Acuity Brands Inc (AYI) 2005 Q2 法說會逐字稿

Good afternoon, and welcome to the Acuity Brands quarterly earnings release.

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

Today's conference is being recorded.

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

Now, I would like to introduce Mr. Dan Smith, Vice President, Treasurer of Acuity Brands.

Sir, you may begin.

Thank you.

With me today to discuss our 2005 second-quarter results are Vern Nagel, our Chairman and Chief Executive Officer;

John Morgan, our President and Chief Development 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 -- 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, 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 Vern Nagel.

Thank you, Dan.

Good afternoon, everyone.

In summarizing our second-quarter results, we are obviously very disappointed to report a net loss of $0.20 per diluted share compared to the $0.22 of earnings reported in the prior year.

For the quarter, we reported an operating loss of approximately $4.5 million compared to a $24.4 million operating profit reported for the year-ago period.

There were four primary factors contributing to the $29 million change in operating profit between periods.

The first three items that I'm going to discuss briefly really contributed about equally to the -- to the shortfall.

The first was rising raw material costs, which outpaced the timing of customer price increases.

Second, we incurred lower absorption of manufacturing costs as production volume declined, both because of softness in orders experienced earlier in the quarter and as a result of our concerted efforts to better manage inventory levels.

Thirdly, operating expenses were higher by approximately $5.4 million because of greater selling expenses and other items, including certain product recall-related costs.

Those three items in total were approximately $12 million of the shortfall.

The final $17 million of the shortfall was a restructuring charge, or $0.26 a share associated with the elimination of approximately 11,000 employees, resulting from our efforts to accelerate our ongoing restructuring program to reduce overhead and streamline operations.

I believe I said -- I should have said 1,100 employees, excuse me.

In total, those four items made up the $29 million shortfall.

Overall for the period, net sales for the quarter were approximately $505 million, up over $14 million, or 3%, versus the prior year.

Both business segments contributed to the sales increase.

The sales increase was due primarily to favorable pricing and a better mix of products sold in our traditional channels, which were partially offset by lower sales to non-strategic customers in the retail channel; and I'll provide some more commentary in a moment on that.

Consolidated gross profit margins declined to 38.6% compared to 41% in the prior year.

The decline in gross profit margin was due primarily to increases in raw material costs that outpaced the timing of price increases to customers and the negative impact of lower production volume in the lighting business, as noted earlier.

In total, our gross profit was down approximately $6.2 million in the year-over-year period.

On a positive note, we generated approximately $25 million of cash from operations during the quarter.

This was due primarily to the improvement in working capital, particularly AR and inventories.

As a result, that declined over $8.5 million to $405 million, while cash increased by nearly $6 million to over $9.5 million at the end of the period.

Looking ahead, we believe that we are positioned to capitalize on the emerging strength in our more traditional markets and to benefit from previously-- previously announced price increases.

We anticipate that in the second half of fiscal 2005, the benefits of ongoing process improvements and accelerated restructuring initiatives will offset some of the challenges we continue to face in certain product line and channels.

Therefore, excluding any potential impact from our inventory reduction efforts, we continue to expect that our second-- that our results in the second half will be more indicative of our future performance and more consistent with our long term performance goals.

We continue to expect to generate positive free cash flow through the remainder of the fiscal year, while spending between 45 and $50 million on capital expenditures.

With that, I would like to now take questions and entertain any other comments that you may have.

[Operator Instructions].

Craig Kennison, Robert W. Baird.

Could you first give us a sense for what happened in maybe the last week of February that caused the Company to move from your guidance of a potential loss to actually a profit of $0.06 if you exclude the restructuring?

Sure.

Actually, it was due to a couple of things.

One, more favorable shipments, or greater shipments, really in that last week to meet customer demand.

It came in a couple of different areas.

It came in the consumer -- the Commercial industrial portion of ABL, as well as on the retail side.

Some of the orders that we were anticipating from our -- our better customers on the retail side did materialize.

Certainly it didn't offset the shortfall we saw in January, but we did see a favorable pick-up, particularly at the Home Depot; and that was really very late in February.

The other item that impacted us in a favorable way was simply better product mix-- of products that were shipped, really, throughout the latter half of February.

Those were the two primary drivers.

So the retail problem that you identified in the last conference call was subsequently resolved essentially?

It has -- well, you have to separate it into two -- two portions.

The non-Home Depot-related shipments, year-over-year, which generally we knew about, are down approximately $6 million period-over-period.

When you look at the Home Depot, in fact, the orders did materialize late in the quarter, and we were able to ship some of that.

When you look at the net difference, January was down as pretty much we had described.

February we had some pickup on the year-over-year period and really as we entered, then, the March time period, orders again started to materialize in a very-- in a very favorable way.

Unfortunately, Craig, as you know, it was a little too late for us to really adjust production.

We'll start to see, obviously, some of the benefit of that in terms of absorption as we get into the third quarter.

John, do you have any additional comment on that?

No, Craig, you're-- you're referring to all of our commentary the last time with regard us adjusting inventory levels, I believe, in the January time frame, and-- and we have come back to very close to recovering fully from that.

We'll have -- we had strong months in -- in both February and March and are anticipating strong April with retail as well.

And the lighting division grew 3% year-over-year during the quarter.

Can you break that into price and volume?

It was substantially priced, and actually when you look at some of the core business, the core C & I business, there was a little bit of volume there, but it was not -- it was not significant.

It was mostly price.

And reading the -- the 10-Q, there's a section on your outlook, and in that section you talk about the inability to raise prices on customers.

How can I reconcile that with the fact that you actually are achieving a price increase?

Well, the fact of the matter is, Craig, it's very difficult to predict, you know, what's going to happen as you look out into the future.

We have done, I think, a very good job in terms of managing our price and our product mix.

We see that in our standard, if you will, variable contribution margins.

They have been improving.

And our expectation is, is that we will continue to differentiate our products in the marketplace to, again, get price -- price that is needed to not only offset cost but also to create the opportunity for investments in product development.

So my only caution there, and our caution is, quite frankly, what is -- what happens in the -- in the competitive world out there.

We still feel that we're doing favorable things in terms of how we're managing price and product mix in our business.

And if we could shift gears and talk about the product recall you talk about in the 10-Q.

Is it -- if I read that right, you're actually paying out more than you're expensing currently.

Do you feel like you have adequate reserves for that recall and what might the financial impact be if it's -- if you're wrong?

Well, we do feel that we have adequate reserves based on the information that we have available to us.

As you know, in following FAS-5, we go through at the end of every quarter and examine very carefully the change in facts, the change in information to determine if, in fact, our estimates are appropriate.

I believe as we've listed in the Q, there's approximately $8.4 million accrued as of February 28th for those various items, of which a portion of it is offset by a receivable from one of our vendors, who has, you know, agreed to take responsibility for their component parts.

So, at this time, based on the information that we have, we think we are appropriately accrued.

And then finally, Vern, could you just address how the CFO search is progressing and how much of your time do you have to wear wearing the CFO hat?

Well, let me answer the second part first.

This company is blessed with a very strong financial organization.

We have CFOs in both of the businesses.

As you know, Karen Holcom is the interim CFO.

Wes Wittich is our SVP of Audit and Risk Management.

Wes is the former CEO of the Lighting company.

Ken Murphy is a very gifted financial person as well and I am also ably assisted by others in the financial organization.

So at this stage, I have really done very little in terms of the CFO -- acting as the CFO.

I'm letting the folks here do that, and they're doing it, again, quite well.

In terms of our search, you know, we have, I think, done a good job.

We've seen some very good candidates, and we actually have extended an offer at this time to an individual, but we'll see.

I feel that we're very close to resolving that issue and resolving it in a way that is favorable to the Company here internally, as well as our shareholders.

So, I'm-- I'm optimistic that we're going to have just a very solid organization here shortly.

I guess do I have just one question.

It relates to the -- your expectations for the second half of the fiscal year.

Last year, from an earnings per share perspective, you earned $1.03.

It sounds like you're suggesting the second half of this year can look strong and look -- and show the kind of improvement you're planning on -- and demonstrating.

Could you put a number to that or give any sense of what type of earnings growth you anticipate?

Well, I think, Craig, I would refer us all back to the guidance that we provided in the -- in the K. You know our objective is to develop a company that is capable of delivering consistent upper-quartile performance and for us that is EPS growth of 15% or better.

And, obviously, we slipped here, and it was a big slip in the second quarter.

I think we've gotten our arms wrapped around some of those issues.

We still have challenges, particularly on the manufacturing front.

You know we have -- this isn't quite your question, but we have done an excellent job taking cost out of our business, particularly through MMT and a few of these other programs.

In fact, our total manufacturing spending is down over 10% year-over-year.

It's the impact of production being down greater than that that has had an impact on us.

We will continue to drive costs out of our business.

We will continue to improve our processes.

And that -- that will have some impact in a negative way as we bring these inventory levels back down.

But without, you know, being able to precisely tell you how much that's going to be, I still think we'll make meaningful progress on improving our business consistent with our longer-term goals.

Are you uncomfortable with expectations for earning $1.23 in the second half?

Well, again, I think that you all have built your models using information that is available to -- to you all, and I think that information is -- is reasonable information.

You know, John Morgan and I were discussing, you know, the opportunities and action plans that we have in place, and, again, as you might imagine, we feel good about those.

But here in my hand is the U.S. construction report for February.

And kind of in the bowels of this, it says the only major category to decline was private non-residential construction, which fell 1.2% in February.

Now, you know, I look at this, and -- and we see good activity out there.

Our order book is -- is starting to build, but it reflects a little of this spottiness that is in the marketplace.

I don't believe that one month makes a year or certainly the next six months, but these are the kinds of things that we continue to wrestle with.

We see a lot of evidence that there is good activity in the non-residential construction market.

And so our expectation is, is that we will participate in a -- in an aggressive way.

I would also say that some of the issues that plagued our business a year ago in terms of consolidating facilities and being aggressive at attempting to take out costs in that regard had an impact on our service levels, and there's no doubt that that had some impact on our ability to, again, penetrate the market in a way that people are accustomed to us doing that.

Having said all of that, I think we have made meaningful progress in turning that around.

I believe that our customers are experiencing the same kind of service that they have come to know from us.

Other customers never saw a blip, but we do have some -- we did have some customers that experienced an issue.

So I am pleased to say that a lot of that stuff is -- is behind us.

We still struggle a bit internally from a cost point of view, but I think we're making good headway there as well.

So when I put all this together, we are -- we are cautiously optimistic about our second half, and that's -- that's how I would comment on -- on your question.

Cliff Walsh, Sidoti & Company.

I think John commented earlier on shipments in February and March being strong.

Was that related solely to Lighting?

The comment was related solely to Lighting, although I would say ASP has been shipping at-- at acceptable rates here as of late as well.

Craig had asked specifically about our comments from our last conference call in the area of retail where, you may recall, our shipments in the end of December and January had suffered somewhat, as -- as we adjusted inventory levels of our product at home center locations.

And the strong shipments I was referring to was the recovery of that.

As we got on into late February and through March, shipments have actually been pretty strong in both businesses.

Okay.

Now in terms of recent raw material costs, have you seen them ease up at all?

Or are they still creeping up on you?

We still continue to see raw material costs increase, and I guess I'd be more specific about that.

We still see petroleum-based raw materials continuing to fluctuate wildly.

And they don't fluctuate down either, by the way.

And so there is still concern on that front, frankly.

It impacts the specialty chemical business because those are intermediary-type products, it also impacts us from a transportation point of view.

We ship product literally all over North America.

So we are watching that with a very careful eye.

Also I would point out that component parts -- certain component parts have continued to rise; seemingly we have that a bit under control, and our expectation is is that the price increases that we have put in place-- previously announced price increases will start to show a positive trend as we get into the third quarter here.

Okay.

Now I haven't seen any-- any price increases recently industry-wide.

Am I-- am I missing anything?

Have you guys seen any-- any of the bigger names in the space raise prices recently?

John, on the Lighting side --

No, we have not, in the recent past, the last we saw of any public reportings of pricing increases, as I recall, was last November, maybe early December for-- for some of our competitors.

And, in fact, I guess that -- I would comment that our folks, I believe, have done a great job of bringing pricing up to the levels necessary to offset these raw material costs.

We haven't seen all of our competitors do likewise and we have, in fact, in our view, lost a little bit of market share.

So we're-- we're watching that very closely at this point in time to see what competition does.

And, John, the Specialty Products business put through a price increase in January, but I -- we had described that at our previous conference call.

Right.

Can you comment -- final question.

Can you comment on where you see the balance sheet over the next couple of quarters given-- given the restructuring that you're working through right now?

Well, we, again, continue to be optimistic about the improvements that we are making and will continue to make, particularly in the area of inventory.

As we continue to improve our business processes, reduce cycle times, and improve the lead times we provide to our customers.

Again, the service issues that we had experienced last year are-- are really largely behind us, and so the opportunity now is to continue to drive systems improvement so that we can continue to reduce our inventory levels.

As you might imagine, if you look at our days and our total trade cycle, we did -- we did make some improvement since November, and we have a bit of a ways to go to get back to August.

And I'm optimistic that by the time we reach our year end, we'll be there and better.

So I feel like we have that kind of opportunity.

Similarly, we commented that our capital expenditures will be down relative to the information we provided in the K, down slightly.

We now are estimating to spend between 45 and $50 million this year in capital.

And a lot of that just has to do with some of the process improvements that we've been putting in place to help us really take more advantage, if you will, of the capital that we already have employed.

[Operator Instructions].

Richard Glass, Morgan Stanley.

Can we get some progress maybe on where we are on the cost takeout program?

What kind of progress we're making, what kind of progress we should expect from here, and then how the $50 million number is looking?

Rich, when you say "cost takeout," I want to be clear in answer your question.

Do you mean relative to the 1,100 folks just announced or are you talking about other programs?

If no, I'm talking about the 1,100.

Okay.

With regard to the 1,100, the way it broke out, roughly speaking, was 600 salary and roughly 500 hourly.

Those hourly folks really are related to facilities that will come very late in the calendar year '05 and maybe actually very early-- early early calendar '06.

Of the 600 folks that we announced in terms of the salary personnel, let me get this number-- pretty close.

Roughly 60, 65% were impacted February 28th, and so the balance will come out over the course of the next six months.

My expectation -- our expectation is that the 50 million run rate, the glide slope that we're on really impacts us starting an our -- excuse me-- the full impact will start in our second quarter of fiscal 2006.

We will get benefit, though, this year.

You know, my hope is, is that we'll go a long way toward offsetting the actual charge.

I don't think we'll completely do that.

In this fiscal year you're saying?

Yes.

Okay, and then in terms of that 50 million.

The 50 million, just to make sure I understand this, that's the people save-- cost savings, the direct savings, right?

Yes.

And benefits.

And benefits associated with those folks, and to the extent that those folks, you know, if you will, have training and fly around and have admin associated with them.

But it's strictly the people, their salaries, their bonus, and their benefits and costs associated with them.

Okay.

So that does not reflect the opportunity maybe over and above that in terms of office space or the pencils that those people won't be using or any of that kind of over-- associated overhead?

Well, I would say it does-- it does count on the pencils that they use.

It doesn't contemplate completely the desks and the physical space that we have, you know, relative to the 600.

I will still have office buildings.

I will still have places where those folks sit, but when it comes to pencils and airplane rides and things of that nature, we won't have those.

And that -- those numbers are contemplated in the overall --

Okay.

And relative to your cost increases, have you repriced your backlogs at all and what's going on with that in terms of trying to keep up with those -- those raw materials pressures you talked about.

Again, as we had spoke before, the -- the backlog with regard to orders that were placed vis-a-vis these longer construction cycle-type things, depending on the timing and how we work that, those were price protected.

We believe that substantially all of that has shipped -- we'll have just very little lingering impact as we go into the third quarter.

When it comes down to the project -- excuse me the stock side of the world, a lot of those price increases were put in place.

This is on the lighting side.

When you get into specialty chemical, those prices went into effect on the date that they were issued.

So I feel that the backlog of roughly 160 million that we have, there's -- there's a small amount of activity.

John, go ahead.

Rich, the current entered backlog that is released for shipment over the next few weeks, at this point, 9% of that backlog has old pricing in it.

And, Rich, to put you it in perspective, our backlog represents, John, roughly a month's worth-- maybe five weeks' worth of sales.

Five weeks.

So you're talking a matter of day's worth of old price.

I show no further questions at this time.

I will turn the meeting back over to Mr. Vern Nagel for any closing remarks.

Thank you, everyone.

Again, second quarter for us is -- was not necessarily our finest hour, but I do believe strongly that where the Company is headed, the direction and the speed with which we are going there, our expectation is to deliver closer to your expectations and to ours.

We appreciate your support and we'll look forward to speaking with you after our third quarter.

Thanks again.

Bye.

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

You may disconnect at this time.