Acuity Brands Inc (AYI) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Acuity Brands' fourth quarter and full year earnings conference call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded at the request of the Company. If you have any objections, you may disconnect at this time. Now I would like to introduce Ms. Karen Holcom, Vice President Financial Services of Acuity Brands. You may begin.

Thank you. Good afternoon. Jim Balloun, our Chief Executive Officer; Vern Nagel, our Chief Financial Officer, and others selected members of our executive team are here today to discuss our 2003 fourth quarter and full year results. We're webcasting today's conference call at www.AcuityBrands.com.

I would like to remind everyone that during this call we will make projections or forward-looking statements regarding future events or future financial performance of the Company. Such statements involve risks and uncertainties, such that the actual results may differ materially. Please refer to our most recent 10-K and 10-Q SEC filings 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 Jim Balloun.

Thank you, Karen. And welcome to today's call. I will be brief with these opening comments to allow plenty of time to address your questions. Today we reported net income for the 2003 fourth quarter of $14.3 million, or 34 cents a share, compared to $15.4 million, or 37 cents a share, reported for last year's fourth quarter.

Net income and earnings per share included $8 million of pretax expense, or 12 cents a share, related to the previously announced settlement of a litigation with Genlyte, and approximately $2.7 million of pretax expense, or 4 cents per share, related to environmental matters.

We continue to reduce debt at a pace that exceeded our prior expectations, ending the quarter with total debt of $445.8 million, which is down $48.6 million from the end of the third quarter, and $97.3 million from the end of fiscal 2002.

Net sales for the fourth quarter were $533.7 million, an increase of 3.6 percent over last year's fourth quarter. This growth in net sales occurred primarily at Acuity Lighting Group, or ALG, due largely to increased shipments through certain distribution channels and the impact of previously announced price increases. For full year, Acuity Brands generated net sales of $2,049,300,000, an increase of 3.9 percent over fiscal 2002. Net income for the year was $47.8 million, or $1.15 per share, compared to last year's net income of $52 million, or $1.26 pro forma earnings per share.

In addition to resolving the Genlyte litigation, we also addressed certain environmental matters at ASP. These were more fully addressed in our press release.

With the conclusion of fiscal 2003, I am very pleased to report solid financial results, as well as substantial progress made through the year in further implementing strategies and initiatives that are focused on making our businesses stronger and more successful financially.

If you exclude the impact of the charges associated with the Genlyte litigation and environmental matters at ASP, our full year results would have been essentially in the middle of the range of earnings projections that we provided a year ago at the beginning of this fiscal year, although our fourth quarter EPS would have advanced 35 percent over the last year's fourth quarter. And we accomplished this while continuing to confront difficult economic conditions that were worse than we expected throughout much of the year in key markets.

During the year we accelerated initiatives to streamline our manufacturing capabilities, improve our margins through better pricing and selling effectiveness, and penetrate new markets with superior value propositions. These initiatives all had a positive impact on our 2003 financial and operational results, and will carry forward to the next year. Our goal continues to be to generate more acceptable margins and cash flow to fund future innovation, and to build greater customer service capabilities, while providing higher returns to our shareholders. While our near-term economic outlook remains cloudy, we remain confident that the long-term potential of our businesses is very bright.

Earnings projections for fiscal 2004 will be provided later in October, once the business plan for fiscal year 2004 has been approved by our Board. We have an extensive conference with our Board coming up next week, and we're just going to hold off on that until we finish with that.

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

(OPERATOR INSTRUCTIONS). Our first question comes from Craig Kennison of Baird.

Good to talk to guys again. Congratulations on a good quarter. The first question has to do with the environmental litigation. That is a new issue with which you are going to deal with. Could you talk about what might be a worst-case scenario. It looks like you took a charge for what you thought was appropriate, but what might be a worst-case scenario?

Let's talk about that in a couple of buckets. I think before we talk about the numbers, I would like to say that we're disappointed in this on two counts. Financially, this has cost us some money in a year that otherwise was a pretty good operating year. But more importantly, this is isn't us. We want to do things the right way, to fix things before problems arise and not after. And this is a lesson to us, and a sobering one.

We have invested money in fixing these problems. They did no damage to anybody, but they cost us money. And hopefully there behind us. You asked a specific question, what are the financial implications and whether we have incorporated all of that. And I will let Vernon deal with that question for you.

Hi Craig. As you might imagine, where we are at in this process is really in the very early stages of it. So quite frankly, it is really too early to determine and even give you guidance on that, where we are at in this process. Like we have handle other issues, we go at it very aggressively. And we will put our best team forward on it, and continue to work with folks to make sure it has the best possible outcome. But right now, it is just too early to put a number on it financially.

I think one thing we ought to make clear is that this is not a continuing environmental problem, it is a problem that came up. We're disappointed in it. We had put the capital investment required to fix the problem. And we have made some organization changes. And it is fixed, and the city is happy with us. But, Ken, you might talk about what continuing exposure we might have.

Jim, I guess what I would like to do is just give kind of a comprehensive answer that may address, but not directly, the question that has been asked. We may anticipate some other questions, and then maybe we can just leave it at that. Obviously, since this is a pending matter, we're not willing to get into much depth here. But we are willing to give some texture and context to what we disclosed in the press release by adding some other publicly available information.

First some background. Pursuant to a permit issued by the City of Atlanta we pretreat wastewater from our manufacturing operations at ASP, and then discharge that wastewater into the City of Atlanta sanitary sewer system. The city, of course, has its own water treatment system. Among other things, the city regulates phosphorus levels in our discharge because the EPA regulates phosphorus in the city's discharge from its wastewater treatment system.

The issues involved in our discussions with the city revolved around two things. First, phosphorus levels in our wastewater discharge on some days exceeded the level specified in our permit. And second, there were allegations that on one occasion we improperly diluted our discharge. As Jim pointed out, we're currently in compliance with our permit requirements. And we're making capital improvements to both expand the capacity and enhance the effectiveness of our pretreatment system.

As indicated in the press release, and as Jim alluded to, we have reached a tentative agreement with the city, resolving all of their claims involving the historical compliance issues. The federal grand jury investigation, we believe, relates to the same sort of historical issues. But because we're at a very preliminary stage of those grand jury proceedings, we are unable to say anything further about them.

Okay, thanks. In one way that Acuity has been able to grow its topline faster than the industry has been to expand in certain channels. And that has required you to take some one time inventory buy downs in various channels. Ultimately that is a benefit, but in this past year it had an impact on your margins. To what extent should we anticipate any impact on margins going forward, or are those sort of channel inventory buydowns, for lack of a better term, behind us?

Craig, actually the act of doing inventory buy downs really was -- it has not occurred. A lot of the investment of that we have going on is really to do a store recess, resetting if you will the point of purchase displays in the stores, as opposed to buying down inventory. In fact, we're buying down no inventory.

We had one channel that we expanded into earlier in the year, where there were some activities revolving around competitive inventory. But that was away early in the year. So really for the second half you have seen none of that. But what you have seen, again, is this investment in store resets. And our selling expense, when you examine it in its totality, is up about a point. And that has a lot to do with these types of initiatives and other initiatives to improve the selling effectiveness of our organization at both businesses.

So our hope is, is that we will see this trend come back to a more of a historical trend. But our expectation is that you'll see a little bit more of it as we enter into next year, simply because we haven't reset all of the stores that we have the ability to do so.

Okay. If we could shift gears just to the relationship with Home Depot. If you could discuss that relationship. What exactly is the nature? What role does Lithonia fill at Home Depot? And why would Home Depot consider Lithonia a strategic partner?

You can take that on two counts. In the Lithonia brand we have the largest single, best known brand for commercial lighting fixtures in North America, which is a real advantage to Home Depot, and they are an attractive customer to us. So it is a mutual advantage. We don't think it interferes with our project business or our stock and flow business in any material way. It opens up a whole new range of contractors and small businessmen who find it convenient to shop in Home Depot. And it is adding incremental volume to us in a way that is profitable.

If you look at Zep Chemical, where we have a very large cleaning chemical business in Home Depot, again, the research we have done is that not very many people know about Zep. But once they use it, they prefer it to other brands.

And we think there's a tremendous opportunity in the Home Depot setting to get people to try it, to repurchase it, and then to continue using it. It is, in fact, in test a superior product. It is less dilutive. It is more effective. And people who are experienced with the product, like it. So it just seems like an ideal marriage. And as you know, since the time we introduced that about six years ago at Home Depot, it has grown very rapidly. Ken, you want to add to that?

I would also comment on the lighting side, it gives us an opportunity to further expand our exposure into the retail, or the residential, side of the world where we have not traditionally had strength. And so what it is actually doing, Craig, is giving us an opportunity to better diversify our portfolio of businesses and our portfolio of end markets that we touch, hopefully giving us greater capacity to be more consistent in our earnings performance as we go forward.

Is there a way that an outsider like myself can measure the success of that strategy with Home Depot?

Well, we will continue to report and provide transparency as we go forward. Our relationship with folks in the home improvement channel and other mass merchandisers will become, we hope, more significant. And so we will articulate that and provide clarity on that in our upcoming 10-K. And so, yes, I think there will be ways that you'll be able to judge our effectiveness as we go forward.

Great, and one more question, and then I will get back into the queue. I would like to ask about your dividend policy. Given your high level of debt, is that dividend policy expected to change in any way in the upcoming shareholder meeting?

Not at all. If there was every a time when we couldn't afford to pay the dividend, it was two years ago, and we're in much better shape now. And we intend to continue the dividend at the same level for the foreseeable future.

Great. Thanks for the answers, and congratulations again on a good quarter.

Our next question comes from Ed Freeis (ph) of Sterling Capital.

Good afternoon folks. Just a couple of traditional questions. Just if you can go through capital spending budgets for this upcoming year? Secondly, on the working capital side, the nature of the inventory improvement has been very impressive, and I'm curious if the pace of that is going to continue? What is allowed for it?

And then finally, if you can talk through, as much as you can, the price increases at Lighting? What percentage of the SKUs are actually getting price increases, or what percentage of the channels are seeing the price increase? However, you want to scale that, and kind of the nature of the competitive response.

Vern, why don't you --

Sure. Let me start --

We have got a big supply chain question here and a revenue question.

Ed, let me start with your first question on capital expenditures. In 2003 we spent approximately $28 million. If you look at our historical pattern, this Company has spent approximately 2 percent two percent of revenues, in terms of what it has invested in the business. We were down slightly this year because we have been preparing, if you will, to embark upon some major initiatives that you have heard us talk about in terms of improving our supply chain, in particular our manufacturing capability at the Lighting Company. Some of that capital expenditure, or capital investment, really is more of a deferral and delay as we prepare. So if you imagine that we typically spend around a couple of percent, we were down approximately $10 million or so from that number. My guess is that we will catch back up to that as we go forward and maintain our historical average.

We actually said at the beginning of the year in our 10-K that we had anticipated investing between 38 and $42 million in 2003. So that difference in that shortfall, I would expect to see us catch back up as we go forward. So we will provide, by the way, more guidance on this, as Jim said earlier in his opening comments, after we have had a discussion with our Board on our plan.

I think I would add one thing to the capital investment, Vern. That there is little or no debt here on capacity addition or growth in volume. Relative to the past, it is more directed toward cost reduction and new product introduction and modernization of the equipment, and less toward expansion and volume.

It is very much directed towards productivity. One of the outshoots of that is going to be the fact that we will get the benefit of being able to produce more, better quality, more effectively.

Let me now with that into the second question on the inventory improvement side. What you're really seeing is an all-out attack on improving our entire supply chain. And if you imagine that the supply chain really for most businesses, especially in this day and age, needs to be globally competitive. We deal primarily in the North American market, but we're dealing with every competitor in the world trying to come into this market. So the idea behind our philosophy of attacking the supply chain is to be globally competitive.

In doing so, we are now starting to source product, literally from all over the world. We're also examining our capabilities within our own factories. We are improving the techniques that we do, the idea of continuous process improvement, focusing on lean manufacturing techniques, reducing cycle times. All of these are having tremendous positive benefits on how we are conducting ourselves, and our ability to be efficient from the manufacturing side. We're working diligently with the engineering folks on how we develop our products, so that we can further push that back into working with our vendors from a supply chain point of view.

The impact of these types of initiatives are incredibly powerful and you are seeing the benefit of them as we continue to reduce the working capital investment in our business. I also believe, and we're quite optimistic, that as we eliminate these non value-added opportunities, what you're also going to see happen is our cost base is going to decrease. So as this economy comes back, and we hope that it will at some point time in the future, we're going to an ability not only to survive but really thrive. And so our hope is that that you will continue to see that not only in the working capital side, but in margin improvement.

And you started to see that really in the second half at the Lighting Group where margins started to advance quite nicely. In particular, if you look at our fourth quarter (technical difficulty) operating profit margins, they pick up 2.7 points year-over-year, which is quite a strong performance. And that is an indication of the success that we're having on these initiatives to improve our supply chain.

I think the third question was on the pricing activities within the marketplace. Ed, as you know, and I believe it was lighting that you were referring to, the lighting market continues to be a very challenging market. In fact, if you look at 2003, F. W. Dodge, a forecasting outfit, has suggested that the nonresidential construction market in 2003 will be down approximately 6 percent. They are expecting a bit of an uptick next year, but it is still modest, 2.5 to 3 percent somewhere in that range.

Our original productions were predicated on the fact that the markets would be flat, and in fact they were down. So the idea that pricing in the marketplace would continue to be very, very aggressive is certainly true. We put forth a price increase essentially effective in the middle part of January, I believe it was. And that has had a positive benefit on our pricing and on our margins as we have gone forward throughout the year.

There has been some competitive response but we have, generally speaking, maintained our pricing. It hasn't been across the board. It is been on product by products situation. And our sense is is that we will continue to see benefit from that. It does not mean that we will not defend our best customers and defend marketshare where it is appropriate, because we have seen some competitors in specific regions, specific channels, where there have been a competitive response, attempting to use price to win business. But generally speaking, this year for us we have been able to offset, if you will, some of the price degradation that has historically impacted this market.

If I could just follow up with one last question on the chemical business. Can you give us any sense of marketshare gains in the face of some of your competitors consolidating, or just kind of general trends there from a marketshare perspective?

I would say we're gaining a little bit of ground. The most interesting thing about that business is that, if you look at direct sales competitors, and look at their margins, ours are an order of magnitude about twice as high as most people in the direct sales business. If you look at Ecolab that is not true. But if you were to look at the direct sales companies, we have been able to stabilize, and we're starting to grow our margins a little bit. And aside from the retail side, we don't look for a very rapid gain in marketshare in the near-term future. But we have been able to stabilize the sales force and start growing it again, and to maintain and start growing margins again. And we think that is a very good sign.

Thank you.

Our next question comes from Allison Fish (ph) of Xena (ph).

My question is already answered. Thanks.

Our next question comes from Fritz von Karp (ph) of Sage Assets.

Good afternoon. A couple of questions, first on pricing. Before you had been talking about, and if I missed this early in the call, I apologize, about that you would -- remind me -- announced I think it was a like 6 percent price increase on some, not across the board, but on some products? And I was wondering, A. how much of that 6 percent did you get on those selected products? And what would that translate into on average, given that you didn't -- whose price you did not raise?

Well, let me give you the spiritual answer and then, Vern, you might help with the dimensions of this. Early last winter we did announce a 6 percent price increase. And we were pleased that most people in the industry seemed to understand the need for this. That was not across the board. There is, of course, a lag whenever you do that, and it applies more to some products than others.

If you look over a long period of time, you can bet on 1.5 percent per year erosion of prices in our lighting business. So every year you start off another 22, $23 million in the hole that you have to make up. This year we kind of brought that to a screaming halt. And that is odd, because it didn't happen by accident, because you would expect in a continued weakening environment that it would be continuing to go down. But a combination of not only the 6 percent announced price increase, but also become the becoming a little bit more detailed, more careful in the details about enforcing terms and conditions; not taking back things free when they are not supposed to be taken back free; not giving discounts when they're not supposed to have discounts; being careful about freight allowances and so on. We have brought that to an absolute halt this year.

And just so I understand, so a you're saying that pricing in general is right now in the quarter, I suppose, is about flat?

It is about flat. Correct me if I am fine wrong, Vern, but it is about flat with what it was a year ago.

A little better or a little worse than flat.

One thing I was going to say is it very difficult to precisely say what is price, what is mix. We serve just an myriad of channels, a myriad of customers. And it depends on the type of project or where the product is actually going. But quite frankly, as Jim was articulating, we have put forth a tremendous effort in terms of our strategic margin management activities or initiatives to get at better valuing our propositions to our customers, better explaining this to them. Because we have continued, actually we have increased the pace of new product introduction and new services to the customer base. So it is a bit difficult to precisely say that it was a price increase on a product A that has caused us to stem the tide versus mix of going in and differentiating products that we sell to either similar customers, or new customers in similar channels, or different channels.

Having said all of that, Jim's point is that from a mix point of view and a price point of view looked together, we have been able to be essentially flat this year, which has not happened in a while. And we will continue to push that effort to draw that differentiation as we go forward.

I think I would like to emphasize one other thing too. It is one thing to announce a 6 percent price increase over the whole Company, and that certainly did a lot of good this year and had its impact.

But beyond that, here is one of our best young leaders put in charge of an entirely new organization, the sole purpose of which is to develop the information systems, develop the control mechanisms, dig into the details of price and revenue management with the goal of comprehensively in detail increasing our revenue across the board. We believe that is going to have major impact on our business. We have put resources behind it. We have put leadership behind it. We are investing in the information technology necessary to get those details in the hands of people who can do something about it.

And so I would think of this in two ways. One is the 6 percent across the board price increase. But the other one that is likely to have more impact in the long-term, is the understanding, the development of an organization, the leadership, the details, the information systems that are going to get at get at this in a comprehensive way. And we have never done that before.

I understand. It makes sense. It makes sense. And then just a follow-up on that environmental thing. Is that a criminal probe or a civil probe?

At this point all I can say is we've gotten subpoenaed to produce documents before a grand jury. There are no charges outstanding at this point, so I can't really answer that question.

Got you. Okay, I see. Thank you.

Our next question comes from Bruce Geller of DGHM.

Good afternoon. You guys had a great improvement in your operating income, so congratulations on that. Kind of on that note, at the end of August when you put out your press release talking about the settlement of the Genlyte litigation, you kind of reiterated guidance at that time. However, the numbers did come in, I think, quite a bit better than your guidance and then people were anticipating. I am just curious why you did not take the opportunity then to discuss that fact? Did you just not realize it at the time, or where you just pleasantly surprised with the results from August? Is it because things have been getting better sequentially?

Bruce, this is Vern. At the time of the announcement, you might imagine, we're in the throes of our quarter and working quite diligently to conclude the quarter and the year. And our sense was that we were putting together quietly a good quarter from a volume point of view, but mix has a very big impact in our business. And so to precisely know the mix, we don't. And so to change the level guidance we just felt was not appropriate to do that.

But I will tell you that we worked very diligently to make sure that we service the customers and the orders that we had, and make sure that those were delivered on time. We also did a very good job continuing to penetrate the home improvement channel. And we really, I think, did quite a good job there of shipping product as they needed. So it was both value and expense control management that allowed us to do that.

The other thing that I would say, we're really pushing very diligently the supply chain and improving our cost structure. And we're just getting our arms wrapped around the power of that from a profitability point of view. So that had some impact as well.

Okay. Just as a follow-up, not to steal the thunder from your Board meeting and your announcement subsequent to that, but I am just curious, in light of the economy that is showing some signs of improvement here, your ongoing cost rationalization program, your much lower interest expense, now that you have paid down so much debt, is there any reason why the next few quarters would not be in a similar range from operations as the one you just reported? Am I missing something?

Well, historically we have -- our business really has -- it is a tale of two halves, if you will. The first half typically from just a seasonal pattern is softer. Why? Because we have the holiday season. We have seasonal activity. So we would expect the first half be softer, if you will, than the second half. Conversely, we would expect the second half of next year to be stronger.

So having said that, our expectation is that we will continue to block and tackle well in our business. But the markets that we see right now continue to be tepid, and give us some cause for concern. So as we discuss our future plans with our Board, we will make sure that they understand and we understand that in terms of us giving guidance.

Understood. Just as a final follow-up to an earlier dividend question. What is the payout ratio that you are targeting over time?

We would like to be consistent with the S&P 500, or the manufacturing folks in that range. But I would imagine that that number would be anywhere from 25 to, say, 35 percent payout ratio. Our goal is to grow into that percentage from an income point of view, not when we (inaudible).

Sure. Well, let's hope you get there this year.

We are working damnably hard to do that, but I don't know if we can --

I know. Okay. Well, I guess on that note, presuming you do get there at some point, would there be anything to preclude you from starting to raise that dividend once you got down into that lower payout range?

The Board will determine the opportunities at that point in time, frankly. As as we continue to become a better business, we will have more and more strategic choices in front of us. But right now our focus is to improve the margins of our business, to improve the cash flows of our business, and to give us ourselves greater financial flexibility to have those choices. So it would be difficult for me to say what will happen down the road, but our objective is to give our Board and our managers those choices.

Let me pile on that just a little bit too. If you think about this in terms of history, two years ago we really had to pour the coal on cash in getting our debt down. And the banking environment was not all that lenient two years ago. Today we are in a place where we pay, what Vern, $200 million of our $650 million debt off?

We paid almost 31 percent of our debt since our inception on November 30th (inaudible).

Which was less than two years ago. And we have used that time to lay in place some highly focused, well structured improvement initiatives that are starting to pay off. We've got a lot of them underway. And we've got a full menu of profit improvement and asset rationalization in front of us for another couple of years, during a time when we don't see any real breaks from the market. If you look at our order rate, there is nothing there that would cause you to believe that next year is going to be spectacular.

If you look at the level of activity we have underway to get a lot of things done, it is pretty huge. Now the potential impact of that is very high. But there is so much going on that is premature to start counting the benefits of it. You know, that'll give you a flavor. Our focus is absolutely on making this a better business before it is a bigger business, before we start thinking about dividend increases or acquisitions or anything that might be other than right on the ball of improving our business.

Great. Glad to hear it. Thanks. Good luck.

Our next question comes from Dennis Delafield of Delafield Asset Management.

Will you talk a little bit about the $1.9 million charge in the Specialty Products Group and what it represented, and anything you can tell us about it?

Sure. Dennis, in the fourth quarter we took a $1.9 million charge, primarily to write down the value of certain inventories to fair market value. Those inventories primarily related to products that we actually were taking through the retail channel, where the product introduction and its acceptance into the marketplace changed quite rapidly. And so our view was that to actually sell those products at appropriate value, we needed to write it down from an accounting point of view. So we did. And we don't expect that necessarily to be something that would repeat itself as we go forward.

The products are still being sold today?

They are, but at a very, very slow pace, frankly. The other piece to that were some applicators that we sold through the I&I channel, tire applicators that went into the automotive industry. And those products were just generally were not accepted, while again, it was an introduction, a new product, attempting to differentiate in the marketplace.

I see. Do we look at this as sort of a marketing cost which is likely to recur every year, or do you think this is a one off --

No, in fact I think that as we continue to examine the processes in our business, frankly, we are attacking how do we go to market with new product introductions more quickly, more cost effectively. And I think that this was a learning that went on, and it goes back a little while. And I think we have learned how to do that a little bit better.

You know, whenever you're dealing in the retail sector you are always going to have to take chances, or make investments on new product introductions. Some of them are going to work; some of them aren't. But I think the learning from it is how do you do it more effectively and without this type of cost impact. And I do think that we have done that.

But your point in looking at, if you will, the margins that were reported by Acuity Specialty Products and trying to then understand, is this a recurring thing is a very good question. And our expectation is that the answer should be no.

Thanks very much.

Our next question comes from Bill Tightner (ph) of Frontier.

This is Bill Tightner at Frontier Capital. The operating margin that you reported in the quarter was over 8 percent, when you X out the one time items. And I was wondering if there were any one time benefits in the quarter that helped you, or if they were just things that hurt you?

One time benefits, I would say generally not. I would say that there are continuing benefits as we talked about. How do we lower our costs through our supply chain initiatives? How do we lower our costs through better strategic sourcing? Things of that nature. But those aren't one time, those are things that we continue to work on very diligently.

There weren't any sale of assets, or anything like that?

No.

And also looking forward over a five-year period, what kind of EBITDA margin do you think you can achieve, given the level of profitability that you got in this quarter plus all the things that it sounds like you are still working on in terms of improving your profitability? Do think that you get to something like 10 percent, 12 percent? Is that plausible over time?

Bill, in our most recent 10-K we articulated what our long-term objectives are. And in terms of earnings improvement, we want to be a Company that can provide 15 percent EPS growth annually. We would want to be business that has the ability to generate consolidated operating profit margins of 10 percent or better. We also want to be a business that continues to generate cash.

More specifically, what we said is that we know that this is a long-term march. We also know that we are in a very difficult environment. So our objective is to improve our operating profit margins at least 100 basis points or more per year. From the results that we recorded for the full year, our operating profit margins were 5.4 percent. But as you correctly note, there were charges in that.

So again, our objective is to continue to improve those margins as rapidly as we can. We think that the initiatives that we have to improve our margin management, as well as to improve our cost structure, both from a supply chain point of view and also attacking our overhead structure, is critically important. When we report, excuse me -- if you look at how we manage our headcount and things of this nature, all of these trends are positive for us. Those are our goals. And to say when precisely, I think, would be inappropriate.

Great. Congratulations.

(OPERATOR INSTRUCTIONS). Our next question comes from Fritz von Karp of Sage Assets.

I wanted to ask two questions related to things overseas. And like on the buy side of your supply chain and on the competition side, you mentioned -- and these are things that you have mentioned. One, that you're competing globally in the United States. If you could just give a little bit more color on that. And what going forward the impact on pricing might be of more foreign competition?

And then part B would be, as you said you are sourcing oversees more, could you give some more color on that? And maybe say how much -- some sort of percentage of what you buy is coming from low-cost countries?

It's actually very interesting. The idea that the North American market is globally competitive -- it is really globally competitive with domestic based companies, who are actually sourcing themselves. And so it is as these folks become better sourcers that we are actually experiencing what we call global competition. We don't see a great deal of companies that are actually foreign-based companies coming into this market competing in the lighting side. If you look at the largest four players in this lighting fixture market in North America, again, they are all domestically based businesses.

So our sense is, is that we need to continue to be -- to provide the superior value to our customers in both the value proposition, meaning the futures of the product, as well as being cost competitive. And to the extent that we're able to find these products that meet our quality standards in areas of the world that offer it at a lower price, or a lower cost, that is what we're doing. And we're working with our supply base to continue to drive that opportunity.

Can you quantify that, the latter part? How much you source from low-cost countries, or how it has changed? Can you put some numbers on that?

Actually, it would be very difficult to do that. Because in many instances what we're doing is we're working with our vendors who are supplying products where it may actually be manufactured here, but working with them to source product, if you will, that comes from offshore, whether it be steel, or whether it be plastic components, or whether it be subassemblies. So actually it would be difficult to do that. We are engaged in a study to better understand that so that in the future we might be able to articulate that to you.

Thank you.

There are no further questions. I would now like to turn the conference back over to Mr. Jim Balloun for any closing remarks.

We really appreciate your interest in Acuity Brands. We think we've had a successful first two years as a Company and are gathering steam. And we're pleased with our results this year in a head wind. And we're pretty confident about the coming year, although we have a lot of things going on. And we appreciate your investing in us and paying attention to us. We are excited about the future of the Company, and look forward to more good things as we go on. Thanks a lot.