Acuity Brands Inc (AYI) 2004 Q4 法說會逐字稿

Good afternoon, and welcome to the Acuity Brands fourth-quarter 2004 and full-year results.

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

At that time, directions 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 Mr. Dan Smith, Vice President and Treasurer of Acuity Brands.

Sir, you may begin.

Yes, good afternoon.

With me today to discuss the 2004 fourth-quarter and full-year results are Vernon Nagel, our Chairman and Chief Executive Officer, John Morgan, our President and Chief Development Officer, Karen Holcom, our Vice President, Controller and interim Chief Financial Officer, and other selected members of our executive team.

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

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

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

Please refer to our most recent 10-K and 10-Q SEC 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 Vernon Nagel.

Thanks, Dan.

Good afternoon, everyone.

What I'd like to do is make a few opening comments and then we'll open it up for questions.

First, on the fourth quarter, we had a very solid fourth quarter.

Sales approached $563 million, which represented an increase of 6 percent over the prior-year period.

We're particularly pleased to report that our operating profit margins advanced 270 basis points in the fourth quarter to 8.7 percent.

Net income was $27 million, or 62 cents a share.

Both EPS and net income were up over 80 percent quarter-over-quarter.

This is while we continued to experience, still, a rather weak marketplace for some of our primary products, particularly the nonresidential construction, and while facing very rapidly rising component and raw material costs, particularly for steel, ballasts, fuel, and other petroleum-related products.

So all in all, the fourth quarter was, again, solid, despite of those negative opportunities.

For the full year, we reported net sales of approximately $2.1 billion, a 3 percent increase over the prior year.

Operating profit advanced to $138 million, which represented a 25 percent increase over the prior year.

Operating profit margins advanced 120 basis points to 6.6 percent for full year 2004, and net income was a little over $67 million, representing a 41 percent increase over the prior year.

That represented or delivered for us EPS of $1.56, which was a 36 percent increase over the prior year.

We're particularly pleased to announce that our debt balance came in below $400 million at a total of $396 million, which represented a decrease of $50 million over the prior year.

One of the things that I'd like to also mention to you is if you recall in our last year's annual report, some of the initiatives that we had identified as being very important for us in 2004, I'd like to mention to you.

For example, we had had essentially five goals, one, to improve our pricing and selling effectiveness; to further penetrate the retail channel of distribution; to expand our global supply chain; to modernize our information technology capabilities; and to enhance our organizational development.

I'm pleased to say that we made meaningful progress on all of those fronts in 2004.

Also in that report, we reiterated and articulated, I should say, our long-term financial goals.

I'd like to again mention those to you.

We are looking to deliver EPS, a relative 15 percent or better on a consistent basis over an extended period of time.

We strive for operating profit margins of 10 percent or better.

Today, we're at approximately 6.6 percent, but as I mentioned, we made meaningful progress in terms of improvement in 2004.

We are looking to deliver a return on equity of 15 percent or better; we essentially achieved that in 2004.

And we are striving to reduce our debt to total cap -- capitalization -- to below 40 percent, and today that number stands at 45 percent.

As we look to 2005, we expect 2005 to continue to be a challenging year.

The reason is that we continue to be cautious about the impact of the recovery in the nonresidential construction market, and we are particularly concerned about the potential for rising prices for certain raw materials and for certain components, again, particularly steel, particularly ballasts, and fuel and petroleum-related products.

We do expect benefits from our continuous improvement initiatives to continue.

We anticipate that our recently announced price increases will have a positive impact in attempting to offset some of these costs.

And we also have an annual review program in both businesses that we use to help better position our products, which we expect to also benefit 2005.

In light of the tepid demand for nonresidential construction lighting fixtures, and the anticipated timing of these raw material cost increases, we expect the operating results for the first half of fiscal 2005 to be relatively consistent with those reported in the first half of 2004.

However, we do again hope to make meaningful progress in 2005 towards our long-term goal of delivering consistent growth and earnings per share of 15 percent or better per annum basis.

Additionally, we anticipate reducing debt to our targeted debt to total capitalization ratio of approximately 40 percent by the end of fiscal 2005, while increasing available cash, investing approximately 50 to $55 million in capital expenditures and paying annual dividends of approximately $26 million.

So, with that, what I'd like to do is open the lines to questions, and we'd be happy to answer those for you.

(Operator Instructions).

Brian Kelly from Robert Baird.

Hello.

I got a couple questions here.

First off, can you talk about the typical RFP cycle and what activity you are seeing in the marketplace that might finally (indiscernible) improvement and nonresidential construction activity?

And then given that steel prices continue to increase and ballast prices are up about 10 to 15 percent, do you expect another round of price increases and what are you seeing from competitors?

Share.

Let me take a stab at that, and then let me ask John Morgan to comment as well.

From a market point of view, our fiscal year, we speculate on the information that we have available to us that the nonresidential construction market was down a couple of points during, again, our fiscal 2004.

Dodge and other forecasting agencies are calling for, in calendar year 2005, an increase of anywhere from 2 to say 6 percent in the nonresidential construction market, depending on who you read.

Obviously, that will impact the second half of our year, not really the first half.

We continue to see orders that we would describe as being somewhat tepid, and not as robust as, of course, we would like.

So it's difficult for us to confirm or, if you will, deny the Dodge forecast.

But as we look out into our first half, we see opportunities in our business, both businesses actually, to do things that are meaningful for the customers that we look to support, so I would expect that you'll see some benefit or some increase in our top line, whether it's going to reflect what Dodge is saying or not is difficult for us to predict at this point in time.

With regard to price increases, as you are aware, we announced on Friday our most recent price increase in our Lithonia business, and the range of price increase was between 8 and 10 percent.

We also have an annual price review process or an annual product review process, whereby we look to examine all of our products, our pricing, and our position in the marketplace.

We do this primarily to determine how we might better enhance and work with those customers and on those particular products that makes sense for us.

Our objective is to continue to drive and improve our gross profit margins as well as our operating profit margins so that we can continue to invest back in our business.

Our guesstimate, if you will, is that everyone is experiencing these types of significant cost increases, and our price increases that, again, was just recently announced, was to address this rapidly increasing environment.

What is going to happen after our annual price review, I can't really comment.

But we will have an annual review sometimes towards the end of this calendar year.

John, would you like to comment as well?

On the price increase, as Vern mentioned, we have recently announced a price increase effective November 15th.

It's yet to be seen what the balance of the industry will do for us, and exactly how much of that we will be able to obtain.

Our history has been that it normally takes us about three to four months to really settle out that price increase, working down our backlog, and seeing what kind of an impact we would receive from that.

In the market forecast, I would add to what Vern has said.

In a recent poll of electrical wholesalers, 76 percent of wholesalers projected some increase in lighting purchases in the calendar year of 2005, so that would impact us as we get on into our second half of our fiscal year.

Dodge contract awards and contract values are what we follow most closely.

There are some categories which are projected to be up, such as warehouses, offices, and some manufacturing.

Other categories that are also sort of in our sweet spot, such as education and some categories of stores and infrastructure spending is actually expected to be down.

So, we're being very reserved in our thinking and our planning.

We're not certain to what degree increases in steel and other raw materials may put some dampening effect on construction activity for '05, so that's what's baked into our estimates for the year.

Great, and I just have one more follow-up question.

You mentioned stronger shipments and lighting.

Is that really just an impact or result of the buy-ahead from the previously announced price increase, or is that something else?

Well, we have made progress in a number of fronts that we believe represent meaningful penetration and expansion.

For example, we talked about, in '04, the objective of improving, again in both businesses, penetration in the retail sector, particularly the home improvement side.

So what you saw was growth in those markets as well as the impact of the buy-forward activity.

Underlying demand, if you will, still, again, continued to be somewhat, again, tepid is the word that I would use.

John do you have a --?

I would just add that we also saw the typical increase in shipments that we would expect in the summer, particularly as some infrastructure and schools are finished out and as some outdoor businesses installed during the summer months.

That's pretty typical.

I think if you go back and look at our history, you'd see that kind of a cycle with us historical.

Great.

Thank you.

(Operator Instructions).

Our next question comes from Richard Glass from Morgan Stanley.

I had a couple of questions.

The first is on the working capital.

Is there something going on there?

I also apologize;

I came on a little bit late.

If you addressed any of these, you could just tell me.

But on the working capital line, it looks like both inventory and receivables were up ahead of the sales increase that you guys saw, and am just wondering why or what's going on there.

Sure.

On the receivables side, it primarily reflects the timing of shipments in the fourth quarter, frankly.

Our typical days are in the middle '50s on a companywide basis.

So as we were shipping product out the door, you saw the impact of that, and it was more -- a little bit more -- back-end loaded.

As we had mentioned in previous conference calls, we have spent a great deal of effort in 2004 further consolidating our manufacturing and the supply chain capabilities within the Acuity Brands Lighting.

As a consequence of that, we have experienced both inefficiencies as well as service-related issues that we attempted to address, both through improvements in supply chain, as we came up to speed, as well as adding more inventories into the system to address some of these issues.

So what you saw is inventories picking up, and commensurately, the payables picking up as well.

Overall, operating working capital days was about 59 days, consistent with the prior year.

Our expectation is to continue to drive working capital improvements in our business, particularly in the inventory-related area as we go forward.

Especially as the manufacturing network consolidation activity continues to really reach a conclusion in the '05 period, you should again start to see that trickle down a little bit.

When in the '05 period does that start -- should that happen, and does that mean when we see the inventory numbers that a lot more will be in finished goods than anyplace else?

No, actually, you'll see it throughout the entire supply, but obviously, finished goods is the largest portion of our inventory, and you'll start to see that, literally, as we speak.

So, I would say that throughout the first half, you'll begin to see those trickle down from the year-end period.

Now having said that, we have a bit of seasonality in our business, as John mentioned earlier, so you'll start to actually see a slight build going into the second half of '05.

And year-over-year, I would expect there to be a rather meaningful decline in the inventory balance.

I would also expect there to be a somewhat meaningful decline in the payable balance.

But overall, I would also expect that our days for operating working capital to continue to trend down.

We have best-in-class numbers as we speak, and we think we have opportunities to continue to improve that.

Okay.

The other thing is on the corporate expenses, can you break out in a little more detail what went on there?

It looks like it was -- you know, it's not a huge number as a percent of sales, but in terms of the delta, it was a pretty big change.

Sure.

Richard, we have in the past, used restrict -- excuse me -- used stock options to fund our long-term incentive programs.

Last year, we began the process of using more restricted stock.

And so what you see happening there is the expense of the amortization of that restricted stock coming into our P&L.

Actual corporate costs have increased somewhat, primarily -- virtually -- all because of Sarbanes-Oxley-related activities.

But the biggest driver in the number that you see there is due to the expensing of our long-term incentive plan, because we're now using restricted stock, primarily, as opposed to stock options.

Okay.

So is that number going to continue to ramp up over the course of fiscal '05 then?

Yes, I would expect it to go up in fiscal '05 by approximately the same amount that you saw in '04, maybe slightly less.

Okay.

And if you could just address in the raw material front -- is there anything in terms of hedging that guys have done or can do, or does that not make sense?

And, you know, is there any -- what's your outlook there a little longer term, I guess, or how do we deal with this?

Well, our expectation is that we will continue to experience a rise in costs -- fuel costs, as an example; steel.

We in fact do have forward buy programs, and we do enter into discussions and negotiations with a number of our vendors to price out some of these products, but as you might imagine, we're not interested in being in the business of speculating, so we try to do it within the timeframe with which we feel we can control our pricing.

There are some components, again, I'll use fuel as an example where it's pretty difficult.

We have to, unfortunately, absorb some of those until we see a point at which we in fact can change our pricing strategy a little bit.

But we have not gone out, really, beyond twelve months on certain items, in terms of how we hedge.

John, do you have a comment on that?

No, I agree with that.

I would say on the other side of the equation, keeping in mind that well over two-thirds of our businesses is project-related business, where we ship directly to job sites, we have been careful not to extend our protect periods, if you will, on quotations on these projects, because, as you are suggesting, there is a great deal of uncertainty in the raw material side.

Okay.

My last question, if I could ask one more -- if you could just give us some color on the backlog.

Obviously, you have a normal seasonal effect there as well.

If you can kind of, maybe break apart how much you think was seasonal -- the seasonal effect, how much do you think was people buying forward and whether there was anything else that went on there?

As you know, we operate with a backlog primarily in the lighting side of our business.

The backlog finished the year at approximately $152 million.

I believe at the end of the third quarter, it had exceeded a couple hundred million dollars.

So that ramp-up was primarily the people getting price protection, if you will, from the previously announced price increase, as well as the seasonal pattern.

Last year end, our backlog was approximately $136 million.

So it seems to me that as we continue to improve our supply chain capabilities, a backlog number actually will begin -- will show -- decreases, while our revenue line show increases as we become more capable and more efficient in terms of pack time and delivery time, lead times.

My sense is that you'll see the backlog continue to drop down as we enter the end of our first quarter.

I don't recall what -- Karen, do you recall what it was at the end of first quarter last year?

123.

123 million.

So we're at 152 right now; it wouldn't surprise me if our backlog number was somewhere in that 120 to 130 number.

Backlog is meaningful, but our cycle times and our lead times are far more meaningful, and order rates, in terms of what's happening out there.

And again, as we said earlier, we think the market is a bit tepid right now, and we'll just see.

Okay.

Alright, thank you.

Our next question comes from Cliff Walsh from Sidoti Co.

With non-residential looking a little bit slow to recover, can you talk a little bit about any growth initiatives you have in place or any margin expansion initiatives that you're working on, to kind of bridge the gap a little bit?

Sure.

Again, our expectation is to continue to improve our margin capability in spite of, if you will, soft markets.

You saw that in 2004, I'm particularly pleased with how the organization responded as we consolidated a number of plants within the ABL business.

And so, you should expect us to continue to improve our margins through initiatives that take us beyond just our manufacturing capability.

From a growth point of view, I would say that we continue to see opportunities in our marketplaces to serve our best customers, and to grow with them.

We continue to invest heavily in terms of product development capability in both businesses.

Those products, as we introduce those, are being met with really quite positive responses.

So while the marketplace is soft, I still feel we have potential, growth potential, and opportunity to continue to drive our business.

I think that the best example of that is if you look back over the last three to four years, our business -- we've been able to continue to show growth in our top line while our primary market, non-residential construction, has been off by as much as a third.

So, I think that's testimony to the creativity and the entrepreneurialism that exists within both companies overall.

Now, we most assuredly would like to see a more vibrant and robust market, but we are positioning ourselves well from an infrastructure point of view and the markets that we touch, and the customers that we touch, to really respond well, if in fact that happens.

And if it continues to be soft, well, we're going to continue to improve our business and make, as we said earlier, meaningful progress on our longer-term financial goals.

Okay.

Now in terms of kind of a balance sheet, you paid off a tremendous amount of debt, since being spun off.

At what point do you feel a little bit more comfortable with possibly looking at some acquisitions for growth?

Well, we continue to look at opportunities in our businesses for expansion, both organic growth, which we see very interesting opportunities, as well as situations that may enhance our entire capabilities for our customers on potential acquisitions.

We've had our hands full with the opportunities that exist within our businesses, and so that's where we have directed our attention.

But I can assure you that John Morgan and others have been looking at opportunities to enhance our business, both organically as well as through acquisition, as well as through other means, not just acquisitions.

So, we will continue to do that as we go forward.

When and if we decide to do something like that, I can't really comment, but we're always looking to enhance our capability.

John, any thoughts on that?

No, I think that's well said, Vern.

I wouldn't add anything to that.

Great.

Everything else has been answered, so thanks very much for your time.

(Operator Instructions).

Our next question comes from Dennis Falestine (ph) from Falestine Asset Management.

Hi, Dennis.

Obviously she doesn't know how to pronounce Delafield, but we'll teach her.

Okay I know who I was!

Just a couple of questions.

One, the tax rate, will that stay at the 34.5 level?

No, Dennis.

Our expectation is that it will hover around 36 percent as we go forward.

And then two, if the corporate expense is going to increase as much in '05 as it did in '04, there will be another $7 million, or roughly 31 million.

And if the tax rate is going to creep up a little bit again, one of your goals has been year-by-year to show a 50 basis point improvement in operating margin.

Given all of the challenges out there, is that doable?

Actually, Dennis, I think that we mentioned 70 basis.

And it's a challenge.

I mean, there is no doubt about that.

My hope -- first of all, let me address the corporate expense.

My hope is that we can in fact contain some of that.

It just really depends on some unknown things such as Sarbanes-Oxley.

It is just devastating, some of the numbers that we're hearing coming back from external auditors who have to do their first time walk-through for Sarbanes-Oxley 404 compliance.

I think we've done an outstanding job of preparing ourselves for that.

But even in spite of that, these numbers are pretty staggering, so we are going to endeavor to keep our corporate expenses in line.

I can assure you it's not that we're having burgeoning activity or people here or things of that nature.

It's what's being done to us from the external side of the world.

I do think that LTIP, our long-term incentive plan, moving more towards the restricted stock as opposed to using stock options, obviously, is an expense, and we have to bear the brunt of that and still deliver improving performance.

I believe that from a margin, a gross profit point of view, we added a 400 basis points last year, in spite of the rising steel costs and the rising ballast costs that our price increases were not able to offset.

Similarly, we gave you a glimpse in the third quarter of what the cost of MNT, the inefficiencies that we absorbed, and our hope is that as we get into really second quarter and beyond, that those are behind us.

So, yes, we are going to be optimistic and we're going to be aspirational in our thinking about how we can continue to improve those margins.

And we're working hard with our best customers to figure out how we can gain share and do those.

So, we're not going to back down from that number, Dennis.

That's great.

Well congratulations and keep on the same course.

(Operator Instructions).

I show no further questions at this time.

I would like to turn the meeting back over to Vern Nagel.

Thank you, again, for joining us.

We are proud of our 2004 results.

Boy oh boy, it was a trying and somewhat turbulent year.

We wish the market had given us a little bit of a break.

It did not, but yet we were able to deliver the solid results.

We look forward to 2005; again, it's with a bit of trepidation that we go forward.

But we are optimistic about the path that our Company is on.

And we thank you for all -- for being shareholders, and we look forward to reporting our progress to you throughout 2005.

Thank you again.