Acuity Brands, Inc. (NYSE:AYI) Q3 2019 Earnings Conference Call Transcript

Jul 02, 2019 • 10:00 am ET

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Acuity Brands, Inc. (NYSE:AYI) Q3 2019 Earnings Conference Call Transcript

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Q & A
Operator
Operator

Thank you. (Operator Instructions) And our first question comes from the line of Tim Wojs with Baird. Your line is now open.

Analyst
Timothy Wojs

Hey, gentlemen. Good morning.

Executive
Vernon J. Nagel

Good morning.

Analyst
Timothy Wojs

So maybe just, again, going back to your last comments there Vern, just on the profitability improvement that you're expecting in the fourth quarter. You mentioned that you expect EBIT to be -- EBIT margins to be up year-over-year and sequentially. Should we think the same for gross profit? Just there was that headwind from the load-in on the sales line, but also think there was a headwind not only from that load-in, but also just some negative operating costs that hit the gross profit line, the COGS line in the fourth quarter last year. So any commentary you can give us on just gross margins being higher year-over-year in the fourth quarter would be helpful?

Executive
Vernon J. Nagel

Sure. So you saw that this quarter our gross profit margin improved well, sequentially to 40.5%. It was the first time in, I believe the last three quarters that we have exceeded 40% the gross profit margin level, a key indicator for all of you and for us internally as well. We would expect to see improvement in Q4 as well. As you know, and we mentioned the last couple of quarters because of some of the intra-channel mix, customer mix within the retail channel and how we serve those customers, it is having an influence that lowers, if you will, based on historical standards, our gross profit margin, but it is made up in lower SDA. We estimate that in the third quarter that impact lessened our gross profit margin by approximately 30 basis points compared with the year ago period. So we are expecting improvements in Q4, particularly as we look at various products and product categories within our portfolio that really don't meet our margin hurdles, our return on investment hurdles. So we're looking to prune that back, which I view as a very favorable activity. And so what that should do in Q4 little bit of noise going out, it will contribute to most likely lower sales in Q4, but a higher margin profile. And as Ricky and I said in our prepared remarks, we're expecting that to result in constant or consistent operating profit dollars.

Analyst
Timothy Wojs

Okay. And then, I guess just to be clear, you would expect gross margins to be up year-over-year in Q4 or sequentially as well?

Executive
Vernon J. Nagel

I would expect them to be up sequentially. The headwind, well, oh, excuse me, for the year-ago period, we would expect them to be up pretty meaningfully above the year-ago period.

Analyst
Timothy Wojs

Okay, great. And then maybe just switching over to kind of the tariffs. What have you heard from your customer base in terms of the move from no tariffs to 10% and then just the incremental move from 10% to 25%? Have your customers or your channel partners being able pit to pass that on to customers? Is that what you've heard