Acuity Brands Inc (AYI) 2007 Q3 法說會逐字稿

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  • Operator

  • Good morning and welcome to the Acuity Brands' 2007 third-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.

  • Now I would like to introduce Mr.

  • Dan Smith, Vice President and Treasurer, Acuity Brands.

  • Sir, you may begin.

  • Dan Smith - VP, Treasurer

  • Thank you.

  • Good morning.

  • With me today to discuss our third-quarter results are Vern Nagel, our Chairman, President, and Chief Executive Officer; John Morgan, our President and CEO of Acuity Brands Lighting; Ricky Reese, 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 refer to our most recent 10-K and 10-Q SEC filings and 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.

  • Vern Nagel - Chairman, President, CEO

  • Thank you, Dan.

  • Good morning, everyone.

  • I would like to make a few comments and then, again, John, Ricky, and I will be happy to answer any of your questions.

  • On behalf of our 10,000 associates worldwide, I am again pleased to announce record quarter results.

  • This is our ninth quarter in a row of quarter-over-quarter record earnings.

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

  • In fact, on a consolidated basis we met or exceeded many of our internal financial targets for the third quarter in spite of challenges, including the impact of the significant decline in the residential housing market throughout much of the United States.

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

  • Our consolidated net sales were up -- were almost $650 million, up more than 7% compared with the year-ago period.

  • A large portion of the increase in net sales was due to the positive execution of our pricing strategies and a better mix of products sold, with the balance coming from greater sales volume in key sectors of the nonresidential lighting market and a positive uptick in chemical sales in Europe and in certain markets in North America.

  • Gross profit margin was 42.2%, compared to 41.3% in the year-ago period.

  • Consolidated operating profit margin was 10.4% in the quarter, up 170 basis points.

  • Net income was almost $39 million, up approximately 35% from the year-ago period, while diluted earnings per share was $0.88, up approximately 40%.

  • Included in this quarter's earnings were three unusual items which in the aggregate reduced our diluted earnings per share by $0.01.

  • These items included a $6.6 million pre-tax gain on the favorable settlement of a long-standing commercial dispute at ABL; a pretax expense of approximately $1.3 million for professional fees associated with exploring opportunities to enhance our Company and build greater shareholder value; and a $5 million pretax charge for the initiation of a Company-sponsored voluntary remediation plan to resolve certain environmental issues at the primary manufacturing facility of ASP.

  • With regard to the settlement of the commercial issue at ABL and the resolution of the environmental issues at ASP, I am very pleased with the extraordinary efforts of so many of our associates to proactively and favorably address these time-consuming issues.

  • We felt that it was in the best interests of our customers, associates, and shareholders to accelerate the resolution of these matters.

  • Moving on, as we review other performance metrics in the third quarter, we're pleased to report that we generated more than $123 million in net cash provided by operating activities through the first nine months of 2007.

  • This was almost double that produced in the year-ago period.

  • Our cash balance was more than $178 million at the end of May, the highest in our history.

  • Our net trade cycle days improved more than 11% to 48 days, while funding a $45 million increase in net sales this quarter compared to the year-ago period.

  • While we repurchased no shares in the quarter, we have reduced our diluted outstanding shares by approximately 1.4 million shares or 3% over the last 12 months.

  • As we look at the performance of each business unit, we continue to make progress on a number of fronts.

  • First at ABL, our lighting company had another outstanding quarter while managing through sluggish demand in certain sectors of the nonresidential lighting market and softness in the home improvement channel, both due primarily to the impact of well-publicized decline in residential home building in North America.

  • Orders in key sectors of the nonresidential lighting market picked up in the quarter, due to a strengthening of new contract awards in the nonresidential market and normal seasonal demand.

  • As a consequence, net sales grew over $43 million, up approximately 10% compared to the year-ago period.

  • The increase in net sales was primarily due to higher selling prices; the better mix of products sold, driven by new products introduced over the last few years; and solid unit volume growth in key sectors of the nonresidential lighting market.

  • Selling prices increased in the quarter as we realized much of previously-announced price increases as part of our annual review process, and other price increases driven by the need to cover rising costs.

  • Additionally we were able to maintain our selling prices in a challenging pricing market because of our much-improved service capabilities and the desirability of our new products.

  • For the quarter, operating profit at ABL, excluding the gain from resolving the commercial dispute, grew 34% while margins improved 220 basis points to a third-quarter best of 12%, reflecting both the leverage from higher sales volume and the success in implementing strategies to increase pricing, enhance product mix, and improve productivity.

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

  • Profitability and margins in the third quarter at ABL grew dramatically in spite of rising costs for performance-based compensation and certain raw materials and component parts, and while continuing to make significant investments to further improve productivity and to expand our market presence, including the opening of our new sales office in New York City.

  • In order to help offset some of these increases in raw materials, components, fuel, and other inflationary items, ABL announced price increases ranging from 3% to 5% effective July 27, 2007, on products in a number of key categories.

  • While these increases will not have a material impact on our fourth-quarter results, we expect that they will benefit our fiscal 2008 results.

  • Lastly, our backlog at ABL as of the end of May was approximately $190 million, down about $8 million from the year-ago period.

  • The year-ago backlog included approximately $15 million in accelerated orders that were placed ahead of that period's announced price increases.

  • Additionally our current backlog reflects significant improvement in our manufacturing cycle times and on-time shipments to customers, which are at a historic high.

  • All in all, ABL had a very solid third quarter, resulting from the implementation of successful strategies, strong tactical execution, and its continuous focus on operational excellence by its associates.

  • Let's look at ASP.

  • Our net sales grew approximately 1% in the quarter.

  • Overall sales gains made in Europe and in certain markets in North America, plus the benefit of higher selling prices in the industrial and institutional channel, were essentially offset by lower shipments in the Midwestern portion of the United States and in the retail channel.

  • Volume in the I&I channel again varied by regions, with certain key markets continuing to report solid unit growth, while other areas such as the Midwest continue to struggle due to difficult economic conditions.

  • Shipments into the retail channel were less than anticipated, due primarily to the impact of lower replenishment orders caused by inventory management programs of a key customer and changes to certain merchandising strategies.

  • We are implementing countermeasure strategies to expand our access to market, accelerate the development of new products, and enhance our merchandising programs, all of which we expect to benefit from in calendar 2007.

  • In the third quarter, operating profit at ASP, excluding the $5 million charge for the voluntary environmental remediation plan, was $15 million or 10.3% of net sales.

  • This was down from the year-ago period due primarily to higher freight and compensation costs and investments to improve customer service and productivity.

  • This was partially offset by higher selling prices and greater volume in Europe.

  • Excluding the environmental charge, the third-quarter results at ASP were in line with the internal expectations and nominally behind those posted in the year-ago period.

  • We believe that actions taken to enhance profitability, including programs to improve pricing, productivity, and to expand unit volume, will favorably impact future results.

  • As we look at Acuity Brands in total, we're very pleased with our performance through the first nine months of the year and believe that these results support our overall positive expectations for the fourth quarter of fiscal 2007 and into 2008.

  • While we expect this momentum to continue, we do have our challenges.

  • Just to note a few of these challenges, first, we expect to continue to experience cost pressures for certain raw materials, component parts, fuel, and employee-related items.

  • Second, we need to continue to find ways to make up for costs associated with investments in programs to drive future profitable growth, including those that enhance customer service, improve productivity, expand our access to market, and new product development.

  • Third, the market pricing dynamics in the nonresidential lighting market continue to be challenging, though no more so than compared with prior periods.

  • Lastly, we expect the residential market to continue to be soft for the foreseeable future, somewhat impacting our shipments through the home improvement channel and for other infrastructure-related projects.

  • While we monitor these issues closely, we continue to be very vigilant on our pricing and quotation posture, and continue to drive programs throughout the Company to enhance our service to customers, increase our introduction of new products and services, improve productivity, and lower costs.

  • Overall we continue to be cautiously optimistic about the growth prospects of the nonresidential lighting market.

  • We see a number of influences that we believe are working in our favor.

  • For example based on the recent rebound in nonresidential building awards and under indicators, such as the Architecture Billing Index, we expected the demand for lighting fixtures to resume its positive trend during the course of this year and into our fiscal 2008.

  • We believe other factors that influence nonresidential construction market will continue to show positive signs, including vacancy rates and rising rents for commercial space; the outlook for employment, which continues to be favorable; increased spending by governments on infrastructure projects like roads and highways; strong growth demographics for school-age children fueling a boom in school construction; and an attractive longer-term interest environment.

  • We are also encouraged by traction in the retrofit market, as commercial, retail, and industrial customers take advantage of more efficient lighting fixtures to reduce energy consumption while creating a better lighting environment.

  • We believe that these factors and the general positive economic outlook for North America continue to support a 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 investments in programs to better train and develop our associates that further enhance their ability to service customers and improve our productivity.

  • We continue to demonstrate that by investing in these programs we 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 for the third quarter and for the first nine months of 2007 support our view for a successful fourth quarter.

  • To that end, we anticipate that we will achieve record results in 2007 and 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

  • (OPERATOR INSTRUCTIONS) Chris Glynn, CIBC World Markets.

  • Chris Glynn - Analyst

  • Vern, you talked a lot about the need to find ways to offset the ongoing costs for investments in productivity, new products, etc.

  • In terms of the investments that seemed to ramp up particularly in this quarter, the New York sales office, and the launch of Rome, how should we think about how that impacted the quarter and how sales might ramp up relative to those investments?

  • Vern Nagel - Chairman, President, CEO

  • So, there's two components to it.

  • There is the sales growth side and then there is the productivity cost reduction side, if you will.

  • We continue to very aggressively work our programs on both fronts, so let's start the sales side.

  • Over the last 24 months, really 24 to 36 months, both businesses have introduced new products that have really been met with great success.

  • What you're seeing is the benefit of those new products really in our mix, improving our profitability, but also enhancing our sales growth.

  • Overall for the lighting side --

  • Chris Glynn - Analyst

  • Okay.

  • I'm sorry; I understand your business model.

  • I think my question was specifically talking about the investments in the New York sales office and in launching Rome.

  • Vern Nagel - Chairman, President, CEO

  • Yes, I would say that in the New York sales office our investments were both in terms of capital as well as expense.

  • And truthfully I prefer not to give you what we are absorbing in terms of the expense at this point in time.

  • We have not made that public.

  • But it is -- I would say while it is a meaningful number, our expectation is that we will turn positive on that investment sometime in the fourth quarter and well into 2008.

  • Our Rome initiative, which again is a very exciting initiative, we are investing capital in there that at this stage is probably something less than $0.5 million of expense per quarter, net of what we have.

  • However we also expect that to, in the first half of fiscal '08, to turn positive.

  • Both of those investments we think are again very exciting opportunities for us and will influence favorably 2008 and beyond.

  • Chris Glynn - Analyst

  • Great, thanks very much.

  • Operator

  • Peter Lisnic, Robert W.

  • Baird.

  • Peter Lisnic - Analyst

  • Vern, if I could, it sounded like -- or at least you may have intimated that order progression improved during the quarter.

  • I am wondering if you could -- A, is that correct?

  • B, can you give us some detail?

  • C, kind of how does that translate into the next few quarters, I guess?

  • Vern Nagel - Chairman, President, CEO

  • We do feel that order progression in key sectors of the nonresidential lighting market were favorable for us.

  • As you know, we participate heavily in the commercial and industrial side.

  • We do well with schools.

  • All of those sectors continue to be favorable for us.

  • Our sense is that larger macroeconomics that are driving those continue to be favorable.

  • We are talking about awards.

  • Lighting tends to lag awards by anywhere from three to nine months, somewhere in that range.

  • So we have a favorable view of what is happening in the marketplace.

  • There are some other sectors that are somewhat influenced by residential construction.

  • If you look at some of our architectural outdoor lighting product lines, some of those are being influenced in certain markets where housing has slowed down considerably.

  • But yet we have been able to absorb that and continue to show positive unit volume growth on an overall basis.

  • John, do you have a comment you would like to make?

  • John Morgan - President

  • No, I think you have characterized it correctly.

  • Order rates have solidified.

  • We are benefiting now from the fact that nonresidential construction contract awards early in the calendar year began to pick back up.

  • They are projected now to be up for the total calendar year and projected to be heading toward sort of flat in the 2008 calendar year, which would not impact us until our fiscal '09.

  • Peter Lisnic - Analyst

  • Okay.

  • I just want to make sure I understand this right.

  • Is it safe to say than that your order comp in May was stronger than in March?

  • Vern Nagel - Chairman, President, CEO

  • Yes, and that would be driven also by seasonal demand activity as well.

  • If we look at June as an example, our June order book was actually slightly above our internal plan and favorable when you adjust for the price increase that impacted June's order rate last year.

  • So again we're seeing what we think are favorable order rate trends at this point.

  • Again, we are seeing in certain sectors of the market slowing down -- those things that are influenced by residential construction.

  • We also continue to aggressively price our products relative to service, product quality, and innovation.

  • There are certain sectors, particularly of the flow business, where we tend to believe that we are not as -- our growth rates there are not as favorable as they are in other aspects of the business.

  • Peter Lisnic - Analyst

  • Okay, thank you very much.

  • I will jump back in queue.

  • Operator

  • Chris Glynn, CIBC World Markets.

  • Chris Glynn - Analyst

  • That was easy.

  • Cash balance, really starting to balloon there.

  • A little bit of a respite on the share repurchase.

  • Could you just elaborate on that dynamic a little bit?

  • Vern Nagel - Chairman, President, CEO

  • Sure, and Chris, you can say in the queue and ask another question if you'd like.

  • Relative to cash, we continue to again work very diligently on our operating working capital management.

  • Again, pleased to say that our operating working capital improved another 11%.

  • Trade days continue to improve.

  • So it is our expectation that we will continue to generate positive free cash flow.

  • We're looking at various alternatives to deploy that capital in the most shareholder-friendly manner.

  • We're looking at businesses that fit with our strategic plans as opportunities to acquire.

  • So again, we are looking at various alternatives to help enhance our Company and use that cash in the most judicious way.

  • Chris Glynn - Analyst

  • Follow-on to that one; do you think the --?

  • How does the pipeline look in terms of bolt-ons relative to how it has looked over the past year or so?

  • I know you have been probably allocating a little bit more time to it, as you have gained more and more traction with the original work you were doing when you came onboard with Acuity.

  • Vern Nagel - Chairman, President, CEO

  • Well, we are very excited about our product creation capability, and so we have really invested a great deal of time and effort in making sure that that capability gives us the strength to fill out our product lines and meet the needs of our customers.

  • So acquisitions, which are again part of our ultimate strategy, are important, but become more specific.

  • We're not just waiting for deals to come over the transom.

  • We are proactively looking at businesses that make sense for us.

  • You know those types of discussions usually take a little bit longer to come to fruition.

  • But we are seeing very interesting opportunities that fit well with our strategy to bring product and capability to our customers.

  • I would also say when you look at a situation like Rome, here is a very exciting service that we are green-fielding.

  • There is really no one to go out and acquire that has the capability that we will have in this particular area.

  • So while those things are expensive initially, they really can provide a great return on investment for shareholders and they really provide a great opportunity for our customers.

  • Chris Glynn - Analyst

  • Yes, much better returns, for sure.

  • Then just a little bit on the Home Depot exposure.

  • How do you feel about in general that exposure?

  • It is an important relationship, so just maybe a little update for both segments.

  • In particular with lighting, what percentage of Home Depot's lighting business or shelf space do you feel you have?

  • Vern Nagel - Chairman, President, CEO

  • I really cannot comment on that.

  • But I will say that our relationship with Home Depot is very important to both the Depot and to us.

  • We serve a very strong niche for them.

  • Our brands are quite well recognized in the customer bases that the Depot is serving.

  • Those folks want to access our products through that type of channel.

  • We continue to provide superior service to the Depot and a product offering that is very targeted to a very specific audience.

  • So we believe that both sides are experiencing very positive benefits from their relationship with each other.

  • John, do you have a comment?

  • John Morgan - President

  • I would say, likewise, the relationship there is terrific.

  • We enjoy a very attractive percentage of the shelf space, specifically in those areas where we think we demonstrate the greatest product and brand strength.

  • But as you can imagine, we have committed we would not share specifically what that is.

  • We did have a little softness in sales through Depot over the last few months as residential slipped a little bit.

  • But actually in this quarter just reported that has rebounded.

  • We are very optimistic about the current sense and the trends and the activity level that we see there going forward.

  • So we feel really good about that.

  • Chris Glynn - Analyst

  • Great, that's very helpful.

  • Thanks a lot.

  • Operator

  • Robert McCarthy, Banc of America.

  • Robert McCarthy - Analyst

  • Could we just walk through kind of the gains and offsets and charges and how you arrive at kind of the $0.01 delta that you're talking about?

  • Vern Nagel - Chairman, President, CEO

  • Are you -- well, do you want me to take through each one of them?

  • Or do you want me just to say how do you in the aggregate get to $0.01 a share?

  • Robert McCarthy - Analyst

  • Whatever you prefer, Vern.

  • Vern Nagel - Chairman, President, CEO

  • We essentially believe that in the environmental charge there will be some areas where it is possible that they will not be tax-deductible, so we have taken a very conservative approach in just determining that.

  • That is why wanted to give you the pretax amount, so that you could add those back.

  • Essentially what you see is that there is a penny impact.

  • But if you look at the operating profit, you get a sense that they are essentially offsetting each other.

  • Robert McCarthy - Analyst

  • All right, so the operating profit line, they essentially offset; but because of the tax deductibility issue it could be a $0.01 headwind there?

  • Vern Nagel - Chairman, President, CEO

  • Right.

  • Robert McCarthy - Analyst

  • Right, okay.

  • In terms of the professional fees, I think you said an unusual increase in professional fees, around $1.268 million.

  • What I would ask there is, is that something you expect to continue?

  • Or will that continue to be non-recurring?

  • Vern Nagel - Chairman, President, CEO

  • We would expect to not see those continue.

  • Robert McCarthy - Analyst

  • And what were they?

  • Were they in conjunction with the charge or just overall litigation expense?

  • What was going on there?

  • Vern Nagel - Chairman, President, CEO

  • No, these were for professional fees to really help us explore some opportunities to enhance our overall business, if you will, position.

  • While I am not going to get into the specifics of them, they really were targeted to how we can create shareholder value through some business opportunities that we see out there.

  • Again, we are looking at certain transactions that are growth oriented for us.

  • So we have expended some monies for outside resources just to help us think more clearly (multiple speakers).

  • Robert McCarthy - Analyst

  • Well, [McKenzie and Lehman] are pretty expensive these days.

  • So anyhow -- and then just in terms of a longer-term opportunity in LED, you saw a recent high-profile transaction with Philips buying Color Kinetics.

  • Just thinking about convergence there, in terms of the fact that you are getting more involved in lighting controls and even some lamp technology or illumination technology, how do you see that kind of marketplace evolving and your position relative to kind of Philips coming in and maybe getting more involved in controls or even in the fixtures?

  • Vern Nagel - Chairman, President, CEO

  • We see it as a unique opportunity to continue to partner with folks, component suppliers, like Philips, to bring that value to the end customer base.

  • Our access to market and our knowledge around how to integrate components into creating the most desirable and effective, if you will, products and services for our customers is what we do.

  • And we are the largest in the world at doing that.

  • Our relationship with Philips goes back more than 50 years, John, I believe.

  • John Morgan - President

  • That's correct.

  • Vern Nagel - Chairman, President, CEO

  • So we see that really as an opportunity for us to further enhance capabilities into the marketplace.

  • So what they acquired were, if you will, the notion of componentry on the inside of the fixture.

  • It is our job to package those things in a way and bring those to the marketplace in a way, in a fixture, that really differentiates and creates value.

  • So we are excited about what those opportunities will bring for us.

  • I'm going to ask John to comment here in a moment, but we have been actively involved in LEDs and OLEDs and other different things for years and years.

  • Our knowledge on how to integrate these things and really get the greatest value out of them I think puts us in a very unique position in terms of what the future of those types of components look like in the industry.

  • John?

  • John Morgan - President

  • You specifically asked about LED.

  • To Vern's point, we have been involved in LED for quite a number of years, about 15 years now.

  • We essentially converted the North American emergency lighting market to LED, completing that about eight years ago.

  • So it is something that our folks know an awful lot about.

  • We have stayed very close to that.

  • Philips is a key supplier, as are a number of other LED suppliers around the world.

  • We have a very impressive team of folks that are taking essentially a ubiquitous approach to LED, identifying ways to take that light source into essentially all of our product line, as opposed to simply having one LED business or one LED division.

  • Robert McCarthy - Analyst

  • I do understand your legacy there.

  • It is very deep.

  • I guess my question was more as a bit of a stretch question, is -- as the market evolves could you see much more of an integration of the fixture and the light source, in terms of being made by the same company?

  • Or are they going to be essentially still complements?

  • John Morgan - President

  • We believe they will still be complements, but you never know.

  • You ask specifically about Philips.

  • They are a key supplier of ours of all the various different components, the drivers as well as light sources, and we think it will remain that way.

  • Vern Nagel - Chairman, President, CEO

  • Rob, just to follow on what John said, we have relationships with -- and deep relationships -- with many of the key suppliers of LEDs and other component parts.

  • So we are in our view right on the cutting edge of much of this.

  • So while you could speculate how others may execute over their strategy, we believe that there is ample opportunity to continue to utilize other suppliers to help us bring technology and capability to the marketplace.

  • Robert McCarthy - Analyst

  • How much of your sales, Vern, would you say kind of address kind of energy efficiency in general for like light commercial applications?

  • Kind of the retrofit market we've been alluding to.

  • John Morgan - President

  • This is John.

  • We no longer have a separate energy initiative, if you will.

  • What we do is in all of our product line, energy consumption and sustainability is one of the key criteria in the development of all of our product, as opposed to just selected energy products.

  • But I would say that it has a very significant impact on our sales, on our product development, on the product selection, a very large percentage.

  • I would say that in general in North America, we as a country are not too good at taking out old light fixtures and replacing them with new ones that are more energy-efficient.

  • That we believe has changed somewhat in the last couple years, particularly with EPAct 2005; and that EPAct 2005 has now been extended further.

  • So there is some retrofit work; but in particular all new construction uses the most up-to-date energy abatement techniques, so it is very important to us.

  • Robert McCarthy - Analyst

  • In terms of the volume you're seeing, you're seeing about 3.5% I think in the C&I channel in terms of just shipment and volume growth.

  • Cumulatively.

  • Could you talk about what you're seeing just in the overall marketplace in terms of any significant deceleration or acceleration?

  • Obviously you talked about the order pickup.

  • Maybe touch on heavier, larger products like office.

  • John Morgan - President

  • First of all, contract awards in general, if you look at the square footage of construction activity as forecasted in particular by Dodge, it is projected to continue to grow for the balance of calendar 2007, ending the year at about a 1% increase; and anticipated to decline somewhat as we get out into late 2008.

  • When we get into various different specific areas, offices are up 5%; manufacturing up 4%; institutional, such as educational facilities, dormitories, are up 5% and 7%, respectively; public works up.

  • The areas that are down are things such as hotel, stores.

  • Retail space are projected to drop off a little more dramatically as you get into 2008 and so forth.

  • So if we look at our relevant markets, we think it will continue to be flat to slightly up on a square footage basis in the balance of 2007; and as we get later into 2008, we would expect it to flatten off or decline somewhat.

  • So we're not expecting any impact until we get out into our 2009.

  • Vern Nagel - Chairman, President, CEO

  • Rob, I think it is important to note John is commenting on square footage; that is one.

  • Two, awards -- I mean, our actual, if you will, lights put in place lags awards by anywhere from three to nine months.

  • So our view is that there is still considerable room to run here.

  • We also believe that the introduction of new products and service will continue to help us drive growth as we get into some of those potentially softer periods.

  • Dodge we believe generally gets these things directionally correct, but their exact timing has not always been the best on some of these things.

  • John Morgan - President

  • If you look at the same thing on the basis of construction values, the non-residential are projected to continue to increase in the low single digits out over the next handful of years.

  • Robert McCarthy - Analyst

  • Thanks for that color and congratulations on a solid quarter.

  • Operator

  • Tom Brinkmann, Davenport.

  • Tom Brinkmann - Analyst

  • Good morning, everybody.

  • Just wondering if you would be kind enough to break out the lighting division's sales growth, 9.5% sales growth, by the pricing, the new products, and the organic volume growth.

  • What contributions those things had.

  • Vern Nagel - Chairman, President, CEO

  • We believe that price and -- price was probably in the 4 to 5 -- half of it, if you will, roughly half of it; the balance coming from volume and new product development.

  • Understand that our new product development not only are we expanding, if you will, share into those areas; but it is also, because of the size of our organization, feeding into and cannibalizing some of our sales of, say, lower margin products.

  • Hence you're seeing the benefit of that really come through in our gross profit improvement there.

  • Tom Brinkmann - Analyst

  • Okay.

  • So I guess with the last question, the last gentleman, he was saying something about 3.5% organic volume growth in the commercial-industrial; that must have been a little bit on the high side then.

  • Is that correct?

  • Vern Nagel - Chairman, President, CEO

  • I'm sorry; the 3.5%, that was Rob's guesstimate.

  • Tom Brinkmann - Analyst

  • Okay, I see; yes.

  • Yes.

  • Then another thing you said in the press release was that the 3% to 5% price hikes for July 27 on a large portion of ABL's product offering; can you elaborate at all on which parts of the product offering you're looking at?

  • Or which end markets or product types?

  • Vern Nagel - Chairman, President, CEO

  • Sure.

  • John, would you?

  • John Morgan - President

  • It is -- from a product standpoint it is related primarily to those products that are being impacted by continued material and energy-related cost increases.

  • The 3% to 5% is intended to offset going into our late fourth quarter and on into our fiscal '08, offset those increases that we expect to come into our cost structure.

  • So those that have a heavy aluminum component, copper, a lot of freight associated with it, and so forth.

  • I don't have off the top of my head each of those individual product families, but that is what it relates to.

  • Tom Brinkmann - Analyst

  • Okay.

  • Have any of your competitors announced similar midyear price increases?

  • Or is this something you are doing as an initiative on your own?

  • John Morgan - President

  • We have seen competitors announce similar price increases after we did.

  • Tom Brinkmann - Analyst

  • Okay.

  • You mentioned some weakness in the Midwest.

  • Were you referring to the chemical sales or the lighting sales, or I guess -- which end markets?

  • Vern Nagel - Chairman, President, CEO

  • We were referring specifically there to the chemical sales.

  • We have a very strong presence in the industrial base in the Midwestern part of the United States.

  • As that portion of the country continues to experience a downturn, particularly due to the impact on the US automotive makers, that has had an impact on our business, as we've worked feverishly to transition into serving more of the service-based economy.

  • Which we do very well with, by the way, in other portions of the country.

  • Hence our comment that we see a number of markets improving.

  • It is just that in the Midwest we continue to struggle in a couple of key areas.

  • Tom Brinkmann - Analyst

  • Okay.

  • The last question was that the -- New York City has obviously just revised their building codes for the first time in 40 years.

  • I am wondering if there's anything now in the language that is more favorable to sellers of energy-efficient light fixtures such as yourselves, and how you see that going forward, I guess.

  • John Morgan - President

  • With respect to lighting, they have adopted the use of the National Electrical Code in New York City; and we think that is favorable.

  • Now, in the City in general there's just an awful lot of interest in continued reduction of energy consumption.

  • We do think that continues to drive demand there.

  • So we are excited about the investments we're making there.

  • We think it is a very important market, and we are very optimistic about that location.

  • Tom Brinkmann - Analyst

  • Okay, thank you and congratulations on a good quarter.

  • Operator

  • Richard Glass, Morgan Stanley.

  • Richard Glass - Analyst

  • Nice quarter, and great work on the working capital side of things.

  • I was wondering if you could give us a little more insight or understanding of where Bill is on the ASP end of things, in terms of when we can maybe expect some traction from sales initiatives and things like that.

  • We understand the Midwest is a mess and Home Depot is not helping.

  • But in terms of anything positive there, how long do you think it is going to take for some of that to get going?

  • Vern Nagel - Chairman, President, CEO

  • Rich, I actually think that we're making great strides on a number of fronts.

  • I do believe that in the fourth quarter you'll see the benefits of some of those efforts.

  • We are just, again, very pleased with, again, activity around most of the country in terms of our penetration and our ability to expand our presence.

  • So we are building on that.

  • In the Midwest I think that we're starting to do some good things in terms of transitioning -- not away from our industrial base but adding on to, by serving more of our service-based businesses.

  • I think ASP is uniquely positioned both at the Depot and in other channels, including the I&I channel, to build on its brand, build on its access to market.

  • I think that the team there is doing a very good job.

  • It is my expectation that fourth quarter will be a favorable fourth quarter relative to the year-ago period, and that that momentum will carry into 2008 in a favorable way.

  • Richard Glass - Analyst

  • Great.

  • Thanks, guys.

  • Operator

  • (OPERATOR INSTRUCTIONS) Peter Lisnic, Robert W.

  • Baird.

  • Peter Lisnic - Analyst

  • Vern, I was just wondering if you could go through pricing again a bit.

  • It sounds like the price increases you've put through have stuck.

  • I just want to make sure that that is the case.

  • Maybe talk more specifically about the more recent, the March/April I guess, price increase and how well that kind of went through.

  • Vern Nagel - Chairman, President, CEO

  • Let me make a general comment; then I would like John to comment.

  • We have worked, and I say this continuously, we have worked very diligently over the last three and a half, four years now, John, to really focus on our pricing strategies and to focus on where our products are in their lifecycle, to, if you will, optimize the value-creating situation vis-a-vis price.

  • You are seeing the benefits of that in improved gross margins over those years.

  • Our feeling is -- and I want to be clear on the point -- that we have gotten full capture of price increases that we have put in place over the last period of time.

  • That is rather lengthy.

  • In fact that has caused us, as I said earlier, to lose -- to potentially price ourselves out of some business, particularly on the flow aside.

  • But we think that it is the right strategy for us.

  • We are looking at alternatives and looking at other opportunities to capture that flow business through new products and just a different, if you will, product offering and (inaudible) situation.

  • So for us we believe that the 9.5% increase was split roughly half price, half volume-related.

  • In that volume-related would be a little bit of mix because of our new products and the growth of those new products, particularly our T5 I-BEAM, some new introductions into the national accounts side of the world.

  • So we are very pleased with the efforts of our associates to continue to create that value and hold the price.

  • John, maybe you can comment on our annual review price -- our annual review process, as well as just other things that we're doing there.

  • John Morgan - President

  • Sure.

  • Peter, I think as you know, we began two years ago an annual price review process.

  • Separate and apart from these announced price increases that are sort of across the board.

  • So in the January and February time frame and in the time frame you referred to, going on into March, we did complete our annual price review process.

  • In addition, we identified selected materials where our cost increases we felt would be coming into our cost as we reached the current period.

  • So in addition to our annual price review that we simply do and reflect in our quotations activity, we also announced across-the-board increases to offset those material increases.

  • Now to Vern's point, we have enjoyed full capture.

  • Our folks have done just a spectacular job there.

  • Our service is excellent right now.

  • Our investments back in the business are just spot on to what customers are looking for.

  • So we've been able to get that full capture.

  • This recently-announced price increase the goes into effect July 27 is really intended to offset some additional cost increases that we expect to be coming into our cost in the coming weeks and on into our fiscal '08.

  • So we need full capture of that as well to offset those increases that, frankly, we had not anticipated six months ago when we went through the annual price review.

  • So it is an area where we think our performance will continue.

  • Peter Lisnic - Analyst

  • But do you think this most recent price increase will be a bit more difficult to realize?

  • Maybe not full capture?

  • Or should we think about it as you will be able to get full capture?

  • Because it sounds like this is just a straight pass-through of increased aluminum costs or ballast costs or whatever the case may be, versus prior price increases including some sort of -- I don't know how to describe it.

  • But I guess some sort of service element, if you will, or new product element that allowed you to realize that price.

  • John Morgan - President

  • I believe you have characterized it correctly.

  • This particular increase announced going into effect July 27 is really intended to offset those material cost increases and energy-related cost increases.

  • We are making the assumption that our competition is seeing similar increases.

  • Peter Lisnic - Analyst

  • Okay.

  • Then if I could, can you just give us a little bit more insight into the retrofit market?

  • It sounded like you are seeing some increased activity there.

  • But can you give us a sense as to how much or --?

  • Because I think what people do is they look at that portion of the business as being relatively insulated from the cycle, if you will.

  • So I think it is a relatively important part of the business.

  • So just wondering how is that shaping up, or how is that accelerating, if you could address that a little bit?

  • John Morgan - President

  • You know, to be totally honest, we do not know exactly what percentage of our business is going to retrofit facilities as opposed to new construction.

  • We have long made the assumption that retrofit activity is somewhere between one-third and one-half of the business, and that it increases or decreases over time with those various different construction cycles that you referred to.

  • We have seen an increase in activity of the sales of the types of products that we've introduced in the last couple of years that really are directed at retrofit.

  • Our I-BEAM product, for example, is directed at retrofitting industrial space; and in some cases similar technology in retail space.

  • We know in a very large portion of our national accounts that one-third or more of the volume there is going in to retrofit their existing space.

  • So we do think it is significant.

  • I cannot tell you precisely the percentage off the top of my head.

  • Peter Lisnic - Analyst

  • Okay.

  • No, that is very good.

  • I appreciate the clarity from you both.

  • Thank you.

  • Operator

  • Chris Glynn, CIBC World Markets.

  • Chris Glynn - Analyst

  • Just on the last answer, it sounds like you were talking about the overall refurb piece of the business as opposed to the energy-efficient retrofit, say, that would be encouraged by the Energy Policy Act of 2005.

  • Is that correct?

  • Vern Nagel - Chairman, President, CEO

  • Chris, if you refer back to our Q, we believe that the marketplace at this point in time is roughly an 80 -- our K, excuse me -- roughly an 80/20 split between new versus the retrofit side.

  • What John was referring to is the opportunities that we see in some of the, if you will, not only that portion of the business but national accounts and other customers that we serve through different channels, who are taking advantage of the opportunity for new energy-related products.

  • So I think in answer to your question, we still believe that it is roughly in 80/20 split, which is what I think we have in our K on our overall business in terms of split between new construction versus renovation.

  • But we are also seeing opportunities, again through national accounts as well as through our traditional access to market channels, for retrofit.

  • John, any further comment on that?

  • John Morgan - President

  • No, that sounds (multiple speakers).

  • Chris Glynn - Analyst

  • Sorry.

  • In terms of the straight-up retrofit in the installed base and the whole energy-efficient movement, you mentioned some traction in that as well in New York City, a lot of interest.

  • As this thing really takes hold, fixtures will maybe share the benefit with just some more efficient bulbs or maybe electrical workers going into a building and just changing the ballasts.

  • So is replacing the fixture really the pre-eminent way to do this, or maybe the most cumbersome?

  • John Morgan - President

  • You know, it is actually the most effective.

  • The industry actually went through a period of time a handful of years ago where energy service companies would go into existing facilities, existing products, and simply change out ballast and change out lamps and so forth.

  • What occurred during that period of time was -- or I should say what owners and occupants in the space experienced at the period of time -- was really reduced energy but really poor lighting jobs.

  • What happens with that kind of in-field modification if not done really well, the optical superiority that you're looking for in an installation to provide a good job is -- it really suffers.

  • So what we have seen is that to a greater and greater and greater extent, as you want reduce energy it really makes more sense to pull out product and put in the newest technology.

  • Because it is not just about the watts input, if you will, to a ballast; it is also about the effective distribution of that lighting.

  • It is not necessarily the best solution to simply reduce the wattage on a one-to-one basis.

  • There is new optical technology that allows you to space fixtures out further, for example, at the same time.

  • So you really need to look at the total application.

  • We're seeing more and more change-outs as opposed to in-the-field retrofits.

  • Chris Glynn - Analyst

  • Great; that is very helpful.

  • Thanks.

  • Operator

  • Thank you.

  • I now would like to turn the meeting back over to today's host, Mr.

  • Dan Smith.

  • Vern Nagel - Chairman, President, CEO

  • Dan, I will take it.

  • Thank you, everyone, for your time this morning.

  • Again, we continue to believe that we're focusing on the right objectives, deploying the proper strategies, and driving the organization to succeed in critical areas that deliver on the expectations of our key stakeholders.

  • I say this each time and it is true each time.

  • Our future is bright.

  • Thank you for your support.

  • Talk to you later.

  • Operator

  • Thank you for participating in today's teleconference and have a good day.