Acuity Brands Inc (AYI) 2008 Q1 法說會逐字稿

Good morning and welcome to the Acuity Brands 2008 first quarter financial 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.

Thank you.

Good morning.

With me today to discuss our first quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer, and Ricky Reece, our Executive Vice President and Chief Financial Officer.

We are Webcasting today's conference call at www.AcuityBrands.com.

I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company.

Such statements involve risks and uncertainties such that actual results may differ materially.

Please refer to our most recent 10-K 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.

Also, as mentioned in our press release earlier today, we will file our first quarter 10-Q by end of day tomorrow.

Now, let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

Ricky and I would like to make a comments and then we'll be happy to answer your questions.

On behalf of our 7,000 associates worldwide, I'm again pleased to announce record quarterly results for net sales and earnings before special charge for the first quarter of 2008.

This is our 11th quarter in a row, quarter-over-quarter record results.

Most importantly our diluted earnings per share for continuing operations before the special charge were $0.93, up 37% from the year ago, another first quarter record.

In addition to our record operating performance, we brought strategic clarity to the company, by completing a previously announced distribution of our specialty chemical business and a tax free spinoff to our shareholders on October 31st of 2007.

Today, that company, Zep Inc., trades on the New York Stock Exchange under the ticker symbol ZEP.

As part of our broader plan to enhance shareholder value, which included the spinoff of Zep we recognized a special charge in the first quarter for expenses associated with the spinoff and actions taken to simplify and streamline the organization once the distribution was completed.

The special charge reduced our consolidated operating profit by $14.6 million, and diluted earnings per share from continuing operations by $0.21.

The simplification of our organization structure afforded by this spin off will allow us to be a more effective and nimble company, by reducing overhead costs by more than $14 million annually.

Ricky will provide more details on the charge and our expected savings as a result of our more simplified organization structure later in the call.

I know many of you have already seen our results but I would like to make a few comments on the key highlights for the quarter.

Our first, with the lighting company as only operating unit.

As I noted earlier, our diluted earnings per share from continuing operations before the special charge were $0.93, again, up 37% from the year-ago period.

Our continued actions to introduce new, more energy efficient products, to improve productivity, to provide customers with superior service and to maintain our disciplined approach to pricing were once again significant contributors to the top line growth, and our robust expansion of our margins.

Net sales for the quarter were $509 million, up almost 7% compared with the year-ago period.

The solid growth in net sales reflects the benefits from the execution of our strategies to be the innovative leader in new energy efficient lighting fixture products, expansion of our presence in key channels in new markets, and continued improvements in our service and our disciplined approach to pricing.

Our top line growth in the quarter was even more notable, given the significant decline in construction activity in the residential housing market, which fell for the 21st consecutive month in November.

While it is impossible for us to know the precise impact at declining demand in the residential housing market had on our net sales, we believe this weakness reduced our total net sales somewhere between 1 and 2% this quarter compared with the year-ago period.

Excluding the impact of the decline in residential housing market , the acquisition of Mark Architectural Lighting, which added about $6 million in revenues in the quarter, and a favorable impact of foreign currency rates, we believe our net sales grew about 6% in the non residential sector.

While it is again impossible to precisely calculate the impact of our pricing actions, product mix and unit volume growth, we believe that this increase in net sales was split relatively equally among these three components.

In addition, we believe we are positioned to continue to enjoy market growth in key sectors of the lighting fixture market in North America, where we believe the market grew in low single digits on an inflation adjusted basis during the quarter.

Our incoming order rates in the first quarter as well as December were favorable as key sectors of the non residential construction market where we have particular strength enjoyed positive growth.

As a consequence, our backlog at the end of November was up 7%, over the year-ago period.

In addition to our positive top line performance, we were particularly pleased with our operating performance, especially regarding productivity and Customer Service.

For example, gross profit margin improved 210 basis points over the year-ago period, to 39.9%.

Consolidated operating profit margin, before the impact of the special charge, exceeded 13% for the first time ever, reaching 13.7%, an increase of 250 basis points.

Once again, significantly exceeding our goal of adding 70 basis points or more to our margin on a period over period basis.

Operating profit before the special charge was almost $70 million, an increase of 30% over the year-ago period.

This was terrific performance by our team.

Looking at our results from another perspective, we generated $16 million of incremental operating profit before the special charge on an increase in net sales of $31.2 million.

This represents a variable contribution margin of 51%.

Profitability and margins in the quarter grew significantly in spite of rising costs for certain raw materials and component parts and employee related costs, and while continuing to make significant investments to further improve productivity and for projects to expand our presence in key markets like New York City, in lighting related adjacencies, particularly in the lighting retrofit market where we see significant growth opportunities.

Also in the first quarter we received a cash dividend of $62.5 million from Zep as part of the spinoff.

We used this cash as well as our net cash flow from operating activities to repurchase over 2 million shares in the quarter for $93 million.

Over the last two years, we have repurchased approximately 3.6 million shares net of stocks issued under our incentive plans, reducing total shares outstanding by 8% to 41.4 million shares as of November 30, 2007.

Lastly, our cash balance was almost $202 million at the end of November, giving us tremendous financial flexibility to continue to invest in opportunities to significantly enhance shareholder value.

These exceptional results are the by-product of the commitment and focus we have as an organization to provide our customers with superior value, our associates with great opportunity and our shareholders with upper core tile performance.

All in all, ABL had a great first quarter.

I compliment the leadership team and all the associates at ABL for their dedication outstanding execution and intense focus in the pursuit of of operational excellence.

I would like to now turn the call over to Ricky to make a few brief comments on our overall financial performance in the quarter.

And then we will make some concluding remarks.

Thank you, Vern and good morning everyone.

Vern previously discussed our operating results for the quarter, so I will not repeat this information.

However, I would like to discuss and provide more detail on our reported results.

First I'll provide a little more color and some details on our first quarter operating results, then I'll discuss the special charge we took in this quarter including the anticipated timing of the savings we are expecting as a result of these actions.

I will conclude my prepared remarks with some comments about our cash flow and financial position.

Let's look at our first quarter operating results.

On a GAAP basis, first quarter 2008 reported diluted earnings per share which includes the special charge of $14.6 million and the results of discontinued operations was $0.72 versus $0.77 in the prior year.

A special charge negatively impacted reported diluted EPS by $0.21, while discontinued operations effectively had no impact on diluted EPS as it was essentially break-even for the first quarter of 2008.

Income from discontinued operations included the net results of Zep Inc., for two months, September and October, prior to the distribution date of October 31, 2007.

And $5.5 million of non tax deductible spinoff costs are $0.13 per diluted share.

These spinoff costs were primarily for professional and legal fees.

Sales for the quarter were $508.9 million, up 6.5% from prior year and gross profit was $203.2 million, an increase from prior year of $22.7 million or 12.6%.

Gross profit margin reached 39.9% for the quarter, reflecting a 210 basis point improvement compared with the year-ago period.

Selling, distribution and administrative costs were $133.6 million in the quarter ended November 30, 2007, compared with 126.9 million in the prior year period.

This increase of $6.7 million is primarily due to higher commission expense as a result of our increased sales, and inflationary increases in certain costs.

However, as a percent of sales, these operating expenses declined 30 basis points to 26.3%, compared with 26.6% a year-ago.

This improvement demonstrates our continued ability to leverage increased sales and to aggressively manage our indirect costs.

During the first quarter, net interest expense declined approximately $1.1 million, primarily as a result of interest income on higher cash balances.

During the first quarter, our effective tax rate related to continuing operations was 35.9%, versus 34.7% in the prior year.

Last year's tax rate benefited from a discrete item which did not repeat in the current quarter.

Going forward, we are estimating our full year tax rate to approximate 35.5%.

Let's now turn our attention to the special charge, $14.6 million special charge taken in the first quarter consists of $12.2 million of mostly cash charges for severance costs that will be incurred primarily during the remainder of calendar year 2008.

In addition, the charge includes $2.4 million which is an estimate of corporate office lease exit costs.

The current lease for the corporate office extends until November 2012.

The ultimate lease exit cost for this space will of course depend on how quickly we can find a new tenant and the sublease rate we receive for this Class A midtown Atlanta office space.

We estimate we will achieve $14 million in annual savings from these actions to streamline and simplify our organization structure.

While we have already begun to realize savings from certain of these actions, we believe it will be the first quarter of fiscal 2009 until we achieve the full $14 million annual run rate.

My concluding comments will address our cash flow and financial position.

During the quarter, we continued our long history of strong cash flow generation, ending the quarter with nearly $202 million of cash.

We generated cash flow from operations of approximately $26 million, versus $43 million in the prior year.

The decline versus prior year was largely attributable to a timing difference in collection of receivable as higher shipment volume earlier in last year's first quarter allowed for collections of such sales.

In the prior year, this acceleration of shipments earlier in the quarter was largely attributable to customer orders placed prior to implementation of last year's price increase.

The positive consequence of this timing difference is that we expect stronger cash flow generation in our second fiscal quarter of 2008, as compared to the previous year.

Overall, trade cycle days continue to improve, including a five day reduction in our inventory levels, compared with last year.

We invested over $6 million in capital expenditures during the quarter, which is comparable to prior year's first quarter.

We continue to forecast full year capital expenditures between 35 and $40 million.

As a result of the spinoff and our recent share repurchases, our shareholders' equity declined to $526 million at the end of the quarter, while our total debt balance decreased modestly to $364 million.

We continue to maintain strong financial flexibility as reflected by our net debt-to-cap ratio which was 24% at the end of the quarter.

Since the end of the first quarter, we have repurchased an additional 390,000 shares at an average price of approximately $42.00 per share.

There are currently approximately 1.5 million shares remaining under our existing share buyback program.

Thank you and I'll now turn it back to Vern.

Thank you, Ricky.

Looking forward, while we have our challenges, we continue to see significant opportunities.

Let me just note a few of the challenges.

First, we expect to continue to experience cost pressures for certain raw materials, component parts, fuel and employee related items, such as Health Care.

Second, as the markets continue to grapple with issues associated with the fallout of the subprime lending market, there appears to be a tightening of lending practices for commercial projects.

This of course may have a disruptive influence on the broader economy which could dampen demand in both non residential construction market as well as the residential market.

Third, we need to continue to find ways to offset costs associated with investments and programs to drive future profitable growth, including those that enhance customer service, improve productivity, expand our access to market and develop innovative new products.

While we continue to make investments to accelerate our product pipeline, including LED based products, as well as fund our expansion in the lighting retrofit market where we see significant growth opportunities.

Fourth, we expect the residential market to be soft for the foreseeable future, somewhat impacting our shipments through the home improvement channel and through other infrastructure related projects that are tied to new construction for the residential housing market.

And lastly, there always exists the potential for irrational pricing tactics while undisciplined competitors.

While we monitor these issues closely, we so far have demonstrated a strong capability to deal effectively with these challenges while delivering upper core tile results for our shareholders.

In addition, we continue to be very vigilant on our pricing and quotation posture and continue to drive programs throughout the company to enhance our competitive position.

Overall, we continue to be positive about the growth prospects of the non residential lighting market where we still expect to see volume growth in the low single-digits in our fiscal 2008.

While the risk of recession in the U.S.

is real, some guess it to be a 40% chance, we feel there are solid opportunities for us to continue to prosper, particularly as we introduce new innovative products and further expand our access to new markets including retrofit.

Additionally, we continue to see a number of influences that we believe support positive volume growth.

For example, while recent non residential building awards and employment numbers have lagged or signaled a slowing of the economy, other indicators, such as architectural building index, office absorption rates and rising rents for commercial space suggest demand for lighting fixtures will continue to be positive in our fiscal 2008 and into 2009, though quarter-to-quarter order rates may be inconsistent.

While we believe these and other factors that influence non residential construction market continue to show positive signs including increased spending by governments on infrastructure projects like roads, highways, strong demographics for school aged children fueling a boom in school construction and a continued attractive longer term interest rate environment.

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

We believe this market, which some estimate to be in excess of $100 billion in size, represents a significant growth opportunity for us.

Also, we continue to position ABL proactively to leverage its market presence better through investments which enhance our go-to market programs and strengthen our geographic footprint as well as expanding our product offering with new and innovative products that provide superior value to customers from an energy and lighting performance perspective.

We have created one of the broadest, most energy efficient and cost effective product lines available in the industry to allow our customers to benefit from the Energy Policy Act.

We believe this will continue to be an opportunity for growth in 2008 and beyond.

In addition, we continue to make investments in programs to train and develop our associates more robustly to 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.

Given the current conditions of the markets we serve and our growth opportunities, we expect to meet or exceed our long-term financial goals in 2008.

Lastly, we will continue to be relentless in our mission to excel in providing our customers with superior value, our associates with great opportunities and our stock holders with consistent upper quartile performance.

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

Thank you.

We're now ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please.

First question comes from Robert Mccarthy, Banc of America.

Good morning, everyone.

Hi, Rob.

Congratulations on a good quarter.

Looks like you had double-digit operating margins even including the special charge.

Could we talk about the special charge and the benefits first.

There's 14 million I think you're seeing.

You expect the run rate to be kind of hit for fiscal year 1Q '08.

Any sense of the timing trajectory near-term of those kind of benefits.

How does that relate to the already stated goal of 70 basis points and base cost takeout over the next couple of years.

First of all, Rob, it was a great quarter, not just a good quarter.

(Laughter)

We believe that the opportunity for the simplification of our organization really does, as I said earlier, allow us to be more nimble and quick.

We believe that we will achieve the full run rate of $14 million of savings when we hit our fiscal year '09.

So you'll see a ramping in.

Ricky, do you have some -- ?

Yes, Rob.

As you look at it, obviously here in the first quarter, we got virtually no benefit from these actions.

We're looking at probably a 7 to $8 million of benefit for the remaining three quarters of this year and as Vern said, that will ramp from say around $2 million in the second quarter, up closer to 3 or 3.5 million by the fourth quarter and then we'll be at that 3.5 million or so run rate per quarter as we get into '09 to achieve that 14 million.

Then you of course -- and then of course you would anniversary that benefit, then, you would start to anniversary that benefit.

Beginning the second quarter.

Understood.

We would expect that it would contribute to the 70 basis points or more of improvement.

And as you know, we have been on a trajectory of doing much better than that goal.

Absolutely.

So this is going to just basically infuse your goal.

This is not a step function in addition to that goal?

Correct.

All right.

That's fair enough.

And then talking about the 2Q trajectory, you did issue some caution in 2Q, but frankly you always issue some caution in 2Q, given seasonal trends.

How should we think about, generally in terms of modeling purposes and what you're seeing in terms of order intake rates in December, just in terms of-- Should we thing about the historical pattern over the past couple of years or how should we look at it and you enter into the 2Q here?

Very good question.

I believe that the seasonal pattern that we experience and have historically experienced will continue to play out.

Q2 is historically our weakest quarter.

Simply because it's December, January and February and as you might imagine, construction activity slows down during those time periods.

So we would expect that to happen again.

I believe that the historical change that you see going from first quarter to second quarter will continue to play out.

However, as we noted, our backlog is up on about 7% on a year-over-year basis, as we enter Q2.

Orders continue to be favorable.

Activity, quote activity in the marketplace continues to be favorable.

Our ability to leverage products that have been introduced over the last couple of years, particularly those that are targeted at retrofit, (inaudible) have an energy story, they all have an energy story associated with them, really continue to play well.

So while I expect us to always have, as you said, these challenges, I do thing that Q2 will continue to be favorable.

As you know, Q1 was our 11th quarter in a row of record quarter-over-quarter results and my expectation is that we'll continue to do that in Q2.

Into Q2 and then finally on just the longer-term.

On the energy efficiency and retrofit opportunity, is there any way -- I mean, you've given us some sense of the overall aggregate market as kind of a tantalizer there, but is there any sense in terms of the 6% growth, how much was contributed by the retrofit opportunity?

Obviously all your products kind of by level of generality, everything could be considered an energy efficient product and could be considered largely retrofit, could you talk about the pricing or mix or kind of volume characteristics in association with that, so we can get a sense longer-term of how much of a secular trend we're seeing for energy efficiency in conjunction with the cyclical trend we're seeing?

At this precise point in time, our ability to track where some of the products that are ending up -- we believe are ending up in the true retrofit side, we're not as specific about being able to track some of that.

We are focused on getting that capability.

We are expanding ourselves into that market and so more to come on that.

Unfortunately, at this point in time, I don't think that me speculating as to how much of our products actually ended up in the retrofit side, it would be just that.

I don't think it would be helpful to you.

We will be providing more information as our systems and our focus around that get more particular.

But yet we see it as a significant, again, growth opportunity on a go-forward basis.

Finally, any legislative highlights kind of coming up or can you you review the recent legislation with respect to energy and what do you see going '08 to '09, particularly with what we are seeing on the political environment, any things we should keep our eyes on, what we should be watchful for, anything that's already been passed that we should be mindful of.

Ricky, you can help me here, I believe they did not extend EPACT beyond December 31st of 2008 because there were other items contained in the bill that were unsavory, apparently.

That's correct.

There is great bipartisan support for the type -- for the EPACT Policy, if you will.

So our view is is that there will continue to be opportunities to help drive that.

I can't predict for certainty whether Congress will take another bite at that apple and extend EPACT 2005 beyond December 31st of 2008.

But my sense is that there's a lot of bipartisan support for that.

So it seems likely that there could be something there.

That's on the incentive front.

You continue to see more local incentives, both from the utility companies as well as municipalities on the regulatory kind of the stick front, you continue to see obviously seeing legislation to ban the incandescent bulb and go to compact fluorescent.

I think now, virtually all 50 states are requiring some levels of controls be applied on new construction when you put lights in public buildings.

So we're continuing to see a major focus, both with the care and the way of incentives as well as the stick in the way of regulations that are encouraging and pushing people to address the huge opportunity out there to improve the efficiency of light as well as improve the quality of the light source.

And then I'd just say from a non regulatory standpoint, just a lot more attention being given to the degree and energy efficient movement that I think is all positive towards thus starting as an industry to see a lot more activity and retrofitting the lighting fixtures out there.

Rob, just again, to follow up on that with a question you had previously posed, what we are seeing is a number of instances where we are calling on customers who have existing facilities and they are looking at the opportunity of redoing these facilities because of the benefits of better lighting their facilities, whether it's for their customers or their associates, as well as the energy savings, as well as trying to be good corporate Citizens in terms of reducing their carbon footprint.

The question that we have is, is that retrofit or is that new in the way we look at it, a lot of our different sales forces have at this point in time difficulty encoding some of that.

That's why for us to give you some of that information right now, it's still a work in progress for us.

But we will be providing that to you at some point in time.

Thanks for your time.

I'll pass the baton.

Next question comes from Peter Lisnic with Robert Baird.

Your line is open.

Good morning, gentlemen and Happy New Year.

Hi, Peter, how are you?

Good.

I just want to ask another question on the retrofit opportunity.

If you kind of look at it from a different angle, and ask yourself what kind of drives retrofit, what I'm really wondering is how much of retrofit is really driven by energy efficiency versus more macroeconomic based fundamentals?

What I'm trying to I guess get at is should we be worried about retrofit in the context of potentially slower or slowing employment growth and slower macroeconomic conditions here in the states?

I actually think it would be the opposite of that, because again, not only do you in many instances have a better lighting experience, so if you're a retailer, it's improving your sales productivity and that's been actually proven, but it's also reducing your operating costs.

So where you potentially have a slowdown in top line growth, you may be very interested in continuing to drive productivity improvements in your business and this is an example of being able to reduce those operating expenses.

So we actually see it as almost being a buffer, if you will, in terms of how the cycles work.

Actually, if you even go back a few years ago when the markets were turning down on the new construction side, our revenues actually expanded during that time period.

We believe that there was not only a mix shift going on towards more tenant fit up and retrofit type opportunities, we were certainly expanding our access to market going to new channels, things of that nature, on a go forward basis, we see the retrofit and tenant fit-up market as really an opportunity to augment our growth as we go forward.

So we continue to be very positive if you will about what the future holds particularly in this market.

That's an interesting point.

Thanks for that.

This is the first chance we get to hear you speak publicly about what's happened in the industry from a structural standpoint with obviously the acquisition of Gen Light by Phillips.

I'm wondering what your thoughts or public thoughts on that are, does it change the game at all for you or your strategy going forward?

I believe that Gen Light was a very good competitor, as a stand-alone company.

Phillips acquiring Gen Light, I believe that they will continue to be a very good competitor.

I don't really see significant changes in the landscape, certainly this was an opportunity for Phillips to get a toe hold in this market in the fixture side of the world.

We acquire a great deal of product from Phillips in terms of component parts.

And our expectation is that we will continue to do that.

Many of those components are sourced -- are available by others.

It's a very competitive world.

It's becoming a very worldwide opportunity in terms of technology, whether it's LED based or whether it's even core technology, traditional lamp balance technology, there's still many, many suppliers out there who are bringing new and creative technologies to the marketplace.

And we're an integrator.

And we know how to do that very well.

We have relationships with them all.

So I don't see a significant change in the landscape by virtue of Phillips acquiring Gen Light.

Okay.

Fair enough and just to clarify one of Mr.

Mccarthy's questions, on the 14 million, that is included in the 70 bips annual operating margin improvement, or not?

We think that it will contribute to our annual margin improvement.

But as I said, and I want to be clear on the point, we have for the last couple of years now, exceeded that 70 basis points by a wide margin.

So I'm hinting that my expectation is that we will do that again in 2008 and beyond.

But to be clear, it is contributing to our 70 basis points of improvement or more.

Okay.

Thank you for the clarification and the time and congrats on the good quarter.

Thank you.

Next question comes from Christopher Glynn, CIBC World Markets.

Your line is open.

Thank you.

Good morning.

You talk about the current order rates in the press release and in the comments and just kind of curious, digging into the clarification of key areas of non residential construction, obviously some parts of it would be a little more linked to the residential.

Are you seeing more variability even in the second half of last year in the different subsectors of non residential?

We are.

I think that as you you look at the different economic forecasters that are out there, whether it's Dodge or whether it's Global Insights, they too get into these verticals, Dodge looks at something like 145 different verticals and it's clear that you see differences there.

Our expectation is that the institutional markets continue to be favorable.

We currently see medium to larger type projects on the commercial side being favorable.

Notion of retrofit and renovation and tenant fit-up continues to be favorable.

Some of the soft spots, as you might imagine, are those that are more directly related to residential.

When you build a new neighborhood, you need a strip mall, you need a gas station, you need some of those things.

Those markets and some of that flow business continues to be soft.

I think hotels are starting to slow down a tad.

So we do see normal cycling, if you will, within these verticals.

The good news for us is I think that where we continue to have strength, those verticals are also continuing to show positive growth signs.

Okay.

And obviously the cash position balance sheet very strong, what are you seeing in the kind of acquisition landscape?

We continue to be active in the marketplace, looking at acquisitions that will continue to build out our portfolio of businesses.

It's difficult to precisely predict when, but we feel confident that there are acquisition candidates out there that really make sense to be a part of us and so we will continue to pursue and examine those opportunities.

Are they almost exclusively in the sort of 20 to $40 million sales range or are there reasonable number of larger properties out there?

I believe that there are some larger properties that are out there, whether those have highest opportunity for us I think would be somewhat -- I don't know that they necessarily have the highest opportunity for us.

Some of the smaller targets to me really fit better with the strategy that we have of building out the portfolio, really from a product and access to market perspective.

Okay.

Thanks a lot.

Our next question comes from Matt McCall, with BB&T Capital Markets.

Good morning, everybody.

Good morning.

First, Vern, you spoke about expectations of volume being up low single-digits next -- or this year and I think in the release you talked a little bit about mix and pricing expectations.

Can you remind us about the most recent pricing action, what's the magnitude, what the expectations are there and the, also, your expectations for the benefit of mix as we progress through '08?

As I said in my comments, when you sort of back out, if you will, the addition of Mark Architectural Lighting, you back out foreign currency and you also adjust for what we believe was the impact on residential impacting our sales, it looked like our growth was something slightly north of 6%.

Within that 6%, our feeling was that it was relatively split or relatively equally split amongst volume, mix and price.

In the July time frame, I believe that we ranged in the -- somewhere in the 2 to 4% range.

I'm trying to remember.

3 to 5.

3 to 5.

But it wasn't on all products.

And so we have been getting a fair bit of that price increase.

I'm not certain if that's necessarily true in the marketplace overall.

Our view on pricing going forward, as you know, we annually do a price review.

We're in that process as we speak.

A lot of it has to do with where do our products fit in their product life cycle.

And so we examine those on a very focused basis.

Mix, and this is why it's very difficult for us to determine precisely price versus mix, the product mix continues to be very favorable.

Products that we have developed and introduced over the last three years continue to provide growth in our business.

And what's difficult to determine is how much of it is cannibalizing our own, say, older products versus the opportunity to expand into new markets.

We believe that it's a combination of both but it's difficult to say precisely how.

I would expect that you will see us and hear us talk about product mix continuing to be a significant contributor to our top line growth and our margin improvements as we go forward.

We're very focused on the development of new products and those tend to appeal to large markets and tend to have a high value proposition for customers and as a consequence, they typically have higher contribution margins for us.

Okay.

Thank you.

That's helpful.

And so if I hear you, I think if we look -- ignore the year-ago comps, it sounds like expectations are for current trends to kind of continue through '08, roughly?

Across all those different factors, whether it be price, mix or volume.

Again, our view is is that the marketplace, at least the components that we participate in, should give us low single-digits of unit volume growth, price, it really depends on what we see out there in terms of what's happening with either costs or what's happening with competitive situation.

But the product mix side I think will be -- continue to be a key driver in terms of the opportunities for us as we go forward.

Again, new products, better service, the opportunity to differentiate how we deliver that level of service has really been -- has been a driver of our top line growth and our profitability and we expect it to be on a go-forward basis.

Okay.

Okay.

Thank you, Vern.

You reported a 13.7% margin in Q1.

If I look historical, yes, Q2 is seasonally weaker.

As we move into the back half of the year, looks like Q3 and Q4 have historically been a little stronger than Q1.

I'm trying to get a picture of -- you discussed the expected cost savings from your -- from the moves you made in Q1.

We're also talking about some potential for some cost pressures on the raw materials and input side.

But help me understand from a seasonal perspective what the back half of the year should look like, directionally versus Q1 from a margin standpoint.

Well, first off, from the top line perspective, I believe that we are about a 52, 53% of our full year's revenues are in the second half, versus the first half.

That volume has two benefits.

One, it has the variable contribution coming off higher sales.

Plus, also helps us absorb our supply chain cost in a more effective way.

So typically you'll get that variable contribution flowing through.

I believe that last year in 2007 on an adjusted basis, excluding if you will Zep, our consolidated operating profit margin Ricky was about 11.3%.

It would be my expectation that we will continue to show favorable improvement over 2007 each quarter, and as you saw from our first quarter results, we were favorable by 250 basis points.

Right.

Strong and pretty robust performance, I would say.

Right.

I don't know if I want to build in 250.

I guess so the back half -- there's nothing seasonally or there's nothing that we should expect, I think Q3 last year had a little bit lower profitability than Q1 on a slightly stronger top line, but there's nothing that's permanent in the business from a seasonal perspective that could cause that to recur on an ongoing basis?

When I look at 2007, our third quarter profitability at the operating profit level was above Q1.

And certainly Q4 was above all of them, giving us an average of 11.3%.

I believe that in the second half of the year, there is still, if you will, this concern out there about how will demand continue to manifest itself in the second half of the year.

Our feeling is is that demand, while in certain sectors is slowing down, we still feel that from a unit volume perspective we'll see low single-digits 2, 3% would be a good guess in terms of unit volume growth.

Contributing to our full year should be our product mix and some opportunities for us to extend into the retrofit market, opportunities to continue to expand in New York City where we have recently made some significant investments and now have a presence in that marketplace.

So all of those things I believe will contribute to a positive second half.

Okay.

Okay.

Thank you, Vern.

That's helpful.

Our next question comes from David Woodyatt Keeley Asset Management Corp.

I was wondering if you could elaborate a little bit more on the share repurchasing.

You helped us out by mentioning what you had done so far this quarter, but 2 million shares bought in the first quarter seems like a high level.

What kind of a pace would you generally expect going forward, another way of asking it is how soon or is there a point in time when you want to get the 1.5 million shares remaining completed?

Looking at the first quarter, the rate of repurchase was at a higher level as we took advantage of the dividend we received on the distribution of Zep, the $62.5 million and felt that the best use for that cash flow in terms of enhancing shareholder value was to repurchase shares with that.

So we were pretty aggressive in our first quarter, while we've been aggressive over the last couple of years, we were at a higher rate there in our first quarter, taking advantage of the opportunity of reinvesting or using that dividend from the distribution of Zep and what we thought was the highest use for shareholder value creation.

We are looking to continue to repurchase and it will -- the 1.5 million shares that we have, we've got a 10B5 program in place now that we're purchasing under and just based on various market factors as well as other opportunities we may see to reinvest that capital will cause us to continue to examine what's the highest and best use of that capital.

At the moment though, I think you're likely to continue to see us in the market repurchasing shares but probably not as aggressive a rate as we saw in the first quarter because we had the a added boost of the dividend from Zep.

Just to add more color to that, since the beginning of 2006, through this first quarter, we have repurchased or invested $330 million in terms of share repurchase, share repurchases over that time period.

Our expectation is is that our cash flow will continue to be very strong.

We have a goal out there of having our free cash flow exceed our net income.

Our expectation is is that we'll do that again in 2008.

So we continue to generate very favorable cash flows.

We continue to improve our Asset Management capabilities because of better processes.

As Ricky said, we would expect to continue to look for ways to deploy that capital in the most advantageous way for our shareholders.

That would include share buyback and investments in terms of back into our business in terms of market expansion, New York City, as well as potential acquisitions that help our portfolio.

Also, could you just comment briefly on stock options, if you've issued any yet since the spinoff and do you have any immediate plans in that area?

I can comment on that.

I don't know the precise number but our long-term incentive plans, our annual plans, they are pay for performance plans.

What that means is that we have to hit certain financial targets in order to fund a pool of long-term incentive.

For the last four years, we have generally used restricted shares as the only vehicle in terms of how we have funded those long-term incentive plans.

In the first quarter, post spin, we funded our long-term incentive plans and it was primarily, again, restricted shares.

But we did issue some options and Ricky, the number was pretty small.

I don't recall the exact number either.

But it wasn't a significant amount.

To put it broadly in perspective, we look at the total number of shares including options that have been issued and as I recall that number was about 1.5% of our total shares outstanding, so it was well below -- about 600,000 shares, that included both restricted shares and options.

And I'm giving this to you off the top of my head, so be a little careful there.

But I think I'm pretty close in terms of the number.

Just one last question.

Given the fact that your a -- say a new entity, but changed entity, do you have any near-term plans for getting on the road to meet with investors?

Yes, we do that on a quarterly basis.

We present at different conferences that are sponsored by the folks that provide coverage on us.

And so it would be our opportunity or it would be our expectation to continue to do that.

Dan, I look to you, I believe we have various road shows or trips that are planned.

We try and do something once a quarter.

We'll probably have a northeast in the next month or so and then probably Midwest later on.

Later on in the period.

Okay.

Great.

Thank you very much.

You're welcome.

Just one last comment on the stock options.

Our overhang has dropped dramatically over the last three years.

I believe that total options outstanding in our most recent 10-K were about 2.1 million, Ricky.

So we were down pretty dramatically, if you go back even just three years ago.

So the overhang issue we have really addressed pretty aggressively, favorably for shareholders, I might add.

Our next question comes from Dennis [Delafield] with [Delafield] Asset Management.

Thank you.

Vern, you talked a lot about the energy policy act.

Did that include anything about the retrofit for federal buildings?

Yes, there is opportunity there.

If you're a taxpayer, there are accelerated tax deductions that you get if you own the building.

But there are also opportunities when it goes into a non-taxable entity for the contractor and the designer to participate in some of those incentives.

So there would still be an incentive through the EPACT as I understand it for even entities that are not otherwise paying any taxes.

There was no requirement that the government retrofit their own buildings with energy efficient lighting?

To my -- certainly not as part of EPACT 2005.

At the Federal level, I'm not aware of any requirement.

You're beginning to see more activity at a local level but I'm not aware of a requirement at the Federal level at this time.

Dennis, the local level is very exciting for us.

We continue to make in-roads into those markets and feel that from a strategy perspective and from an organizational structure perspective, we are going to realign or better align some of our resources to target some of those types of markets in a more effective way because of the growth potential that's there.

Great.

Thanks and congratulations.

(OPERATOR INSTRUCTIONS).

Our next question comes from Robert Mccarthy with Banc of America.

Just a couple of follow-ups and I notice we are getting late in the day here.

Respect to the New York market, Vern, obviously you made a big splash there with your new design center, things like that.

Can you talk about -- and the fact is those commercial markets, particularly the northeast remain fairly firm.

Are you seeing any signs anecdotally of market share gains or growth there above kind of market expectations?

Well, in the city itself, we had very little presence.

So any real opportunity there is market share gain for us.

And we believe the way we have positioned the product portfolio, it fits very well with the opportunities and the demands of the New York City market.

The acquisition of Mark Architectural Lighting, some of the structuring that we've done with our specialty products businesses under one of our better leaders, really is just a very exciting growth opportunity for us.

So we're after that.

Supply chain is focused on making sure that we have New York type product.

But we see this in other markets as well, other large markets where there continues to be an we expect there to continue to be strength in demand.

So for us, those are share gains.

They're geographical share gains, if you will.

So there's definitely an opportunity there.

And then finally, on the acquisition front, just following up on a previous commentary and questions, with the fact that Gen Light is effectively focused on other things now, being acquired, is there any potential for any residential properties and have you started to see multiples for some of those smaller residential properties kind of come down now as people kind of go through the coiffures stages of dying and realize that they're not going to get quite the multiples they thought?

Again, we see opportunities in that market.

It may be a little too soon to put our toe into the acquisition side there.

Having said that, we continue to develop and enhance our own product portfolio through our internal engineering design capabilities, targeting at that market because again, we believe that there is an energy story there as well.

So we see the residential market as a very large market and an opportunity for us in the future to participate in more aggressively.

Whether we do that through, again, continued development of products internally or through acquisition, those are choices and opportunities that we'll have to consider I think later, not right at this point in time.

Thanks for your time.

Thank you.

There are no further questions.

I'll now turn the call back over to Vernon Nagel.

Thank you for your time this morning.

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 of our key stake holders.

I would like to thank all the associates again of Acuity Brands, terrific quarter and more to come.

Our future is bright.

Thank you for your support.

Thank you for participating in today's conference.

You may disconnect at this time.