Acuity Brands Inc (AYI) 2007 Q1 法說會逐字稿

Good morning and welcome to the Acuity Brands 2007 first-quarter results conference call.

After today's presentation there will be a formal question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded.

If you have any objections you may disconnect at this time.

I would now like to introduce Mr. Dan Smith, Vice President and Treasurer of Acuity Brands.

Sir, you may begin.

Thank you.

Good morning.

With me today to discuss our first-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 Executive 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 risk and uncertainties such that actual results may differ materially.

Please prefer to our most recent 10-K and 10-Q SEC filings in today's press release which identify important factors that could cause 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.

Good morning everyone and happy new year.

I'd like to make a few comments and then John, Ricky and I will be happy to answer your questions.

On behalf of our more than 10,000 associates worldwide, I'm again pleased to announce record results.

We sold more products and earned more income in the first quarter of 2007 than any other first quarter in our history.

In fact on a consolidated basis we met or exceeded many of our internal financial targets for the first quarter.

Many of you have already seen our results but I would like to give a brief recap of the key financial highlights for the first quarter.

Our consolidated net sales were more than $614 million up 9% compared with a year ago period.

More than half the increase was due to deposit of execution of our pricing strategies and a better mix of products sold, the balance coming from greater sales volume at the lighting company.

Gross profit margin was 42.2% compared to 39.8% in the year-ago period.

Consolidated operating profit margin was 9.8% up 240 basis points.

Net income was $33.6 million, up 53% from the year-ago period while our diluted earnings per share was $0.77, up more than 60%.

In addition to our strong earnings performance we generated over $37 million in cash flow from operations.

This was three times that produced in the year-ago period.

Our cash balance was almost $103 million at the end of November, the highest in our history.

Our net trade cycle days improved 14% to 50 days while funding almost a $50 million increase in our revenue base this quarter compared to the year-ago period.

And lastly we purchased another 632,000 shares of our common stock in the open market in the quarter investing a total of approximately $30 million and an average purchase price of approximately $47.42 per share.

During the same period employees and retirees exercised about 682,000 options generating approximately $13 million for the Company.

Overall we have reduced our outstanding shares by approximately 1.9 million shares over the last 12 months.

Let's look at the performance of each business unit and we made progress on a number of fronts.

First at ABL.

Our lighting company had an outstanding first quarter.

Net sales grew more than $44 million, up 10% compared to the year-ago period.

The increase was again broad based as virtually all brands, channels and geographies experienced unit volume growth while many enjoyed unit volume growth while many enjoyed higher selling prices in a very challenging pricing market.

Overall, more than half of the growth in net sales at ABL was due to higher selling prices and a better mix of product sold with the balance coming from volume expansion and new product introductions.

For the quarter operating profit grew 58% while margins improved 380 basis points to a best ever 12.7% reflecting both the leverage from higher sales volume and success in our execution over strategies to improve pricing, product mix and productivity.

Our results at the lighting company continue to benefit from previous investments to expand our market presence in key channels, enhance customer service, introduce new products, more effectively manage pricing and improve productivity as well as the overall growth of the nonresidential construction market.

Our profitability in margins in the first quarter grew dramatically in spite of rising costs for compensation, certain raw materials and component parts such as ballast and while continuing to make significant investments to further improve productivity and to expand our market presence.

Lastly, our backlog at ABL as of November 2006 was approximately $160 million, up 2% from the year-ago period.

Our current backlog reflects an increasing ability to support the expanding unit volume demand in the nonresidential construction market in a more timely fashion and a very favorable position in late orders to customers which are now at a historical low.

All in all ABL had a great first quarter resulting from the successful strategies, tactical execution and continuous focus on operational excellence over the last six quarters.

Now let's look at ASP.

Our net sales grew over 3% in the quarter.

Overall the increase was due primarily to higher selling prices in the Industrial & Institutional channel in North America partially offset by lower shipments through the retail channel.

Volume in the I&I channel again varied by region with certain markets in the western and southern portions of the United States as well as Canada continuing to report solid unit growth.

This mitigated most of the weakness in other markets caused by the impact of higher sales prices that lessened customer demand and actions by the company to participate or to not participate in lower margin business.

The first quarter ASP reported operating profit of $7.5 million or 5.5% of net sales.

This was down from the year-ago period due primarily to the shortfall in net sales in the retail channel, lower unit volume in certain channels and markets within the I&I market, higher raw material and compensation costs, and greater expenses for investments made to grow the sales force and to train associates on new methods to improve productivity throughout the organization.

While the results at ASP in the first quarter were less than anticipated, we believe that actions taken to enhance profitability including programs to improve pricing, productivity and to expand unit volume will favorably impact balance of the year particularly their second half of fiscal 2007.

We have confidence that Bill and the team at ASP will make the changes necessary to build an organization that can profitably grow at rates consistent with our overall long-term financial goals.

As we looked at Acuity Brands in total we were very pleased with our performance in the first quarter and believe these results support our overall positive expectations for all of fiscal 2007.

While we expect this momentum to benefit the full year in fiscal 2007, we do have our challenges in the second quarter.

Just to note a few of those challenges.

First, the second quarter is typically our softest due to normal seasonal factors including inconsistent customer demand and inventory rebalancing by certain customers.

Second, we expect to continue to experience rising costs for certain materials, component parts including key components such as ballast and employee related items.

Third, we intend to continue to make investments in programs to drive future profitable growth including those that enhance customer service, improve productivity and expand our access to market.

Four, market pricing dynamics in the nonresidential construction market continue to be challenging.

And lastly, we remain somewhat cautious about the near-term shipments at ABL due primarily to weaker than originally anticipated nonresidential construction awards in earlier periods.

As you know, the installation of lighting fixtures can significantly lag nonresidential construction awards depending on the project.

While all of these issues are worrisome, we continue to be very vigilant on our pricing and quotation posture and continue to drive programs throughout the company to enhance our customer service and to improve productivity and lower cost.

In addition, we see a number of influences that we believe are working in our favor.

For example, based on the recent rebound in the nonresidential construction awards and other indicators such as the architectural billing index, we expect that demand for lighting fixtures to resume its positive recovery during the course of the second half of our fiscal year.

We believe other factors that influence the nonresidential construction market continue to show positive signs including vacancy rates for commercial space which have been declining as the economy grows, the outlook for employment which continues to look favorable and an attractive longer-term interest rate environment.

We believe these factors and the general positive economic outlook for North America supports the positive longer-term growth trend in the nonresidential construction market.

In addition, we continue to proactively position both businesses to better leverage their market presence through investments that enhance our go-to-market programs and strengthen our geographical footprint as well as expanding our product offering with new and innovative products.

Lastly, we continue to make investment in programs to better train and develop our associates that further enhance their ability to service customers and improve our productivity.

We have demonstrated that by investing in these programs we had can profitably grow our business, better serve our customers and improve our margins while investing for future profitable growth.

Overall we believe that our results in the first quarter of 2007 support our view for a very successful year in fiscal 2007.

To that end, we anticipate that we will meet or exceed many of our longer-term financial goals including operating margin expansion, earnings growth and cash flow generation in fiscal 2007.

Thank you and with that we will entertain any questions that you have.

(OPERATOR INSTRUCTIONS) Matt McCall, BB&T Capital Markets.

Good morning.

A couple of questions.

You made a comment first about market pricing and the nonresidential environment being challenging.

Can you expand on that a little bit?

I know you made some comments about it last quarter.

Has it persisted?

Has it gotten worse, better?

Where does pricing stand and are you still able to get price increases through?

It sounds like you were.

I'm going to save my voice and turn that over to John.

Good morning, Matt.

In the non-res area of pricing, what Vern has been referring to is that in particular there is one competitor that we consider to be a major competitor that has been very aggressive in pricing.

I believe we commented on that in the last couple of quarters as well.

We've been fortunate I think primarily due to our new products and our service levels to customers.

At this point in time we have not had to react to that more aggressive pricing and we don't intend to react to that more aggressive pricing in the immediate future.

Of course if it persists, we will have to take some action.

We have had and have experienced increases in raw materials.

We're confident that the balance of the industry has experienced similar increases in raw materials and we would think that that would have to find its way into pricing in general.

And we are anticipating a ballast price increase at the current moment.

We've received some notifications in December that are being factored into our normal annual price review that finds its way into our products which will be released to customers next week.

So, the bottom line is it's an aggressive pricing posture on the part of one of our competitors we have not yet found that we have had to react to that and we would not intend to do so anytime soon.

Matt, I would just further add that we continue very diligently to work on programs internally to improve our productivity and service the customers that give us an opportunity to be responsive, as John had mentioned to the extent that we need to.

Okay --

-- right products, right service offering, the right package and customers are asking for that more frequently each and every day.

Okay.

And Vern, you also mentioned some expansion of your market presence in key channels and John just spoke about new products.

Can you give us kind of an update on your exposure to some of these different segments?

I think you highlighted that in the press release.

What is your exposure like maybe ranked from top to bottom your most exposure in some of these end segments?

Let me ask John to answer that with regard to ABL and then I will answer that with regard to ASP.

Yes, Matt, in regard to ABL, first of all we are not very exposed to residential and as you know residential construction starts have been down considerably.

We don't believe we've been impacted much by that.

We're more focused on the C&I, the commercial and industrial institutional markets, that has actually been good for us.

Categories such as offices, some of the larger retail manufacturing facilities is a strength of ours, infrastructure particularly roadway with our Holophane and American Electric brands are now a strength of ours.

So we have -- we have been the benefactors of -- excuse me -- I should add schools to that is another area where we have products that are particularly well-suited.

So we've benefited from that.

There are some geographies where we would like to be stronger and we are making some investments.

I think Vern has mentioned in the past the investments that we are making in the New York City market.

That is a very important investment for us, relatively expensive but we think an important investment for the future.

There are a couple of other major metropolitan areas where we would intend to invest at a more aggressive rate, possibly even with some regional operations to enhance our marketshares in those areas.

So for the foreseeable future we feel pretty good about the categories of the C&I marketplace that have been robust.

I will turn it back over to Vern to comment on the ASP.

Thank you, John.

I would also say, Matt, with regard to ABL before I comment on ASP, we continue to generate very positive cash flow.

Someone is probably going to ask what are we going to do with that?

We will continue to look for ways to optimize shareholder value but very specifically we are looking at opportunities to enhance and expand our market presence in the lighting business through acquisitions.

And to the extent that we can acquire these businesses fairly and effectively and in a way that makes sense for us, we will look to do that.

If we cannot, we will use our product development capability to go into those geographies to further expand that market presence that give us the products to serve the customers in those markets the way they want to be served.

And I'm very excited about the work that John and his team are doing in that area.

With regard to ASP, ASP is very interesting.

Bill and his team continue to expand the sales force.

In fact, in the first quarter of -- this first quarter of 2007, we incurred expenses to expand the number of our direct sales force.

That was in geographies that are growing particularly in the West Coast, the Southeast.

Those are markets that are very favorable and we are seeing growth there.

In addition, at ASP we continue to make investments to expand our product offering.

We've introduced new products on the retail side that are very interesting and similarly on the I&I side.

ASP just celebrated its 70th anniversary in September and at that meeting we introduced a number of new products that will continue to be or I believe will be very interesting as we go forward.

So ASP is a business that is a bit in transition.

Bill and his team are aggressively driving change there to create a business that is more timely to the market, more aggressive in some of its strategies.

And I believe that you are going to see over the next 12 to 24 months a reinvigoration of the ASP business to drive profitable growth because of these things that we are doing.

Okay.

And one last one.

John, when you were mentioning the different end segments, if you could maybe just comment on what the trends are like in some of those end segments?

I know obviously residential is weak but what about some of those areas that might be tied to residential?

And then, you just did a 9% -- you just reported 9% growth in ABL on a down 3% comp a year ago.

Give us an idea given this trend you are seeing and some of the comments what a comfortable growth rate may be in comparison to that 9% looks like in Q2?

In the commercial and industrial, I might even add institutional markets, let me first say about six or eight months ago we did see a bit of a downturn in contract awards.

It's not frankly clear to us exactly why; a lot of speculation in the industry but clearly a lot of contractors have been at capacity.

When you look at the hiring levels of construction workers you can see that.

That having been said, overall in calendar '06 we expect that it will be reported that there is about a 6% to 7% increase in construction contract awards or construction put in place for '06 when we are looking back.

We would expect somewhere between 2% and 4% increase in calendar '07 relative to calendar '06.

So therefore we would expect to be at or slightly above the market rate of construction activity for that period of time.

Although frankly I don't expect that to come in the next two or three months.

We can see that our order rates in the last couple of months have been a little more modest primarily because of the contract award reductions that occurred late last spring and on into summer.

And we have also seen that in our backlogs.

Our backlogs are approximately flat to last year.

So we would expect a little more modest outlook if you will for our Q2 but for the full year we would still expect the C&I marketplace to be up that 2% to 4%.

Is that --?

Well, I think so -- the more modest versus the 9% or more modest versus the 2% to 4%?

The 9% which you just reported, I'm sorry?

We would expect the 2% to 4% market increase to occur on top of the market for '06.

Now we've also seen that a little bit more than half of our increases of course have come from price.

Right, right.

Less than half has come actually from unit volume increases.

We would anticipate that the pricing level trend would continue but we would not expect to see significant increases in price in '07 over '06.

Is that --?

I think so.

Thank you very much.

Peter Lisnic from Robert W. Baird.

Good morning gentlemen.

If I could just follow up some questions on the pricing issues that are apparently making their way into the industry.

In terms of what you've seen the current quarter versus previous quarters is the pricing pressure that this one competitor is causing, is that more widespread than it was or is it still relatively contained to certain markets and certain projects?

We have seen out of that particular competitor it be widespread geographically and that has been true now for two or maybe even three quarters including our Q1.

We have not seen -- and of course this is based upon feedback from our own salesforce, from our own customers.

But we have not seen widespread reaction to that by any of our other major competitors and of course we have not reacted to that.

We are anticipating and have already received in fact an announced price increase for ballasts that would go into effect in calendar '07 and we believe certainly in our case that needs to find its way into the pricing of our products in the marketplace and we of course would expect that that would be that case of all of our major competitors as well.

So we are anticipating from our standpoint a pricing posture going forward similar to what we've experienced and the past.

We've been very fortunate.

Our people have done just a fabulous job on customer service.

And we believe that excellent customer service and new product introduction is what is keeping us from having to really react to those more aggressive pricing on a few commodities from one of our competitors.

And Peter, this is Vern.

I would further the point that our service over the last six quarters in the nonresidential construction market has improved dramatically.

We sell based on the features that we can bring to bear that help create value for our customers.

Price is important but it's not the only feature.

And so we've been able to grow our business, grow at above market rates because we have a differentiated capability and it's not just price.

Our cost structure continues to improve.

We see that in our margins and to the extent that we see pricing in the marketplace, we have a cost structure that we believe that will allow us to win business that we want to win.

And to the extent that we find that our competitors in the marketplace are competing just on price, we will pick and choose how we decide to respond to that.

And I am very pleased with the work that John and team have done again over the last six and seven quarters to put our business in a position to do that.

The new products that we have brought out, the way we serve our customers has really created a competitive advantage and you are seeing that in the growth of our business.

As John responded earlier to Matt's question, the notion, and you guys see all the same information from all these prognosticators, if awards are going to grow on a square footage basis 2% to 4%, we believe that pricing and opportunity to continue to improve our margins through the types of things that we are doing internally whether it is new products or productivity improvements will allow us to continue to grow our profitability consistent with our longer-term objectives.

So we are quite pleased with the work that we've done and we are quite optimistic about our future.

Okay.

And if I can just continue the questioning on the pricing environment.

It has been going on for two to three quarters now; does that competitor at this point even have the capability of causing a competitive response on your part?

In other words, are you just in different markets or just have different service capabilities where you don't even need to respond to what that competitor may or may not be doing?

Peter, this is Vern.

Let me just make a comment, then I'd like John to comment.

The fact of the matter is is that the nonresidential construction market give or take is a $10 billion market.

There are four major competitors in the North American market that make up somewhere in the neighborhood of 55% of that market.

So all four of those folks are large enough to create an environment or a dynamic in the marketplace that would cause others to have to take note.

And so we all compete on the value propositions that we bring to the table.

We continue to reposition our business to compete on service features and product features and a competitive pricing package that make sense for those customers that choose us.

We are growing our business at above market rates but at the end of the day price is a key element so we have to be responsive to that.

We have rising costs that we have to contend with.

So again we will look to respond to serve our customers the way they want to be served in the fashion they want to be served while continuing to improve the profitability of our business.

We are spending a lot of time here on the pricing issue.

It's an important issue but nonetheless I think that John and his team have demonstrated an ability to effectively compete not on price.

Okay.

Well I think the more important issue is the margin that you put up in lighting this quarter was -- I don't know how else to put it, but it was shocking to some extent.

Can you give us a sense as to how your incremental margin goes from 35%, 36% somewhere in that kind of run rate to 50% in the first quarter?

Just how are you dropping through so much profitability when at this point I think we would have or we have annualized the 50 million in cost saves from the M&T program or the restructuring program?

Just what is going on there?

Is it mix?

Is it price?

How is that flowing through the bottom line so effectively I guess?

Peter, I am very pleased that you and others took note of that.

We are very pleased with the work that we have done and have been doing and the investments that we make really in both businesses to improve our profitability not just by reducing fixed costs but also improving our variable costs.

But as importantly bringing new products to market that really have a value, a differentiated value-added feature and that those are packaged together in a way that truly makes sense.

So you have a combination of the leverage of the business due to volume and we say that a little bit more than half of what we have going on is price related, price and product mix, and then the balance is volume.

So you are getting leverage of volume, you are getting the benefit a pricing offsetting rising costs and we have rising costs on a number of fronts whether it is normal inflation -- inflationary items such as compensation, healthcare costs but also rising material costs and component costs such as ballasts and other items.

But you are then also seeing the benefit of product mix and our productivity.

And I'm very pleased on the productivity side.

While our folks have done a good job we have a long way to go to be as productive as we think we can be.

But nonetheless you are seeing some of the benefits from those investments that we've made in the past.

John?

Yes.

Well I would be pretty much piling on, Peter, but investments we've made over the last year or so in market presence, in new product and in our service capabilities have helped us grow the business, have helped us improve our pricing overall.

To Vern's point, we did see productivity improvements in our various factory operations.

There are a couple of our locations where I'm not pleased frankly with our productivity, our rate of productivity improvement.

But there are most of our factory locations I'm very pleased with the continuous improvement that I am seeing in our productivity.

So, it's one of those fortunate situations where it's not any one thing.

We've seen some improvement in market share as a result of investment in market presence.

We've seen some improvement in our pricing as a result of service.

We've seen some improvement in our margins as a result of our product mix with a release of new products.

And particularly in the recent past we've seen productivity improvements in selected locations.

And so it has been sort of the perfect storm, if you will, from that standpoint.

Okay.

That is very helpful.

And if you could help me understand one more question I guess.

And that is if we look at the structural profitability profile of the business, are you looking at this now as the lighting business specifically -- is this something that can be a 15% kind of operating margin business?

I'm not trying to pin you on something but when you see a 380 basis point improvement year-on-year on the margin and if you just extend those numbers and I'm not saying that's going to be the case for the year, but relative to a 9.9% operating margin next year -- or I'm sorry -- last year, this year's number could be 13, 12, 12.5, 13% or something like that.

I'm just wondering where can this go?

Peter, you are trying to pin us down so don't be --

It's what I'm paid to do I guess.

-- and we are not going to let you do that.

That is fine.

John and his team and we as an overall company because I want to include ASP in this, are very focused on profitable growth.

And we believe that the way you do that is delivering value to the customers in a way that is different than what is being provided to them in the marketplace.

We also believe that focusing on our cost structure to improve -- remove waste in the system, remove non-valued added activities is a key element.

And lastly, we're transforming the culture I believe to one that is really driven around continuous improvement and how do we drive operational excellence.

As John said, there's a long way to go in both of our businesses, not just the Acuity Brands Lighting but particularly at ASP as well.

So we see opportunities to continue to improve our margins in a flattish environment.

And I'm not suggesting that the marketplace is going to be flat but what I am saying is if you go back to our previous 10-Ks, we said that we wanted to see a 70 basis point or better improvement on the previous year's volume base.

So if volume goes up you should continue to see some benefits of our variable contribution margin coming through.

I believe that the lighting business we have outpaced that 70 basis point improvement and again kudos to John and his team but we believe that there is more to go.

Where can it go?

I don't know.

I mean there is lots of examples of other industrial businesses that are out there that are serving markets that are not dissimilar to ours that do very well that perform at some of the numbers that you had mentioned.

But we need to more consistently deliver the kinds of performances that you've seen in the first quarter -- very excited about it.

But we see future opportunity.

Okay.

If I asked for that first quarter relative to that 70 bps volume target or incremental volume target, what was it in the first quarter?

Would you answer that question?

Well, last year -- I haven't done the math so I can't really answer, would be a little reluctant to do it off the top of my head.

We certainly have outperformed the 70 bps.

Okay, that's fair enough.

Thank you for all of your time and help.

Christopher Glynn from CIBC World Markets.

Good morning, everybody.

I was wondering can you or did you put a range on what the price increases next week will be in the magnitude?

Chris, you are probably referring to lighting so let me just go ahead and answer that.

Right.

It will be product dependent.

We are interested in a couple of things.

To the extent that there is a raw material or a component part that is a significant part of our cost, obviously we have to get that passed through to the market and we are experiencing price increase in ballast in the coming year.

I'm of course reluctant to specifically identify what percentage that looks like in terms of our product that requires me of course to get into that as a percent of our product cost and so forth.

That is not the only factor that goes into the pricing of our product.

We would anticipate an attempt to get a little bit more price expansion to allow us to increase the rate of investment back into the business especially in new products, new technologies and market presence.

And so certainly it is low single digits.

Certainly we would intend to take a portion of that and invest it back into the future of the business.

But you'll forgive me I don't want to prognosticate exactly what percentage we would anticipate.

I'd like to let my team finish their work here over the next three days and be more clear about that once we document that and put it out for our salesforce.

And Chris I would also mention if you look at 2006 and what ABL did in terms of investments back into the business, in terms of new product development, training and development of employees around methods and to improve productivity, you are seeing the benefit of that coming through in better margins and the ability to more effectively serve customers that has resulted in the types of margins that you saw in the first quarter.

So we believe that it is a winning strategy and a strategy that is, as John articulated, one where you can invest back in your business while delivering improving profitability.

Ricky, maybe you could comment on ASP for us because we're doing good work there as well.

Yes, ASP as well as putting through a price increase effective the first of the calendar year so it went into effect this week.

They too go through an annual price review process and it was time to do that.

And many of the items are going up in price again in reaction to some raw material increases they've had since the last price increase which was almost a year ago.

In fact it was a year ago since they last across the board raised prices in their institutional and industrial channel.

But that is going through and it too is going to be in the mid single digit area on average.

Some are going up more than that and some frankly are coming down a little bit based on where the market is but based on the current mix, you are looking in the of 4% or 5% kind of range of average price increase that is going through on ASP effective this week.

Okay.

And copper prices, a lot of news about copper prices coming down.

Will that benefit you anywhere?

Copper prices are not a significant impact to our overall lighting business.

It affects in only specific product areas.

We were fortunate last year to be able to stay the issues relative to copper increases by using some aluminum where it is appropriate in some of the transformers that we utilize.

It might allow us to go back to copper which is easier to produce in some cases but by and large in our overall business I don't expect it to be a significant impact.

Okay.

And Ricky, you've done a lot of work on studying and trying to develop the market for the energy efficient retrofit.

I just wanted to try to get an update on how that is evolving?

And at what point that might become a layer on top of the 2% to 4% contract awards growth that you are expecting in '07?

Well, first, we were glad to see that Congress has helped by extending the period that the EPAct tax deduction has offered to building owners and that has been extended by one year.

It was set to expire at the end of this calendar year and now it is going out to 2008.

So that was good news and I think we will continue to create some momentum behind that initiative.

As you point out we feel very well positioned there based on some energy-efficient products we've introduced in the market over the last couple of years that will allow our customers to take full benefit of the lighting portion of those opportunities.

And as you know there are opportunities as well on a regional basis.

We are seeing very good action there in buildings that are owned and operated by the same person.

So on a national account, a major box retailer, a major national account that we would have in the distribution area for example, those customers certainly see the value proposition, see the full equation and we're seeing some pretty good success and some good opportunities to grow that retrofit part of the business.

The part that has been a bit more challenging and continues to be a bit more challenging is in the more commercial office type space where the person paying the utility bill is not in many cases the same person who is putting the lighting fixtures in there.

So trying to get all of the right players together to see the value proposition and best figure out how to share that continues to be an area we're focusing on.

With the extension of EPAct, I think that gives us more time to work with that part of the market and hopefully see some opportunity beyond what we've experienced today.

And Ricky, if I could just pile on for a moment because Chris, you specifically mentioned the contract awards.

We had talked previously about that 2% to 4% range going forward.

That's square footage.

So if you look at dollars of course because of inflation it would be higher than that.

It would be high single digits that we would expect in '07 for actual construction dollars.

So I wouldn't want to leave you with the impression that you'd only expect 2% in the future.

Right, right.

Okay.

And just lastly then I will pass it along.

The deceleration scene in the third quarter that you referred to in your press release for the starts, you guys did see some sequential deceleration in top-line growth made it up on the margins.

So did you already see some impact from that or is that more a comment on probably see that show up in the current quarter?

We believe we saw impact on that in our order rates, not in our shipment rates.

So we would anticipate therefore a little more modest shipment rate in our Q2 as a result of that impact.

Our backlog again specifically in lighting is about equal to the level of backlog this time last year and our order rates approximate the order rate levels for last year as well.

So we would expect that to show up in our Q2.

We would anticipate that the overall market for the whole of calendar '07 would be more like I described earlier.

Okay --

-- the annual declined you are seeing would be much more than normal seasonal patterns we would see in both businesses versus anything more specific to that lift we saw in orders I think.

And, Chris, this is Vern.

It is very important that we understand that sequential from fourth quarter to first quarter.

Our pattern is happening as we would expect it to be due to the seasonal nature of our business.

Nonetheless, you are seeing improvement on year-over-year basis that continues to be positive.

In addition to you get the benefit of that volume, but in addition you are getting the margin improvements that we've been able to generate for all the reasons we've discussed here on this call.

Okay.

Could you just comment on -- your lead times have come back.

So is the backlog really comparable to last year?

No, the backlog at the lighting business is down quite significantly from a year ago period.

It is down in the pretty meaningful level year-over-year.

No, year-over-year, Ricky, it is essentially flat.

It's total backlog but I thought you were asking the late backlog.

Oh the late backlog.

I'm sorry.

Total backlog is essentially flat year-over-year.

In fact at lighting, it's up $2 million so that's essentially flat.

Late order backlog is almost immeasurable at this point in time.

I prefer to think of it as on-time shipments.

It is exceedingly -- it is the highest in our history.

So we measure late frankly a little bit differently than our customers measure late.

We measure it on a little bit tougher standard.

So even things that our customer might delay at their election we leave in our laid-over backlog and it is just at an historic low.

Which has been a huge benefit as we deliver and as we go to market with our, again, service capabilities and how we can benefit contractors and our electrical distributors and our many customers in terms of that level of service.

Yes, let me be more specific.

In the overall aggregate backlog, I think it is -- I think you should view it to be comparable in terms of the makeup of the backlog.

Great, thank you very much.

Cliff Walsh, Sidoti & Co.

Can you guys comment a little bit on your thoughts about ASP?

In the press release you commented you thought that operating profit would be flat, but you're already kind of behind a little bit; you know, operating profit was down 30% in the quarter.

And it doesn't seem like you expected too much in the second quarter.

So maybe you can just give me your comfort level with that statement and why you are confident in that.

Sure.

Cliff, we were down in the first quarter for really a couple of reasons.

One, our volume on the retail side was a little less than anticipated, primarily due to less promotional issues on the year-over-year type growth -- or excuse me -- type comparison.

Also if you look at our profitability, we were down because of raw material costs being a little bit higher than what we anticipated relative to pricing.

Pricing, we're taking an action as Ricky had described, essentially January 1st.

And additionally, we made some rather significant investments in expanding our workforce -- or excuse me -- our sales force in the first quarter.

And so as we add salespeople, their productivity ramps up over time.

So we knew that we were going to make these investments and did so.

Our expectation was that we would have done slightly better than what we did in the first quarter, but yet these results are not necessarily unexpected.

As we look forward, our expectation on the business is that they will do roughly at last year's operating profit level, maybe slightly better.

Bill and his team have a lot of work to do to make that happen because we are making investments in the business to expand our access to market, whether it be through the sales force, growing the sales force, or whether it be through improving our productivity and our customer service capabilities.

That business is people intensive.

When you add people or when you do things with people, the expense goes to your P&L right away.

So those investments we think will be significant this year that will temper, if you will, our growth and profitability.

But I have a high degree of confidence in Bill and the team that we have in place to continue to drive those to reposition and better position the business for future profitable growth.

I think it has a great platform, and we in fact can continue to build on it.

Ricky, do you have some other thoughts in that area as well?

Well, another item that negatively affected the first quarter that we hope would not have as much of an impact the rest of the year is the softness in the retail business.

Seasonally, we saw a very soft retail business in our first quarter that adversely affected the performance against expectations.

We typically see that around the end of the calendar year.

We saw it a little earlier this year than we did last year anyway, but that is another factor, Cliff, that I think causes us to believe we will do better later in the year than what you saw in the first quarter.

Okay, great.

Thank you very much, guys.

Robert McCarthy, Banc of America Securities.

Good morning, everyone.

Congratulations on a great quarter and great volume conversion there.

A couple of questions.

One, have you seen any kind of bifurcation in demand characteristics between projects -- or excuse products that go into more heavier construction versus light construction?

I know that is hard given your skew set.

But have you seen any difference there?

Do you expect to see a difference there throughout the year?

John, can you comment?

We believe we have seen an increase in activity in larger projects.

Our average order rates, for example, would increase in the face of that.

It is not uncommon at all during periods of increased construction contract awards that our customers -- contractors would focus more heavily on larger projects.

We're seeing it in offices and in bank buildings.

We have seen a resurgence of activity in manufacturing facilities.

Certainly in commercial warehouse facilities as we all know there is a lot of exports -- a lot of imports, excuse me coming into the United States and there has been a lot of warehouse operations grow to support that.

So I guess the short story is we believe we have seen an increase in activity of what we would call major projects.

I don't honestly know whether there has actually been a drop off of smaller projects that is the strip malls and that type of thing or whether they are just somewhat being overshadowed by the larger projects.

But clearly there's an increase in major projects.

And when you think about that 2% to 4% in terms of building awards, I mean you've got to think about the mix for your company.

And given the fact that you might be more -- some would argue that you are more skewed toward heavier projects, larger projects, office, you might haven't actually see -- [your] oscillation versus that number at a higher level?

That is what we are expecting, yes, Rob.

Okay.

So that is fair enough.

Vern, did you have anything to comment there or not?

I agree with John's comment.

Okay.

And then just on ASP, kind of the question there is you got a business that is struggling a little bit right, some retail softness; you have a very robust private equity market right now.

It is basically -- you had two businesses in the portfolio.

Does it make sense at some point to be more of a pure play going forward and just focus on the lighting?

Is there a price for that business?

How do you think about ASP going forward?

Rob, it's a great question.

My belief and our belief at this moment in time is that ASP has the opportunity to be the type of company that can contribute to Acuity Brands in a way that will help us meet our longer-term financial goals.

And to the extent that they're not able to do that then we would have to look at any business in that regard as to how we might better energize its earnings performance to create value for shareholders.

But I have again -- reiterate -- I have a high degree of confidence in Bill and the team at Acuity Specialty Products.

I believe that they recognize the challenge that is before them and the rate of change that they need to embrace is I think well understood.

This business is I believe a great franchise.

If you look at the size of its market, it serves a market in total of about $14 billion.

It probably has another adjacent markets to it that are another $8 billion and we're the third largest player in the $14 billion market.

So we are big.

And we have the opportunity to leverage that scale.

So our folks are committed to doing that.

We are committed to helping them do that.

And I believe that now is the time to make the investment in that business to reposition it or to better position it to give us the kind of growth dynamics that are available to us.

The other thing I would say in that business is if you look at its cash flow return on investment it is very strong and very robust.

And so our opportunity there is really how can we energize the profitable growth cycle while taking advantage of our fixed cost based there?

And I believe that the strategies that Bill and team have in place are very appropriate.

And so we will continue to support those strategies and help drive the change in the business that is necessary.

At this point in time when you look at Acuity Brands on a consolidated basis you see a business that is growing quite nicely; you see a business that is developing and generating the kinds of returns for shareholders that are pretty upper quartile.

In fact they are in excess of upper or the 75th percentile I should say and we are optimistic that we can continue to deliver that kind of performance for our shareholders.

Remind me of the two competitors in ASP that are larger.

Is it Ecolab or who is it?

Ecolab and Johnson Diversity --

That is right.

-- two larger players and both of those would be larger in size at this point in time.

Understood.

And then just, Ricky, in terms of you've obviously effectuated a lot of great changes since you've arrived at the company.

How much time are you spending -- could you just give me some sense of where you are spending your time now in terms of the productivity and cost initiatives across the portfolio?

How much time are you are spending at ASP, how much time you are spending at ABL, how much time you are looking at acquisitions?

If you had to break it down into kind of percentage?

I would say I probably do spend a little more time relative to size with ASP than I have been with ABL.

Of course we've had some leadership change and all there as well that has caused that.

I've been spending a fair amount of time in the strategy development area and looking at longer-term strategy that will then get into some of where we may need to look at mergers and acquisitions as a way to complement that as well as internal growth opportunities and working very closely with each of the business units on developing more robustly in the strategy area and strategy development area.

Also spending a meaningful amount of time supporting the overall productivity initiative in coming up with measurements, metrics, trying to drive that through those areas as well as looking at some of the sales general and administrative areas where we are just now beginning to get more focused from a productivity.

Our initial efforts were more so on the factory floor and you are seeing and hearing about a lot of the progress that are going on there.

How far through do you think we are through that process?

I mean if you had to give an inning?

I would say we are still in the second or third inning in total as far as this opportunity to get the productivity, maybe a low bit further than that at ABL on the manufacturing/supply chain side.

But I think if I look at the total company we are still very much in the early part of the ballgame.

What I'm encouraged about though is the cultural change.

I feel we are making very good progress, as Vern commented on earlier, about getting the organization to focus on continuous improvement and that type of a cultural change which as you can appreciate is probably the hardest part of making this kind of improvement in a business is getting people to realize that and make that cultural change and I feel good about where we are there.

But when I look at the opportunities ahead of us, and it's not just in profitability, it's in the return on investment and how we can get more out of the assets that we have whether it is the machinery and equipment or floor space or management or working capital.

Still a lot of opportunity in all of those areas that I'm very excited about the focus that we're getting on that.

But I would characterize us as a still very much in the second or third inning of this ballgame.

Rob, this is Vern.

I would agree.

I would say actually that we are the home team and we haven't come up to bat yet in the second.

But having said all of that if you -- if one were to look at our organization as deeply as we have, if you look at what John and Bill have put in place in terms of investment in the organization, in time management and the overall investment in man hours towards the cultural change and the productivity improvement programs that we have in place, it is enormous.

Ricky and team have been putting together programs to better deploy our strategies.

But when you look at how we've structured our business we just over the last 12 months have put in if you will groups that their sole job is to help the teams throughout the organization whether it is supply chain, whether it's office transactional activity, to lean out our operations.

We've added a senior vice president of if you will our change management process here at the corporate office to help support John and Bill and their teams.

So the investment that we are absorbing into the business to help drive those changes is quite significant.

But make no bones about it, the reason that we are having the success in terms of productivity improvements is because of the efforts and leadership again of John and Bill in making these kinds of cultural changes happen and our employees are responding very favorably to those types of cultural changes that we are putting in place.

And that is why we feel we're kind of coming up to bat in the second inning of this program.

Well, let me wrap it up with just two additional questions if you will indulge me.

One is for John is just maybe you could comment on the state of his independent selling reps in the lighting business and his internal sales force to extend there is one, in terms of areas for improvement maybe by geography where you see maybe more of a need perhaps in a couple of major metropolitan areas?

And then Vern, maybe you could just kind of and Mike at least my inquiry just talking about what you see in terms of the macro environment, what you see as the biggest opportunity perhaps for '07 and the biggest risk to kind of to this nonresidential construction expansion?

Rob, our independent reps, which is predominantly on the (indiscernible) package side, we've got the number one or number two rep in over 80% of the markets.

We aspire to have the number one rep in 100% of the markets.

We're very strong in the rural areas.

We're very strong in a majority of the metropolitan areas.

We've recently made some significant changes in larger metropolitan areas that will take a little more time to bring them up to the performance levels that we'd like to see.

There are still some major metropolitan areas, I mentioned earlier, New York City.

There are some other areas that frankly I don't want to disclose at this point in time where we would expect some changes in the future.

We may have to support some of those changes with some regional operations as well from an assembly standpoint to support those locations.

But we are fixed on continuing to invest in ending up with the number one rep in each of the market areas we serve and that is about 100 locations.

In terms of our direct selling organization our factory sales organization that works with infrastructure, industrial, that type of thing predominately under Holophane to a lesser extent American Electric, we have continued to grow that sales force.

I commented in fact to them three weeks ago at a national sales meeting that the single greatest investment we've made over the last 18 months is actually in expanding our market presence.

And we would intend to continue to focus on that both in the factory selling organization and in our national accounts organization.

So I feel actually quite good about the historic rate of progress.

I'm always frankly inpatient about the current rate of progress.

So we will see what we can get down there.

But I feel extremely good about the rate of progress folks have made in that regard in the recent past.

And Rob, from my perspective, let me start with the risks first.

I believe that there is always the general macroeconomic risks that we face though I have to say I don't think that those are terribly huge risks.

I believe that the interest rate environment will continue to be favorable.

I believe that the employment environment and therefore the overall economy will continue to be positive.

In other words it won't be negative so I think we will be able to continue to take advantage of that.

Certainly the risks that I think that would keep John and Bill awake at night and therefore would keep us awake at night is the executional risk.

I think John pointed out that we're making good progress at some locations but there is opportunities at others.

We need to continue to drive productivity into our business.

We need to continue to reduce our cycle times to improve our customer service capability.

So that is executional risk.

The same thing is very true at ASP.

In fact it's probably even more true.

We have some opportunities to enhance our business processes there that will give us a real competitive advantage.

But we have to do it and have to do it quite efficiently and effectively.

So those are the risks that keep us awake at night.

I think the opportunities that are before us to continue to drive an organization culture as Ricky pointed out that is just absolutely passionate about operational excellence, that embraces continuous improvement and embraces teamwork, cross-functional focus on creating a world-class organization is our opportunity.

You are seeing some of the benefits of that particularly on the lighting site.

I also see opportunities for us to continue to enhance our new product development capability, to continue to add differentiated capabilities to our customers.

You're going to see a slew of new products come out from the lighting business that will be very exciting.

Both products that will provide new looks or to the existing products that we have in key segments but will also embrace new technologies that will help bring energy-efficiency with greater lighting capability.

So all of these are very exciting times for us.

We think that the market again will continue to be positive so that is kind of the balance that we see between our risks and opportunities as we go forward.

Thank you for your time.

F Rygiel from FBR.

Thank you very much and good morning.

Two quick questions.

Has the rate of change of the higher raw material costs accelerated in the past few months or decelerated?

Let me answer for ASP and then I will pass that onto John.

While the rate of change has decelerated somewhat it is still an unfavorable rate of change for us.

We are still continuing and I believe Ricky, we are not into something like our 24th month in a row where we have had raw material and cost increases month over month and that is not something that prior to two years ago that we had experienced in really quite some time.

So that business continues to experience cost changes at our raw materials.

But things other than raw materials again you have wage inflation, you have healthcare costs that are rising so our productivity rates need to offset some of those and you are also seeing a price increase in that business essentially in the early part of January to help us mitigate some of those things in that business.

And just a brief comment on ABL, you are continuing to see -- while everyone talks about costs coming down you are continuing to see key component costs rise.

John, would you like to --?

Yes.

Overall, we are continuing to see material cost increases; the rate of increase has reduced.

Particularly on electrical components that has flattened out somewhat especially those that utilize copper and aluminum.

Castings, you can look at aluminum indexes.

You can see what has happened there.

That has flattened out somewhat.

But it is still increasing modestly.

Electronics did not increase all that much in the last year or two.

We are now beginning to see an increase in electronics and that is what is beginning to affect the current increases that are coming into ourselves and I assume the rest of the industry particularly in form of electronic ballast, electronic components such as starters and that type of thing.

Steel, again you can pretty well take a look at the indices that are well published there.

Those are the major categories that affect us.

I hope Alex that answers that the rate of increase has reduced in aggregate although we are still seeing some modest increase in aggregate.

Yes, that is very helpful.

One last question.

You mentioned that you are seeing an increase in larger order rates.

Does that suggest that you are also seeing a slowdown in smaller order rates?

Well, we are not sure, frankly.

I'm not sure.

I suppose our folks that are very close to that may be able to give us a better answer to that.

I apologize I didn't come prepared with that information.

I suspect however the answer is yes.

And that is purely based upon my experience in the industry.

Okay.

Thank you very much.

Richard Glass from Morgan Stanley.

My question was answered, thanks.

At this time, I show no additional parties queued up for questions.

I'd like to turn the meeting back over to Mr. Vern Nagel for closing remarks.

Everyone thank you for your time this morning.

I would like to reiterate that we believe our results in the first quarter of 2007 support our view for a very successful year in fiscal 2007.

We believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that deliver on the expectations for our key stakeholders.

Our future is bright.

Thank you for your continued support.

Talk to you next quarter.