Acuity Brands, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 Jan 2008

[Matt Mccall:]

Thanks good morning everybody. Vernon J. Nagel Good morning.

[Matt Mccall:]

Let’s, see first Vern you spoke about expectations of volume being up low single digits next or this year and I think inthe release you talked about a little bit about mix and pricing expectations. Can you remind us about the most recent pricing action what’s, the magnitude what the expectations are there and then also your expectations for the benefit of mix as we progress through ’08. Vernon J. Nagel As I said in my comments when you sort of, backed out if you will the addition of Mark Architectural Lighting you back out foreign currency. and, you also, adjust for what we believe was the impact on residential impacting, our sales it looked like our growth was something slightly north of 6% within that 6% our feeling was that it was relatively split or relatively equally split amongst volume mix and price in the July timeframe. I believe that we ranged in the somewhere in the two to 4% range I’m, trying to remember.

[Matt Mccall:]

It was three to five. Vernon J. Nagel Three to five but it wasn’t on all products and so we have been getting a fair bit of that price increase I'm not certain that that’s necessarily true in the marketplace overall our view on pricing going forward. As you know, we annually do a price review we’re, in that process as we speak a lot of it has to do with where to our products fit in their product lifecycle. And so, we examine those on a very, focused basis mix and this is why it’s, very difficult for us to determine precisely price versus mix. the product mix continues to be very favorable products that we have developed and introduced over the last three years continue to provide growth in our business and what’s difficulty to determine is how much of it is cannibalizing our own say older products versus the opportunity to expand into new markets we believe that it’s a combination of both. but it’s difficulty to say precisely how I would expect that you will see us and hear us talk about product mix continuing to be a significant contributor to our top line growth and our margin improvements as we go forward we’re very focused on the development of new products and those tend to appeal to large markets. And, tend to have a high value proposition for customers and as a consequence, they typically have higher contribution margins for us.

[Matt Mccall:]

Okay thank you that’s helpful and so if I hear you I think if we look ignore that the year ago comps it sounds like expectations are for current trends to kind of, continue through ’08 roughly across all those different factors whether it be price mix or volume. Vernon J. Nagel Again, our view is that the marketplace at least the components that we participate in should give us low single digits of unit volume growth price it just it really depends on what we see out there, in terms of what’s happening with either costs. Or, what’s, happening with competitive situation but the product mix side I think will be continue to be a key driver in terms of the opportunities for us as we go forward. Again new products better service the opportunity to differentiate how we deliver that level of service has really been has been a driver of our top line growth and our profitability and we expect it to be on a go forward basis.

[Matt Mccall:]

Okay thank you Vern so you reported a 13.7% margin in Q1 and if I look historically yes, Q2 is seasonally weaker and as we move into the back half of the year it looks like Q3 and Q4 have historically been a little stronger than Q1. So I’m trying to get a picture of you discussed the expected cost savings from your from the moves you made in Q1. We’re, also talking about some potential for some cost pressures on the raw materials and input side but help me understand from a seasonal perspective what the back half of the year should look like directionally versus Q1 from a margin standpoint. Vernon J. Nagel Well first off from the top line perceptive I believe that we are about a 52, 53% of our full year revenues are in the second half versus the first half. That volume has two benefits one it has the variable contribution coming off of, higher sales plus, it also helps us absorb our supply chain costs in a more effective way. So typically you'll, get that variable contribution flowing through I believe that last year in 2007 on an adjusted basis excluding if you will Zep our consolidated operating profit margin Ricky was about 11.3% it would be my expectation that we will continue to show favorable improvement over 2007 each quarter. And, as you saw from our first quarter results we were favorable by 250 basis points, a strong and pretty robust, performance I would say.

[Matt Mccall:]

All right well I don't know if I want to build in 250 or if I guess so the back half there’s nothing seasonally or there’s nothing that we should expect I think Q3 last year had a little bit lower profitability than Q1 on a slightly stronger top line. But, there’s, nothing that permanent in the business from a seasonal perspective that would cause that to recur on an ongoing basis. Vernon J. Nagel Yeah when I look at 2007 our third quarter profitability at the operating profit level was above Q1 and certainly, Q4 was above all of them giving us an average of 11.3%. I believe that in the second half of the year there is still if you will this concern out there about how will demand, continue to manifest itself in the second half of the year. Our feeling is, is that demand while in certain sectors is slowing down we still feel that from a unit value perspective we’ll, see low single digits. Two three percent would be a good guess in terms of unit volume growth contributing to our full year should be our product mix and some opportunities for us to extend into the retrofit market opportunities to continue to expand in New York City where we have recently made some significant investments. And now, have a presence in that marketplace so all of those things I believe will contribute to a positive second half. Operator Your next question comes from David Woodyatt - Keeley Asset Management.

[David Woodyatt:]

Yes, I was wondering if you could elaborate just little bit more on the share repurchasing you’ve, helped us out by mentioning what you had done so far this quarter but clue me in shares bought in the first quarter seems like a high level. I what kind of a pace would you generally expect going forward and be another way of asking is how soon. Or, is there a point in time when you want to get the million and a half shares remaining completed. Richard K. Reece Looking at the first quarter therate of repurchase was ata higher level as we took advantage of the dividend we received on the distribution of Zep the $62½ million and felt that the best use for that cash flowin terms of enhancing shareholder value was to repurchase shares with that. So, we were pretty aggressive, in our first quarter while we’ve, been aggressive over the last couple of years. We were at a higher rate there in our first quarter taking advantage of the opportunity of reinvesting or using that dividend from the distribution of Zep on what we thought was the highest use for shareholder value creation we are looking to continue to repurchase. and it will a million and a half shares that we have we’ve got a 10b5 program in place now that we’re purchasing under and just based on various market factors. As well as other opportunities we may see to reinvest that, capital would cause us to continue to examine what’s, the highest and best use of that capital atthe moment. Though I think, you're, likely to continue to see us in the market repurchasing shares but probably not as aggressive, arate as you saw in our first quarter because we had the added boost of the dividend from Zep. Vernon J. Nagel And Ricky just to add more color to that since the beginning of 2006 through this first quarter we have repurchased or invested $330 million in terms of share repurchase or share repurchases over that time period our expectation is, is that our cash flow will continue to be very strong. we have a goal out there of having our free cash flow exceed our net income our expectation is, is that we’ll do that again in 2008 so we continue to generate very favorable cash flow as we continue to improve our asset management capabilities because of better processes. So, as Ricky said we would expect to continue to look for ways to deploy that capital in the most advantageous way for our shareholders that would include share buyback and investments in terms of back into our business in terms of market expansion new all at New York City as well as potential acquisitions that help our portfolio.

[David Woodyatt:]

Also, could you just comment briefly on those stock options have you issued any yet since the spinoff of and do you have any immediate plans in that area? Vernon J. Nagel I can’t, comment on that, I don't, know the precise number but our long-term incentive plans are annual plans they are pay for performance plans. what that means is, is that we have to hit certain financial targets in order to fund a pool of long term incentive for the last four years we have generally used restricted shares as the only vehicle in terms of how we have funded those long term incentive plans through the first quarter post spin. We funded our long-term incentive plans and it was primarily again restricted shares but we did issue some options. And, Ricky the number was pretty small, right. Richard K. Reece I don’t, recall the exact number either but it wasn’t a significant amount. And to put it in broadly in perspective we look atthe total number of shares including options that have been issued and as I recall that number is about was about 1 ½ % of our total shares outstanding. So it was well below about 600,000 shares but that included both restricted shares and options and I’m, giving this to you off the top of my head sobe a little careful there. But, I think I’m, pretty close in terms of the number.

[David Woodyatt:]

Okay just one last question given the fact that you're, say a new entity but changed entity do you have any near term plans for getting on the road to meet with investors. Vernon J. Nagel We yes we do that on a quarterly basis we present at different conferences that are sponsored by the folks that provide coverage on us and so it’d be our opportunity or it’d be our expectation to continue to do that. So and Dan I look to you I believe we have various road shows or trips that are planned we try and, do something once a quarter and. Dan Smith Yeah we’ll, probably have a northeast in the next month or so and then probably Midwest later on. Vernon J. Nagel Just one last comment on the stock options our overhang has dropped dramatically over the last three years I believe that total options outstanding in our most recent 10-K were about 2.1 million Ricky. So, we were down pretty dramatically, if you go back even just three years ago sothe overhang issue we have really addressed pretty aggressively favorably for shareholders I might add. Operator Your next question comes from Dennis Scofield with Delafield Asset Management. Dennis Scofield – Delafield Asset Management You had talked a lot about the energy policy act did that include anything about the retrofit for federal buildings. Richard K. Reece Yes, there is opportunity there if you're, a taxpayer there are accelerated tax deductions that you get if you own the building but there are also opportunities when it goes into a non-taxable entity for the contractor. And, the designer to participate in some of those incentives so there would still be an incentive through the epact, as I understand it for even entities that are not otherwise paying taxes. Dennis Scofield – Delafield Asset Management But, there was no requirement that the government retrofit their own buildings with energy efficient lighting. Richard K. Reece No to my certainly not as part of epact 2005 and at the federal level I'm not aware of any requirement you're beginning to see more activity at a local level but I'm not aware of a requirement at the federal level at this time. Vernon J. Nagel And, Dennis the local level is very exciting for us we continue to make inroads into those markets and feel that from a strategy perspective and from an organizational structure perspective. We are going to realign or better align some of our resources to target some of those types of markets in a more effective way because of the growth potential that’s, there. Operator Our next question comes from Robert McCarthy with Banc of America. Robert McCarthy – Banc of America Just a couple of follow-ups and I notice we’re getting late in the day here with respect to the New York market Vern obviously you’ve made abig splash there with your new design center things like that. Could you talk about and the fact is those commercial markets particularly inthe northeast and some of the major metropolitan remain fairly firm are you seeing any signs anecdotally. Or, incrementally of market share gains or growth there above kind of market expectations. Vernon J. Nagel Well in the city itself, we had very little presence so any real opportunity there is market share gain for us and we believe the way we have positioned the product portfolio it fits very well with the opportunities and the demands of the New York City market. the acquisition of Mark Architectural Lighting some of the structuring that we've done with our specialty products businesses under one of our better leaders really is just a very exciting growth opportunity for us. so we’re after that supply chain is focused on making sure that we have New York type product but we see this in other markets as well other large markets where there continues to be. And, we expect there to continue to be strength in demand so for us those aren’t, shared gains they're, geographical share gains if you will. Robert McCarthy – Banc of America So, there’s definitely an opportunity there. Finally on the acquisition front just following up on a previous commentary and questions with the fact that Genlyte is effectively focused on other things now being acquired is it is there any potential for any residential properties. and have you started to see multiples for some of those smaller residential properties kind of come down now as people kind of go through the Kübler-Ross stages of dying and realize that they're not going to get quite the multiples they thought. Vernon J. Nagel Yeah and we see opportunities in that market it may be a little too soon to put our toe into the acquisition side there having said that we continue to develop and enhance our own product portfolio through our internal engineering and design capabilities targeting at that market. Because again we believe that, there is an energy story there as well so, we see the resi market again as a very large market. and an opportunity for us in the future to participate in more aggressively where we do that through again continued development of products internally or through acquisition those are choices and opportunities that we’ll have to consider I think later not right at this point in time. Operator There are no further questions so I’ll now turn the call back over to Vernon Nagel. Vernon J. Nagel Thank you for your time this morning we believe we are focusing on the right objectives deploying the proper strategies and driving the organization to succeed in critical areas that deliver on the expectations of our key stakeholders I’d like to thank all the associates again of Acuity Brands terrific quarter and more to come our future is bright. Thank you for your support. Copyright policy