Earnings Call Transcript - AYI Q3 2021

Operator, Operator

Welcome to the Acuity Brands 2021 Investor Day.

Charlotte McLaughlin, Host

Good morning, and welcome to the Acuity Brands 2021 Investor Day and Third Quarter Earnings Update. As a reminder, some of our comments today may be forward-looking statements based on management's beliefs and assumptions and information currently available to management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that the company's actual results may materially differ from those anticipated and we undertake no obligation to update these statements. Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available in our 2021 third quarter earnings release. And in the appendix of the accompanying Investor Day 2021 presentation, both of which are available on our Investor Relations website at www.investors.acuitybrands.com. Today you will hear from our Chairman, President and Chief Executive Officer Neil Ashe. Our Senior Vice President and Chief Financial Officer Karen Holcom; our Business Presidents, Trevor Palmer and Peter Han, and a selection of our key senior executives who will give you an update on the Acuity Brands long-term strategy. In addition to providing information around the quarter performance. After our financial update, there will be an opportunity for you to ask questions. If you wish to participate in the Q&A, please submit your question, your name, and your company in the chat function. There is a live chat help function available to anyone experiencing technical difficulties. As a reminder, we are webcasting today's presentation live. Thank you for your interest in Acuity Brands. You will now hear from Neil Ashe.

Neil Ashe, CEO

Welcome to the Acuity Brands investor update. We're really excited to be with you today to talk to you about the future of our company to introduce you to our team and to talk through the results of our fiscal third quarter 2021. So we're going to do it a little differently today. Rather than a couple of us and a lot of PowerPoint, we're going to introduce you to our broader team and we're excited to do it. So first, we're going to talk to you about our lighting and lighting controls business with the team who runs it, then we'll move on to our new intelligent spaces group, the team that's been assembled to develop and grow there is really impressive, and we're excited that you get to interact with them. After that, we'll dive in and talk about our culture, our impact on the environment, as well as how we actually run the company. And then, finally, Karen will come and she'll talk to you about our capital allocation priorities and our results for the last fiscal quarter. So let's get started. As we look forward, our company is unique. Our lighting and lighting controls business is the market leader in North America. We've returned the business to growth and we've increased the margins. How have we done that? We've done that through product and productivity improvements as we increased the vitality of our product portfolio and we brought the precision of a digital company to this business. As we look forward, our strategy for winning the next decade is very clear. We're going to increase the service levels in the industry. We're going to increase the amount of technology that's both in our products and in how we provide those services. As of today, we've created a new segment we call the Intelligent Spaces Group, that group has the opportunity to do exactly what its name says, finally, make spaces intelligent. It's a collection of really valuable technology assets, and some incredibly talented people who we've assembled to go prosecute the opportunity. Distech is an open protocol and open-source distribution technology, which powers buildings. Atrius is the opportunity to create applications, which make a real difference in those buildings and spaces. Our business is financially very efficient. We generate a lot of cash, and we can create a significant amount of value through capital allocation. Our capital allocation priorities are clear. We're going to grow our current businesses. We're going to grow through mergers and acquisitions. We're going to maintain our dividend. And when there's the opportunity, we're going to create value through share repurchase. We've also invested significantly in our culture. We're a values-driven organization where the best people come because they feel like they can do their best work here. We're also making an incredibly positive impact on sustainability, what we do matters. And we're doing it because it's the right thing to do and because it's a good business opportunity. We're proud of the improvements we've made in our company. You know that the world has changed. People's expectations have changed. Digital has changed everything. You can operate every business with the precision of a digital business and every business needs to be digital going forward. So we've begun that transformation here at Acuity Brands. The process we use is called better, smarter, faster. And it is exactly what the name implies, better, smarter, faster, is our process that takes the best of lean and the best of digital product development. And it starts from a very simple promise, which is that the satisfaction of the end-user, the customer is all that really matters. And so we identify what's going to drive that satisfaction. We compare that to what we currently do, including data to understand how are we really doing. And then we chart a path that gets us from where we are to as close as we possibly can to the art of the possible, and then we put it in front of customers and we do it again and again and again, so that we continuously improve. As we get better, smarter, and faster, it's more and more important to be focused on where we're going. I like to say that life is lived in the windshield and not the rearview mirror. And so as we accelerate the pace of our organization, it's even more important to focus on where we're going, and how we're getting there. So that we can operate with precision and consistency going forward. So the core of any company is people. And I am super pleased with the collection of people that we are bringing together here at Acuity Brands, talented people who have been in the company for a long time, and new people who are bringing fresh ideas, perspectives, and experiences mostly around technology. As we bring them together in a unique collection of talent, you need to look no further than leaders of our two segments to demonstrate the talent that we're bringing together. Trevor Palmer is a veteran of Acuity Brands, and he's off to a great start leading the Lighting and Lighting Controls Business. Trevor understands technology. He's an innovator at heart. He's driving the product vitality and the pace of operation in the business and leading to significant improvements that you're seeing. Peter has been a leader in the technology industry, all the way from startups to the largest technology companies in the world. He knows how to spot new technologies, new business models, and he's a talent magnet. And he's demonstrated the ability to put all those things together and build large businesses. When we talk about the impact that we can have, I'm really proud of how our whole team has come together to make a material impact in a positive way. At Acuity Brands, we are creating a better, more connected world as we expand our focus on sustainable solutions that protect our planet. The Acuity sustainability legacy is strong. Our EarthLIGHT initiative is enabling us to do even more to protect, preserve, and improve our world. To that end, we are proud to announce our commitment to dramatically improve our world by achieving a 100 million metric tons of carbon reduction by the year 2030. We recognize that this ambitious goal will require a relentless focus and ongoing commitment from all of us. But the benefits will be significant to the planet, to our communities, and to our business. Together, let's light the way to a better world. So first, on our products and services, sustainability is what we do, it's at the core of who we are. We have made a pledge that our products and services will mitigate the impact of 100 million metric tons of carbon by 2030. That's a really, really big number. Additionally, in our own operations, we've reached carbon neutrality over the course of the last year. We're releasing a white paper, which details how we're making that 100 million metric ton impact, so that others can learn from what we're doing. And hopefully, they can share with us things that they're learning and we can get better along the way. And then, as we think about the culture of our organization, we're building an organization where the best people come because they feel like they can do their best work here, because they're bought into our values. They're bought into our mission. They're bought into who we are and what we are doing. And they believe that they can make a positive contribution and they'll be rewarded for it. And then finally, over the course of the last year, we've made necessary governance changes from our board to our pay structure and everything in between, so that all of our interests are aligned, our shareholders, our associates, our customers, and our communities. Our ability to allocate capital effectively has been and will be a source of value creation for us going forward. So we think about our priorities for capital allocation, they're very straightforward. The first is we're going to grow the businesses we already have. The second is we're going to grow through mergers and acquisitions, both in our current businesses as well as entering new businesses. The third is that we are going to maintain our dividend; and then finally, share repurchase. We view share repurchase as the opportunity to create permanent value. We demonstrated over the course of the last year that if there is dislocation in the stock price, we can and will be aggressive to create value and we did. We bought back about 10% of the company for less than one year's free cash flow. So taken together, as we look forward, we are confident that our ability to effectively allocate capital will create long-term value for our company. So let me dive in and talk about our acquisition strategy. There are really two buckets there. First, is adding to our existing businesses. We're proud of the addition of OSRAM and the digital solutions business to our portfolio. What does that allow us to do? It allows us to: number one, control the technology in our luminaires and our ability to innovate faster and scale; the second is, it provides us a path to the rest of the market to participate in an OEM business that supplies other manufacturers; and finally, it allows our supply chain to be more robust and resilient going forward. We're really pleased about the addition of Rockpile, that brings to us an additional capability the ability to participate in earlier-stage companies focused on edge AI, which are consistent with the direction we want to go as we make spaces intelligent. We think there's an opportunity to continue to deploy capital to accelerate that. We're excited over the next 12 to 36 months to have the opportunity to add another large business to our company. So what are we looking for? We're looking for sectors that have systemic growth opportunities, where we have the opportunity to demonstrate what we've done in our lighting and lighting controls business, the introduction of better, smarter, faster the transformation that we've done there and our ability to develop technology like we're doing in our spaces group to revolutionize another sector. We're confident that we can create significant value when we do that. AYI is the market leading lighting and lighting controls business in North America, that we've returned to growth at attractive margins and returns. It's the option for us to build a very valuable business in technology by finally making spaces intelligent. It's the ability for us to deploy capital to grow these businesses and to add new businesses to our company. And finally, and most importantly, it's an organization of culture and people that have come together because we're passionate about what we're doing and we're excited about where we can take this company.

Trevor Palmer, Business President

Acuity Brands lighting is the leader in lighting and lighting controls in the North American market. We've returned the company to growth and see a bright future ahead for us. Lights are essential to all spaces where there are people, there are lights and there is an opportunity for growth. The opportunity for growth is both in existing and new spaces greater than 85% of the planned indoor environments already built. In order for the world to meet broad sustainability goals, we will need to materially increase the retrofits of the built spaces with energy-saving technology, lighting and lighting controls are a huge part of this. Lighting controls which provide functionality beyond illumination are growing in popularity. When the industry was transformed by LED, it was an inflection point for controls and luminaires to do more. We should now think of luminaires with embedded network controls as a constellation of sensors which deliver value beyond illumination. As the market leader we offer a broad grouping of the best brands and categories and as a result can address more of the market than others at a high level of service and consistency. We have the number one market access in the industry comprised of the leading independent sales agents, electrical distributors, and retailers. This is a big part of our success today and will be tomorrow. To continue to lead the industry, our strategy is simple challenge the service levels of the industry. There is an opportunity here to provide a consumer-grade experience to our channel and change the industry's expectations on what service means. Data and software will play a part in the transformation of the industry, we will aggressively reinvent the service experience using technology. We will also maintain a high product vitality and continuously reinvent our portfolios faster than others can. By doing this, we will continue to lead the industry's technology curve. As a lighting and lighting controls manufacturer, our portfolio provides a consistent integrated controls platform with luminaires that others cannot, we will continue to use technology like this to differentiate our portfolios and lead the market as a result. We're excited about the opportunities for growth in the future. Our strategy to continue leading and reinventing the industry is sound and Acuity Brands, lighting and our associates are committed to continue leading the market. It's kind of interesting the way you're thinking in terms of their portfolio and the CPHP, it's a great example of not only how you're creating a new product, but actually how you're thinking about the next generation of products and what they're going to look like in terms of kind of form factor content, technology, what's the customer experience going to be like, what's the contractor experience going to be like.

George McIlwraith, Senior Vice President

From my perspective, traditionally we've focused on product vitality, particularly on new and exciting products and technologies we introduce to the market. However, moving forward, we are considering this in a much broader context. You've frequently heard us mention that we have the industry's most extensive portfolio. We are also facing global competition, which requires us to keep our portfolio competitive daily, both in terms of performance and cost, while also introducing new and innovative technologies. Typically, we launch over 75 new product families each year, which is remarkable. When we consider the capabilities of our broader portfolio—such as enhancing product performance—it's important to note that LED chips improve every 18 months. This requires us to update the luminaire with those chips, adjust the driver technology, and reduce the scale of the luminaire. A prime example of this is our new Compact Pro High Bay (CPHP), designed for the warehouse and logistics market, featuring an 80% reduction in cubic volume. Contemplate the implications of that reduction on raw material usage, freight, and packaging, along with the ease of installation given the smaller size. This creates a positive cycle of customer satisfaction. Additionally, it contributes to carbon footprint reduction through energy savings for customers and reduced materials, packaging, and freight costs. I view this as a fantastic opportunity for us to not only innovate but also enhance, reduce costs, and improve the overall value proposition of our extensive portfolio.

Sarah Golish, Senior Executive

It's just so interesting to see embedded controls really start to take off within all of our luminaire portfolios, right all the way from JOT, which is much more positioned to the contractor created with them in mind, all the way through to better controls that are driving your architectural platforms.

Rich Earlywine, Senior Executive

Yes. Our focus has been to be able to work directly with the architect and the lighting design community to be able to bring their visions for a given project alive. And with our embedded controls, we are able to do that. Classic cases right here in Atlanta, at Atlanta, Hartsfield Jackson International Airport, if you drive under the new canopies that they've created, you'll see that they're beautifully lit with white static light. But come July 4, it'll be red, white, and blue. And on St. Patrick's Day, it'll be green and perhaps pink during Breast Cancer Awareness. So that's just one of many opportunities where our challenges use that technology, whether it's Hartsfield Jackson, the 911 Memorial, the New York City, the new KPMG Learning Center in Orlando, that we've used our product and embedded controls, is a great opportunity for us to take that leading technology and work with that architect and lighting designer to deliver what they want out of that project.

Neil Ashe, CEO

When we think about product vitality, moving forward, we can proxy it to luminaires, the contractor select portfolio architectural controls, but we really want to lead the technology curve of the industry, right, reinventing these portfolios faster. So what are some of your thoughts, maybe just go around the room?

George McIlwraith, Senior Vice President

Well, as you think about it, there’s never been a more exciting time to be in the lighting business and you’ve been in that long time.

Trevor Palmer, Business President

Yes, absolutely.

Sarah Golish, Senior Executive

Well, I'm just excited to as we look forward, we're going to learn from all what we've learned through COVID and we're going to take that and we're going to build a culture for the future, which is going to be sort of this blend right of remote versus in-person for those roles that need to be and really set, I think a very modern work style going forward.

Rick Earlywine, Senior Executive

Now, I think the other thing we have there’s not that questioning a customer on whether or you believe what they’re telling you or whatever we take care of customers problems throughout the entire chain internal, external customers and there’s a genuine desire throughout the organization to do the right thing.

Neil Ashe, CEO

And we’ve continued to be able to maintain that environment here. Even as we pivoted and made the change to becoming a technology company and still being able to do that.

George McIlwraith, Senior Vice President

Well, let’s not forget quality here, it gives us the opportunity to be able to really maintain the level of quality that we're used to from Acuity perspective, the ability to deal with customers, when they have problems directly. There’s so many opportunities for us to continue to have premium quality.

Trevor Palmer, Business President

So, big part of big part of the opportunity we have in front of us is kind of having more influence or control over each one of the pieces. So whether it's the luminaire itself and redesigning to some of the new characteristics, what the next generation of these luminaires are going to look like it could be for the customer.

Sarah Golish, Senior Executive

It’s a simplification of controls, right by embedding them in the luminaire, it just makes it easier to install, it makes it easier to set things up, control it going forward.

Rick Earlywine, Senior Executive

That was a key project too, right. We brought people together from all the different groups, marketing, product, sales, and really just pushed out that launch. And that just taken off since then.

Trevor Palmer, Business President

No, I think that’s very exciting. So when I think about the light science, and you want to go through some of that like the various other artifacts too that we've developed - it’s our positions of strategy together.

Rick Earlywine, Senior Executive

So we need to look at how we build that offer and how we blend that — the different styles. And the different qualities so if we look ultimately we lead towards our end goals to set in terms of product directives.

Neil Ashe, CEO

It’s important our ability now to think about how to highly optimize that. This gives us much more influence in those roadmaps to work closely with those technology providers. And when you start to allow your mind to work forward into what is potentially possible to optimize the solution, the system, the network, again, it’s very exciting about where this is all heading.

Peter Han, CEO

We’re also committed to embedding that experience into our solutions.

Martin Villeneuve, Business President

Yes. This is a good point. With more than 600 system integrators, distributors, and OEM customers in over 55 countries, they have been engineering, programing, and installing our intelligent building management product and solution for more than two decades. And I believe the secret of the success of the tremendous growth has been the one, the true open technologies and two, the open distribution.

Neil Ashe, CEO

In summary, as you can see, we've returned the company to growth. There's growth opportunity in each of the individual segments. We've demonstrated we can deliver margin and we're excited about our ability to continue doing that going forward, Charlotte.

Charlotte McLaughlin, Host

Thank you so much. Just as a quick reminder, if anyone would like a follow-up call in the next couple of days, please reach out to our Investor Relations department. We also wanted to highlight that we have relaunched our website and IR website. So please go there if you have any further questions. And then we're going to cut back to our close. So thank you very much.