Acuity Brands Inc (AYI) 2009 Q3 法說會逐字稿

Good morning, and welcome to the Acuity Brands 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'd like to introduce Mr.

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

Sir, you may begin.

Thank you.

Good morning.

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

Please refer to our most recent 10-Q and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

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

Thanks, Dan.

Good morning everyone.

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

Our results for the third quarter of 2009 reflect the impact severe economic conditions are having on the residential and non-residential construction markets throughout the world.

We are not immune to these external factors.

However our associates once again demonstrated their resolve and skill by continuing to deliver great value to our customers and solid performance for our shareholders.

Further, I believe we performed at least as well, if not better, than many of our served markets.

Additionally, we continue to achieve success in a number of strategic priorities, including continued introduction of new and more efficient energy efficient products and services.

Expansion into new markets, and important channels, further improvements in productivity, and most importantly, the acquisition of Sensor Switch, allowing for the creation of Acuity Brands Controls.

I know that many of you have already seen our results and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights.

Net sales for the quarter were $396.6 million, down 23% compared with the year-ago period.

Operating profit was $41.5 million, down from $71.7 million reported in the third quarter last year.

Operating profit margin was remarkable, 10.5% in the quarter, in spite of dramatic decline in net sales.

Diluted earnings per share from continuing operations were $0.54, compared with $1.01 from the year-ago period.

While these results reflect the continued fall-off in economic activity, they do not fully reflect our accomplishments in the third quarter, given the magnitude of the challenges.

So let me share some additional information with you.

First, we delivered reported operating profit margins in excess of 10%, while net sales were down 23%, that's exceptional in my view.

Second as we mentioned in our previous conference calls, raw materials and component costs increased significantly, particularly from June through September in 2008.

Prices for certain commodities then fell rapidly as the economy deteriorated, though not below year-ago price levels.

Because of the rapid rise and fall we indicated we would not be able to pass along this spike in costs in the form of higher prices to customers.

In total, we estimate raw materials and component costs in the current quarter were higher by approximately $8 million compared with the year-ago quarter, of which we believe a significant portion was due to the spike in commodity costs.

We believe these higher raw material and component costs reduced our operating margin by approximately 200 basis points in the quarter, and yet we reported operating profit margins were 10.5%.

Third, we continued to structure the organization to be consistent with requirements necessary to serve current customer demand, while continuing to invest significantly in growth opportunities including new product development and greater presence in the renovation and relight market.

Our actions this year to streamline our organization lowered our operating costs by $10 million in the quarter.

We expect to realize approximately $28 million in cost savings in fiscal 2009, and more than $50 million in annualized cost savings from these actions in our fiscal 2010.

Fourth, we continue to drive productivity throughout the organization, particularly in the supply chain, where we reduced our total production cost slightly more than the percentage decline in sales.

A remarkable feat, in such a short time for a manufacturing Company.

This is a strong demonstration of how well our associates executed in a very challenging and difficult economic environment.

Another point you may find interesting is that on essentially the same level of sales volume this quarter, compared with our second quarter, our operating profit margins adjusted for the flow-through of the spike in commodity costs in both quarters, improved sequentially by more than 200 basis points.

Again, remarkable.

We have been able to produce these results because of the great dedication of our associates and the progress made in four key areas of strategic focus: Customer service, pricing and margin management, product portfolio expansion including significant additions to our stable of sustainable and energy efficient products, and Company-wide productivity.

Let me talk a little bit about our sales in the quarter.

We were off approximately 23% from the year-ago period, or about $116 million.

The decline in sales was broad-based as most channels and geographies were impacted by weakening demand for lighting fixtures due to the deteriorating economic environment.

Overall, we estimate that unit volume was off about 23% in the third quarter compared with the year-ago period, as benefits from acquisitions were essentially offset by the negative translation effect of a stronger dollar on international sales.

We estimate the impact of price mix was less than 1% in the quarter.

For us, this was the third quarter in a row where we really felt the broad-based impact of weakening demand for light fixtures in key channels serving the commercial, industrial and institutional markets.

As we noted in our previous conference calls, the downturn in new store construction for big box retailers and residential construction began more than a year ago, and of course continued this quarter as well.

Additionally, we continue to experience delays for construction projects and in some instances, outright cancellations as well as continued weak demand from key distributor customers as construction activity declines.

Even sales of renovation projects declined in the quarter, as business decision makers look to conserve cash in light of the economic uncertainty and lack of clear guidance on how the stimulus plan may impact their businesses.

We expect this market to begin to rebound as government stimulus plans become more clear.

All in all, a very challenging quarter from a commercial perspective.

On a positive note we did see a few bright spots including share gains in the home improvement channel.

I will talk more about our future growth strategies and our expectation for the construction market later in the call.

I would now like to turn the call over to Ricky to make a few brief comments on our overall financial performance before I make some remarks regarding our focus and efforts for the fourth quarter of 2009.

Ricky?

Thank you, Vern and good morning everyone.

I'll provide a little more detail around our earning results, and then I'll discuss our cash flow and financial condition.

Vern has already discussed in some detail our net sales for this quarter, so let's go to the gross profit.

Gross profit for the third quarter was 38.7% of sales.

This gross profit margin reflects a decrease of 190 basis points compared with the year-ago period.

A significant portion of this decrease is due to the impact of last summer and fall's spike in commodity-related costs that Vern discussed previously.

So if we excluded the impact of this spike in material cost, our gross profit margin was essentially flat with the prior-year period, which is an impressive accomplishment considering the 23% decline in sales.

Clearly, our results reflect the benefits from increased productivity, and savings from previously announced streamlining efforts.

Our proactive approach and anticipation of a challenging market to right-size the business through our streamlining efforts, as well as benefits realized from productivity gains, is further reflected in our cost of goods sold, where our actual non-material spend is down 24% for the third quarter compared with the prior year, which is slightly -- which is a slightly greater percentage reduction than the decline in our net sales.

And we still have not realized the full benefits from all our previously announced streamlining efforts.

Selling, distribution and administrative cost increased to 28.3% of sales in the quarter, compared with 26.6% in the prior year.

This increase of 170 basis points is partially due to the significant drop in sales.

But primarily reflects the investments we continue to make in product innovation and technology, sales and marketing activities, as well as expanding our capabilities to service the renovation and relight market.

In addition, selling, distribution and administrative costs, both in the absolute amount and the percentage of sales, is modestly higher due to the recent acquisitions.

Partially offsetting these factors is the benefit from productivity gains and streamlining activities, as well as lower incentive compensation.

The December 31st, 2008 acquisition of Lighting Control and Design and the April 20th, 2009 acquisition of Sensor Switch contributed approximately 2% to third quarter sales and had an immaterial impact on earnings.

Net interest expense in the third quarter decreased approximately $800,000, as a result of lower average outstanding debt balances as the $160 million, 6% public notes matured in February.

Partially offset by reduced earnings on invested cash, due to lower interest rates and lower invested balances following the retirement of the public notes.

The income tax rate decreased in the quarter to 32.5%, compared with 33.8% for the third quarter of 2008.

This decrease was due primarily due to tax deductions having a greater impact on the effective tax rate due to lower pretax earnings compared with the prior-year period.

We expect the full year tax rate to approximate 33.5%.

Now let's look at cash flow for the nine months ended May 31st, 2009.

Cash flow provided by operations for the first nine months of fiscal 2009 was $27.4 million.

Operating working capital, calculated by adding accounts receivable, net, plus inventories and subtracting accounts payable increased by $13.5 million for the nine months ended May 31st, 2009.

This increase is due primarily to the operating working capital of the acquired businesses.

In addition, we are currently carrying higher levels of inventory in order to appropriately service customers during the previously announced consolidation of certain manufacturing facilities, as well as increased raw materials to support manufacturing of products previously manufactured by outside vendors.

Inventories declined over $14 million during the quarter, net of acquisitions and foreign currency.

And we expect our inventories to decline further during the fourth quarter of fiscal year as we continue the consolidation of certain manufacturing facilities.

We invested $162.4 million of cash in acquisitions during the first nine months.

Capital expenditures in the first nine months were $15 million, and for the full year are expected to approximate $25 million.

We also paid cash dividends for the nine months ended May 31st, 2009 of $16 million.

Looking at the financial position, we ended the quarter with cash of $28.3 million.

Also at May 31st, 2009, total debt outstanding was $294.8 million, down $69.2 million from August 31st, 2008, due primarily to the repayment of the $160 million public notes, offset by additional borrowings under the revolving credit facility and issuance of a $30 million, 6% promissory note.

Proceeds from the additional borrowings were used to finance the acquisition of Sensor Switch.

We continue to maintain strong financial flexibility as reflected by our net debt to total capital ratio, which is approximately 29% at May 31st, 2009.

And our availability under the revolving credit facility is $180.5 million, as of May 31st, 2009.

Thank you, and I'll now turn the call back to Vern.

Thank you, Ricky.

As we look forward, we obviously see considerable challenges but more importantly, opportunities.

First, we have a few observations about expected market conditions.

Without a doubt this continues to be the most difficult economic environment most of us have experienced in our lifetimes.

The rapid and steep decline in demand in the overall construction markets around the globe is unprecedented.

How long will these turbulent economic conditions prevail?

Only time will tell.

Though it seems the efforts of many governments around the globe to stimulate their economies is beginning to have a positive influence on consumer confidence, though credit availability remains very tight, particularly for commercial projects.

Also, key indicators for our traditional markets, both residential and non-residential construction, continue to signal a decline in available market for the balance of 2009 and into 2010.

This was all widely known.

Forecasts by independent third parties suggest that unit volume for construction put in place in the non-residential construction market could be down at least 20% and probably a bit more in 2009 compared with 2008.

Again, I'm in the bit more category.

This is particularly true for commercial and industrial buildings.

These same forecasts indicate further declines in the mid-teens for fiscal 2010.

This suggests headwinds will continue for all companies serving the construction markets in North America and Europe.

Next, while we have done an excellent job of pricing and margin management, we do expect pricing to become more competitive in certain channels and geographies.

This is not unusual, particularly from competitors with lesser value products.

However, while the actual impact in timing is difficult to predict, we did see a pick-up in price competition in the third quarter.

Our margins in the quarter suggest we handled this challenge well.

We expect to be vigilant in our pricing posture, particularly as we continue to introduce new higher value products and services.

However, I would like to be clear.

We will defend our position vigorously from competitors should they attempt to use price as their only point of differentiation.

Next, we have begun to bring down our inventory levels to be more consistent with incoming order rates as we complete certain previously announced plant consolidations.

We allow these inventory levels to remain higher than otherwise necessary to minimize disruptions in service to customers.

Inventory levels are down about 9% from their peak, adjusted for acquisitions, with considerable reductions remaining.

As a consequence, we may recognize additional expense in the fourth quarter due to underabsorption of our manufacturing overhead.

While it is difficult to predict the actual impact on our gross profit due to these actions, we could recognize up to $3 million of additional expense in our fourth quarter and a similar amount in the first quarter of 2010.

Items impacting this outcome include the rate of incoming orders and how aggressively we can continue to improve productivity, which to date we have done a very good job achieving.

Lastly, we expect costs for key material and component costs to remain relatively constant in the fourth quarter compared with the year-ago period, a first this year.

As I noted in our last conference call, our strategies to drive profitable growth remain intact.

We continue to see opportunities in this environment, and our strategy is to leverage our industry-leading products and market presence as well as our considerable financial strength to capitalize on those opportunities.

We will continue to focus our considerable resources on the following four key areas: Providing superior customer service, driving organizational productivity, introducing new, innovative and energy-efficient products and expanding into markets and channels including renovation and relight and now lighting controls.

These four areas have been, to varying degrees, key elements of our strategy for the last few years, yielding growth, market share gains, and upper quartile financial performance and we expect that to continue over the longer term.

With the acquisition of Sensor Switch, we now have one of the most formidable platforms in the industry to participate in a dynamic and fast-growing market for lighting controls and energy management.

The addition of Sensor Switch, along with the acquisition of Lighting Control and Design, along with our own Synergy, Roam and Dark To Light brands will form the backbone of our Acuity Brands Controls effort.

This group working in conjunction with the Acuity Brands lighting, the largest [lumenier] Company in North America, will allow us to leverage all of our capabilities through multiple channels to provide customers with superior integrated solutions to enhance their lighting environment while significantly reducing energy costs.

We believe the market size available to Acuity Brands controls today is now approximately $800 million, and our collective share of this market is very small.

Many believe this market will triple in size over the next five years as higher energy costs, more stringent government regulation and greater demand for more sustainable lighting solutions come into vogue.

We are now well positioned to be a leader in this exciting and growing market.

While our Company policy is not to give earnings guidance because we feel it is more beneficial to concentrate on those key strategic and tactical actions that can best help us achieve our long-term financial goals on a consistent basis, we do have a few observations which may provide you with insight into our focus for the fourth quarter of 2009 and beyond.

We expect pricing in many markets to be more competitive than usual, potentially putting pressure on margins beyond our ability to reduce cost, improve productivity or enhance product mix fast enough to offset this impact.

The exact impact, if any, is difficult to predict.

That notwithstanding, we expect to continue to drive productivity improvements throughout our business.

As I noted earlier, we expect to realize benefits of approximately $11 million in the fourth quarter, bringing our total savings to $28 million in fiscal 2009, from the streamlining efforts initiated this year.

In 2010, we expect benefits from these programs to yield annualized savings in excess of $50 million.

Our gross profit could be impacted by as much as $3 million in the fourth quarter due to lower absorption of factory overhead, caused by the planned reductions in inventory.

We expect unit volume in the fourth quarter for new construction portion of the market to be down.

How much, we don't know, but our current backlog is down about 20% from the year-ago period.

Of course, as we look out over the next several quarters, we hope to offset a portion of the expected market decline by expanding our presence in existing channels and geographies, entering new markets such as renovation and relight, and accelerating our introduction of new products and service, which will be introduced at a record pace for us in 2009.

Lastly, acquisitions should add about $12 million of incremental revenues in the fourth quarter.

The margin impact will be muted due to the purchase price accounting requirements and integration efforts.

While we have a demonstrated track record of successfully executing our strategies, the uncertainty and volatility currently in the marketplace make it a challenge to precisely quantify how successful we will be at achieving our financial goals in the near term.

In summary, we believe the execution of our longer term strategies to focus on productivity improvement, accelerate investments in innovative and energy efficient products and lighting control solutions, expand market presence in key sectors such as renovation and relight market, and enhance services to our customers will provide growth opportunities which will enable us to outperform the markets we serve in 2009 and beyond.

As we look beyond the current environment, because this too shall pass, we believe the lighting and lighting related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront and we are now well positioned to fully participate in this exciting industry.

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

Thank you.

(Operator Instructions).

The first question will come from Chris Glynn with Oppenheimer.

Thanks.

Good morning.

Hi, Chris.

Good morning.

So on the comments around the acquisitions and the inventory with the consolidation, can you give some initial commentary on the cash flow dynamics over the next couple quarters or rather fiscal 2010 outlook?

Sure.

Let me just start and then Ricky, if you'll chime in.

The acquisitions in the fourth quarter will really, again, have a fairly de minimus impact on our results, both cash flow-wise as well as earning-wise, simply because of purchase accounting and just really honing the integration.

We do expect that to obviously change as we roll into our fiscal 2010.

Very excited about the platform of Acuity Brands Controls and what it means for the market, because of lighting control and energy management, just where all that's going.

With regard to inventory levels, as I said earlier, we're down about 9% from our peak.

Our guesstimate is is that we probably have, oh, roughly another 15 to 20% to go.

That number approximates, give or take, about $30 million of inventory reductions that we would expect over the fourth quarter and into the first quarter.

That's why we are guesstimating that the impact on absorption could be in that $3 million per quarter range, but the cash from that inventory will flow and should favorably impact both the fourth quarter of 2009 and our first quarter of 2010.

Ricky?

Yes, nothing much more to add to that.

The real opportunity for cash flow in the working capital is the inventory as Vern commented.

The acquisitions came to us with pretty well-managed working capital.

There's a little bit of opportunity as we continue to integrate those businesses, particularly on some of the raw material and a little bit on the finished goods.

But it's not going to be a significant number, Chris.

So the real opportunity is going to be in the inventories that we had at the legacy businesses as a result of the plant consolidations, which are on track to get completed very early into next year and that's a big driver of our ability to bring the inventory down.

Okay.

And the comments on the $3 million underabsorption, that's sequentially, comparing to the third quarter?

It would be.

Yes.

The third quarter, we were able -- we did an excellent job of managing, if you will, our productivity and really sizing the manufacturing operations to be reflective of the current environment.

In fact, as I noted, we were down as a percentage, vis-a-vis our conversion cost, a greater percentage than what our sales were down.

So that helped mute some of the impact as we decreased our inventories.

Just looking into the price/cost dynamic a little bit, last quarter you kind of talked in terms of a net impact, I think you had $18 million in cost inflation and $8 million in price and this quarter you just gave the inflation.

Can you talk about the net impact there?

Yeah, there was virtually no -- we anniversaried the price, so virtually no offset as a result of the price.

As you know, Chris, we were seeking to raise prices last summer around the August time frame when the spike occurred, but before that could get enacted, commodity costs went back down, and that price never did get any traction in the marketplace.

So the benefit in price was in the first two quarters.

We pretty much anniversaried that, so we weren't able to offset the cost increase and the materials by any price realization in this quarter.

Okay.

Thanks.

Last one.

Can you give a little more context around the pricing comments about certain markets and geographies and any way you might help us think about the net overall impact in that respect?

Sure.

The commercial and industrial markets are down significantly, and those markets tend to be larger projects, medium sized projects, where there's a great deal of value-add.

So what you're seeing in those markets is just the sheer dollars being down.

I think that some information I saw recently, it said that the commercial market is expected to be down in the 30% range for 2009.

So that's pretty significant.

In terms of geographies, the usual suspects are really being hit hard.

The West Coast, whether it be California, Phoenix, Las Vegas, really still feeling the impacts of the severe decline in residential construction, spilling over into employment, spilling then over into the non-residential construction side and that similarly is true in the Southeast, particularly Florida, where, again, led by residential declines spilling over into the non-residential construction market.

And then of course, certain pockets of the Midwest, which are still reeling from the dramatic declines in the automotive industry.

Those are being offset for us by gains that we are seeing in the home improvement channel, for example, gains that we are seeing in certain markets where our footprint continues to expand.

So net-net, I would say that while the marketplace continues to -- in different pockets, demonstrate and show the severe impact of the economic environment, we are seeing pockets where we can continue to expand our business.

On the pricing side, I have to say, while price mix for us was relatively insignificant this quarter, that is a pretty significant accomplishment, given the activities that are out there in the marketplace, due to the dramatic fall-off in volume.

Okay.

Happy fourth.

You too.

Thanks, Chris.

Peter Lisnic with Robert W.

Baird.

Good morning, gentlemen.

Good morning.

Good morning.

Vern, just to follow up on that pricing question, I was just wondering if you could maybe give us a sense as to some of the business that you're seeing under pressure and what competitors are doing.

Can you give us maybe a proxy as to what sort of pricing pressure you're seeing in business that either A, you're having to walk away from or B is being won by your competitors?

Yes.

Again, I think that we have done a very good job of holding our own in this environment.

When I look at our volume being off approximately 23%, that is very consistent with the numbers that we see out of other forecasting capabilities.

For example, Mima just recently provided their outlook and for the third quarter, or excuse me, for the second quarter, on a calendar basis, which alliance aligns with our third quarter, more or less, they were expecting total luminier shipments to be down a little more than 24%.

For us, we were down slightly less than that.

We probably have a little bit of mix difference to the overall market.

We do very well in national accounts, probably a little more skewed there than what the overall market is.

Commercial and industrial space, probably a little bit more heavily skewed there versus some other areas and those items have been down pretty significantly, just in terms of unit volume.

That spills over into price.

Sure.

We see price but we have always seen price competition.

Maybe it's a little bit more intense and we know it is a little bit more intense because of this environment.

But we continue to differentiate ourselves because of our service capabilities, new products, so our price mix was virtually flat this quarter compared to the year-ago period.

So I can't really comment on what others are doing, per se, but I look at what we are doing, what our numbers are reflecting.

We're still continuing to be pretty vigilant around our pricing strategies.

Okay.

Maybe if I rephrase the question and I look at what you did in the second quarter and the third quarter, and then roll in the underabsorption cost that you're going to see in the fourth and the first quarter and some of the restructuring savings, is it fair to say that the second quarter of this year could potentially be and factoring in kind of the down 10 or down low double digits next year for volume, is it safe to say that second quarter could be potentially a bottom in the margin profile of the business.

When you said is it safe to say --

How about it's a model?

I would tell you that historically the second quarter is always our lowest in terms of unit volume.

But it also appears at least at this point in time a bit of the perfect storm, volumes being down 20%, despite material costs rolling through and us really starting to ramp up some of the benefits from our streamlining efforts.

So while I can't say whether that's a bottom or not, I do feel that we are working diligently to continue to drive our profitability and our performance, and I think you saw that this quarter.

I'm very pleased with our margin performance, our market -- if you will, if you look at what, again, other sort of forecasting entities would say about our third quarter, the overall market seems to be down a little bit more than what we were, so that would suggest some share gain, and we believe strongly that we are in certain markets gaining share and we're managing that mix very, very well.

So to your previous question, where I think you suggested that I evaded it, we really did show improvement, if you will, volume relative to market and we were able to hold our margins.

That's productivity, that's pricing management.

So I think that's a pretty solid harbinger of good things hopefully to come.

One other comment, Peter, I would make is that the acquisitions that we made, while currently are not contributing meaningfully to the profitability because of some purchase accounting and integration activities, as you know, their profitability profile was above our average profitability, so as they get through some of that and come in, that is something else that could enhance our profitability going forward as that becomes a bigger part of the mix.

I was actually going to ask whether Sensor in the first month or so that you've owned it, whether that sort of opened the door to some incremental business and what the early returns from that addition have been?

Well, actually, by strategy, we expected that the integration would probably take a quarter or two as we look to extend that brand into the marketplace, but we are quite excited and quite optimistic, even in this environment, that Sensor Switch will be able to demonstrate good growth.

It had good growth.

The marketplace started to slow down in terms of the market that is serves, whether it's new construction or that renovation, relight side but our expectation is is that by marrying up if you will, the lighting side, the fixture side, the control side, it gives our sales forces an integrated solution, a greater capability to sell.

So I believe that pretty strongly by the time we hit our second quarter, you're going to start to see the real benefits from that -- from those acquisitions and our stat psychiatry.

Okay.

That is very helpful.

Thank you very much.

And have a good holiday.

Glen Wortman with Sidoti.

Good morning, everyone.

Good morning.

Good morning.

Can you just talk a little bit more about the retrofit market during the quarter.

I think you said during your comments that there was a little slippage there sequentially.

Give us some numbers?

Sure.

That market was down probably a tad bit more than our overall percentage.

When I say market, our sales into that market.

And I believe that pretty strongly, it reflects the slowdown in what some of the big box retailers are doing at this point in time.

We have a number of programs and opportunities, if you will, through both solutions and products, to rekindle that market, demonstrating pretty strong payback.

But I think a lot of the bigger box retailers just are taking a wait and see approach.

I also believe that that is true in the commercial and industrial space, where folks are just keeping their powder dry at this point in time, just waiting to see what the stimulus bill do for my business, what's the outlook for my business.

So we did see a sequential or excuse me, a period over period decline, slightly more than what we experienced overall.

Okay.

Okay.

And I know you had mentioned that there was some share gains in the home improvement channel, I think in the past several quarters you had also referenced some gains in the lower end markets through the contractor select series and New York as well.

Can you comment on any developments in those markets?

Yes.

While the overall market is down, again, 24 plus percent, our business in the home improvement channel was off low single digits.

And again, as you imagine, that home improvement channel serves both residential as well as non-residential type projects.

It's very difficult for us to tell precisely what, but resi was down again very significantly.

So we believe that that represents some of the opportunities, if I will, and the results of programs to further penetrate the home improvement channel.

And feel very excited about what that means for us on a go-forward basis.

Also, I would tell you that our specialty businesses, these are businesses that have higher value added value propositions in terms of going into commercial construction projects, those businesses, certain of those businesses actually were up period over period.

So I feel good that our strategy to introduce new energy-efficient, innovative products and lighting solutions is really -- is benefiting us in this difficult environment.

New York City, we continue to see some benefits there as we expand our presence and now with the Control acquisitions, we're busy about educating that market of the integrated solutions.

Again, not a lot of that coming through in the results but continue to feel good about our ability to meaningfully penetrate that market, although obviously it's down as well, given the economic outlook.

Okay.

And then finally, do you guys anticipate paying down the credit facility in the coming months?

We do.

Obviously, we generated reasonably good cash this quarter, excluding the acquisition of Sensor Switch but cash flow from operations and with the reduction of inventory that we talked about before as well as ongoing earnings, we would anticipate being largely out of the facility by the end of the year.

We were targeting to be totally out by the end of the year.

May slip a little bit into the first quarter, but do anticipate being able to pay down that line and have all of that line of credit available for us, for other strategic needs.

Thank you very much.

Craig Irwin with Merriman.

Thank you for taking my question.

First question I wanted to ask is can you give us a little color on the specific actions you're taking to position Acuity for the increased energy efficiency spending we should be seeing over the next several months?

Yes.

I don't know that it will be over the next several months.

I do believe that while there is a lot of positive action being taken, I think it takes it a while to find its way, if you will, into the main stream of activity.

Shovel-ready projects, yes, there is some opportunity but that's -- for us, I believe quite de minimus compared to the broader opportunities of the stimulus plan and then more importantly, ultimately, the energy bill.

What are we doing to position ourselves in those markets?

We internally have dedicated resources that are tracking key projects throughout the country, whether they're federal projects or whether they're down at the state level.

These projects have been specifically identified and are being tracked and then the question is how are we engaging in those projects and then it depends on a project by project basis.

It may be something where our national account, where we have specific folks dedicated to calling on the government, will go after those projects.

It may be local projects where our agency force will be going after those.

It could also be a project where our direct sales force through our hall of fame business would be going after those.

We have a utility sales force, so it really depends on the project and where that lead then ends up, those folks will then drive that to a conclusion.

So just to follow up, does this mean that you're not optimistic that you'll get a nice chunk of the spending related to the energy efficient block grants where the applications were due last week, basically a couple billion dollars, a component of that for lighting that's supposed to be out within the next 60 days?

I mean, are you more conservative about the potential there?

Well, let's be clear.

Your question, as least the way I interpret it is, what is it going to mean over the next few months.

I think that over the next 12 to 18 months, I think it represents a wonderful opportunity.

But just imagine the physical act of saying I want to now relight or do something in a physical space, what's that going to look like?

Architect, engineer, ordering material, installing the material, all of that takes usually more than just a few months.

That was my only comment.

I actually think that as the energy bills come to -- and really bring clarity, I think it's going to be a huge opportunity for our organization.

I think it's going to be a huge opportunity for the industry.

Energy management is with us and will be with us forever.

And the opportunity for us to fully participate in that, not only on the fixture side, but on the lighting control side, is huge.

Hence, the acquisition of LC&D and Sensor Switch to bring that capability, that combined capability to go after it.

So I want to be clear.

I'm very optimistic about the potential.

I'm just not optimistic that in 30, 60 or 90 days, it's going to have a meaningful impact on anyone's business.

That's very fair.

That's very fair.

Then my second question is about backlog.

In your Q you said it was down 21% year-over-year.

But if we do the math, it looks like it was up a couple percent sequentially.

I know backlog can be volatile, from month to month, quarter-to-quarter.

Could you talk a little bit more about sort of recent trends in there and if there's anything we could possibly read into the modest sequential improvement there?

That's a great question.

If you look at our business historically, again, our fiscal year ends August 31st, our second quarter is usually our weakest.

Third quarter then we start to see that pick-up, usually the build for the spring and summer construction season.

That build really didn't happen.

A lot of electrical distributors really made the decision to reduce inventories and not build up, if you will, to handle that demand.

So when you look at the sequential difference between third and fourth quarter, usually we experience an uptick and so you are noting that uptick.

That then usually translates into our fourth quarter topline sales being higher than our third quarter sales and as we look internally, we would expect that same pattern to continue, albeit at a much lower rate than what we experienced, say, last year or the year before, for example.

Excellent.

Excellent.

And then just a broader question.

I understand from talking to a number of people in industry that the language in the stimulus bill, the Buy American language, is a bit of an impediment to ballast procurement, given that we don't have a trade agreement with China.

Most of the ballasts come out of China.

Some out of Mexico.

I was hoping you could frame this out for us a little bit, as far as your expectations on a potential waiver there and what this could mean as far as your ability to ship volumes of fluorescent products into the market when we eventually see the money.

Sure.

That's a great question.

In fact, we are having a webinar for our entire organization next week to really address the Buy American opportunity.

We believe that we are uniquely positioned, given our manufacturing footprint, to take advantage and allow our customer base to take advantage of that, because of where we manufacture.

Great deal of our ballast we make ballast but most of our ballasts are purchased and a great deal of that, I don't have the exact percentage, but a great deal of that is consistent with our footprint and our Mexican operations and we have great suppliers who also are very focused on the buy American and our opportunity there, I think to differentiate will be fairly strong.

I'm not exactly sure of how -- because, well, depends on the project.

Depends on the value.

Depends on the content, how that's going to exactly play out.

But again, given our footprint, we feel quite favorable and quite positive about that.

And one other thing I would mention, sensors are a huge element in the control of light and the reduction of energy and Sensor Switch is based in Connecticut and really virtually all of its components are US-based.

So we feel we have the one, two punch on the fixture side as well as the control side to actively participate and comply with Buy American.

Great.

Thank you for taking my questions.

Thank you.

Matt McCall with BB&T Capital Markets.

Thanks.

Good morning, everybody.

Good morning.

So first, a couple of clarification points.

The other expense line's a little bit higher than we expected.

Any color there, Ricky?

Again, gets impacted mainly by translation.

Okay.

Step back.

Okay.

Okay.

And then I think your guidance for CapEx for the year was -- pointed to about $10 million in Q4, higher level than you've seen.

Anything specific you want to highlight there?

Continuing to develop the new products in the tooling and all associated with that.

So as we continue to launch LED as well as other energy-efficient products, is influencing that.

A little bit of impact from the acquisition, but very minor from them.

Okay.

Okay.

And Vern, did I understand that -- I think your point about the acquisitions were that -- was that you were still kind of in the integration and training phase; is that correct?

Yes, that's correct.

Training of our various sales forces and transitioning some business to those sales forces and then ramping up that capability.

We are aggressively adding, if you will, staff and capability because of the potential of that business.

So it's just getting the right hand and left hand to understand what's going on and it was our expectation that it would take us into fourth quarter as well as a bit into the first quarter of our fiscal 2010.

You know the rules behind purchase accounting from a GAAP perspective, so obviously your profitability in the nearer term is usually impacted negatively because of that.

But again, I think you're going to see the benefits start to ramp up in Q1, more aggressively and then certainly for the balance of 2010.

Okay.

And then I think you also highlighted, Vern, that you had seen another $11 million in cost savings, just clarifying the comparable period, is that sequentially or year-over-year?

And I guess and then you said the $50 million, so the $50 million would be the run rate for the full year next year.

I'm just trying to make sure I don't double count any of these cost savings.

Good question.

It's year-over-year.

In the third quarter we guest mailed that actions taken in 2009 benefited the third quarter by slightly less than 10, let's call it $10 million.

We're expecting fourth quarter year-over-year to be benefited by $11 million we'll really conclude some of those streamlining activities as we enter the very early part of our first quarter 2010, so we're expecting on an annualized rate to fully realize that 50 plus million dollars of savings.

Full year 2009, I believe Ricky we're at about -- we expect about $28 million of savings from the 2009 streamlining actions.

Exactly.

And then expecting the full 50 as we get into fiscal 2010.

So imagine to get the full 50 you need to be at about 12.5 plus, and we should be there kind of towards the end of the first quarter, definitely in second, second quarter and beyond.

Okay.

And then after that, are we kind of in a holding pattern or do you have more opportunities to adjust the cost structure, should we see a number like that in the market?

Well, as we have said in the past, we continue to drive productivity into our business.

We expect that 70 BPs or better on a base business, so that's -- we're going to continue to drive that into our organization.

I am very pleased with what the Company has done in terms of taking that productivity and giving a big bunch of it to our shareholders in terms of performance, but we are carrying investment in our R&D capability, our technology and innovation group today stands at 60 folks, compared to 11 or 12 just three years ago.

We continue to fund investments into New York City and other markets where we see great opportunity.

So we are carrying investment that we expect to gain share from and I -- truthfully, I think you're seeing the benefits of some of that, the overall market was down we believe more than what we were.

We're starting to gain share in those areas where we've made investments in new products and greater capability with our customer base.

So yes, there's always opportunities for improvement.

We are expecting the market to be down in 2010.

But the investments that we're making in our people are really to help us gain share and claw back as much of that market decline as we possibly can.

Okay.

I'll follow up offline with the rest of them.

(Operator Instructions).

The next question comes from John Emrich with Ironworks Capital.

Two unrelated questions if I could ask them separately.

The $2 million of miscellaneous expense this quarter and 1.59 in the year-ago quarter, what's in that number, generally speaking?

That's primarily the translation or transaction impact on foreign currency on inter-Company borrowings, we've got a fair amount of intercompany Company borrowings, largely in Canada, and as that currency moves around that we run through the P&L, Canadian dollar denominated.

Okay.

Then the second one was, what is, for the Company, kind of on a run rate basis, total revenues percentage exposure to new non-residential construction?

I would say that that number, if we based it on 2008 for which we have good market data, we would say that roughly 85% is new construction.

15% being that renovation.

I believe that what we will see, once 2009's numbers are done from a market perspective, you'll start to see a pretty good shift in that.

Does it go to 75/25?

It very well could.

And typically, when you start to get to the bottom of a recession, what happens is as vacancy rates are quite high, they'll start to fill up as employment comes back, those spaces and that usually finds its way into that tenant fit-up world.

Right?

So that's where you get that 70/30 kind of potential.

Okay.

Great.

Thank you.

That concludes the Q&A portion and I'll now turn the meeting back over to Mr.

Vernon Nagel for closing remarks.

Thank you for your time this morning.

We understand the current environment is unsettling.

However, we strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that will over the longer term deliver on the expectations of our key stakeholders.

Our future is bright.

Thank you for your support.

Thank you all for your participation.

You may disconnect at this time.