Acuity Brands Inc (AYI) 2008 Q2 法說會逐字稿

Good morning and welcome to the Acuity Brands 2008 second-quarter financial conference call.

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

(OPERATOR INSTRUCTIONS).

Today's conference call is being recorded.

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

I will now turn the call over to your conference host, Mr.

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

Sir, you may begin.

Good morning.

With me today to discuss our second-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 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-Q in today's press release which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

I would like to make a few comments then Ricky and I will be happy to answer your questions.

On behalf of our 7000 associates worldwide, I'm again pleased to announce record quarterly results for net sales, net income and diluted earnings per share for the second quarter of 2008.

This is our twelfth quarter in a row of record results.

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

Our diluted earnings per share from continuing operations were $0.82, up 64% from the year-ago period.

Net sales for the quarter were $483 million, up almost 9% compared with the year-ago period.

Solid growth in net sales and continuing robust increase in earnings reflect 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, continued improvements in our service, increasing productivity gains and our disciplined approach to pricing.

The growth in our net sales in the quarter was even more notable given the continued decline in construction activity in the residential housing market.

While it's impossible for us to know the precise impact that declining demand in the residential housing market had on our net sales, we believe this weakness reduced our total net sales by roughly 1% this quarter compared with the year-ago period.

The acquisition of Mark Architectural Lighting and the favorable impact of foreign currency exchange rate changes contributed about 2 percentage points of the increase in net sales in the quarter.

Excluding the impact of these items and the decline in the residential housing market, we believe our net sales grew about 7% in the nonresidential 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 to our positive top-line performance, we were particularly pleased with our operating performance especially regarding productivity and customer service.

Improvements in these key areas contributed to the 260 basis point expansion in gross profit margin over the year-ago period to 39.8%.

Consolidating operating profit margin was 12.6%, an increase of 370 basis points over the year-ago period.

This is particularly impressive given our second-quarter results tend to be our softest due to the seasonal nature of the construction industry.

Operating profit was $60.7 million, an increase of 53% over the year-ago period.

This was outstanding performance by our team.

Looking at our results from another perspective, we generated $21 million of incremental operating profit on an increase in net sales of $38.3 million.

This represents a variable contribution margin of 55%.

Profitability and margins in the quarter grew significantly in spite of rising costs for certain raw materials such as steel and component parts and certain 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 and lighting-related adjacencies, particularly the lighting retrofit market where we see significant growth opportunities.

In addition, cash flow from operating activities in the quarter was again strong exceeding $30 million, up almost 29% from the year-ago period.

Lastly, our cash balance was $185 million at the end of February giving us tremendous financial flexibility to continue to invest in opportunities to significantly enhance shareholder value.

These exceptional results are the byproduct 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 quartile performance.

All and all, ABL had a great second quarter.

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

I'd like to now turn the call over to Ricky to make a few brief comments on our overall financial performance IN the second quarter before I make some concluding remarks.

Ricky?

Thank you, Vern, and good morning, everyone.

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

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

In addition, I will briefly comment on first-half results and cash flow.

Net sales for the quarter were $482.6 million, up 8.6% from prior year.

The impact of foreign currency exchange rate changes contributed approximately 1 percentage point to this improvement.

The contribution from Mark Architectural Lighting added around another 1 percentage point.

We continue to be very pleased with the contribution this business, which was acquired in July 2007, is making especially in the New York City market.

We are in the process of adding additional New York City compliant product to its portfolio and believe we can further penetrate this significant market.

Vern previously said that we estimate that our net sales grew about 7% in our primary market, the nonresidential sector, and that the product mix, price and volume growth each contributed relatively equally to this improvement.

Looking first at the enhanced product mix, our efforts to be an innovative leader especially in energy-efficient products such as RT5, ES8, I-BEAM, SuperGlass and others, is resulting in a higher price per unit as compared to the more standard products they can replace.

Secondly looking at price, we continue to be very disciplined in our approach to pricing.

While most of the increases are necessary to offset higher costs, we are seeing opportunities as we improve service and highlight features and benefits in our products that lower the total cost of ownership for the end-user and allow us to get paid for this differentiation.

Lastly, our volume growth generally reflects the overall markets that we serve.

However, as we improve our service and custom capability of our higher value specialty brands such as Peerless and Hydrel, we are seeing greater than market rate growth in these product sales and we have added some additional stocking units to our residential products serving the home channel partially offsetting the weakness in the residential market.

Offsetting some of these gains is some ceding of market share in the more price sensitive distributor stock business as we reposition our product offering so that we can be more competitive while preserving our margins.

Gross profit was $192 million, an increase from prior year of $27 million or 16.3%.

The gross profit margin reached 39.8% for the quarter reflecting a 270 basis points improvement compared with the year-ago period.

Product mix, pricing, and the increase and volume were the primary contributors to this improvement.

Manufacturing productivity gains also boosted our margins.

Partially offsetting these gains was increased cost, especially in commodities and freight.

Selling, distribution and administrative costs were $131.3 million in the quarter ended February 29, 2008, compared with $125.4 million in the prior year period.

This increase of $5.9 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 100 basis points to 27.2% compared with 28.2% a year ago.

This improvement demonstrates our continued ability to leverage increased sales, some early benefits from simplification of our administrative structure as a result of the spin-off of Zep, and our aggressive management of indirect cost.

During the first quarter, net interest expense declined approximately $700,000, primarily as a result of additional interest income generated on higher cash balances.

During the first quarter, our effective tax rate related to continuing operations was 36.1% versus 31.3% 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 will be approximately 35.5%.

Let's now turn our attention to the first-half results.

Sales for the six months ended February 29, 2008 were $991.4 million, up 7.5% compared with the prior year period.

Factors affecting this comparison are very similar to the factors discussed previously for the quarter.

Operating profit for the first six months of fiscal 2008 was $115.6 million.

This reflects an increase of $22.4 million or 24% compared with the prior year period.

The operating margin of 11.7% is up 160 basis points compared with the last year.

Included in the first half of fiscal 2008 results is the special charge of $14.6 million or 1.5% of sales taken in the first quarter.

Diluted EPS was $1.55 for the six months ended February 29, 2008 compared with $1.32 in the same period last year.

The current year results include the special charge of $0.21 per diluted share.

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

During the first half, we generated cash flow from operations of approximately $56 million versus $65 million in the prior year.

This decline versus prior year was largely attributable to a use in operating working capital which we define as receivables plus inventory less accounts payable of $6.5 million in the current period compared with a source of $18.5 million in last year's comparable period.

Our overall trade cycle actually improved two days as of February 29, 2008 compared with the same period last year but we enjoyed a greater rate of improvement last year.

Also contributing to the reduced cash flow from operations was the timing of tax payments as well as payments made against the special charge in the first half of fiscal 2008 compared with last year.

We invested $14.6 million in capital expenditures during the first half which is slightly more than the prior year's $14 million.

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

During the first half, we continued our stock repurchase activity purchasing almost 2.9 million shares and used $131 million of cash.

Since February 29, 2008, we have repurchased an additional 117,000 shares at an average cost of under $42 per share.

There are currently 1 million shares remaining under our exiting share buyback program.

As a result of the spin-off and our recent share repurchases, our shareholders equity declined to $527 million as of February 29, 2008 compared with $672 million as of August 31, 2007.

We continue to maintain strong financial flexibility as reflected by our net debt to cap ratio which was 25% at the end of the quarter.

Thank you and I will now turn the call back to Vern to discuss our outlook.

Thank you, Ricky.

As we look at the balance of 2008 and beyond, we continue to see challenges but more importantly, opportunities.

Just to note a few of these challenges, it is well known the economy in the United States is experiencing a slowdown due to the disruption in the housing and credit markets.

Clearly it is impossible to know if or predict when the timing or impact these disruptions could have on the growth rate of the nonresidential construction market.

Several factors which influence the future growth rate of new construction in the nonresidential housing market including the future vitality of the economy, job creation, occupancy rates and the availability of capital are all at a current state of flux.

Although these concerns are worrisome, the Federal Reserve and the U.S.

Treasury implemented a number of actions designed to boost investor and public confidence about the overall direction of the U.S.

economy including lowering interest rates and increasing liquidity in the financial markets.

We believe these actions will have a positive influence on the longer-term trends for construction in North America.

Overall we remain positive about our performance for the remainder of 2008 where we expect to meet or exceed our long-term financial goals including margin expansion, earnings growth and cash generation.

While our backlog at the end of February was down about 2% compared with the year-ago period, the decline was due primarily to improved cycle times, the timing of certain orders and the reduction in past due backlog.

More importantly, our daily incoming order rates in March were positive compared with those reported in the year-ago period as key sectors and geographies of the nonresidential market where we have particular strength enjoyed positive growth offsetting the falloff in the residential market.

We expect other factors to influence the balance of our fiscal 2008 including continued cost pressures for certain raw materials, component parts, fuel and employee-related items.

To help offset some of these recent spikes in cost, we announced a price increase on most products ranging between 3% and 10% effective early May.

Similarly, we continue to find ways to offset 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 develop innovative new products.

We are aggressively making 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.

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

Additionally, we continue to drive programs throughout the Company to enhance our competitive position and improve our productivity.

Overall, 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.

We are encouraged by our traction in the retrofit market as commercial, retail and industrial customers take advantage of our broad array of efficient lighting fixtures designed 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 to better leverage its market presence by continuing to make 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 our customers from an energy and lighting performance perspectives.

We have created one of the broadest, most energy-efficient, and cost-effective product lines available in the industry that allow our customers to reduce their energy consumption while providing a better lighting experience for their customers and associates as well as contributing to their own sustainability goals.

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

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

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 shareholders with consistent upper quartile performance.

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

(OPERATOR INSTRUCTIONS) Peter Lisnic, Robert W.

Baird.

Good morning, gentlemen.

Vern, I guess the first question I had is if you can expand a little bit on really what you are doing on the productivity side?

Because I think margins here continue to surprise to the upside and I'm getting a sense that part of that is driven by productivity.

So can you give us maybe peel back the onion a little bit more on the productivity side of the equation and how that is driving margins?

Sure.

We have been on, if you will, our lean journey for more than three years now.

And I believe that as we become a leaner, more customer centric company that is committed to driving both continuous improvement as well as achieving operational excellence in everything we do, the organization is a rallying to these calls.

And as a consequence, we are very aggressive as a company about reducing or eliminating lesser value-added activities and focusing on higher value-added activities.

Our facilities, whether it be our manufacturing facilities, our distribution facilities or even in the office, we are seeing productivity at all levels.

This is something that we believe is contributing significantly not only to our bottom line vis-a-vis cost savings, but it's affording us the opportunity to better serve our customers which allows us to gain share, if you will, as well as create a better experience allowing us to differentiate that value.

And lastly, it's allowing us to invest more aggressively in our new product development which is allowing us to have an enhanced product mix, if you will, of sales.

So all of this is a concerted program to drive greater value for our customers, allowing our associates to continue to grow and the benefit really you are seeing margin improvement, cash flow generation, upper quartile performance for our shareholders.

Okay and if you looked at your productivity metrics I guess, how would you rank yourselves in terms of being world-class?

What I'm trying to get a sense of is how much more opportunity is there?

You've been successfully doing this for quite a few quarters in a row now.

And I'm just wondering, if we use the baseball analogy, what inning are we in?

How much more opportunity is there?

Our team would say we are probably in the second inning.

And we haven't come to bat yet.

Well, you must have skipped your bat in the first inning and I will ignore that I guess.

No, we haven't come to bat yet in the second inning.

Look, we are very early in our journey.

We see a great deal of opportunity to continue to -- as an organization -- to drive greater value for our customers, to continue to deploy those assets and those investments in areas that have higher growth rates and higher opportunities for the customer base.

And there are many folks that are going down the same path and the tools are all known.

But as Toyota is fond to say, we will let anybody walk through our facilities because it's not what you see, it's how your people go about their daily activities.

And I'm just very proud and very pleased at our organization and the passion with which we have to improve value, quality, delivery, cost, product innovation, all of these key areas that are very important to us in terms of creating value for those key stakeholders.

Okay, fair enough.

And then if you don't mind just on the retrofit market, I know this question is often asked, but can you give us a sense of the size or scale of that business or at least what kind of traction you are seeing in penetrating the retrofit market?

We recently announced an organizational change in our Company creating a new business unit called Acuity Brands Technology Services.

And part of that effort is really to develop a more concerted value proposition targeted at more broadly what we will call the [relight] retrofit market.

And to coalesce our resources and our capabilities to provide value to our customers whether they are through all of our various channels.

We right now at this point in time estimate the market, as I said earlier, to be north of $100 billion, but it's a marketplace that is being served in a very small way today.

And so we are about creating or defining, if you will, our strategies to that.

But today we are taking advantage of our very broad energy-efficient productline.

As Ricky mentioned earlier, whether it's an RT5 or an ES8 or an I-BEAM, or capabilities around SuperGlass, all of these things afford our customers the opportunity to enjoy substantial energy savings while realizing improved lighting aesthetics and capability.

These products have a great deal of technology in them, they are proprietary in many respects.

So for us, we are about getting after that market but serving customers today in the more traditional way.

We think that there are other ways to expand our access to market, to give our agents even more capability to go after this market, to enhance our national account capability.

So a lot more to come on our strategies as we hone and fine-tune those.

But we are not ready for a full, if you will, release of that strategy at this point in time.

Okay, fair enough.

Thank you for your time and congrats on a great quarter.

Thank you.

Matt McCall, BB&T Capital Markets.

Thank you, good morning everybody.

One of the comments you made was -- and I think you've talked about this in the past, that you were ceding some marketshares and some more price sensitive commodity segments of the marketplace.

Can you give us an idea of what the impact has been there both I guess really since I guess over the past say four or five years on the top-line and even more so recently what the impact has been on the top-line?

But also what the impact has been on your margins as you move to those higher margin businesses?

Or segments, I should say, and products.

I would like to make a comment on your first comment about us ceding, if you will, lower end.

We, as I said a couple of quarters ago, really view all portions of the market to be opportunities for us.

As the clear market leader, the notion of ceding some portion of the market is not very appealing to us.

And as a consequence of that, we have introduced products that have features and benefits at various price points in the market to go after that share.

So the lower end of the market from a price point perspective, we have introduced Contractor Select to target, if you will, those markets at those price points that have features and benefits that are consistent with that and we are seeing traction in that area.

Whenever you introduce a new productline, it takes a while to develop that.

So we are pleased with our progress to date.

More to come on that.

But you are absolutely right in your observation that we have maintained our price discipline at all segments of the market to good, better, best value propositions.

Our specialty businesses as we continue to introduce new and innovative products have allowed us to enhance the mix of our business.

As I said earlier, we believe that in this quarter of the decline in the residential market probably impacted our overall revenues roughly a point.

It's very difficult for us to know that precisely given the various channels that we access to market but we feel very positive about the growth that we've been able to show in the quarter and our ability to continue to maintain our price discipline.

Again, I believe it's a reflection, as I said earlier, of the product portfolio.

Our team is doing a great job of introducing new and innovative products and continuing to do that as well as productivity.

So it's my view that you will continue to see that positive mix as well as us continuing to go after various segments of the market with products that have features and benefits at price points that makes sense for that portion of the market.

Okay, okay, I understand that I think better this time.

If you maybe use the baseball analogy again and you talk about that mix shift and moving that area where you've been strong in the market previously to higher margin products.

How far along are we in that game?

(multiple speakers) basically trying to understand what the margin benefit that remains is.

It's impossible to always predict how products will be -- new products will be received into the marketplace and what their acceptance will be and then therefore their price points.

I believe that the innovation and the teams that we have who are focused on creating innovative new products have some great things on the drawing boards whether it is current core technology, core lamp ballast technology with better capabilities, energy-efficiency, better lighting output; there is a lot of runway left there.

I'm very excited about the LED products that we have on the drawing board that we will showcase at the upcoming light fair.

So I feel that as we continue to drive innovation, these technologies coupled with our strong capability around optics and thermal management, you are going to see again continued new products being introduced that we believe will have very positive acceptance into the marketplace that will allow us to differentiate and continue to add value irrespective of what the economy does.

Because these things have paybacks to them, they enhance the lighting experiences within the retail space, they enhance lighting experience within the workspace.

So I believe we are kind of early in the game as well.

We continue to invest very heavily in our engineering capability, our design capability.

So I feel we are early in the game there as well.

And Matt, I would add that if you looked over into this Acuity Brands technology services business that Vern spoke to earlier, extremely early in our development of those opportunities and businesses.

And as we see this relighting retrofit market, as we see services, some of the capabilities that we are looking at there, again, we are not even at batting practice yet on some of those much less in the game in terms of what inning we are.

But those two could provide opportunities for growth as well as margin expansion beyond the traditional lighting fixture part of our business.

Okay, that is helpful.

And one last question.

You spoke about the price increase you are pushing through in early May, I believe.

Can you talk a little bit about industry pricing overall?

It doesn't look like you are seeing dramatic declines or weakness in industry demand but has the industry pricing environment overall remained stable or have you seen any changes there?

We believe that the industry has recently or many of our competitors -- I shouldn't say the industry -- but many of our competitors that we monitor have also put forth price increases that are effective around the same time as ours, kind of in the same range it appears.

We are all experiencing the same costs and cost increases so they are significant.

So none of this surprises me.

From a pricing perspective, we don't see any significant changes in the environment at this point in time.

Even on the residential side where volumes are off relatively significantly, we see price being relatively consistent.

It's just that the [volumes] are off.

So I believe that from a pricing perspective there has not been a noticeable change in the marketplace.

Okay, thank you all.

Shawn Boyd, Westcliff Capital Management.

Good morning, just a couple of questions if I could.

On the backlog dropping here and your commentary regarding what caused that, it sounds as though with the March orders back up, you all would expect this to just be a temporary blip down and that we will go back to slow growth in that backlog?

Well, I'd like to comment on the fact, the backlog is becoming less of an indicator of future vitality particularly as we lessen both our cycle times within our facilities and cut our lead times.

As we continue to provide a differentiated capability vis-a-vis lead times in the marketplace, it's our hope and expectation that customers will take advantage of that and allow them greater flexibility in their design phase knowing that they can wait longer and rely on us to deliver product when they need it.

And so as a consequence, what we are seeing and it's a benefit that we've been working very hard on, is to deliver when the customers want it precisely.

And so those cycle time reductions will have the impact on a go-forward basis of having less backlog but our incoming order rate top-line growth is where you will see the benefit in that.

That is a better indicator period-over-period growth of the vitality.

That is why we made the comment, if you will, on our March order rates because we wanted people to understand that order input was positive compared to the year-ago period.

Got it, got it.

Maybe you can help me further, does that mean that basically your -- the amount of your business in turns, that we never see in that backlog, would be increasing?

Yes.

Can you give me a feel right now how much of your business is in turns each quarter?

Well, you saw that we were up roughly 9%.

If you back out of foreign currency and you back out Mark Architectural Lighting, you were up about 7 points.

We tried to give some as best we can -- and it's truly a guess-timate as to what the impact of the what we believe the decline in the residential market to be.

So our input, our orders coming in, if you will, in the quarter, we believe on the nonresidential side were up north of 7%.

So that was pretty robust.

Got it.

Okay that is really helpful, thanks.

The other thing about retrofit business where you guys are focusing a little bit more on that, you set up this different division.

But I would understand that on a day-to-day basis, you've got that retrofit demand throughout the business.

And I'm just wondering have you guys been able to quantify that in any way in terms of what percentage of the new orders are really driven by that decision?

Well, the answer is no, we don't have, if you will, that data available to us.

But what we are seeing based on the products that we've introduced over the last couple of years and to the markets that they are targeted towards, that the growth in some of these products really are targeted at more of folks relighting their facilities to garner or capture, if you will, energy savings, better lighting experience.

As well as, many company's CEO's are really aggressively trying to lessen their carbon footprint, becoming more sustainable organization.

We ourselves are doing that and doing it successfully.

So, we see and whether it's through our package agency or our national accounts or other access to markets, we see people who are very interested in the story around how can we create a better bayou proposition.

As Ricky has pointed out in previous conference calls, paybacks on many of these investments in light fixtures can be two years or slightly more than that.

So it is very attractive and, unfortunately, quantifying that at this point in time is a bit difficult.

Okay.

Just one more question then on the balance sheet.

I see that $160 million in debt moved into current portion.

Can you all just remind us what that is and what the plans are in refinancing that?

Yes, that is our public debt that we have outstanding that is due February of 2009.

So within a year, we classified that as current.

We also have a $200 million tranche that would come due in November of 2010, I believe, August of 2010.

Our current plan is to continue to look at what is the most efficient use of cash and capital to create the most value for shareholders.

But we certainly, given the cash generation and all, could be prepared to just retire that debt and not refinance that.

Obviously, we are looking at other uses of cash, whether it's mergers and acquisitions.

We've been aggressive in buying back stock; obviously have the dividend out there and we will continue to assess all of those.

But our current plan now, given the strong cash flow, is to look to retire some of that debt.

Okay.

And based on cash flow from operations for the first half of the year, you're running about $110 million a year in terms of a run rate on cash flow from operations.

We would be disappointed if we did that in 2008.

Another point that I ought to make on the cash availability, we do have a line of credit, $250 million that we just put in place mid last year with no real use of that, other than some letters of credit that are using that.

So we clearly have additional sources of cash as well if that debt comes due, and we look at other uses of cash.

But no, I'd agree with Bernard we'd be disappointed if the cash flow wasn't greater than the number of debt.

Okay.

And what is the target for cash flow for fiscal '08?

We've not provided that forward-looking information.

Okay.

So given the disappointment, something significantly above that 110 I just mentioned.

We just said we would be disappointed in your number.

We didn't go beyond that.

Understood.

Thank you very much, gentlemen.

Michael Regan, Janus Capital.

Hey, Vern; hey, Ricky.

So, Vern or Ricky, a lot of consternation kind of in the market about steel price increases, especially sequentially first-quarter over fourth-quarter and year-over-year while a lot of people expected steel to be kind of flat year-over-year in '08.

Just wondering how to think about how you are hedged or not hedged but how your contracts run?

And how to think about steel cost increases which seems to be a pretty big part of the fixture business versus how you are thinking about price and how those two flow for the rest of the year?

That is a good question.

We believe that steel will rise for lots of different reasons and we are seeing that.

Our contracts take us out --they are kind of layered in, if you will, but we are not super hedged super far.

I would say that at best we are probably out a quarter or so.

And so what we are doing, Mike, is passing along, if you will, those cost increases in the form of higher prices.

I believe that in reading the commentary from some of our other competitors, they too noted steel cost increases as one of the motivations for price increases into the marketplace.

It is our sense that steel will continue to rise for again, lots of different reasons.

And we continue to be very focused and vigilant on our pricing posture around that.

And so it is my expectation that we will continue to stay reasonably in front of that spike or potential spike.

Right, so I guess that is the bottom-line question.

I mean it seems like kind of 30% to 40% spot increases.

And I know it depends on the kind of grade that you use but does 3% to 10% price in May kind of keep you ahead of or sort of equal to 30% to 40% spot as of right now as you roll those contracts off a quarter, two quarters forward?

We believe that the current increase will keep us at parity depending on again depending on the fixture but keep us at parity for at least a couple of quarters.

Okay, very helpful.

Thanks.

Satish Athavale, KSA Capital.

Good morning.

One, I was going through your outlook statement and you say that the basically the backlog was down as a result of number of factors and then you say a reduction in late backlog.

Can you elaborate on that what that means?

Yes.

A very good question.

As we continue to enhance our service, as our supply chain in its entirety becomes a more effective supply chain not only improving its productivity but its ability to serve our customer base by delivering on time, complete and doing it on a more consistent basis, we are reducing the amount of, if you will, past due that we find in our backlog past due to customer delivery date.

In the past that number -- and it has been coming down really quite dramatically but it again, on a period-over-period basis was down sequentially.

I believe it was down roughly $1 million quarter-over-quarter.

And that just is a reflection of us becoming a better, more consistent and efficient supplier.

Okay, I see.

And as you look forward actually in the marketplace when you scour for new project activity, what are you actually seeing in terms of new projects being proposed or put on the drawing board?

Well, I will contrast the two.

All of the certainly public available information leading indicators whether it is Architectural Building Index, contract awards, all of that information is out there and is known.

But it is very current.

In other words, the decline in Architectural Building Index which some people view as a leading indicator of what may happen six, 12, 18 months down the road, dropped off significantly in February.

Personally I don't believe that one month makes a trend but yet it is worrisome to us.

We have had just recently, we've had all of our agents in town for various meetings and our folks continue to be busy working with specifiers, working with the distribution.

And while we all read the newspaper every day and have concerns about that, when we come to work it is still kind of business as usual.

There is still quite a bit of activity out there.

We do see geographies where they are being hit particularly hard by this decline in residential homebuilding.

That has had some of spillover into the nonresidential side.

But I think on balance we continue to see projects out there that are interesting whether it is institutional projects, whether it is larger commercial projects, we still see business out there.

How some of these other activities like tightening credit standards, how those things impact development, I think that still remains to be seen, frankly.

Okay, thank you.

Peter Lisnic, Robert W.

Baird.

Hi, Vern.

Just on the energy efficiency or new product front, I'm wondering if you could give us a sense as to -- with the vertical integration that has recently happened in the industry, do you think you are at all technically disadvantaged relative to a more vertically integrated competitor to address things like new products and energy efficiency specifically?

And I guess the second part of that question would be, if so, is that potentially a source of acquisition opportunities for you?

Our strong view is that some of this vertical integration is really not an inhibitor to our ability to create new energy-efficient products.

In fact, we see it as an opportunity, frankly.

There are folks all over the world who are each and every day coming up with new and more creative ideas on how to advance, if you will, the lighting driver side, the guts inside the fixture.

But at the end of the day, it is how you direct that light source, how you create the experience, how do you manage the heat and how do you do it in a way that allows for these energy savings to occur for the better lighting experience to be had?

And so we believe that the world is our oyster in that regard and that there is plenty of opportunity out there to find folks and work with folks who are leading edge technology.

Okay, but not really necessary you don't feel compelled to go out and get someone who is "in the guts" of the system, if you will?

Well, again, let me be very, very clear.

Someone could come up with an LED die but how that die gets incorporated into the fixture, there is tremendous intellectual property around that.

And we bring great value into that process, hence our own intellectual property, the expansion of our intellectual property, the investment in our engineers.

There is an awful lot of again, technology that is being brought together by us and our view is that that we do not need at this point in time to own, if you will, die manufacturing capability.

There are people out there who do that very, very well.

And there are many people who do that very, very well.

But how those things get incorporated into a fixture to create the right experience, the right lighting experience and manage it in the most energy-efficient way, that is our game.

Okay, that is very helpful.

Thank you.

Shawn Boyd, Westcliff Capital Management.

Just a follow-up on the price increases, if I may?

When did you all announce them?

We announced them about three weeks ago, Dan?

Yes, about mid-March.

Mid-March.

Okay.

And so would that have had any impact on the year-over-year gain you see in terms of the orders in March just prebuying ahead of these price increases?

No, we wouldn't typically see that type of activity until it gets much closer to the effective date (multiple speakers)

So more like in April?

-- yes, which would be the end of April.

Got it.

Okay.

And what were the price increases last year that you guys (multiple speakers)?

Our price increases last year were effective kind of around the first of August, were in the 3%, 4% range.

It varied again by product, so it is impossible for us to tell you precisely.

But the range was kind of in the 3% to 6%.

But I would say more on average around 3% to 4%.

Okay, 3% to 4% -- 3% to 6%, I'm confused.

At this point, you're going 3% to 10%.

Well, you had asked about last year.

That is correct.

Last year at 3% to 4%, is that what the original proposed increases were or were they 3% to 6%?

The range, dependent on the product, similar to this year, similar to what is happening effective May 5, we said that the range is 3% to 10% depending on the product.

And without getting specifics as to what that mix would look like, it is the range.

Last year our price increase was effective around August 1 of '07.

The range was 3% to 6% -- 3% to 7%.

The average was about 3%, slightly north of 3%.

Got it.

Got it, okay, that is helpful.

And last question is on the -- you made a comment earlier about the residential slowdown spilling over to nonresidential and certain areas.

Can you give us a little bit more color on that?

Sure, just imagine that you are in Florida and you are building a new neighborhood.

That neighborhood has streets, those streets have streetlights.

We make a number of fixtures that support, if you will, the infrastructure that neighborhood then has been probably a strip mall, it has a bank.

So we see collateral, if you will, fallout from the lack of residential development in these commercial operations.

So again, that is what we were referring to vis-a-vis geographies.

Certain geographies are experiencing some slowdown in the nonresidential side due to the decline in the residential business.

The 1% that we believe roughly impacted our sales is really stuff that goes through the home improvement channel that would go through national showrooms, those types of things.

It's more a direct impact.

It's impossible for us to measure the indirect impact, though it is there.

Understood.

But specifically, those geographic markets where you are seeing it, so that would be Florida, I assume maybe Southern California?

Is that areas where we are seeing the biggest weakness in homebuilding?

Sure.

Phoenix.

Okay.

Good enough, thank you.

Michael Regan, Janus Capital.

So, Vern, if I remember correctly, you joined Acuity as CFO kind of very late '01, probably early '02.

On the day -- go ahead, sorry.

No, go-ahead.

I joined on the day of the spin.

From when they spun off Acuity Brands from National Service Industries, that was December 1 of '01.

Right.

So as I look back, the ABI had kind of been sub 50 for most of '01.

So you kind of got there as at least on the ABI statistics commercial was starting to roll over.

So I guess just for perspective, what in your experience in the '01, '02, '03 timeframe, how do you contrast that to the early indicators you are seeing now?

And as you said, the ABI for February is only on one month.

But more importantly, how you kind of prepare the organization if that early -- that February read on ABI continues and because it is a leading indicator, can you get the organization ahead of the curve on expenses or do you just kind of have to follow the trend down relative to what your customers and distributors want?

Mike, that is a great question.

If you go back and you look at the nonresidential construction market on an inflation-adjusted basis from the peak, which Dan was roughly 2000 down to the trough, we dropped roughly 28%.

If you look at what Acuity Brands Lighting was able to do during that time period, our top-line grew at a CAGR of something north of 3%.

I believe very strongly that there are a couple of key things that we need to do and we are doing.

One, is we need to continue to drive productivity into our business.

We are doing that and we are doing that very aggressively.

We are redeploying a lot of the investment or the gains from that productivity into new product development.

The new product development is really driven at energy-related fixtures that create a better lighting experience that have paybacks for folks.

So not only do we believe that we can continue to show growth because we see new opportunities.

For example, the opportunity in New York City, we had virtually very little share in New York City.

As Ricky mentioned earlier, we are introducing the full capability of Acuity Brands Lighting into New York City.

We are introducing the Lithonia brand where its New York City compliant.

We've acquired Mark Architectural Lighting.

We have a sales office in New York City to fully represent our brands.

That is a $250 million market locally that we really had very little share.

And so it's our expectation to gain as we expand our access to market.

As we bring out new products that have an energy story and a retrofit story, we see that $100 billion market, our ability to free up some of that and get after that marketplace.

Others are going after it too but we think we have better features and benefits to offer.

So, new products, expansion of market as well as productivity gains, I think are going to be the key to us really thriving during this next opportunity.

We also believe, Mike, that there will be acquisition opportunities to enhance our portfolio of capabilities.

So we are going into it with a very aggressive attitude about how we can win in that environment.

So, the 3% growth in a -- where your biggest end market was down 28, is obviously very impressive.

Can you -- and maybe you can't off the top of your head -- but can you just give some perspective around how much of that was the fact that residential was still doing reasonably okay during that time period?

And how much was just straight share you think you took in the commercial or nonresidential space?

As you know and as our shareholder base knows, our exposure to -- our direct exposure to the residential market unfortunately during that time period and continues to be, but was very low.

Fortunate now.

Pardon me?

Fortunate now, unfortunate then.

Exactly.

So the fact of the matter is we did have the opportunity to enjoy sort of that benefit of that rising RESI market during the 2000 to 2006 timeframe as much as our competitors enjoyed.

But nonetheless, we see opportunities in our marketplace to continue to evolve that and we think that the RESI market on the longer-term basis will be an important market.

It's a market that we have interest in and think that we can offer products that have features and benefits that make sense.

We are not in it right now so we are not experiencing as much of the downturn as maybe some of our other competitors are at this point in time.

So it's a bit difficult for me to say, gee, how will we perform and what the next cycle will look like?

Because I'm not necessarily convinced of what that cycle -- I don't think given what we have seen and the prognosticators that are out there that are smarter than me about some of these things, I don't think that the next cycle is going to look like the previous cycle.

Nonetheless, we are positioning the Company irrespective of the cycle to perform well.

Great, very helpful.

Thanks.

(OPERATOR INSTRUCTIONS) At this time we have no further questions.

I will now turn the call back to Mr.

Vernon Nagel, for the closing remarks.

Thank you everyone for your time this morning.

We continue to 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 expectation of our key stakeholders.

Our future is bright and thank you for your support.

This will conclude today's conference.

All parties may disconnect at this time.