Acuity Brands Inc (AYI) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to the Acuity Brands quarterly earnings release. [OPERATOR INSTRUCTIONS.] Now I would like to introduce Mr. Dan Smith, Vice President, Treasurer of Acuity Brands.

Sir, you may begin when ready.

Thank you.

Good afternoon.

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

John Morgan, our President and Chief Development Officer;

Ed Bastian, our Senior Vice President and 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 risk and uncertainties such that actual results may differ materially.

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

Thank you, Dan.

Good afternoon.

Welcome, everyone.

By now, hopefully, you've had a chance to read the earnings release we issued earlier today regarding our third quarter performance.

I would like to take a couple of minutes to recap the major highlights of today's earlier announcement.

Looking at net income, our net income was $20 million for the third quarter, up 9% year over year.

Diluted earnings per share was $0.44 up 5% year over year.

We again generated significant cash flow, bringing year-to-date cash flow from operations to $61 million, and allowing us to reduce or total debt outstanding to $391 million, while ending the quarter with over $44 million of cash.

Consolidated net sales for the quarter were up 2%, to $545 million, reflecting better pricing and a more favorable mix of products sold.

This was offset somewhat by lower shipments in lightings, commercial and industrial channel, consistent with industry trends, while specialty products saw a volume weakness in its retail channel.

Operating profit was approximately $39 million in the quarter, up 6%.

Operating profit margins were up 20 basis points to 7.1%, as significantly lower operating expenses more than offset weaker gross profit margins.

Gross profit margins decreased to 39.6%, from 41.8% recorded in the prior year.

The decline was due primarily to lost contribution margin on lower unit sales and a negative impact of reduced production volume, primarily at Acuity Brands Lighting.

In addition, raw material and component costs increased approximately $20 million in the quarter compared to the year ago period.

This increase was largely offset through price increases in virtually every channel.

Certain costs, including raw materials, continued to increase during the quarter.

As a consequence, both ABL and ASP announced additional price increases in early June.

Looking at our balance sheet, we continue to improve our financial position.

In this quarter, reduced our overall trade cycle days down from 61 days in the period, down from 64 in the year-ago period.

Overall, we posted solid results in the quarter and made strides in improving our overall effectiveness.

However, our performance is still not where we would like it to be.

Looking forward, we see both opportunities and conditions that continue to cause us concern.

On a positive note, order rates at Acuity Brands Lighting were strong in May and continued so in June, reflecting unit growth, as well as our ability to hold recent price increases.

The backlog at ABS -- or excuse me, at ABL, continues to build while our customer service metrics improved.

Actions to enhance the efficiencies of our facilities should begin to benefit our financial results.

Assuming all these conditions continue, they should have a positive impact on our results going forward.

We continue to be concerned about rising raw material and component costs, particularly those impacted by the price of oil, as well as end-market demand, which seems to ebb and flow giving signals -- giving mixed signals of growth stability.

Nonetheless, we expect that the numerous actions implemented to improve our customer service, reduce our operating costs, and improve the effectiveness of our manufacturing facilities will enhance our fourth quarter performance as compared to the prior year and positively impact fiscal 2006.

Lastly, before we take any questions, I would like to introduce Ed Bastian, our CFO.

Ed brings a tremendous experience base in all aspects of financial and operational management, and we're sure glad to have him on board.

Also, I would like to thank Karen Holcom, our Controller, who has so-ably filled in as interim CFO.

Now, I would like to address any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS.] Thank you.

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

Hi, Craig.

Hi, good afternoon, everyone.

How are you?

First question has to do with the price increase that you mentioned in June.

What is the percentage price increase across your broader -- across your portfolio?

And have your competitors followed suit?

The price increase announced was ranged from between 5 to 10%, depending on the product, depending on the channel at the lighting company.

And at specialty chemical, the price increase range was approximately a 4% increase, again, depending on the product.

At the lighting company, I believe, John, that all of the competitors, the major competitors -- I can't speak, obviously, for all -- have followed suit in some form or fashion.

And at ASP, similarly, at least the ones that publicized price increases, we believe two have continued to increase prices, Craig

And announced on or about the same effective dates, certainly within two weeks of the effective date that we had announced.

And when did you say it was effective?

June 6.

Okay.

So there -- are your clients or your customers price-protected in any way, like they have been in the past?

Craig, similar to the past, we allowed orders to be entered at the previous prices up to that date.

And we did see an increase in order rate up to that date, a couple days prior to that date, where there was some price protection at the old rates.

There is about another 30 days' worth of price protection on some of our outstanding quoted projects, where we had previously committed to the longer-term projects, but that is a small percentage of our overall business.

So we should see the effects of the price increase begin to roll through here as we get into the next 30 to 60 days.

Thanks.

The next question -- What is a reasonable operating margin target for fiscal 2006?

Well, Craig, as you know, our objective is to improve our operating profit margins by at least 100 basis points or more.

You also are aware that in the second quarter we announced a rather significant reduction in force, which we expect, coupled with other actions, to hit a run rate of annualized savings of over $50 million by the time we really enter calendar year 2006, which is the tail end of our second quarter of fiscal 2006.

So if you do some of the math on all of that, I mean, our expectations is to get up into the very high single digits as we get into the end of 2006.

Fiscal 2006?

Right.

And what underlying assumptions in terms of an economic backdrop or revenue do you assume to hit that target?

You know, Craig, it's interesting, again, we are all armed with all of the available public information that you all see as well.

Dodge continues to call for a calendar year increase in the non-residential construction market of roughly 3 points, and I believe that's for calendar year 2005.

As you look into 2006, I think they have roughly the same number out there, maybe slightly higher.

So, our expectation is -- and our hope is -- is that the marketplace will play as they have indicated.

Our opportunities continue to be really working our cost and service structure so that we can bring a greater value-add to our customer base.

Whether that market will play out completely that way or not, I don't know, but we see plenty of opportunity, again, for us to continue to improve the things that we do internally.

And my expectation would be that we would see those types of improvements in operating profit margins, assuming a reasonably benign market.

You know, just a comment.

You didn't ask, but I'd like to make a comment.

Really through the first handful of months in calendar '05, while Dodge was calling for -- and has been calling for -- a 3% uptick in non-residential construction, if you look at it, for example, at the purchase price index for building materials and you look at January, February, March, April, all of those on an inflation-adjusted basis on unit volumes were down between 1 and 3%.

May was the first month where we actually saw a positive 1% increase.

So in our own circumstance, particularly for us in this third quarter, our expectation was is that there would have been at least flat volume, but , in fact, what we experienced was declining volume.

So I have a little bit of caution about me as to whether Dodge has this right.

On the positive side, we've seen two pretty strong months of May and June for us of strong order rates at Acuity Brands Lighting.

So we are cautiously optimistic about what we've seen so far, and we hope that a lot of that specifying activity that's been going on for some time will now start to materialize in orders, as we've seen for the last couple of months.

Just because we're in the business of making the estimates that you in the end are judged against, I'm going to take one more crack at the operating margin target for 2006.

Any -- you're talking in fiscal years and calendar years.

Any sense of a range?

Is 7.5 to 8.5% reasonable?

Or are we off base?

Well, again, I think if you go back to our fiscal 2004, I mean, our operating profit margins were roughly 6.6%.

This year, as we came into the second quarter, in particular -- we all know the story there -- I think it took us a little bit off track.

But having said that, I do believe that as volume picks up -- not declines, but picks up even to a flat level -- you'll start to see our margins reflect, I think, activity more consistent with our goals.

And as I think about 6.6, if you imagine 7.6, and then you took 7.6 and added another 100 basis points and got it to 8.6, without forecasting here, those are the types of targets that we are shooting for.

The actions that we've put in place, both the consolidation of our manufacturing facilities, the streamlining of our operations, as a result, the reduction in force, I think all bode well for us getting our cost structure in order.

The marketplace just -- we think that there is some real opportunity out there, but, again, I'm not going to predict that.

I'm going to look at our order rates, I'm going to look at our ability to serve our customers and win orders.

May and June are a pretty positive reflection of that.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from Cliff Walsh of Sidoti.

Hi, everyone.

Hi, Cliff.

How are you?

Good.

How are you?

Good.

Can you comment a little bit?

I mean, you mentioned lower shipments in certain commercial and retail channels.

Can you point to any specific segment or geographic region where you saw weakness?

Let me comment, and I'd like to ask John to comment as well.

When you look at the non-residential market and you look at the very broad footprint that Acuity Brands Lighting has in that space, we touch, literally, all aspects of the non-residential construction market.

And when you have on unit basis of -- again, publicly available information -- January, down a point;

February/March, down 3 points;

April, down a point, you get a sense of the kind of impact it would have had on us, especially given our share.

And that is -- that is a key contributor to our reduction in gross profit dollars, as well as gross profit margin.

May showed a positive uptick, and, again, our expectation is is that the seasonal pattern will occur, but we're hoping to see actual consistent unit growth year over year, consistent with the Dodge forecast.

John, do you have -- ?

Cliff, no specific geographical areas, although some areas held up well.

For example, Southwest U.S. with a lot of construction schools and warehouses and that type of thing held up well, even in the early part of the calendar year.

But it appears as though what has happened is that, towards the tail end of calendar '04 and on into early calendar '05, contractors in managing their labor pool and in managing the cost of construction as construction steel, as you recall, continued to climb, there were some delays in various different projects.

But we view those as delays.

The National Association of Electrical Distributors, for example, in our space, polls their membership each quarter.

And there was about 72 to 73% of those distributors were positive about a modest uptick late in the first quarter of calendar '05.

And that modest uptick is a point or two.

About 85%, as of about four weeks ago, are optimistic about a further uptick getting on into the end of the second quarter, which, of course, has now ended, and going on into the third quarter.

Likewise, NIMA, National Electrical Manufacturers Association, polls its membership and looks at the market as well, and it identified that the entire electrical industry in '01, '02, '03, and '04, going on into '05 had really, sort of, modest gains only as you got into early '05, with a large portion of the industry being flat to slightly down, but are now projecting significant increases going into the second half of '05 and into '06, which is consistent with Dodge's forecast.

Dodge has forecast, as Vern pointed out earlier, a 1 to 3 point increase in the coming period.

That's in the face of their projections that residential construction values in '06 will decline about 5 points.

That would mean non-residential construction would increase somewhere in the neighborhood of 8 to 9%.

So that's, kind of, the backdrop.

But there's not been any particular geographical area or construction type.

The one exception to that is government spending in infrastructure did drop off over the last year and is projected to remain down for another three to six months.

Okay.

Fair enough.

And on the retail side, any thoughts there?

No dramatic changes on the retail side.

As you know, most of our retail goes through the Home Depot.

A portion of our sales that go through the Home Depot would go to smaller contractors, and a portion of that to homeowners renovating and that type of thing.

I would not anticipate any dramatic changes there, with the exception of the fact that we continue to add new products to our offering through Home Depot, and we're -- we continue to be optimistic about that relationship.

Okay.

So things are back to normal after the second quarter weakness in the home-centered channel?

And, Cliff, just to further that point, I think that our third quarter in the lighting side was indicative of that kind of robustness in coming back, if you will.

Really, on the -- on especially chemical side, some of the softness that we saw on the retail side was primarily non-Home Depot related.

It was more in the mass and hardware side, or in, if you will, non-core type activities.

Okay.

Can you give -- Vern, can you give us a sense as to where you are with taking costs out of the business?

How satisfied are you with the plant consolidations that have taken place?

And what else needs to be done here?

Well, our folks have worked quite diligently to continue to, if you will, work through the consolidations on the lighting side, particularly in Lithonia, with some of our key manufacturing facilities.

I see from our actual spend, we are down rather significantly in terms of overall spending for our manufacturing capability, and that trend continues in a positive way.

Our efficiencies are improving.

And so my expectation and our expectation is is that our unit costs will start to reflect the positive benefits of those actions.

When you look at our overall program, as we stated in February, to take out $50 million of overall costs, we are pretty much on track with where we thought we would be.

In the quarter we were benefited by approximately $6 million of expense reduction due to the reduction in force that was announced in February.

That run rate is a little over $25 million, and that, again, is where we expect it to be at this time.

So while I'm pleased with where we are, we're never pleased because the idea of continuous improvement and the opportunities that we have before us are still quite significant.

That's why it's a bit difficult to answer, Craig Kennison's question.

We are very aggressively after improving our margins.

The third quarter, really when you look at the decrease in our consolidated gross profit margin, it was split pretty evenly between unit volume being down, not having that variable contribution margin, and simply taking our production down because we have become more efficient, and the lost absorption associated with that impacted the quarter as well.

Anyway.

Okay.

And could you just give us a, kind of, a quick overview of the major raw materials and what they've been doing over the last couple months?

Well, if you -- our major raw materials are steel, aluminum, ballast, petroleum-based products both used at ASP, as well as oil delivered -- for delivering logistics and transportation costs.

We also will procure lenses and lamps and different things of that nature.

As we pointed out in the quarter, our cost increases year over year were approximately $20 million.

And, you, yourself, can go back and look at how cold-rolled steel has changed during that time period.

Ballast, again, are a significant cost to us.

All of those are up year over year rather significantly.

Our hope is that some of these cost increases will begin to abate.

In other words, they won't consider rising as they are.

Steel continues to fluctuate.

And as you look at oil prices, every day it's a new -- it's a new story.

And we have to wrestle with that because we consume a great deal of oil costs in terms of transportation and logistics.

Fair enough.

Thank you, very much.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS.] And our next question comes from Don Cobin of Matador Capital.

Hi, Don.

How are you?

Hey, good.

Good afternoon, guys.

Couple of questions.

First of all, on the SG&A side, came down very nicely, as we've talked about, and I think it's about 177 million, was my calculation.

Should we -- as we kind of work forward here into the fourth quarter, should we think about that as sort of a -- your reduction force decreasing that absolute number going forward?

Or will that still vary pretty significantly with revenues?

It will vary somewhat with revenues, but our expectation is is that we will be able to lever the fixed cost portion of that.

If you look at the fourth quarter a year ago, our operating expenses were roughly 33%.

At the end of the third quarter this year, we were at 32.5% of revenues.

I would expect that as we get into the fourth quarter, you'll see us leverage that capability.

And then as we get into 2006, we expect costs to continue to come out as we improve the efficiencies of our operations in a whole host of areas, not just people costs, but other areas, return product, errors in our processes, so on and so forth, things that cause us to have costs that we think we can make a meaningful difference in, so that you'll see that.

So I would expect us to continue to lever our operating cost base.

And you should see the benefit of that as our -- as we proceed forward.

okay.

Great.

In terms of the cash, you had a significant amount of cash accumulate on the balance sheet at the end of the quarter, I think 44 million, and, typically, your fourth quarter is quite strong in terms of cash generation, cash flow generation.

Is there any reason you didn't use that 44 million to pay down debt?

Well, our fixed debt ultimately -- and I'm talking about both the bonds that we have outstanding are roughly $360 million, plus we have IRBs and other types of things which are another 11 or 12 million.

So we consider our fixed debt to be roughly $372 million.

We currently have a mortgage outstanding, which we've moved into the current portion on our balance sheet.

And I would expect that in a reasonable amount of time, we'll pay that down.

So, essentially, you'll see our cash balances continue to build because we will be out of variable debt that we're able to reduce.

I think to go into the market to actually buy back some of these bonds would be very expensive, and so we'll look at that.

We'll look at what options we have and how we'll use the cash as we get in -- really, into 2006.

And how would you -- would you consider buying back stock at this point?

I think that there are a number of options that are viable opportunities for us to continue to invest in our business and to increase shareholder value.

So what we're going to focus on is how can we best use that available cash and our strong cash flow that we expect to continue to really improve shareholder value.

Okay.

Okay.

And there's no reason the fourth quarter shouldn't be a strong cash flow quarter as it usually is, correct?

From what we see right now, our expectation is that we'll continue to generate solid cash flow.

So I would say I agree with you.

Okay.

Good.

Last question here.

Just on the backlog, it's certainly improving sequentially, and it's still down a bit year over year, though.

I think the number I had was about 200 million last year at this time.

Why is that, given the price increases you've had so far?

How would you, kind of, discuss that?

Actually, last year, just to remind everybody, the price -- the price increase last year, John, I believe was in April -- ?

that's correct.

And so what you saw was a lot of orders coming in during that time period.

And we actually handled the price increases on the lighting side slightly differently than we have, and I'll let John comment on it in a moment.

But at the end of April, our backlog had increased over $220 million.

So it was coming down by the time we reported in May to be roughly 204, as I recall.

So the way the price increase handled out, it was different.

So you didn't see quite the run-up.

I actually think our backlog is currently quite healthy, and our service metrics are improving.

So what you're not seeing is late backlog there.

So it's just a timing of what happened in the year-ago period compared to what happened in this particular period.

Don, let me just add that you may recall that at that period of time last year, we had some concerns about our physical ability to service the business with a run-up in the backlog that might have come in in advance of a price increase.

And so we managed through that by extending the protect period out a little bit longer than had typically been the case.

So we maintained, therefore, a little bit higher level of backlog than you would typically expect post-price increase.

If you sort of try to net that out and compare our current level of backlog pre-price increase this time to the, sort of, netted out effect of price increase last time, our backlog is up, essentially, double digits, about 10% over that same period last time.

So we feel pretty good about the backlog.

We handled the price increase this time a little more like -- well, exactly like -- we had traditionally handled in the past.

And so that recent run-up in backlog that -- well, excuse me -- that you would not have seen yet actually, would be as a result of recent price increases that will work out in the fourth quarter.

So bottom line, if you sort of net out of the impact of various price increases and how it causes strange things in our numbers from a timing perspective, we would view our backlog to be up essentially 10% over the same period last year.

Okay.

If I could just get in one more here.

With the price increase, it usually takes, I guess, a number of months before you're certain that it's all in place and sticking.

When do you feel like you'd have a really good feel for whether this June increase has stuck?

Certainly by the time we're having this conversation again next quarter, we'll be able to tell you what we've seen.

There's no question that the entire industry is seeing the kinds of raw material and other costs increases, such as oil-based products and freight and transportation.

And so, therefore, we've got to believe that an increase sticks, but we'll certainly know by the next time we talk.

And, John, to further that point, as we evaluate our numbers, and we look at what's happened, if you will, in our gross profit, we see, clearly, that our price increases that we've put in place have stuck.

The benefits that we receive to help outset some of these rapidly rising raw material costs across our entire customer base have been helpful.

So looking backwards, we can say that, with confidence, that our price increases have stuck, and we will continue to push those forward because it's imperative, given the types of raw material increases that we see.

We actually believe that back at that time Vern's talking about, that looking back now, we believe one of our competitors probably did not go up in price back at that time.

But we did, and our price increases -- our price increases did stick, and we would intend for them to this time, again.

Great.

Thanks, guys.

Thank you.

Thank you.

And at this time we are showing no questions registered.

I would like to turn the meeting back over to Mr. Vern Nagel for closing remarks.

Sir?

Thank you, everyone.

Thanks for joining us on this conference call.

Again, we think we posted solid results.

While we're not pleased with everything that we saw, given the dynamics of the quarter, we think that, again, we did a pretty good job.

As we look forward, we are optimistic about the opportunities of our Company, and we're optimistic about the actions and the things that our associates are doing to make our Company more effective and more profitable for you, the shareholders.

Thanks for your support, and we'll look forward to talking to you a quarter from now.

Thank you.