarks..

Thank you all for joining us this morning. We really appreciate your interest in Acuity Brands. I would say from my perspective summary is, I believe that our team delivered a really a really good quarter in a really challenging environment. As we look forward, demand remains strong; supply chain remains tight and challenging.

And we'll continue the hard work to deliver on the results that you've seen going forward. So thank you for your interest in us and thank you to our team and our independent sales network for their hard work delivering these results..

This concludes the program. You may now disconnect. Everyone have a great day..