Acuity Brands Inc (AYI) 2006 Q1 法說會逐字稿

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  • Operator

  • Good afternoon, and welcome to the Acuity Brands 2006 first-quarter results conference call.

  • After today's presentation, there will be a formal question-and-answer session.

  • At that time, directions will be given on how to ask a question.

  • 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 Mr. Dan Smith, Vice President, Treasurer of Acuity Brands.

  • Dan Smith - VP & Treasurer

  • Good afternoon.

  • With me today to discuss our first-quarter results are Vern Nagel, our Chairman President and Chief Executive Officer;

  • John Morgan, President and CEO of Acuity Brands Lighting;

  • Ricky Reece, 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 risks and uncertainties such that actual results may differ materially.

  • Please refer to our most recent 10-K and 10-Q SEC filings in 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.

  • Vern Nagel - Chairman, President & CEO

  • Thanks, Dan.

  • Good afternoon, everyone.

  • Before we turn it over to -- or open it up to questions, I would like to make a few comments about our quarter.

  • Overall, we are very pleased with the performance of our organization on really many fronts.

  • We believe that you're starting to see some of the benefits from programs previously implemented to streamline our operations, to enhance our customer service, to improve our manufacturing and transactional efficiencies and benefits from the introduction of new products.

  • These programs, as well as other continuous improvement actions, including our pricing product review process, benefited the Company's performance and operating margins in the quarter.

  • When you look at our earnings per share for the quarter, we reported $0.48, $0.18 above the year-ago period or up 60%; very strong results.

  • Similarly, net income, we reported $22 million, up $8.8 million or 67% over the year-ago period.

  • Net sales for us in the first quarter of 2006 were a first-quarter record at $566 million, up a little more than $40 million or 8% over the year-ago period.

  • Both businesses reported strong sales increases with our Acuity Brands Lighting business being up approximating 9% and our Acuity Specialty Products business being up approximately 4%.

  • When we look at the overall increase of $40 million plus on the top line, approximately two-thirds of the increase was due to price and better product mix of products sold and approximately one-third of the increase was due to volume increases in the period.

  • With regard to pricing, our business has instituted multiple price increases in 2005, reflecting both the dramatic rise in cost, primarily for raw materials, components and freight and our ongoing efforts to more effectively price our products in the marketplace, reflecting their value and use to our many end customers.

  • Our continued efforts to improve margins are critical to allow us to continue to invest in new, more innovative products and services, which, again, benefited our first quarter.

  • Net sales in the current quarter were benefited by unit volume growth in key channels and certain brands, including the home improvement channel, our Hall of Fame business, Austin (ph) Lighting Products and a number of our international operations.

  • While overall market demand became somewhat more favorable in the quarter, we saw some sluggishness in orders for office buildings and certain commercial and industrial applications.

  • We estimate that constructions put in place expanded between 1 and 2% in our first quarter over the year-ago period.

  • Demand for light fixtures continues to fluctuate based on the channel and markets served.

  • We expect this trend to continue through the second quarter and then show very positive unit growth for the remainder of 2006.

  • I'm pleased to report that our backlog stood at $158 million at the end of the quarter, up about $6 million from our year end.

  • Moving on to our operating results, operating profit was $42 million for the first quarter of 2006, up almost $14 million or 49% from the year-ago period.

  • Operating profit margins expanded 200 basis points to 7.4% in the first quarter compared with the year-ago period.

  • We are very pleased with the growth in operating profit and operating margins, as programs I noted above are beginning to benefit our financial performance.

  • The growth in operating profit was due to an increase of approximately $12 million in gross profit and a reduction in operating expenses of approximately $2 million.

  • Gross profit grew nicely in the quarter.

  • The increase was due primarily to benefits from higher selling prices, the contribution margin from greater shipments and improvements in manufacturing efficiencies.

  • This was partially offset by higher costs for raw materials, components and freight.

  • More specifically, as we look at our raw material component freight costs, it increased approximately $20 million in the current quarter compared to one year earlier, very dramatic increase.

  • These costs were more than offset by multiple price increases implemented in both businesses in 2005 and a better mix of products sold.

  • We estimate that the higher unit volume contributed approximately $3 million of the increase in gross profit in the current quarter.

  • The remaining improvement in gross profit was primarily due to better manufacturing efficiencies.

  • We continue to make very good progress in a number of our facilities as we look to improve our cost dynamics in those locations.

  • Gross profit as a percentage of net sales declined to 39.8% in the first quarter of 2006 from 40.7% in the year-ago period.

  • The decline in margin percentage is primarily due to the impact of higher selling prices going to offset the dramatic rise in material costs and freight costs in the quarter.

  • As we look at operating expenses, operating expenses actually declined $2 million in the current quarter compared to the year ago.

  • The decline was impacted by four key factors, lower selling, general and administrative costs, primarily due to the previously announced reduction in force, lower share-based compensation expense due to the impact of variable accounting for certain of our stock-based programs, higher logistics costs due to greater unit volume and fuel costs and higher commission due to the greater sales noted above.

  • As a percentage of sales, operating expenses actually declined to 32.4% in the current quarter compared to 35.3% in the year-ago period.

  • Again, remember that approximately $20 million of the increase in net sales was due to higher prices offsetting raw material, component and freight costs.

  • Nonetheless, I believe we made very good progress in containing our operating expenses during the current quarter.

  • Moving on to our financial position, we again made significant progress in improving our business processes and our overall effectiveness.

  • As a consequence, we were able to improve improvements in cash on hand, operating working capital and cash flow from operations compared to the year-ago period.

  • Overall cash flow from operations was $12.5 million in the current quarter compared to a cash use of almost $18 million in the year-ago period, a very significant turnaround.

  • Higher earnings and continued focus on receivables management, particularly at Acuity Brands Lighting, were significant contributors to the improvement.

  • Inventory picked up a little for us in the quarter, as we looked to improve our service capabilities in certain channels and as we prepared to consolidate against certain manufacturing facilities as part of our previously announced program to streamline our supply chain.

  • We expect inventory days to again show improvement as we get into the second half of 2006.

  • Capital expenditures in the quarter were about $4 million.

  • While this is lower than our historical spend, it is not unusual and it's very consistent with our focus on improving our asset utilization.

  • We expect to invest approximately $40 million on equipment and tooling in 2006.

  • I'm quite pleased to report that our cash position grew to $105 million at November 30, 2005 from approximately $99 million at the end of August.

  • Therefore, our debt position net of cash now stands at $267 million.

  • Our net debt to total capitalization is now 32%, well below our target of 40%.

  • In early November, we began acquiring shares in the open market as part of our previously announced program to repurchase up to 2 million shares.

  • We acquired approximately 400,000 shares at an average price of $30.10 during the quarter.

  • Also in the quarter, we generated approximately $10 million in cash and stock option exercises, offsetting much of the impact of our buyback program in the period.

  • As we look forward to the remainder of 2006, we continue to be very optimistic about our future.

  • Our financial position continues to improve, providing us with great flexibility.

  • We expect that past actions and our continuing improvement initiatives will create the more efficient and effective operations, producing results expected by you, our key stakeholders.

  • Our service to customers continues to improve and we are making progress in creating a leaner, more efficient Company.

  • I believe that we are on target to achieve the previously announced annualized savings run rate of approximately $50 million by the end of our second quarter of fiscal 2006.

  • Additionally, we continue to be encouraged by external forecasts that are projecting unit volume growth for the calendar year 2006 in the nonresidential construction industry, which as you all know is a core market for us.

  • To the extent that this occurs, we believe that it will have a very positive impact on our unit volume for lighting fixtures.

  • We expect our cash flow from operations to remain strong while investing, again, approximately $40 million in capital.

  • Our enthusiasm is somewhat tempered by the continued high cost of certain items, including oil-based materials and the unpredictable nature of our second quarter, which, again, as you know, is historically our weakest.

  • We expect the second quarter of fiscal 2006 to be challenging due to the normal seasonality and the unpredictability of the buying patterns of certain customers as they may seek to reduce inventory levels as they approach the end of their fiscal year.

  • Nonetheless, we remain very confident that for fiscal 2006, we will make meaningful progress towards the achievement of our longer-term financial goals.

  • Importantly, the goals include growing our earnings per share in excess of 15% per annum with fiscal 2004 as our starting point.

  • Actually, before taking any questions, I'd like to welcome Ricky Reece to Acuity Brands as our new CFO.

  • Ricky, who joined us on December 1, brings tremendous financial and operational management experience to our team.

  • We look forward to his contribution.

  • And also, Karen, I would like to thank you for your time, effort and her actions in so ably assisting us as the interim Chief Financial Officer.

  • Karen will continue in her role as Vice President and Controller.

  • So with that, I would like to open it up for questions.

  • Operator

  • (Operator Instructions).

  • Robert McCarthy and CIBC World Markets.

  • Robert McCarthy - Analyst

  • Good afternoon, gentlemen, great quarter.

  • Just a couple of questions.

  • Is it possible to get some granularity, particularly with Acuity Brands Lighting in terms of sales increased around 9%.

  • Was that along the lines of what you said for the overall Company, two-thirds price and one-thirds volume?

  • Vern Nagel - Chairman, President & CEO

  • Yes.

  • Robert McCarthy - Analyst

  • And what was it for ASP?

  • Largely the same?

  • Vern Nagel - Chairman, President & CEO

  • Largely the same.

  • Robert McCarthy - Analyst

  • And could you quantify or give us some color of positive impact from the home improvement market and the offset from the commercial industrial markets -- was commercial industrial down?

  • I guess non-res was flat but what was C&I overall?

  • Vern Nagel - Chairman, President & CEO

  • Let me take one stab at your question and then I'm going to turn it over to John Morgan for additional comments.

  • Our expectation or our estimate is that the nonresidential construction market was up between 1 and 2% on a dollar-adjusted basis, if you will, in the quarter.

  • We so variability in the various channels that we serve.

  • Some were up a little bit more than that for us, primarily due to new product introductions and service enhancements that we made and others fluctuated a little bit downward, primarily, we think, due to timing.

  • So, I would say that from a color point of view, what you see is pretty much what you get in terms of that 1%.

  • We were a little bit above that, again, because of new product introductions in a couple of different channels.

  • John, would you like to add some additional comments?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • I would say, Rob, while our home improvement business does continue to grow nicely, we also saw growth in other areas of the business, specifically in the infrastructure business and so forth.

  • In the Lithonia area, the largest portion of our business, that's more directly impacted by new contract awards in the non-residential area.

  • We were relatively flat in our unit volume in that area, as you would expect.

  • With the exception of the growth that came from service improvements that have occurred in the last few months and in particular, some product quality improvements.

  • As we had previously announced, we had some product quality issues as a result of some General Electric capacitors.

  • We were able to change suppliers and get that problem resolved and that has improved our situation with a handful of customers, which strengthened our position in the quarter as well.

  • Robert McCarthy - Analyst

  • Okay.

  • In terms of pricing commentary, obviously very positive.

  • There was talk in the industry that there would be further pricing actions taken in kind of the December time frame.

  • Has that materialized in any meaningful way?

  • Vern Nagel - Chairman, President & CEO

  • At ASP, we have taken some actions to reflect the continued increase in intermediary type components and so we have taken some actions with regard to that business.

  • And with regard to freight costs, which were very expensive in the quarter, we have looked to adjust some of the freight terms that we have to help us offset some of that cost increase.

  • John, with regard to the overall pricing process, maybe you could comment on the annual review process that you go through as well as other things you're looking at.

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • Yes, I think first of all, Rob, in the first quarter, our pricing, in effect, caught up with the material cost increases we had, which had occurred earlier.

  • We are currently in the process of our annual price review process, which is applied both to our project business and to our stock business.

  • We have made some adjustments as a result of that.

  • Most recently, we have announced an increase to our freight minimums in all of the areas of our lighting business.

  • That goes into effect in the month of January.

  • There was no benefit from that in the first quarter but we would expect some benefit from that in the second quarter and beyond.

  • We are anticipating some material cost increases as we get further into calendar '06.

  • Not in steel but in other component areas.

  • And as that occurs of course, that may trigger some further price actions on our part, but generally, we expect the price levels where we are today to hold up going on into the next few quarters.

  • Vern Nagel - Chairman, President & CEO

  • And Rob, I would also comment that, again, we, Company-wide, not just in the lighting business at Acuity Specialty Products, we continue to exercise a great deal of discipline and rigor around our price review process to understand pricing in the marketplace but it's very important that we continue to get price and margin so that we are able to invest in the types of programs that we think will be beneficial for future growth in terms of new product and service introductions.

  • We have been about this for the last I'm going to say 24 to 36 months and our margins reflect -- our margin improvement -- are reflecting the benefits with those types of programs.

  • You're seeing a little bit of margin degradation, primarily because of the dramatic rise in raw material costs, and as John mentioned, the act of pricing trying to catch up.

  • And fortunately in the first quarter, we've now gone past some of that, but that has had an impact on the margins.

  • When you do the math, I think you'll be pleased with where our margins came out overall.

  • Robert McCarthy - Analyst

  • You mentioned the backlog increased about 3.8% in the quarter., I believe.

  • Was that mostly all price, do you think?

  • Vern Nagel - Chairman, President & CEO

  • You know, it's interesting on the backlog situation, I think as you look out and go forward, you'll see our backlog in terms of dollars actually decline sequentially because our service capabilities are improving.

  • Our light backlog has dropped quite dramatically over the last 18 months and as a consequence of that, we're shipping a high degree or a high percentage of our product on time and complete.

  • That's a key objective.

  • So I think you'll continue to see that.

  • Now having said that, you will also see, we believe, our top line continue to grow as we are able to serve our customers more effectively from a timing point of view.

  • Robert McCarthy - Analyst

  • Okay.

  • What metrics are you specifically looking at, I mean what you guys review, in terms of seeing some sense that or having some confidence that volumes will really improve marketably (sic) in the nonresidential construction markets in the back half of your year?

  • Vern Nagel - Chairman, President & CEO

  • John, would you answer that?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • Rob, we take a look at a couple of things.

  • First of all, our own backlogs and our agency backlogs, which are not reported in our backlog.

  • Related to that as well is the feedback from our sales force.

  • The portion of our sales force which is working with the specification communities, specifically architects and engineers, is a pretty good leading indicator to us.

  • The feedback we're getting from that portion of our organization is very similar to the feedback from the AIA numbers, which suggests an uptick in activity at the design level with architects.

  • And then finally and the thing that we have tracked most closely and have correlated most closely with demand for lighting fixtures and our business in the past and we believe is true in the future, as well, is the Dodge non-residential contract awards, both in square footage and in dollar values.

  • Calendar '05 in that regard was essentially flat.

  • It actually declined a little bit as '05 ended.

  • As we get on into the second calendar quarter of '06, we expect that to pick up and Dodge expects in excess of 5% growth in non-residential contract awards.

  • Growth essentially in all areas except for storage and shopping centers, and so that would be the statistic we would track most closely and have the most confidence in.

  • Robert McCarthy - Analyst

  • Any further comments on the state of the office space market?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • Well the absorption rate of office has continued so vacancy rates have continued to decline.

  • They're down into the mid teens, about 16% now.

  • All the prognosticators we follow are predicting an increase in office construction activity.

  • Robert McCarthy - Analyst

  • Okay.

  • And then just finally, switching gears, the second quarter, there is a lot of seasonal weakness involved, though (ph) in association with it.

  • Is this just kind of a general demonstration (sic) to us or is there any specific weakness you're seeing in trends in December?

  • What led you to the commentary essentially with respect to the quarter?

  • Vern Nagel - Chairman, President & CEO

  • Well, I think it's important that we provide an outlook both quarter out.

  • As you know, we don't provide guidance but we wanted to remind the investing our shareholders and investing public of the seasonality that we historically experience in our second quarter.

  • And what that does is it causes a bit of unpredictability in terms of our capabilities of estimating what orders are going to look like.

  • And that's why we wanted to be very clear that we feel that for the full fiscal year 2006 and then the full calendar year of 2006, we remain both positive about what those longer-term prospects look like and I certainly don't believe that any quarter stop us or derail us from having that view.

  • So it was just a normal, if you will, cautionary comment.

  • I think the more important thing is the longer-term trends that we see in our business, both from a macro -- external macro perspective as well as a number of the programs that we have in place to continue to drive service, to drive the quality of our products, to drive the cost of our products and to bring new products to market.

  • We are seeing a great deal of benefit from those.

  • And we think that, on the longer-term basis, those are going to benefit our shareholders.

  • Robert McCarthy - Analyst

  • Finally, one last question and thank you for indulging me.

  • In terms of the strength in the home channel, do you expect that to continue?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • We do.

  • Both in chemical and lighting, we expect that to continue.

  • We work predominantly with Home Depot.

  • We expect Home Depot's growth and strength to continue and we would expect to continue to support them in that and they us.

  • Vern Nagel - Chairman, President & CEO

  • And I would also say, Rob, that again, coming back to the idea of new products and the opportunities there to bring those through that channel and other channels, again, continues to be an opportunity for this Company.

  • Robert McCarthy - Analyst

  • Thank you for your time, gentlemen.

  • Operator

  • Craig Kennison, Robert W. Baird.

  • Craig Kennison - Analyst

  • Good afternoon.

  • Congratulations on a great quarter.

  • First with respect to the $50 million run rate, where did you sit relative to that goal at the end of Q1?

  • Vern Nagel - Chairman, President & CEO

  • We believe that we are relatively on track.

  • As we made clear awhile back, we felt that the initial wave of improvement was going to take -- it would take hold, but that the second then leg of improvement would really start in late December and January, February here as we continue to move forward with the consolidation of some of our facilities, not just at the lighting business but throughout the Company.

  • And so we have started that process and I feel that we are reasonably on track with that.

  • When you look at our overall headcount from a salary perspective, from a year-ago period, we're down roughly 400 folks, but we still have a ways to go if you will, on the hourly side as we continue to consolidate some of those facilities.

  • But nonetheless, I think that we will hit our targets as we go forward.

  • Craig Kennison - Analyst

  • And now that you're fairly well into this operation to streamline your operations, have you noticed any further opportunities to reduce cost or any areas where maybe you cut perhaps too severely?

  • Vern Nagel - Chairman, President & CEO

  • Well let me take a crack at it and then I'd like John to comment from his perspective.

  • I would say that the idea behind continuous improvement is that you're always seeing opportunities to enhance your productivity and to enhance your service, to enhance your product quality and to use those opportunities to be faster and more nimble.

  • I think that we have ample opportunity to continue to do that.

  • We are very excited about the opportunity of accelerating our new product development process in both of our businesses to be able to grow share, to be able to grow our Company by improving our service and capabilities to our customer base.

  • So, I would say that it's a cultural transformation; if you do it right, it never ends.

  • John, what's your perspective?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • Craig, I would say you asked that question in two parts.

  • And I would say first of all, I don't believe there are areas that we would back up on.

  • I think the changes that were underway, particularly in the manufacturing network transformation, are correct.

  • I have a high level of confidence in the completion of those in the next call it 60 days.

  • And while I would suggest there maybe some changes that we made too fast, making them all at the same time, which is what caused a disruption in our service, I believe all the changes looking back now were appropriate.

  • I do continue to see what I view to be significant productivity improvements opportunities for the future, but that's more around existing locations or remaining locations and less around consolidation.

  • I think there is still some room for some consolidation but of course we're not prepared to announce anything specific about that at this point in time.

  • Craig Kennison - Analyst

  • Okay, thank you.

  • And then with respect to a few modeling issues, the corporate unallocated line was lower than we had expected and lower than it was a year ago.

  • Can you give us a sense of where that number might shake out for the year?

  • Vern Nagel - Chairman, President & CEO

  • Probably the difference for you was in some of the stock-based compensation plans that are subject to variable accounting.

  • On a year-over-year basis, we did have a slight benefit of roughly $1 million or so in that regard.

  • Our guesstimate is that stock-based compensation expense will come in roughly at 11 to $12 million in the '06 period compared to roughly an $8 million number in the '05 period.

  • My belief also is that from a corporate expense point of view, I think that the number that we tracked to last year plus maybe a point or so is going to be a fairly consistent number that we will track to this year.

  • In fact, our corporate expense from a people point of view has declined but some of that has been offset as we complied with the Sarbanes-Oxley requirements completely.

  • Craig Kennison - Analyst

  • Okay, thank you.

  • And then relative to your capital expenditure guidance, I believe it was $40 million for the year, yet for the first quarter it was under 4 million.

  • Could you give us a sense for why maybe it was so low in Q1 and where you expect to spend the remaining roughly $36 million?

  • Vern Nagel - Chairman, President & CEO

  • Yes.

  • A lot of it has to do with timing of projects.

  • We invest a great deal in tooling for new product development and so it's really as those products roll out that the spend gets associated with those.

  • I would say that as part of our internal efforts to improve the overall operating effectiveness of our Company, we continue to find ways to utilize the assets that we have in place more and more effectively.

  • Some of the timing of the investment has to do with investments in our IT systems.

  • And again, that is more of a timing issue.

  • I still believe that we will spend roughly $40 million for the year and that's probably not an inconsistent number as you look forward.

  • Craig Kennison - Analyst

  • Thank you.

  • And finally, with respect to your plans for cash, could you just refresh us on your priorities?

  • Thanks.

  • Vern Nagel - Chairman, President & CEO

  • Again, as you know, we have a share repurchase program.

  • We are looking to acquire up to 2 million shares of our stock in the open market.

  • So far through the first quarter, we acquired approximately 400,000 shares.

  • And we will continue to look for ways to really enhance shareholder value as we go forward.

  • We think that our stock price represents a good investment and as we look to grow our business, we will look to invest in new product development and other areas that may make sense for us to expand our capabilities for our customers.

  • But let me make it very clear, it will be in a way that maximizes shareholder value.

  • Operator

  • Cliff Walsh, Sidoti & Co.

  • Cliff Walsh - Analyst

  • Can you discuss at what point you will feel comfortable with making acquisitions?

  • I know you're still working through plant consolidations.

  • Maybe you can talk about the pipeline and when you might feel comfortable jumping in there?

  • Vern Nagel - Chairman, President & CEO

  • Well, at this point in time, we continue to look in the marketplace at opportunities and what makes sense for us.

  • We continue to feel very strongly that the best investment we can make with both our management, talent, as well as our capital, is in our current business.

  • But having said that, as we, if you will, enhance our own internal capabilities, we may make look to accelerate our growth through acquisitions.

  • My own view of that is that that's probably less than 24 months out but certainly more than 12 months out.

  • And again, it's really subject to what we see as opportunities in the marketplace.

  • Again, very excited about the things we're doing internally and that has taken a great deal of management attention.

  • And I think that both of the CEOs of the businesses really are not that interested in taking their attention away just at this moment in time.

  • But I certainly don't want to close the door on the potential for acquisition and opportunities that we see and that make themselves available to us in the nearer term.

  • I don't foresee anything happening but I don't want to preclude it from happening.

  • Cliff Walsh - Analyst

  • Fair enough.

  • And Vern, you cautioned about the inventory issues from a year ago on the home center channel.

  • I'm assuming that this year, you are a little bit more conscious of it.

  • Can you discuss whether or not you have heard anything or the salespeople have heard anything from the home center customers as to what's going on with inventory levels?

  • Vern Nagel - Chairman, President & CEO

  • Two things, actually, that is not what we said last year.

  • We had issues around -- through the whole distribution network, you have folks who -- we have customers who have year-ends that are December, January and some in February.

  • And as they look to manage their own balance sheet, it has the potential to have an impact on their order rates with us.

  • And so from our perspective, we know that this happens.

  • It's a seasonally low period of time.

  • And so we're just cautious about working with those folks to meet their needs and also to ship product as they order it and as they need it.

  • So we continue to work with many different customers to help support what they're doing in the quarter and support their demand.

  • Unfortunately, it creates a bit of unpredictability in terms of how we forecast.

  • John, do you have a comment?

  • John Morgan - EVP & CEO, Acuity Brands Lighting

  • That's right.

  • I would just add one element, a characterization of that.

  • It's also a low point of demand for our distributors, not only home center but also commercial distributors, for selected products.

  • For example, outdoor lighting products, it's not terribly exciting to install some of those January 20 in the north side of Chicago.

  • So some of that demand, this decrease is anticipated and some of that inventory reduction that occurs in preparation for that on the part of our distributors, both commercial and home center.

  • So there's the element of the fiscal years, but there is also the element of just actual demand for, in particular, for lighting products during the winter months. so that seasonality we've experienced for years and years and years, we just simply expect to continue.

  • Vern Nagel - Chairman, President & CEO

  • And Cliff, that's also true with the specialty products business, where demand for them fluctuates similarly but for different reasons.

  • Cliff Walsh - Analyst

  • Okay.

  • So with the managing of the balance sheets that you were discussing, have you seen anything as of this date, anything out of the ordinary, in terms of that?

  • Vern Nagel - Chairman, President & CEO

  • Anything out of the ordinary relative to --?

  • Cliff Walsh - Analyst

  • A normalized restock -- normalized managing of their inventory?

  • Vern Nagel - Chairman, President & CEO

  • We believe that we are experiencing a typical second quarter for us.

  • And I would say that we are not seeing anything that is unusual relative to both the seasonality that John described from demand in the marketplace nor from any specific customer at this point in time.

  • So again, our second quarter, historically, if you go back, as John said, many, many years, is down relative to our first quarter.

  • We expect that same type of pattern to continue in our second quarter here.

  • And without dwelling too much on the second quarter, I really do want to emphasize that we feel very strongly about the opportunities that we have for the full fiscal 2006 and unlike, if you will, some of the issues that we had last year, we think that we really have our arms wrapped around the opportunities for all of fiscal 2006 and intend to deliver on that.

  • Operator

  • Jeff Cooley, Westfield Capital Management.

  • Jeff Cooley - Analyst

  • I don't want to beat a dead horse surrounding this seasonality issue, but one interpretation I heard of your press release today with respect to the Q2 commentary is that demand got pulled forward from Q2 into Q1 and, therefore, there was some inventory destocking that needed to take place.

  • Based on your comments today so far, I don't think that is a current interpretation.

  • Vern Nagel - Chairman, President & CEO

  • No.

  • Company-wide, that is not the case.

  • Let me be very clear about that.

  • Operator

  • At this time, I would like to turn the call over.

  • Vern Nagel - Chairman, President & CEO

  • Thank you very much, everyone.

  • We appreciate your time today.

  • We again, I would like to reiterate, we're very pleased with the quarter.

  • We think we have again a very bright future in front of us.

  • We are pleased with the actions that continue to put in place programs that we have in place and the benefits of those.

  • We have 10,000 associates that are working very hard to create greater shareholder value by better serving our customers and by focusing on how do we become even more efficient and more productive with what we have.

  • Again, thank you for your support and we will look forward to talking with you at the end of the second quarter.

  • Thank you.

  • Operator

  • Thank you for joining this conference call and have a great day.