Acuity Brands Inc (AYI) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the Acuity Brands first quarter for 2004 conference call.

After today's presentation there will be a formal question and answer session.

At that time instructions will be given on how to ask a question.

Today's conference is being recorded at the request of the company.

If you have any objections you may disconnect at this time.

I now would like to introduce today's speaker, Ms. Karen Holcomb, VP of financial services at Acuity Brands.

Good afternoon.

Jim Balloun, our Chief Executive Officer, Vern Nagel our Chief Financial Officer and other members of the executive team are here today to discuss our 2004 first quarter results.

We are many webcasting this at www.acuitybrands.com.

We will make projections or forward-looking statements regarding future events or future performance of the company.

Such statements involve risks and uncertainties such as the actual results may differ materially.

Please prefer to our most recent 10(K) and 10(Q) SEC filings in today's press release which identify important factors that could cause the actual results to differ materially from those contained in our problems or forward-looking statements.

Now let me turn the call over to Jim Balloun.

Thank you, Karen.

Welcome to today's call.

I will be brief with comments to allow plenty of time to address your questions.

Today Acuity Brands reported net income for the 2004 first quarter, $12.9 million, .30 per diluted share compared to $10.5 million or .25 per diluted share reported from last year's first quarter.

Year over year net income increased approximately 23% and diluted earnings per share increased 20%.

Additionally during the quarter total debt outstanding increased modestly to $449.8 million at the end of the quarter compared to $445.8 million at the end of fiscal 2003.

You know, I like that so much I want to say that again.

Year over year net income increased approximately 23% and diluted earnings per share increased 20%.

The words sounds really good and they are so unfamiliar I just want to do repeat them.

Net sales for the first quarter were $517.5 million, an increase of 2.4% or last year's first quarter.

This growth in net sales occurred at both Acuity Brands Lighting and Acuity specialty products grew largely to increased shipments to the home improvement and retail channels.

Overall consolidated gross profit margins advance to do 41.5% of net sales during the quarter compared to 41% reported in the years ago period.

This is primarily due to improvements in pricing, the mix of products sold and the impact of initiatives to reduce product cost.

These were partially offset by higher raw material costs and expenses associated with the consolidation of certain manufacturing facilities at Acuity Brands Lighting.

Now, we anticipated adopting certain provisions of accounting standards 148 in the first quarter of fiscal 2004 which would have required stock options to be expensed.

In light of recent public communications from the Financial Accounting Standards Board the company has elected to delay the recognition of expense related to stock options until the final standard is [inaudible].

The recognition of stock option expense was project to do reduce earnings in fiscal 2004 by approximately 2 cents per share for each quarter beginning with the second quarter.

Our first quarter results modestly exceeded our expectations and reflect the positive impact of initiatives to improve the performance of our business units in the face of continued softness in key markets, especially nonresidential construction, of which as you know the starts are down about 27% from their high two or three years ago and they have not improved yet.

We were able to improve our gross profit margins while experiencing cost increases for certain raw materials and employee related programs as well as to fund key initiatives to improve our selling effectiveness and supply chain.

Also we were able to generate more cash flow than expected essentially maintain our debt level while paying our quarterly dividend and expanding our investment in each segment.

While we remain optimistic about the long-term potential of our company.

In fact, I don't think optimistic is the word.

I think confident is the word.

But we are cautious about near term results due to the continued softness in demand and uncertainties that exist in our key markets, particularly that of construction which continues to be delayed a quarter at a time into the future, although we do see some really good signs of design activity.

Considering that we have yet to see or benefit from a rebound in portions of this nonresidential construction market and that we are entering into what is historically our weakest quarter.

We anticipate the second quarter of 2004 to be are very challenging.

We still expect earnings for the first half of 2004 to approximate those reported in the same period in 2003.

Adjusting for the previously mentioned delay in accounting for stock option expense, we expect full year for 2004 to be in the range of $1.31 to $1.51 per share, that is for the fiscal year that will end September 1st this coming year.

Lastly, as we have previously indicated the company's debt balance at the end of the second quarter may increase up to 10% from the end of fiscal 2003 due primarily to the timing of certain expenses and particularly the capital spending associated with the consolidation of the manufacturing network at Acuity Brands Lighting.

Outstanding debt is then expected to decline and be approximately $400 million by the end of fiscal 2004, and you recall it was $446 million at the end of fiscal 2003.

Now we'd like to address any questions you may have .

Thank you.

We would now poll for the Q&A portion of today's call.

Should anyone wish to ask a question, you may simply press star 1 on your telephone touchpad.

If you are using speakerphone, you may need to lift the handset prior to pressing star 1.

To cancel your question, you may press star 2.

The first question comes from Craig Kennison of Robert W. Baird.

Good afternoon.

Hi Craig.

First question has to do with the second quarter.

If I do the math correctly your implied guidance for the second quarter is around 14 cents, yet the first half of if the first half of this year is to be similar to to last year.

My question is why the steep fall off, you did 19 cents last year in the second quarter , what is different and is business softer than you might have expected even a quarter ago.

Vern, why don't you take that.

The expectation in the marketplace as you know, Dodge is continuing to call for a decline in the overall nonresidential construction market for '03, and our business continues to prosper actually in the face of that type of environment.

So our expectation is that second quarter activity is going to continue to reflect those type of difficulties in the marketplace.

You saw that our backlog decreased slightly in the first quarter.

Some of that had to do just with some weakness in incoming order rates.

We believe this this is market related.

So you have a bit of that.

We also feel that overall we will continue to experience potential stock price increases that will impact our stock base plan.

As you know we have restricted stock that we are amortizing as part of our '03 plan.

So you'll see corporate expense which includes that to be higher than the years ago period as we go forward.

So, Craig, it's a combination of our expectation that market conditions will continue to remain difficult as well as some of the stock based programs creating greater costs, partially offset by improvements that we've made in the business to operate more efficiently.

The ADC at ASP is working much more effectively.

We are having strong gains there, but we also have other cost increases, whether it be steel, whether it be certain component or whether it be just normal wage increases.

So there's all of those influences that are impacting that.

Let me just say that our objective is to obviously outperform that but I think for that to happen we'll need to continue to see a little bit more of a benefit in the marketplace than we are seeing at this point.

Great.

Secondly, in your previous calls you've discussed the potential at least for 100 basis points of operating margin improvement on an annual basis as sort of a soft target for the company.

As I look at the high-end of guidance it would imply maybe 50 basis points of margin improvement.

You may have addressed this in your response to my first question but could you help me reconcile those two?

Yes, I actually feel, at least we feel very confident and as Jim said in his comments, about the direction that we are taking the operations of the business.

Some of the programs that we've used as incentive tools such as restrictive stock versus in the past potential of using options which should find their way to the income statement are having an impact on our business.

So if in this quarter if you were to imagine the increase in corporate expenses in large part has to do with the impact of these stock based programs going up that probably added about four ticks, off our, or took a way about four tenths of a margin point off of what we were trying to do, or what we would have reported on a comparable basis.

You can do that math yourself.

So our feeling is that we in fact are improving our business, the core operation is getting more rapid rates.

The other thing that you will see going forward, Dodge is calling for a slight uptick in calendar year '04 and our feeling is, and we are obviously keeping our eyes and ears very attuned to the marketplace, there is some activity out there.

If that materializes and we see the general pick up that we are seeing, or reading about, if you will, in other sectors, it will have an impact on our business, volume and obviously will positively influence what we are doing and our ability to continue to take costs out of our business is really a powerful combination.

I think when you look to reconcile our guidance to that sort of goal, it has a lot to do with what's happening in the marketplace continuing to remain soft coupled with some of these programs that typically are [inaudible].

I think if you reconcile that you will see a different picture.

There are two things that will make us cautious compared to the time when we first issued guidance and John might comment, one is non[inaudible] starts and the second is the impact of pricing disciplines that we put in.

Craig, we normally, this is John, we normally plan on about a six to twelve-month lag from the time we see nonresidential contract awards occur to the time we would see it show up in our business just because of the construction cycle.

As you recall as we got on into calendar 2003, contract awards continued to drop off, but at a reduced rate.

So while they were double-digit declines in contract rewards in 2003 it was don't, it was 3 to 5% off as we reached the most recent period and so that softness has impacted us.

As you also recall we got some uplift early in the calendar year last year as we announced price increases and people released projects with us in advance of those price increases.

Well, we also believe of that after that period of time while we held our prices not all of the major lighting manufacturers did and we think we might have been hurt somewhat by that in our volumes, in our order rates just recently when could have some impact on us in the second quarter that Vern is talking about.

So we will have to wait and see what the other major lighting manufacturers do and hopefully we won't have to respond to that.

The pricing for the quarter was firm relative to the first quarter of last year.

Those initiatives to really improve our margins, you saw that our margins went from 41% to 41.5% at the gross profit level.

That's while offsetting costs and continuing to consolidate the manufacturing network within Acuity Brands lighting.

So there were a lot of positive things that we think will have really strong earnings potential as we go forward.

Thank you.

One final question and I will get out of the queue.

How will the change in the steel tariff policy affect Acuity Brands if at all?

We don't have a number on that yet.

It's got to be, the comment that I would make is we obviously experienced cost increases when the tariff came through.

It wasn't insignificant.

But our sourcing initiatives really kicked into over drive to help familurate some of that increase that we saw domestically.

What does that mean?

We actually look to source or sub-assembly or components that had operations on to them so that we could in fact keep our cost competitive on a global basis.

The sense is that it may open up some opportunity to source here on a price competitive basis more easily.

So I'm not sure that it will have a significant impact on our profitability but it will give us the opportunity to look to greater supply opportunities here domestically.

Great.

Thank you very much.

Thank you.

Our next question comes from Barry Hayes from [inaudible]

Thanks.

Could you fill us in on where you stand from a manufacturing foot print from where you are in lost cost countries, Asia, versus more traditional marks such as North America and Europe?

Thanks.

Hi, Barry.

Essentially you have to split the two businesses, if you will, apart.

At Acuity special products our primary manufacturing base is here in the United States.

We do do some manufacturing in Canada and we do do some manufacturing in Europe.

But essentially I believe the number is 96% or so is here in the U.S., if I recall the numbers.

If you look at Acuity Brands Lighting, we have significant operations in Mexico.

And so if you want to say North America, it's probably close to 60% of our total manufacturing, more than that, 40% in Mexico and probably closer to in the North American base, I am going to say close to 80%.

We have a tiny bit then that would be in Europe and the balance would be coming from Asia.

The Asia piece is a growing portion of our business as we continue to look worldwide more competitively.

So today we are doing a relatively small piece of our total production that is growing piece.

Great.

Thanks very much.

Appreciate it.

Thank you.

Once again that's star one to ask a question and star two to cancel.

I show no further questions at this time.

I would like to turn the conference back over to you for final comments.

Thank you.

We are very pleased with our first quarter and although we are cautious about the second quarter because of all the reasons we discussed we think we are into a good year and we are happy with the way this company is progressing and we thank you for your support.

Have a happy holiday.