Yahoo Finance Acuity Brands, Inc. (NYSE:AYI) Q3 2024 Earnings Call Transcript
Acuity Brands, Inc. (NYSE:AYI) Q3 2024 Earnings Call Transcript June 27, 2024
Acuity Brands, Inc. beats earnings expectations. Reported EPS is $4.15, expectations were $4.1.
Operator: Good morning, and welcome to the Acuity Brands Fiscal 2024 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. Charlotte, please go ahead.
Charlotte McLaughlin: Thank you. Good morning, and welcome to the Acuity Brands fiscal 2024 third quarter earnings call. On the call with me this morning are Neil Ashe, our Chairman, President, and Chief Executive Officer; and Karen Holcom, our Senior Vice President and Chief Financial Officer. Today's call will include updates on our strategic progress and on our fiscal 2024 third quarter performance. There will be an opportunity for Q&A at the end of this call. As a reminder, some of our comments today may be forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as detailed on Slide 2 of the accompanying presentation.
Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2024 third quarter earnings release and supplemental presentation, both of which are available on our Investor Relations website at www.investors.acuitybrands.com. Thank you for your interest in Acuity Brands. I will now turn the call over to Neil Ashe.
Neil Ashe: Thank you, Charlotte, and thank you all for joining us this morning. In our fiscal 2024 third quarter, we delivered solid results. We increased our adjusted operating profit, adjusted operating profit margin, and adjusted diluted earnings per share. We generate strong free cash flow and we allocated capital effectively to drive value. In our Lighting and Lighting Controls business, we continue to expand profitability while we focus on returning the business to growth. In our Intelligent Spaces business, the growth rate and overall performance remains impressive. In ABL, we increased our adjusted operating profit $2 million to $162 million and increased our adjusted operating profit margin 100 basis points to 18% on $42 million less sales.
These results are being driven by our ongoing efforts to increase product vitality, elevate service levels, use technology to improve and differentiate both our products and how we operate the business, and to drive productivity. We define product vitality as the combination of new product introductions and improvements to our existing portfolio with the intention of making products that are more valuable for our customers and more profitable for us. A great example of this is the Lithonia FRAME, which we recently introduced to the market. This luminaire is a modern and sustainable alternative to traditional LED panels and can be used in all indoor applications, including commercial office and K-12 schools. FRAME offers our customers value as a result of three things.
The first is its flexibility of design. The FRAME comes in three different size options with switchable technology to offer different lumen outputs and color temperatures. The second is its lightweight design and patented snap connections that allow for quick assembly and ease of installation. And the third is that it costs less to package and ship as a result of its minimal sustainable packaging. I'd now like to spend a few minutes talking about our differentiated product portfolios. Made-to-Order, Design Select, and Contractor Select, and how they are creating the most effective way for our end-users and contractors to get what they need, when they need it for their specific projects. The majority of our products are Made-to-Order, which uses our entire portfolio to create limitless design options for our customers.
From concept to creation, we meet their requirements. I'd like to share a few examples with you. We have been working on the restoration of the Michigan Central Station in Detroit, where we took the original lighting blueprints from 1912 and recreated them as current-generation LED fixtures. When combined with our controls, these fixtures deliver energy savings and create distinct event lighting to deliver a completely unique solution. We are also able to adapt our existing Lighting and Lighting Controls portfolio. For example, this quarter, we met the retrofit requirements of a large retail customer by using the base design of several key fixtures and combining them with our controls to create a unique tailored solution. And finally, we have specialty brands known for innovation like A-Light, Luminis, and Eureka, which meet the needs of lighting specifiers in different spaces, ranging from offices to healthcare to schools.
Next, Design Select takes the limitless design options from Made-to-Order and curates them into an offering that delivers a highly productive approach to project design, with ease of selection and service predictability. Whether a customer needs their products in three weeks or three months, we are able to satisfy their timelines. We deliver highly configurable product options for superior solutions by incorporating a broad portfolio of our trusted brands and offering nLight embedded controls. And the final part of our differentiated portfolio is Contractor Select. About 300 high volume products that are used in common everyday lighting applications designed to be stocked and resold. We have been able to create a portfolio that offers quality products that our customers want at competitive prices, while at the same time allowing our distributor partners to achieve higher returns.
We also continue to make investments for future growth, prioritizing new verticals where we have not historically competed or where we are underpenetrated. We have recently entered the refueling vertical, which includes service stations, convenience stores, and quick-service restaurants. We are reimagining the customer experience using solutions specifically developed for these applications in addition to our other existing products from our Lighting and Lighting Controls portfolio. This is a vertical where we have not broadly competed, and earlier this week, we announced that we have signed one of the leading independent sales agents, positioning us well to compete in this established and growing market. This builds upon our discussion last quarter around entering the horticulture market.
This is another example of a vertical where we had not historically competed and where we have long-term opportunities for growth. We continue to be recognized by the industry. This quarter, we were awarded three Red Dot Design Awards for product design, one of the most sought after distinctions for design and quality. We won for INLINE by Luminis, which we profiled in our first quarter earnings call, Atoll by Eureka, and Mochi by Cyclone. Atoll is a high performance ring fixture with an elevated design that produces an evenly distributed glow and is available with multiple size and mounting options for use in commercial spaces and other indoor environments. 2024 marks the 10th consecutive year that our Eureka brand has won a Red Dot Design Award, and Atoll brings its total product wins in this category to 20.
Mochi is a contemporary dome streetlight that offers precision illumination for use in infrastructure projects where safety is a priority, including city, residential streets, and commercial buildings. Its innovative design offers multiple configurations in addition to a patented latch that allows for easy maintenance access without compromising security. This is the first Red Dot win for our Cyclone brand. In addition, we were awarded 21 Bright Star awards from LEDs Magazine, which acknowledges innovation in lighting, components and controls for products across 14 of our brands, including Aculux, Hydrel, eldoLED and nLight. Now, moving on to our Intelligent Spaces Group. Our mission in our Intelligent Spaces business is to make spaces smarter, safer and greener through our strategy of connecting the edge to the cloud.
Distech has the best edge control devices in the market, while Atrius will be the best in cloud applications. In spaces, we are focused on where we compete and what we can control to expand our addressable market. As part of our geographic expansion, this quarter, we continue to add systems integrator capacity in the U.K., Australia, and Asia. We partner with the best SIs in specific geographies to sell our full suite of Distech and Atrius products. In May, we hosted our key SI partners and end-users at our European Connect Conference in Marseille. It was a great success, and we look forward to hosting our North American Connect Conference in Nashville later this year. At Connect, the Distech Resense Move sensor that we discussed in the first quarter continued to generate positive reviews.
As a reminder, this is an advanced seven-in-one ceiling-mounted sensor that is able to detect occupancy and provide feedback on occupancy requirements in built spaces. We also showcased our refrigeration offering, which included the upgraded Distech KE2 Therm Smart Access, a personalized secure portal that provides real time refrigeration system data that can troubleshoot system issues, prevent unnecessary site visits, and save our customer's money. The device talks to all Distech KE2 Therm sensors and controls and allows on-site and remote monitoring for one or multiple site locations. And this quarter, our Spaces products received recognition from several industry leaders. Our Distech Resense Move won best AI tech innovation for intelligent buildings at IBcon 2024 last week, having also won an Excellence Award in the 2024 Electrical Review and Data Center Review earlier in the quarter.
Our Distech Controls' ECLYPSE APEX controller won a Product of the Year award at the 2024 Consulting Specifying Engineer Awards, and Atrius won Best ESG and Climate Reporting software from ESG Investing Magazine for the second consecutive year, and won Top Products of 2024 by E&E Leader. Now turning to our outlook. In our lighting business, our order rate continued to grow year-over-year in the third quarter. We built backlog as our orders exceeded our shipments. This backlog will be served in the coming quarters. As we enter the fourth quarter, the order rate trend is likely to continue and we will remain focused on returning the business to growth, while expanding margins and generating strong free cash flow. Our Spaces business continues to grow impressively and is becoming a more important part of our company.
Our performance is, and continues to be strong, and we will continue to allocate capital to expand our addressable market. Now, I'll turn the call over to Karen, who will give you an update on our third quarter performance.
Karen Holcom: Thank you, Neil, and good morning to everyone on the call. We continue to deliver solid performance in our third quarter with both our Lighting and Spaces businesses delivering margin improvements. We increased our adjusted diluted earnings per share and we generated strong year-to-date operating cash flow. We allocated capital effectively and continued to make progress on our strategic priorities. For total AYI, we generated net sales in the third quarter of $968 million, which was $32 million, or 3% below the prior year as a result of the lower net sales in our Lighting and Lighting Controls business. Our Spaces business continued to experience strong growth of 15% in the quarter. We continued to deliver year-over-year margin improvement.
During the third quarter, our adjusted operating profit was up $4 million from last year on a $32 million decline in sales, and we expanded our adjusted operating profit margin to 17.3%, an increase of 100 basis points from the prior year. This increase was driven largely by the significant year-over-year improvement in our gross profit margin, as we continue to execute our strategy and drive margin through product vitality, the management of price and cost, and productivity improvements. During the quarter, our adjusted diluted earnings per share of $4.15 increased $0.40, or 11% over the prior year due to higher net income and lower shares outstanding. In ABL, net sales were $899 million, a decrease of 5%. However, as Neil said earlier in the call, our order rates are higher year-over-year.
While the independent sales network was down as a result of the challenging comparables last year, this quarter was a good quarter for corporate accounts, which benefited from a large retail relight project. Adjusted operating profit increased to $162 million on lower net sales, while we delivered improved adjusted operating profit margin of 18%, a 100 basis point improvement over the prior year. Net sales in Intelligent Spaces for the third quarter were $76 million, an increase of 15% as Distech continued to grow. The integration of KE2 Therm is now complete and KE2 Therm products are now product line under the Distech Controls product portfolio. Adjusted operating profit in Intelligent Spaces was $17 million with the adjusted operating profit margin at 22.9%, a 340 basis point improvement over the prior year.
Now turning to our cash flow performance. We generated $445 million of cash flow from operating activities year-to-date and we are earning attractive returns on the cash that we have on our balance sheet. We continue to allocate capital consistent with our priorities. Year-to-date, we invested $41 million in capital expenditures, we acquired the assets of Arize Horticulture Lighting, we increased our dividend per share 15%, and allocated approximately $89 million to repurchase over 454,000 shares. Since the beginning of the fourth quarter of fiscal 2020, we have repurchased approximately 9.5 million shares at an average price of about $145 per share, which was funded by organic cash flow. This amounts to about 24% of the then outstanding shares.
We continue to demonstrate solid performance. We delivered improved margins and increased adjusted diluted earnings per share. We generated strong cash flow from operations and we continue to allocate capital effectively. Thank you for joining us today. I will now pass you over to the operator to take your questions.
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