Acuity Brands Inc (AYI) 2004 Q2 法說會逐字稿

Good afternoon and welcome to the Acuity Brands second-quarter 2004 conference call. (OPERATOR INSTRUCTIONS).

Now I would like to introduce Ms. Karen Holcom, Vice President, Financial Services of Acuity Brands.

Good afternoon.

Jim Balloun, our Chairman and Chief Executive Officer;

Vernon Nagel, our Vice Chairman and Chief Financial Officer, and other selected members of our executive team are here today to discuss our 2004 second-quarter results.

We are webcasting today's conference call at www.acuitybrands.com.

I would like to remind everyone that during this call we will make projections or forward-looking statements regarding future event or future financial performance of the Company.

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

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

Now let me turn this call over to Jim Balloun.

Thank you, Karen, and welcome to today's call.

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

Today Acuity Brands reported net income for the 2004 second quarter of $9.5 million or 22 cents per diluted share compared to 7.7 million or 19 cents per diluted share reported for last year's second quarter.

Year-over-year net income increased approximately 23 percent and diluted earnings per share increased 16 percent.

Additionally we continued to reduced total debt at a pace exceeding previous expectations.

We ended the quarter with total debt of $437.5 million, which is down $8.3 million from the beginning of fiscal 2004, which you remember as September 1.

Year-over-year net sales for the second quarter increased to $491 million from $489.3 million.

Net sales were essentially flat as gains from pricing at both Acuity Brands Lighting and Acuity Brands Specialty Products and greater shipments of lighting products to the home improvement channel were offset by declines in certain other channels, primarily those serving the nonresidential construction market which remains weak.

Overall consolidated gross profit margins advanced to 41 percent of net sales in the second quarter of fiscal 2004 from last year's 39.9 percent.

This is due primarily to favorable price and mix changes and the impact of profit improvement programs under way that helped offset the cost of higher raw materials and the consolidation costs of certain manufacturing facilities in Acuity Brands Lighting.

Our consolidated operating profit of $24.4 million was $5 million or 26 percent higher than last year as the improvement in gross profit more than offset the higher operating expenses, which increased primarily because of companywide restricted stock incentives.

We are pleased that during the second quarter we improved our consolidated operating profit margins by 100 basis points and increased diluted earnings per share by 16 percent over the prior year.

These strong results reflect the strength of our value propositions to our customers, the benefits of margin management initiatives that have been underway for a while now, and our continued efforts to build a more globally competitive supply chain.

We were able to accomplish this positive outcome while continuing to incur costs at Acuity Brands Lighting that are necessary to redeploy resources within the supply chain and while we were continuing to deal with weak economic conditions in certain key markets, particularly in nonresidential construction starts.

Looking ahead, it now appears that certain sectors of the economy are starting to show some signs of renewed growth, and some economists are predicting modest growth in portions of the nonresidential construction market that will start in the second half of calendar year 2004.

While we remain cautious about the potential benefit from such a rebound in our fiscal 2004 which ends on August 31st, we now expect our full fiscal year earnings to be in the middle to upper end of the range of $1.31 to $1.51 a share we estimated sometime back.

Now we would like to address any questions you may have.

(OPERATOR INSTRUCTIONS).

Craig Kennison (ph), Robert W. Baird.

Congratulations on your performance again this quarter.

The first question has to do with steel.

Could you just quantify the impact of steel on your business?

Vernon, why don't you take a crack at that?

Actually, Craig, we do not disclose the amount of steel that we use.

But what I can say is that obviously we use a great deal of steel, and there is steel in the component parts that we acquire.

The good news for us is that a number of the purchases that we make are under longer-term contracts, and so those contracts do have positive price points in them.

But we experiencing cost increases, and as a consequence of that, we have in fact looked to adjust pricing on a number of our products to reflect that.

As you know, we go through an annual review process on pricing, and for both businesses, that was completed really at the beginning of the fiscal -- or, excuse me, the calendar year, but we are also looking at and have announced price increases into the marketplace to help with the impact of rising costs.

What has been your price increase that you have asked the market to bear?

In total -- well, it depends on the business.

It depends on the business.

In the Lighting business?

It depends on which portion of the Lighting business, but it is generally ranged in the 4 to 6 percent range.

Again, as Vernon mentioned, we had recently completed our annual price review wherein we began to make some adjustments that would impact us later this year.

This is an attitude of price reviews as a result of some of these anomalies occurring in some of these materials such as steel.

When should we expect the 4 to 6 percent price increase or whatever you get to influence the income statement?

I imagine it is not right away.

It normally takes three to five months for us to see what the impact of our increases are given the project nature of our business.

That is helpful.

Turning over to your margin, 100 basis points is very strong.

Is that sustainable?

And it does not seem as though it is based on the guidance.

I think if we were to get 100 basis points a quarter, we would be well above your guidance.

Could you just comment on that?

Sure.

As you know, we continue to take actions within the businesses to strengthen them, particularly as Jim mentioned the Manufacturing Network Transformation that had Acuity Brands Lighting.

We continue to go through the consolidation to improve our manufacturing capabilities there, and obviously those moves are not without cost.

We are particularly pleased with again our strategic margin management initiatives that are, as John was referring to earlier, about trying to better, if you will, price products that are reflective of the value propositions that we are bringing to the marketplace so that we can continue to invest.

Our sense is that over time we are looking to add between 70 and 100 basis points per annum of improvement at the operating profit level to our business.

It is a particular challenge as we continue to experience cost increases as we noted earlier, but as we also continue to manage some of these projects, it is our objective to continue to show margin improvement as we go long.

As you know, it is pretty difficult to precisely prognosticate when some of the markets are going to improve.

We are starting to see some positive activity -- activity that is usually a precursor to orders.

But it is very difficult to precisely predict.

But what you can take from our actions and our initiatives is that we are definitely focused on continuing to improve our margin performance.

As you point to some economists thinking that we might have a second-half recovery somewhat in the nonresidential construction market, can you point to things internally within your business that might be providing evidence of that as well?

John, you might talk about --

(multiple speakers).

I think probably the internal indicator that points to similar directions for the future is that our salesforce or the portion of our salesforce that calls on the specification community has seen a significant increase in activity.

That would normally be then reflected in the design of new projects that would come out of the ground in, say, four to six months, and that would generally then impact our business within another four or five months.

I see.

That is helpful.

Congratulations again.

I will get back in the queue.

One more thing about your pricing question.

I think we have reported before that as you look at our pricing levels in Lighting, they have eroded at a steady 1.5 percent per year over a long period of time.

But this past year the actions we took to announce the price increase early in the calendar year and then to install a very well organized targeted effort to better manage the detailed specifics of pricing on the ground have had an impact in this past year.

And so we are not at all discouraged about that.

We are redoubling our efforts if anything.

On the pricing issue, it sounds like this current quarter you benefited from mix and maybe also from some industry efforts to raise prices.

But could you talk a little bit about maybe even trying to quantify the impact that you have had from internal initiatives?

I know you have a new Vice President in charge of that.

Maybe you could just talk about how that has impacted the pricing environment.

We are encouraged by it.

It is paying off, but we are not ready to say the extent to which it is working.

I would say, Craig, and John chime in here, our gross margin improvement really is predominantly internal efforts to both improve our cost structure, as well as John mentioned going through our annual price review process and trying to better align price and the value propositions that we bring to the table.

So what you are seeing right now is a lot of I think pretty solid blocking and tackling.

We are going to wait -- we hope that the market gives us some benefits as well, but I think what you are seeing is pretty good execution.

I think that is right, Vern.

We are cautiously optimistic, but we are always cautious because it is unclear to us until a few months passes what the competition -- our competition -- will do with pricing in the marketplace, so we just have to wait and see.

Understood.

Thanks again.

Fritz von Carp (ph), Sage Asset Management.

Good afternoon, guys. (inaudible).

I was happy to see margins expanded despite the headwind from raw materials.

You mentioned that -- I am a little confused, however, and I was hoping you could just help me understand at least not quantitatively perhaps, but at least qualitatively both the magnitude -- like, how much of the margin expansion of 100 basis points was internal efforts?

How much roughly was pricing?

Was internal efforts bigger than pricing, or are they the same magnitude contributing, and then roughly how much did steel detract from that, A?

And then Part B is, on the timing, you said it takes some time for price increases to be reflected.

What is the timing aspect?

When -- have we seen the worst of the steel impact timing-wise, or is that yet to play out?

Let's break that down into really three components because we really can treat them separately.

One would be the impact of the industry-wide price increase we announced a little over a year ago.

Second would be the efforts we have under Rick Hurleyline's (ph) leadership to greatly strengthen our control of tactical pricing in enormous detail and with good facts.

A third would be the impact of steel because they really do try to breakout separately.

John, Vern, you want to take a crack at those?

Sure.

A couple of things, and, John, please chime in as we go.

I think with regard to our, again, margin management initiatives, the lion's share of what we have seen in terms of improvement has been internally generated.

When it comes down to the price increase that the industry or more particularly us initiated last year, a lot of that was really reinvested back in the business.

And so from a margin point of view, you would have seen relatively de minimus improvements there.

The strategic margin management initiative that Jim was referring to I think really gets at the bulk of how we are more intelligently if you will pricing the products that we have into the marketplace.

Some of the other initiatives that we have going on in terms of sourcing, I think to date have allowed us to dampen some of the cost of these cost increases.

But steel is starting to roll through as we speak.

Just as an example, there are other costs that are increasing.

And so I think we are going to be facing the brunt of the steel really as we go into the third quarter and beyond to the extent that steel abates or this issue abates time will tell.

We really don't know.

We're preparing -- hoping for the best and preparing for the worst.

We are also doing this while we continue to realign our supply chain in particularly the factories at the Lighting Company, and that is not without cost.

So I think that at the gross margin level, the 110 basis point improvement that you see is really internally generated, and some of the improvements are being somewhat dampened by cost increases.

John?

I think that is right.

I would not add anything to that.

(OPERATOR INSTRUCTIONS).

I show no further questions at this time.

I would like to turn the conference back over to Mr. Jim Balloun for closing remarks.

Thank you.

Let me make three points.

Number one, we really are pretty pleased with what we are doing here.

The nonresidential construction starts as I recall are down about 27 percent from their peak several years ago.

And they are not really not showing a lot of strengthening, although as John said we are seeing signs in the specification world that say it is going to strengthen.

Virtually all of this improvement you see and the paydown of a third of our debt at the time we went public is because of efforts we have managed through ourselves.

We have launched a sourcing initiative, a revenue management initiative.

We are rationalizing the configuration of our manufacturing plant.

We are building salesforce in our Specialty Products business on a profitable basis.

We are doing a lot of things here to make this a great company, and they are starting to payoff and, we believe, building momentum.

The second thing I would like to say really is that this is the first time we have had a conversation since I announced our succession plan.

This was I think a very well thought through transparent process that had the complete understanding of our Board and a lot of discussion internally.

I am delighted that we have Vern as an announced successor and John on board as President and Chief Development Officer.

This has been received very well in the company.

We have not lost a lick of our momentum, and we are very much looking forward to the future.

We have a management meeting coming up here in the Spring toward the end of April where we will have our top 140 people here.

This will be a terrific opportunity for us to reset the tone for the next stage of our development.

And I see us accelerating, not skipping a beat, and I wanted you to know that I feel that way.

The last thing I would like to say is that I don't understand the stock market either.

I thought these were pretty good results we announced today, and I guess the stock market did not think so.

But thank you for your support, and we will talk with you at the end of next quarter.

Thank you for participating in today's conference call and have a great day.

You may disconnect at this time.