Acuity Brands Inc (AYI) 2006 Q2 法說會逐字稿

Good afternoon and welcome to Acuity Brands quarterly earnings release. [OPERATOR INSTRUCTIONS]

Now I would like to introduce Mr. Dan Smith, Vice President and Treasurer, Acuity Brands. Sir, you may begin.

Thank you. Good afternoon. With me today to discuss our second quarter results are Vern Nagel, our Chairman, President, and Chief Executive Officer, John Morgan, our President and CEO of Acuity Brands Lighting, Ricky Reece, our Senior Vice President and Chief Financial Officer, and other select members of our executive team. We are webcasting today's conference call at www.acuitybrands.com. I'd 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.

Thank you, Dan. I'd like to make a few comments on our overall performance, Ricky will comment on our financial highlights, and then John Morgan, Ricky, and I will answer your questions. Overall we are very happy with our performance, both in the second quarter and for the first half of 2006. In all important financial measures, including sales growth, margin expansion, net income, earnings per share, and cash flow from operations we exceeded our internal expectations, and in some areas significantly. When you compare these results with the prior year, we dramatically improved our overall performance. I'd like to take this opportunity to acknowledge our 10,000 associates worldwide. Through their dedicated efforts and their commitment to excellence in everything we do, they have made these results and our turnaround possible.

Let me point out a few key highlights for the second quarter. We achieved net sales of $550 million, a second quarter record for us, up almost 9% over a year ago. Our net income was $14.5 million, or $0.32 per share. Included in this net income was a pretax charge of $3.3 million for incentive compensation tied to the change in our stock price, and expense for stock options, which reduced EPS by a total of $0.05 in the quarter. Overall our operating profit margins improved to 5.5%. This included 60 basis points for the additional share-based compensation expense. Cash flow from operations for the first six months of 2006 was $16 million, up $9 million from the year-ago period. Overall, our net sales grew almost 9% in the second quarter.

Though it is impossible to determine precisely the impact of changes in price, product mix, and unit volume, we estimate that slightly more than half of this 9% increase in net sales was due to unit volume growth and a better mix of products sold, with the balance coming from continued efforts to increase selling prices. We're particularly pleased with the balance between pricing and volume growth driving our top-line improvement. As you all know, much of the increase in our selling prices has gone largely to offset rising raw material and component costs; however, we continue to make solid progress in our on-going, company-wide efforts to improve product pricing. Raising product prices to more effectively recognize the value we provide to our customers has led to better margin that allows us to continue to fund investments in new technologies and new products. While both business units reported solid second quarter results relative to our internal expectation, our Lighting business, Acuity Brands Lighting, posted very strong results, while experiencing only a slight benefit from improving market conditions in the nonresidential construction market, its primary market. As we look at ABL, overall net sales grew 11% in the quarter compared with the year-ago period; very positive growth. Operating profit margins advanced to 7.6%, well above our internal expectations.

There were essentially four key factors that contributed to this very strong performance. First, we continued to increase selling prices across most product lines. We implemented several price increases throughout the entire Company, including increases for products marketed in our Lithonia brand in November of 2004 and June of 2005. In addition, we continued with our annual price review process, which we expect to improve margins and enhance our market competitiveness as we go forward. Second, we have dramatically improved customer service at Lithonia Lighting, which is our highest volume brand. Today we are performing at historic levels. This afforded us the opportunity to compete and win available business more consistent with our historical performance. Third, our previously initiated programs to enhance our market presence and improve our selling effectiveness in selected channels continued to yield positive results. The fourth key factor, we introduced a number of new products, including the RT 5, I-Beam, Super Glass, and a new line of both indoor and outdoor products from our consumer products group, which added to our growth.

In addition, we continued to improve our operational efficiencies at ABL in this quarter. For example, gross profit margins expanded almost 300 basis points, while operating expenses remained flat. Our conversion cost at Lithonia Lighting declined 7% compared with the year-ago period, while units produced grew almost 10%. This is a strong testimony to the effectiveness of our continuous improvement programs implemented in prior periods to drive better efficiencies. More importantly, we have dramatically improved our service to customers. Those actions that created the opportunity to reduce costs, including plant consolidations and information system changes, also impacted our ability to consistently serve our customers. We're pleased to report that those issues are behind us. Our service metrics are at all-time highs, and our customers are once again enjoying the service and reliability that made us the market leader.

Furthering that point, in Q2 we converted our largest manufacturing facility in our Lithonia Lighting brand to our primary IT software platform from our legacy system without any impact to customer service. I'd really -- I would like to congratulate John Morgan and his team for a job extraordinarily well done. While we still have work to do in this area, we are committed to providing reliable and dependable customer service. The ongoing process of converting our Lighting company to a single IT operating platform will continue to yield significant benefits to customer service and operational efficiencies as we go forward. I'm pleased to say that we are substantially closer to the end of that entire transformation effort -- excuse me -- than we are to the beginning. I would like to point out that all of our brands posted strong results in the second quarter. Our results outpaced the modest improvements in the overall demand for lighting fixtures in the non-resi market. For example, we grew sales by more than double our overall growth rate at some of our key brands including Holophane, Consumer Products, Antique Street Lamps and SpecLight, due to greater market presence and new products.

Finally, I'd like to comment on the pricing front. We continue to be vigilant in monitoring our incoming costs for raw materials and components, including those affected by copper, petroleum and other natural resources. As I noted earlier, we completed our annual price review process, resulting in appropriate adjustments based on market conditions. This review process continues to enhance both our competitiveness in the marketplace and our profit margins.

Let me move on to ASP. At Acuity Specialty Products net sales grew modestly, while operating profit margins, excluding the restructuring charge in the prior year, were consistent with the year-ago period. As we look closer at ASP's results, we made good progress on a number of fronts. We were able to raise prices in a difficult economic environment to help offset rising raw material and freight costs. Effective January 1st we raised prices again to help us offset those types of cost increases. We also grew unit sales in certain key markets. For example, net sales expanded approximately 15% in the West Coast, while most other markets improved at a rate greater than the price increases introduced throughout the year. We expanded our sales into certain U.S. government installations, extending our channels of distribution. We continued to focus on eliminating less profitable accounts, which impacted net sales, but had little impact on profits.

We essentially had three big challenges in the quarter at ASP. One, weak demand in the Midwest, due primarily to the softening automotive economy. Two, the impact of Hurricane Katrina, both on sales volume and raw material cost. And three, the timing of shipments to the retail home improvement channel. Other than the shipments to the retail home improvement channel, which we anticipate will return to more normal rates, we expect the Midwest economy to remain challenging for the foreseeable future. However, we expect to continue our growth in other geographies and channels. In addition, we continue to introduce a stable of new products, including a line of soy-based products that -- and enhance our market presence through our Zep direct effort. Both of these opportunities continue to hold a great deal of promise for us. Looking at the first half of 2006 at ASP, results were well ahead of the year-ago period, as well as internal expectations. We believe that ASP is poised to perform well as we enter our traditionally strong second half of the year. Overall we expect ASP to make meaningful improvements in operating profit margin and growing its presence in key markets in 2006 and beyond.

One of the other issues that we confronted during the quarter, which was a very positive issue, that was a rapidly rising stock price, that had an impact on corporate expenses. For example, corporate expenses were higher than we expected, as I noted earlier. We would expect that our total corporate expense, including our stock-based compensation for the year, to be approximately $31 million. So what you'll see there is a bit of an adjustment in the second half; at least we hope that to be the case. Also, in the first half of 2006, we purchased two million shares of our stock at an average price of $35.11. This repurchase program offset the 1.8 million shares created through the exercise of options, primarily by retired employees.

Thank you. These are the beginning portions of my comments. Now I'd like to turn it over to Ricky to provide some brief comments on our consolidated financial results. After Ricky is done, I would like to provide you with an outlook and -- for the remainder of the year, and then answer any questions you may have. Ricky?

Thank you, Vern. Excuse me. I'd like to first take a couple of minutes to recap our consolidated results. Before I begin, I'd like to note that we have prepared a reconciliation of non-GAAP financial measures adjusting operating profit, margins, and EPS for the special charge we took last year. This reconciliation is posted on our website as part of the webcast material. Consolidated operating profit increased to $30.2 million on net sales of $550 million, which were up 8.8% year-over-year, as Vern noted earlier. Consolidated operating profit margins increased 300 basis points to 5.5% versus last year's 2.5%, which excludes last year's $17 million charge related to efforts to streamline our operations. Diluted EPS for the quarter was $0.32 versus $0.06 in the prior year. This prior-year number excludes the $0.26 per share special charge.

Looking at our operating performance, we continue to make significant improvement in our cost structure. Consolidated gross margins improved over the prior year by 160 basis points. If we look back to the second quarter of fiscal 2004, which is more of a clean comparison, gross margins are actually down 90 basis points. This is due primarily to the fact that, while we increased prices significantly over the period, this benefit went to cover increases in raw material, components and freight cost over the last two years. This, of course, impacted the gross margin calculation. While we believe we have obtained pricing to cover these cost increases, we estimate that the impact of these recovered cost increases on the gross margin calculation is approximately a 190 basis-point reduction in the percentage. That's the impact of dividing the same gross margin dollars by higher revenues. Therefore, simply excluding the impact of these recovered cost increases, the Company's operations actually improved gross margins by 100 basis points over the past two years. For the second quarter of 2006, selling, distribution, and administrative expenses, as a percentage of sales, declined 140 basis points, to 33.7%, versus last year's 35.1%. SD&A expenses in the second quarter of fiscal 2004 were also 35.1% of sales.

In summary, considering these items previously mentioned, comparable operating results reflect a 240 basis-points improvement over the last two years. Clearly we are making good progress in making our business better. Our results over the past two-year period reflects the benefits of the reduction in force and improvements in our cost structure. This has been accomplished in an environment of rapidly rising costs, which we have been chasing to recover through higher prices, and in a period where we have not enjoyed any meaningful increase in market demand. We estimate that the end of the second quarter, our annualized run rate in savings from the RIF and other programs associated with this effort was approximately $40 million. We remain committed to realize our targeted annualized savings rate of $50 million, and estimate we will be at this run rate by the end of the current quarter.

I would like to make one final comment regarding our consolidated results. Included in SD&A was approximately $9 million of corporate expense for the second quarter of 2006. As Vern noted -- noted earlier, about $3.3 million of corporate expense was attributed to certain share-based incentive plans, which were impacted by the 27% price appreciation in the stock. I'm not complaining, but this is a much larger number than we typically plan for. Also included in the $3.3 million was approximately $500,000 in option expense related to adopting FAS 123(R). While cost associated with these share-based incentive plans negatively impacted EPS by $0.05 a share, we don't believe it was too onerous a consequence, given the $364 million increase in our market cap during the quarter.

Looking at our businesses individually. Lighting generated operating profit of $32 million during the second quarter, increasing its profit margins to 7.6%, while Specialty Products generated $7 million of operating earnings, with its profit margins relatively flat with prior year, excluding the impact of prior year special charge. Now turning to the balance sheet and cash flows. Cash at the end of February was approximately $70 million, and our debt balance was $372 million. The debt to total cap ratio was 40.7%, while the net debt to total cap ratio was 35.8%. Cash was down $29 million from the $99 million at the beginning of the fiscal year. This decline was due primarily to stock repurchases of $70 million, which were partially offset by $35 million in proceeds from stock option exercises. Cash flow generated from operations was approximately $16 million for the first six months of fiscal 2006, well ahead of last year's $7 million.

The net trade cycle improved seven days over the prior year, reflecting improvement in both days sales outstanding and inventory turns. To reduce potential customer service disruptions, inventory levels during the quarter were somewhat elevated in preparation of an ERP system conversion at Lighting's Monterey manufacturing facility, as well as the closure of two similar -- I mean two smaller U.S. facilities. Capital expenditures during the first half of the year were $9 million and about half the level of last year's $19 million. We now expect CapEx for the full year to approximate $30 million. Our lower CapEx forecast is due to a combination of some deferred spending, which now will likely occur next year, as well as the elimination of certain spending resulting from efficiency gains within our facilities. CapEx this year should be about $10 million less than our annual depreciation and amortization estimated run rate of $40 million.

We expect to generate sizable free cash flow in the second half, similar to prior year, allowing for the repurchase of an additional two million shares, which we announced earlier this week. Diluted shares outstanding for the second quarter were 45.8 million versus 42.9 million a year ago, an increase of 2.9 million shares or 6.8%. Our intent is for the share repurchase to reduce some of this dilution. The effective tax rate for the second quarter was 34.2% compared with 35.4% in the prior year. Looking ahead, we continue to evaluate our effective tax rate on a quarterly basis, but based on current facts and circumstance, we expect the tax rate to approximate 34.5% for the remainder of the year. From a financial perspective, we are well on our way to improving our financial condition and meeting our long-term financial objectives.

Now I'd like to pass it back over to Vern.

Thank you, Ricky. Overall, we believe we are poised to do well in the second half of 2006. As we noted in our press release, we are seeing the early signs of recovery from a prolonged, multi-year decline in the nonresidential construction market, including leading indicators that suggest the potential for more robust demand. Our incoming order rates are improving on a year-over-year basis. We are particularly pleased with the customer demand in -- for many of our new products. Our backlog at ABL is growing; therefore, we continue to be optimistic about the prospects for industry-wide unit volume growth of lighting fixtures in the second half of our fiscal 2006 and beyond. We expect our unit shipments at Lighting to track the overall market growth in nonresidential construction. In addition we expect the second half of our fiscal year to benefit from the traditional seasonal increase in demand at both ABL and at ASP, as compared with the first half of fiscal 2006.

Lastly, we expect profitability and margins in the remainder of fiscal -- of the fiscal year to benefit from our continuous improvement programs and favorable pricing actions implemented over the previous 12 months, though we remain cautious, due to the potential for rising raw material and component cost. Our financial performance in the first half of fiscal 2006 provides a very solid platform for sustainable results for the remainder of 2006 and beyond. We remain confident that the Company will continue its progress towards the achievement of its longer-term financial goals of operating margin expansion, earnings growth, and cash flow generation. As previously announced, we are pleased that the Company's board of directors has authorized the repurchase of up to two million additional shares of the Company's outstanding common stock, as we believe this represents an effective use of our cash flow to generate greater shareholder value.

Thank you, and with that, I'd now like to entertain any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question, Craig Kennison of Robert W. Baird.

Hi, Craig. How are you?

Good Afternoon. Doing well. Congratulations on the year-over-year improvement.

Thank you.

First question. In the Specialty chemical business, you had an inventory correction issue at one of your customers -- or perhaps a few of your customers -- in the do-it-yourself channel. Do you expect to see some restocking benefit in this third quarter?

We do. We continue to work with many of our distribution -- or our customers to, in fact, enhance their inventory metrics. This is a key element of our continuous improvement program to create greater value to the customers by helping them improve inventory turns, helping them improve the effectiveness of, again, how they manage their inventory. Our ability through cycle-time reduction is allowing us to do this in a more effective fashion. So, I would expect our order rate to pick up. I would also expect us to continue to help them -- help those types of customers. It's true in the Lighting business, as well, with many different types of distribution customers to, again, help us drive that kind of value. But in answer to your question directly, yes, we would expect, as I noted earlier, our volumes to be, again, at a historical pace.

Okay. Then you mentioned that Q2 EPS exceeded your internal expectations.

Yes.

Could you share with us what your expectation was for the quarter and, maybe, what your internal expectations are going forward?

No, sir. [LAUGHTER] Actually, Craig, as you and I have had many conversations, and as we have had with many of our shareholders, we stated in our 10-K, and have for awhile, what our longer-term financial objectives are. We've also stated what our service objectives are. I believe that we are on progress, or on path or on course to meet those and, in fact, exceed those types of expectations. You might imagine that our internal plans are driven around how can we most effectively do that. So without sharing with you the internal plan, let's just say that it's not inconsistent with those longer-term financial objectives.

In the past you talked about margin goals of approximately 100 basis points per year, with a base year being 2004. That would suggest operating margin of 8.6%, at least, in 2006. Do you believe that goal is still achievable?

I believe that I said north of 70 basis points. The 100 basis points was before the FASB came out with 123(R), and without me commenting on whether that's an appropriate FASB or not, we, of course, comply with it, and not only in spirit, but to the letter of the law. I think that the number is probably north of 70 basis points. And, yes, I do think that we will continue our march on achieving 70 basis points or more of improvement, using the 2004 year as the base year.

I'm particularly pleased with where we stand as of right now. If you look at both the second quarter from an EPS perspective, as well as year-to-date, and you use the '04 number as the base period, you can see that we're up considerably above our target of 15% or better, so I feel very pleased with that. I also feel that, from an operating profit margin point of view -- and, again, remember the 70 basis points was on a flat-volume base. We're starting to see some uptick in the market. I wish I had a crystal ball to be able to tell everyone precisely what that unit volume's going to look like. We just are very excited that the wind is seemingly, now to our back and not a gale force into our face. So I think that we're making progress both on a -- a margin improvement on a flat-unit base, and now we're starting to see the uptick of unit volume. So there could be some upside potential to that 70 basis points, depending on where our units come out, and right now that is really anybody's guess.

So if I were to say that another way, in '04 you had 6.6% operating margin. Adding 70 basis points a year would get you to 8%, at least. That's on flat volume, including FASB 123?

Yes.

And year-to-date, where is your volume relative to flat?

Well, as we said in the press release, and as I commented, we believe that slightly more than half of second quarter's uptick of 8.8% was volume related, with the balance being price and mix. So we feel pretty positive about that balance. But I think it would be -- it would be very important for you to understand -- and we've stated this -- that we believe that some of the volume had to do with the dramatic change in -- and improvement in our service, particularly in our Lithonia Lighting brand.

We should not underestimate just how difficult it was, as we went through our plant consolidations and some of our systems changes, the impact of that on our customer service and our ability to compete for available business during that time period. And so, while I don't believe necessarily that we lost customers, it's pretty evident that we probably lost some orders. I think what's happening now -- and I'm going to ask John Morgan to comment here in a moment on the same issue -- I believe what we're seeing is really us being able to now compete effectively, because our service is back to, again, really, historical levels. I actually think that service -- and John, I would like you to comment -- is above what our historical trend has been. We're seeing our ability to be reliable and our ability to do it timely and effectively, improving rather dramatically. And we believe that that is, really, consistent with our historical patterns, which made -- It's what's made the Lithonia brand the strong brand that it is.

John, do you have a comment on that?

I think that's right, Vern. I would agree, we haven't lost any customers from the past, but we did, without a doubt, lose some projects, some orders. I think we've recovered. Our late order backlog is at an historic low, actually. Our people did just an amazing job over the last several months of getting that thing on track. As Vern mentioned and Ricky mentioned earlier, we recently converted to our ERP system in our Monterey facility. We completed that here in the last 30 days. We did that without disruption, and, in fact, some of the inventory we had built in preparation for that, it turns out we didn't need. Our people went through that in a seamless fashion, so I'm very, very pleased with what they've been able to accomplish and very impressed, frankly, with what they've been able to accomplish.

The other component of this though, Vern, as you recall, is product. We do believe we've gained, maybe, a little bit of share here. It's hard to tell, until you're a little further out and looking back. But we believe some of the growth on the volume side has really been from some products we've introduced over the last several months in a variety of our channels. And we've seen some great success in that area, and our optimism around that, of course, is that that's not a one-time shot. That will go on for quite sometime, and I don't believe we've reached peak sales on those new products, or even close to it. So, Craig, we're pretty pleased with what our folks have been able to accomplish in both of those areas; both service and in the introduction of new products.

The final question relates to the restructuring charges you took last year. I think cumulatively they add to $23 million, and I believe there's still $10 million remaining in that -- in that charge. Do you expect any reversals, or do you expect to use all of that accrual?

Our expectation would be that we would use that accrual. We have -- as you know, as part of that process, we had identified both salaried and hourly workers as part of that. Many, if not most all of those programs, are either done or are near completion. We just consolidated a couple of facilities right at the very end of the quarter here, which was part of that plan. So the timing now of those payments will start, you know, accelerating. So it's my view that we'll be very close to that. Ricky, do you have any --

Just to clarify, we did reduce that accrual by some $4.4 million, $4.5 million in the quarter. Emphasizing what Vern said, we now, with the closure of the two smaller facilities as well as further into some of the other reduction in force, that -- reduction in that accrual will accelerate through the year, and our current estimate, Craig, is that that remaining $10 million is appropriate for what's left for those programs.

Okay. Thank you.

Thank you, Craig.

Thank you. Our next question comes from Robert McCarthy of CIBC World Markets.

Good afternoon, gentlemen.

Hi, Rob. How are you?

Good. Excellent quarter. Wanted to talk about the -- specifically the Lighting performance and I know you don't want to get too into those numbers, but I'll try, nonetheless. You had 11% sales growth, and if you look at the consolidated commentary -- what you talked about in terms of your operating results -- it would certainly imply that if I broke down that 11%, certainly maybe 5% of it's price, with the balance being basically the service initiative share, and then overall volume gain, with respect to nonresidential construction markets. So you could probably argue that at least 3 to 4% is just from overall volume gain. Is that inconsistent with what you've been seeing or consistent?

Well, first of all, the information that we provided was on a consolidated basis.

Right.

And again, our feeling is is that ASP, as you can see, was, you know, up -- up just de minimusly about a point.

Right. The volume was down.

So volume was down there. But generally speaking -- and, again, I'll ask John to comment -- generally speaking, we feel that the opportunity from a volume point of view was service and new products, that were the primary drivers on the volume side. We think that the marketplace is starting to tick-up a little bit. Certainly our order book is getting stronger, as we come into the season; stronger than the historical pattern, so we think that the marketplace is moving. There's lots of information out there, whether you're tracking architects' billing rates or lighting designers' billings, and what's happening in the marketplace, vis-a-vis vacancy rates, and it's both suburban and downtown commercial space. All of these trends are moving in a favorable way. Lighting tends to lag, as John has pointed out in previous conversations, so we think that that lag is now starting to work to our favor. And in the quarter, it was somewhat helpful, but I think the lion's share, as John articulated, had to do a lot more with our ability to serve our business, as well as new products that continue to create quite a buzz in the marketplace, under various brands within the Lighting business. John?

Yes, I think, Robert, that your characterization and the two overall factors are correct, that price improved nicely, continues to. That is true not only on the core business, but also on the plus business we've gained in -- from a unit standpoint. We don't really believe the market has helped us all that much, just yet. We articulated just a moment ago the lift we've gotten as a result of some of the new products having found favor in the market. That's been really good for us from a volume perspective. The other element of this we really haven't talked much about is we have made some investments from a market presence standpoint. That is, we've expanded our access to market, if you will, from a headcount standpoint, and with some of our reps that are sort of coming into their own after having gained a little bit of experience over the last year, and so we're gaining a little bit in that regard, as well. But I think it's predominantly our ability to service that speed and convenience business, as well as the growth that's occasioned from new products. We're still looking forward to the market turning around, actually.

Okay. All right. Well, thank you very much. And then, switching gears, just any incremental detail [inaudible] also, and amplifying your comments in the 10-Q with respect to the legal situation at ASP. Could you just kind of discuss that and what should we expect going forward in terms of modeling for any kind of incremental monitoring expense there?

Sure. We added some additional disclosures, as facts became known. I think that we've articulated well in the Q the current status of the DOJ investigation into our waste water pretreatment facility at Acuity Specialty Products. It's been an ongoing investigation and we have been complying fully with their request. We received an additional request for information under a subpoena, which is, again, typical and normal in these types of things, and so we continue to provide them with that information. We continue to do our own investigation. So I believe that, again, as we've described, the Company really believes that the misconduct was by that of a former employee. It was not directed by anyone or known to us at senior management, of either ASP or the Company. And so we feel that, ultimately, the end resolution of this, which we would hope to do relatively quickly, but unfortunately we don't completely control that, will not result in any material impact. We believe that we have adequately accrued for what the potential exposure could be.

And, again, I would also point out that what we're dealing here with is phosphorus, and we have significantly upgraded our pretreatment facilities over the course of the last, really, handful of years, and it's the city of Atlanta that we actually have the permit and completely comply with and are working very well with the city of Atlanta. And as we have noted earlier, we settled all issues around this issue with the city of Atlanta. So my hope is is that over the course of the next quarter or so, we'll be able to bring this issue to resolution, and bring it to resolution in a way that will not have a material impact on the results of the Company.

Okay. Thank you. And, then, what do you think are the prospects for year-over-year margin improvement at Acuity Specialty Products in the back half of '06, given some of the headwinds you've been facing?

Actually, if you look at the first-half results at ASP, we have had some very -- very favorable performance, and the quarter -- the second quarter for us has always historically been a wildcard. It's very difficult for us to precisely forecast, because it's a seasonal lull -- and this is true in both businesses -- and I believe that from our internal expectation, we did very well. The headwind that we see is really more coming out of the Midwest, where, again, a lot of our sales reps really had done an excellent job of penetrating the industrial base that exists there. As that marketplace is changing, these are large accounts that we're having to -- we're doing less business with, simply because they're doing less business, so we're now migrating our attention to other service-type businesses. If you look at other markets, particularly the West Coast as one example, we're growing there very, very rapidly. Our ability to provide the kind of value to those customers who are in the service marketplace is quite positive. It's just that, in the Midwest, we have to begin to turn those 16-inch guns that we have towards those types of customers. I believe that we will have success. It doesn't happen overnight.

So as I think about ASP, and as we think about ASP, we believe that we're poised for a very nice second half. The business -- the ASP business in the year-ago period, again, it had the charge, so when you look at the margins that it had there, recall that it had a charge in there. But I think that we will make nice improvement, consistent with our overall objectives of 70 basis points or better, on the kind of base or normal base that you would have to calculate and can calculate. So, I'm expecting them to, again, continue to grow their overall performance nicely in the second half, including margin improvement.

Okay, and then one final one. It's kind of a broader one, maybe for Ricky. Just talk about the major reductions in CapEx guidance here. I mean, it looks like you had -- targeting $40 to $45 million in your annual, and then $40 million last quarter. Now it's $30 million. Comment on why are these plans changing so rapidly? Why are you doing such a good job in terms of productivity here? You know, what could it be? And, then, maybe just any incremental commentary on these two scheduled plant closures in the second half of '06?

Okay, yes. First, on the CapEx, what we are seeing as we continue to consolidate the manufacturing footprint, put in some of the efficiency improvements and so forth, we're able to generate additional capacity, if you will, as we reduce cycle times. As we improve the velocity through the factory and so forth using [pole] and other techniques, we are actually generating some excess capacity in these areas. And, of course, as John mentioned earlier, to date we've not seen meaningful -- this second quarter we started to see some volume increase, but still haven't seen meaningful volume increase in Lighting and virtually none in the Specialty chemical -- in fact, could be down slightly in volume there. So we've been able to defer some of the capacity expansion-type programs probably into next fiscal year, as these efficiency improvements and all come into place, and so that is a big factor in that.

Also, we are seeing some ability to be more efficient in the cost reduction-type areas, as we're able to do that with less capital as we get smarter, as we look at how to improve our cost position in a very efficient manner instead of a more capital intensive manner, that's resulted in certain programs that we had anticipated being taken off the board all together. We are still very committed to invest in the business. We are going to continue to invest in product development, continue to invest in cost reduction. We've not put any constraints on the operating units beyond what we would normally do in making sure that the programs meet the hurdle rates, so there's been no aggressive effort, or proactive effort to reduce the capital available to the business. In fact, quite the opposite. So I think it's more just a timing of those certain areas.

As far as the plants, the two plants are actually taken out here in the first half. We don't have further plants being taken out in the second half.

Rob, I may -- if I misspoke, I apologize, but let's be very clear on that. The facilities that closed in the second quarter were scheduled to close essentially -- and we've closed those essentially on the original plan that we had. We don't have any planned closures for facilities in the second half, so I just want to be very clear about that.

You know, Vern, I think you were very clear about that when we went through some meetings a month and a half ago, so I think you're right. Congratulations, gentlemen, on a great quarter, and good luck.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Steve [Surl] of Conning Asset Management.

Hi, Steve, how are you?

I'm fine, thanks. How are you?

Good.

With respect to share repurchases, would you expect to limit the pace to your free cash generation and maybe some of your existing cash balances, or would you actually borrow to ramp it up even more?

Steve, if you look at the Company's ability to generate cash, and, again, our expectations on achieving our financial goals, you would conclude that we will be generating a significant amount of free cash flow in the second half. We currently have a cash balance of roughly $70 million, so I would expect that, both from our available cash, as well as our ability to generate free cash flow, that that is where we'll have the funds to acquire those shares.

Okay. And on the acquisition front, you guys have been very quiet for several years. Any expected change there or any -- maybe some general comments on the M&A front?

We continue to be very excited about the investments that we're making in our business. There was a question earlier about CapEx. What's fascinating to me is we continue to invest very significantly in our product development capability, in terms of creation of new products. And so, some of the uptick that you're seeing in our top line from a volume point of view, has a lot to do with those new products. So from our perspective, we are really honing our skills on how to generate and accelerate, again, our own internal product development capability. Having said that, we are also very excited about the prospects of both of our markets, and our opportunity to participate even more aggressively in those things. And I would believe that, as we get better at honing our own skills internally, as you see our margins continue to improve, you will see a well thought through acquisition strategy to add capability, where appropriate, into our businesses.

Okay. Thank you.

Thank you.

Thank you. At this time we see no further questions registered. I would like to turn the call back over to our host for closing remarks.

Thank you very much, everyone. Again, we are very pleased with our results for the second quarter. We are pleased with the position that we find ourselves in. I am hopeful, and as I know others are, that we will start to see the benefits from improving market conditions. Both of our businesses are working very hard internally to continue to drive the continuous improvement in our productivity, to reinvest back into our business in terms of new products, products that can continue to add share. We continue to look for other channels where we can sell our products to customers who find them of value. And I believe that as we go forward, we will continue to have success in those areas.

I look forward to the second half of 2006. We go into it with a little bit of uncharted waters, but I do believe that the wind is starting to turn, and it is now to our back. And couple that with, again, our own internal efforts to improve, and I think we have, again, a bright future. Thank you for your support, and we'll look forward to talking to you at the end of the third quarter. Thank you.

Thank you. Participants, this does conclude today's conference. You may disconnect at this time. Everyone have a good day.