Acuity Brands Inc (AYI) 2009 Q4 法說會逐字稿

Good morning and welcome to the Acuity Brands 2009 Fourth Quarter Financial Conference Call.

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

(Operator Instructions).

Today's conference is being recorded.

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

Now I would like to introduce Mr.

Vern Nagel.

You may begin.

This is Dan Smith, VP, Treasurer and Secretary.

Good morning.

With me today to discuss our fourth quarter and full year results are Vern Nagel, our Chairman, President and Chief Executive Officer, and Ricky Reece, our VP and Chief Financial Officer.

We are webcasting today's conference call at www.Acuity Brands.com.

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

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

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

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

With the conclusion of our fiscal year, I think it's fair to say, 2009 has been the most challenging year we have experienced in at least the last 30 years.

With unemployment in the US hovering close to 10%, along with virtual freeze in lending for commercial and industrial real estate projects many markets we serve are experiencing almost depression like conditions.

For example, construction spending for commercial buildings was down nearly 30% during the past year.

Our results for the fourth quarter and for all of 2009 reflect these severe economic and market conditions.

However, upon careful examination of our results, it is very clear our associates demonstrated their resolve and skill by delivering great value to our customers and solid performing for our shareholders.

Further, I believe we performed at least as well and, in many cases, better than many of our served markets suggesting share gain in certain sectors.

Additionally, in 2009 we achieved success on a number of strategic priorities including the continued introduction of knew, more energy-efficient products and services, expansion into new markets and important channels, further improvements in productivity and, most importantly, the acquisitions of LC&D and Sensor Switch, significantly strengthening our presence in lighting controls.

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

First for the fourth quarter.

Net sales for the quarter were $422.6 million, down about 19%, compared with the year ago period.

The decline was broad-based both with regard to channel and geography, though we did have our bright spots.

Operating profit was almost $50 million, down from $73.7 million reported in the fourth quarter last year.

Operating profit margin was a remarkable 11.8% in the quarter, despite the dramatic decline in net sales.

Diluted EPS from continuing operations were $0.68 compared with $1.02 from the year ago period.

For the full year in 2009 net sales of Acuity Brands were almost $1.7 billion down a little more than 18% from fiscal 2008.

Consolidating operating profit margins, excluding streamlining charge, were 10.9% a strong showing given dramatic and rapid decent in market demands.

On a GAAP basis we made $85 million; the after tax impact of the streamlining charge reduced our earnings by about $17 million.

The point here is we remain very profitable in spite of these extremely difficult market conditions.

In addition we generated almost $93 million in net cash provided by operating activities.

This is down from the year ago period due primarily to the significant decline in economic activity and the resulting impact on revenues, which reduce net income and lower the accounts payable.

Also earlier this year we paid our performance based incentive programs to customers and associates earned in 2008 which was a record year for the Company.

Obviously payouts under these incentive programs are down dramatically this year compared with the year ago period.

Ricky will talk about our financial position later in the call but I'm pleased that our net debt position at the en of August was about $213 million, this after investing more than $162 million in acquisitions and strategic investments in 2009 and paying off $160 million in bonds.

I consider this modest leverage, given our earnings and cash generating potential.

Lastly, I'm pleased to report that we continue to return more than our cost of capital in 2009 and our cash flow return on investment exceeded 20% in spite of these horrid economic conditions.

While these results reflect a continuing fall off in economic activity as I noted earlier they do not fully reflect our accomplishments throughout the year given the magnitude of the challenges.

So let me share some additional information with you.

First our operating profit margins excluding special charge for the year were 10.9% while net sales were down more than 18%.

Exceptional.

The same is true for the fourth quarter as well.

Our margins in 2009 were even more impressive, if one takes into account the approximately $40 million impact in the first three quarters caused by the significant rise and fall in raw materials and component costs.

We were unable to pass along this spike in costs through higher selling prices because of the rapid decline in market demand.

We estimate this spike in cost reduced margins by approximately 240 basis points in 2009.

Actually, the fourth quarter was the first quarter this year where material costs did not have a meaningful impact on margins compared with the year ago period.

Second, we continue to structure the organization to be consistent with the requirements necessary to serve current customer demand while continuing to invest significantly in growth opportunities, including new product development and greater presence in key markets, such as renovation and relife.

Our auction are actions this year to streamline our organization lower our operating cost by approximately $28 million in 2009 and more than $11 million in the fourth quarter, essentially achieving our targets.

We expect to realize approximately $50 million in annualized cost savings from these actions in our fiscal 2010.

Third, we continue to drive productivity throughout the organization, particularly in the supply chain where we reduced our total production costs slightly more than the percentage decline in sales, a remarkable feet in such a short time for a manufacturing company and while absorbing the negative impact of reducing inventory levels to better reflect current market demand.

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

When considering our fourth quarter performance another point you may find interesting is that the last time we had this level of sales volume was in the second quarter of 2006.

Our operating profit and margins more than doubled this quarter compared with that period, again, remarkable.

The same is true for the full year.

The last time we had similar revenues was in 2005.

Again, our operating profit and margins adjusted for streamlining charges have more than doubled, while our EPS adjusted for the spin-off of Zep have more than tripled.

We have been able to produce these results because of the great dedication of our associates and the progress we've made in four key areas of strategic focus.

Customer service; pricing and margin management; product portfolio expansion, including significant additions to our sustainable and energy-efficient products; and company-wide productivity.

On the strategic front our accomplishments in 2009 were considerable.

The following are some of the most noteworthy.

We introduced almost 100 new products or families in 2009, the most in our companies long history.

Accelerating the introduction of new more energy-efficient products and services has been a key contributor to our improved margins over the last few years and is one of the cornerstones of our growth strategy going forward.

We continued our expand into new markets such as New York City and increased our penetration of important channels such as home improvement which serve to offset some of the market decline in certain commercial and industrial markets.

We made great strides in advancing the Acuity Business System throughout our organization, enhancing product quality, improving delivery, and driving productivity throughout company.

The Acuity Business System, an enterprise-wide business process, based on lean principals, has been instrumental in our success in delivering value for all stakeholders over the last four years.

Lastly and most importantly, we acquired LC&D and Sensor Switch, significantly strengthening our presence in the fast-growing lighting controls market.

These accomplishments have strengthened our foundation will be serve as a robust platform for future growth.

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

Now I'd 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 fiscal 2010.

Ricky?

Thank you, Vern.

And good morning everyone.

Between the earnings press release and Vern's comments, we have covered most of the key items regarding our fourth quarter and fiscal year earnings, so I will only highlight a few additional items regarding our income statement.

I then will discuss our cash flow and financial condition before turning the call back to Vern for what everyone is most interested in, which is our outlook.

Let's now turn our attention to a few key items regarding our fourth quarter results.

We discussed in the earnings release the factors contributing to the 19% decline in fourth quarter sales.

As stated in the release inconsistent with our previously communicated expectations, unfavorable price and product mix changes contributed to the decline in net sales in the fourth quarter of 2009 compared with the prior year period.

While we are not able to precisely separate price from mix we believe a meaningful amount of this decline is product mix due to success we are enjoying in our home center channel resulting in a greater proportion of our total sales coming from consumer products versus our commercial products.

While both of these categories of products and services have reasonably consistent operating margins the selling price for consumer products are generally lower due to the fewer product features and benefits.

Gross profit for the third quarter was 39.1% of sales.

This gross profit margin reflects a decrease of only 150 basis points compared with the year ago period despite the 19% or approximately $100 million reduction in sales.

In fact, over 50 basis points of this decrease is self inflicted as a result of our action to reduce inventory during the fourth quarter by almost $18 million yielding approximately $2.3 million under absorption of factory overhead.

Fortunately the spike in material and component costs we experienced early in our fiscal year and we were not able to recover in price and therefore has been hampering our profitability for the last two or three quarters has finally worked its way through our Cost of Goods Sold with minimal impact to our fourth quarter.

Selling, distribution, and administrative costs increased to 27.3% of sales in this quarter compared with 26.5% in the prior year.

This modest increase of 80 basis points reflects the benefits we are realizing from our streamlining efforts as well as lower incentive compensation in customer sales incentive costs.

These benefits helped us mitigate the impact of the significant drop in sales as well as continued investments in new products, innovation and technology, and sales and marketing activities.

Weighted-average shares for the quarter used in calculating diluted EPS increased approximately two million shares, primarily as a result of shares issued for recent acquisitions.

Now let's look at a few key items regarding our full year results.

In fiscal 2009, price and product mix was slightly positive compared with 2008, as the fourth quarter negative impact that I previously discussed was more than offset by favorable changes earlier in the year.

Foreign currency translation reduced current year sales by 1.7% compared with the prior year.

This was partially offset by the impact of the recent acquisitions which contributed 1.3% to current year sales compared with last year.

Gross profit for fiscal year 2009 was 38.3 percent of sales.

This gross profit margin reflects a decrease of 210 basis points compared with the year ago period.

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

If we excluded the estimated impact of this spike in material costs, our gross profit margin percentage for fiscal 2009 was actually slightly higher than the prior year, which is an impressive accomplishment considering the 18% decline in annual sales.

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

Selling, distribution, and administrative costs increased 80 basis points to 27.4 percent of sales in this fiscal year compared with 26.6% in the prior year.

This modest increase for the year, considering the significant drop in revenues, illustrates that we continue to proactively right size the Company and aggressively manage cost ahead of the weakening economic environment.

Now let's look at cash flow for the year ended August 31, 2009.

As Vern mentioned earlier, cash flow provided by operations for fiscal year 2009 was $92.7 million.

Of this amount, $65.5 million was generated in the fourth quarter.

While it is typical for our fourth quarter to be a strong cash generator, this year we saw an added boost as during the fourth quarter we reduced inventories by almost $18 million as we completed some of our production transfers.

Operating working capital, calculated by adding account receivables, plus inventories and subtracting accounts payable increased by $3.1 million for the year ended August 31, 2009.

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

In addition our working capital Days Outstanding increased as we still are carrying hiring levels of inventory in order to appropriately serve customers as well as an increase in raw materials to support manufacturing of products previously manufactured by outside vendors.

We also have seen a slight increase in accounts receivable days due to the success we are having growing our share in the home center channel, which traditionally has longer payment terms than our other channels.

A significant use of cash for operating activities in fiscal year 2009 compared with prior year was a category of other current liabilities.

This additional use of over $50 million, compared with last year, is primarily due to the payment in fiscal year 2009 of incentive compensation and customer sales incentives earned in 2008, which had a record-setting performance and is therefore much greater than the accrual in 2009 that will be paid in 2010 where the economic challenges negatively affected the amount of incentive compensation in sales incentives earned.

We ended the quarter with cash of $18.7 million.

Perhaps more importantly, we achieved our target of totally paying off all of our borrowings under our $250 million bank credit line as of our fiscal year end.

Therefore, as of August 31, 2009, our total debt was $231.6 million, consisting primarily of the $200 million, 8.375%public notes due next August.

In light of the current favorable investment grade debt market, which indicates an all in cost approximately two percentage points below our current notes rate, we are seriously considering prior to the calendar year end issuance of new debt which would include refinancing of $200 million notes ahead of its scheduled maturity next year.

The exact timing and amount of any new debt offering, as well as whether we make a tender offer for the existing notes, is, of course, dependent on market conditions.

If we decide to take advantage of favorable market conditions and refinance the debt there will likely be additional cost due to the negative carry of the added interest and or the premium necessary to tender for the existing debt.

However, we believe any additional cost are justified over the longer term due to potentially favorable terms currently available versus those that may be available when the debt matures, as well as the added flexibility from the enhanced liquidity position.

We continue to maintain strong financial flexibility as reflected by our debt to capital ratio, which is approximately 26% at August 31, 2009.

And our availability under the revolving credit facility was over $242 million as of year end.

Fortunately, even if we decide to do not refinance the maturing debt based on our current liquidity including availability under our $250 million bank facility and expected continued cash flow generation we believe we would be able to retire the $200 million of debt when it comes due in August 2010.

So we do not feel we have to address this short maturity debt but we believe particularly in light of current market conditions, it is the prudent thing to do and allows us to maintain excellent financial flexibility.

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.

In fact, we see others pulling back, we are aggressively investing, which I will highlight in a moment.

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 life times.

The rapid and speedy decline in demand in the overall construction markets around the globe has been unprecedented.

How long will these turbulent market conditions prevail?

Only time will tell, although it seems the efforts of many governments around the globe to stimulate economies is beginning to have some positive influence on consumer confidence, though credit availability remains very tight particularly for industrial and commercial products.

Key indicators for our traditional markets both residential and nonresidential construction continue to signal a decline in the available market for 2010; this is all widely known.

Forecast by independent third-parties suggest that unit volume for construction put in place in the non-residential construction market could be down at least 15% fiscal 2010 and probably a bit more.

Again, I'm in "a bit more" category.

This is particular true for many of the commercial markets we serve.

This suggests considerable 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 valued products and services.

However, while the actual impact and timing is difficult to predict, we do expect a pick-up in price competition in our fiscal 2010.

Our margins in 2009 suggest we handle these challenges well.

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

However, I'd like to be clear, we will defend our market position vigorously from competitors should they attempt to use price as their only point of differentiation.

Lastly, we continue to expect cost for key material and components to remain relatively constant with current levels in fiscal 2010.

However, as we saw in 2009, this is always subject to change very quickly.

As I noted on 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 new markets and channels including renovation and relife and now lighting control.

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 performance, and we expect that to continue over the longer term.

Additionally with our acquisitions in 2009, we now have one of the most formidable platforms in the industry to participate in the dynamic and fast growing market for lighting controls and energy management.

The additional of Sensor Switch along with LC&D combined with our own Synergy, Roam, and Dark to Light brands form the backbone of our lighting controls offering.

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

We believe the market size available for lighting controls today is now approximately $800 million 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.

Lastly, we continue to believe the renovation and relight market will afford us great opportunity for growth over the next decade, particularly as the need for more sustainable lighting solutions comes to the forefront of thinking by business and government leaders and building owners throughout the world.

For Acuity Brands, we feel we are well-positioned to not only participate in this evolving industry, but to accelerate that change in growth by providing unique and innovative solution to meter the needs of our customers.

While the current recession has slowed down the immediate opportunities in this market, we believe that long-term potential remains very significant.

While our company policy is not to giving earnings guidance because we feel there's more beneficial to concentrate on those key strategic and tactical actions that can best help us achieve our longer term financials goals on a consistent basis, we do have a few observations which may provide you with additional incite into our focus for 2010 and beyond.

Again, we expect pricing in many markets to be more competitive than usual, potentially putting pressure on margins beyond our ability to reduce costs, 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, targeting in excess of our longstanding goal a 70 basis point improvement on our base business.

Please recall we expect the overall market to be down mid-teens, which is what we would measure as our new base.

Contributing to this goal we expect to realize an additional $22 million in cost savings in 2010 from a streamlining efforts initiated in 2009.

In total, we estimate our annual costs, are lower by approximately $50 million since the initiation of this program.

Our gross profit could be impacted in the first quarter due to lower absorption of factory overhead caused by planned reductions and inventory.

How much is difficult to estimate.

Inventory levels are down about 18% from their peak adjusted for acquisitions.

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

How much we don't know.

But our current backlog is down about 23% from a year ago period.

Our current assumption is the overall markets we serve will be down at least middle teens in 2010.

Given our current backlog, this suggests we are looking for the first half of our year to be down disproportionately more than the second half, when the comparisons become easier.

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 services, which were introduced at a record pace for us in 2009 and will continue again in 2010.

Lastly acquisitions should add about $30 million in incremental revenues in the first half of 2010.

While we have a demonstrated track record of successfully executing our strategy the uncertainty and market volatility 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 accelerate investments and innovative and energy-efficient products and lighting control solutions, expand market presence in key sectors such as renovation and relight, enhance services to our customers and drive productivity should provide profitable growth opportunities which we believe will enable to us outperform the markets we serve in 2010 and will position us over the longer term to meet or exceed our financial goals, including expanding our annual operating margins by 70 basis points or more, earnings growth of 15% or better,and cash flow generation in excess of our net income.

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 you have.

(Operator Instructions).

Your first question will be from Matt McCall with BB&T Capital Markets.

Your line is open, sir.

Thank you, ma'am; good morning everybody.

So, I want to break down the topline a little bit that you just reported and maybe put some more numbers to what we just heard.

You highlighted good trends in home improvement.

I think you highlighted some of that in the past.

Can you tell us what that, give us any more details behind what happened there in the quarter and what the benefit was on a year over year basis beyond what the market would be generating?

Matt, I think when you look at our numbers, again I commented earlier that the decline was broadband both broad-based both in terms of channel and geographies.

We did see some bright spots.

Home improvement was one of those bright spot.

But a bright spot in this environment is down less than others, so I think when you look at our overall volume being down about 17%, that's pretty strong performance relative to what we see from other groups' economists in terms of where they predict, or forecast actually, the overall market to be.

Without getting into channel specific I would say that our feeling is we outperformed the overall market and I think that's how we would like to just leave that comment.

Okay, I am going to try one more angle.

You mentioned pricing and mix as a source of pressure and you said most of it came from mix.

Did you talk about the actual pressure that you saw there.

Again, price mix, as Ricky pointed out in his comments, had a lot more to do with mix.

As you might imagine, we sell through that home improvement channel the selling prices of those products are typically less than what would you find selling into larger commercial projects.

So while we believe there was a little bit of price out there it's very difficult for us to estimate.

We believe that most of that price mix in this case was really mix shift.

And we gave you sort of a "guesstimate" around that at being what, Ricky?

The majority of the price mix and we indicated in the earnings call is about 1%, a little more than that, about 1.5%.

Sorry I missed that.

That was helpful.

So as we look out in the next year you gave us a number of items to look at.

Right now the projections are down double digits, I think, on the topline for the Company on street estimates.

The market is down 15%.

You've got some acquisitions coming in.

The one thing I didn't hear you mention was stimulus.

I'd be interest to do hear your thoughts there.

But outperforming the markets, if we are down 15% , what do all these things add up to?

Are you going to outperform by how wide a

Well, Matt, if I knew that I would be able to go into the marketplace and do marvelous things.

I'm not a very good economist.

As I mentioned to our board in the most recent board meeting, I had to great myself as economist it would be less than an F.

What I do know is that while others are expecting the markets to come down and while we are starting to see some consensus in the middle teens for the market overall that we serve our expectation and as you might imagine our plans are to aggressively go after every opportunity that is available to us.

We are looking to claw back as much of that decline as we possibly can.

We have a demonstrated track record of having some success in that regard.

But, I'm sorry, I just can't really help you with how much.

But just know that between new products we will introduce another 100 plus new products in 2010.

So we are going to get the benefit of those that were introduced in 2009 and even prior to that.

That has been helpful to us.

Entering the lighting controls market.

Now that we have a very robust platform represents an exciting opportunity.

For growth.

So just know that we are going after every opportunity we can to offset as much of that 15% as we possibly can.

Okay.

Probably not the best question the way I asked it but you didn't mention stimulus.

Any thoughts on what that could look like next year?

You know, the stimulus monies that have been finding their way as we understand them into the marketplace having a fairly slow trickle affect.

I don't think that's a political statement.

I think that's a fact.

We are seeing in some markets, it's going to roads and highways, that will help facilitate some roadway spending but yet I think it's just the economy coming back, unemployment now is at what 9.8%.

They are expecting it to go higher.

Those types of numbers are very important to us.

As that employment or unemployment figure starts to decline that's very beneficial because those folks need places to sit, and if they need places to sit they usually need lighting over their heads.

Employment, credit standards, those are key, key indicators for future vital of our many businesses or markets served.

Then I think you might have answered this next one but the Capex projection $35 million well up from the last few years you said 100 new products this year.

Is that kind of the focus of that new capital spending?

Yes, Matt, most of that will be in the new products and services, tooling and all around that.

It's also some continued investment in our IT area as we continue to build out our platform of our customer facing integrating our customers, both agents, distributors and others more tightly with us.

So those would be the two key areas, other than ongoing maintenance spending and so on.

I also would like to clarify my comment on price mix.

We indicated in the press release that it essentially offset $15 million of the acquisition contribution.

So that would be a little over 3% of total price and mix and the majority of that would be the mix that we described.

Okay.

Thank you.

Thank you all.

Thank you.

Next, Peter Lisnic with Robert W.

Baird.

Good morning, gentlemen.

I guess first question, can you give us a sense as to how the integration of the LC&D and sensor business is going and how the penetration of the distributor channel is working on that from that.

We can, we can.

I believe that the integration is going along well.

As you know with any integration even a single acquisition you have challenges, but when you are now integrating two businesses into a third, it exponentially creates those challenges, but I believe that we are moving along well.

The businesses are coming together.

We have strong leadership.

And the opportunity for us to now take that capability to our various channels is robust and strong.

And so you should expect to see some improvement, and hence we knowledge that by saying we expected our growth to be $30 million or more from acquisitions in 2010.

Again, my comment to Matt earlier, we are looking for every opportunity to gain share and grow our business profitably, and we believe that the lighting control and energy management market will afford us great opportunities there.

All right.

Well, the 30 million, isn't that just adding in the sensor and LCD sales from what they were?

I'm wondering how much more of the market can you penetrate now that he have you have a more complete product suite?

And my second question on that is I guess this is a higher value proposition, i.e.

higher margin, so how would that mark into your margin expectations next year?

In other words, shouldn't mix be potentially a positive factor on the margin line next year?

I think that the answer to both of those questions is yes, we are hopeful that given some of the plans that we have that we can outperform the expectations that we have provided both in terms of greater sales penetration as well as "spicing the stew" if you will to enhance our product mix and therefore our margin.

But at this point in time it's pretty difficult to precisely predict because the markets are still trying to find their footing if you will.

New construction is down; people are still weighting for direction and clarity around what type of energy billion will we have.

I think that the energy bill will have a much greater impact on our overall business than stimulus programs that are out there.

So it's difficult to precisely predict but yet we are optimistic over the longer term about the investment that we've made and the portfolio and the business that we have to really go after lighting control and energy management.

And, know, by the way, that portfolio of lighting control capability combined with our fixture business really gives us another opportunity in that renovation relight mark.

That particular market continues to be very flat, actually down on a year over year basis primarily because again folks are just trying to figure out what their business model looks like and their future economic opportunities.

But over the longer term those markets are going to be very robust and we feel we are uniquely position to do really take advantage of that.

How much will that impact 2010?

At this moment in time it's difficult to predict.

Okay.

And you actually answered one of my next questions which was on the relight retrofit market.

Down year over year, but what's the body language out there?

Is there, are people still taking a hard look at it?

Is waiting for stimulus dollars, is that a big impact?

What's the body language from their customers on the relight activity?

That's a great question.

I would tell you that the body language is very favorable.

Folks, though, are sitting, they are sitting on their cash.

They are trying to understand where credit markets are and how those credit markets are going to impact them.

They are looking for very short pay backs.

But, yet, they're still very interested.

I mean, the comments that, body boy, as soon as the purchases strings are opened up this is where we are going, we feel that the marketplace is there and will be strong for us.

We were down year over year not terribly inconsistent with the overall numbers that we saw.

But the good news is fourth quarter was down considerably less than the overall year.

So I'm not going to look at one quarter and say we have a trend but we know from being in front of our customers that this opportunity is still very much in their sites.

It's just they are trying to examine other alternatives in this current environment; if that makes sense.

Yes, it does.

Last question, looking at your balance sheet, in very good shape, post the Sensor acquisition and the debt pay down this quarter, could you comment on strategic uses of capital that you're contemplating right now.

Well, let me take a stab at that and then I would like Ricky to comment.

We do have a very strong balance sheet particularly in light of our ability to generate cash and earnings.

We see opportunity out there.

We continue to invest in our business in a very robust way.

Last year 100 plus new product and product families.

We have the same goal for 2010.

So considerable investment in those areas.

We continue to look to expand our consider facing opportunities.

So those are on both the human resource side as well investments as Ricky pointed out in capital for tooling.

As we look at other market opportunities in terms of acquisitions, we see some interesting businesses out there where we think they could make sense with us.

But I think paying a fair and reasonable price is what our objectives are and so we will be strategic and thoughtful in terms of how we deploy that capital around the acquisition side of the world.

Ricky?

Yes, I think not much to add to what Vern said, but we arguably today are somewhat under levered, 20%, 26% at the total cap so we sit in a very good position which is a good place to be given where the market is and the cycle.

So the use of cash will continue to be prudent about that, but there are opportunities as Vern said in the acquisition front and we are as I commented looking to go ahead and extend the maturities on the debt that we do have given the favorable market conditions as well as the shorter duration of the bonds as well as some of the other debt.

So we'll shore up the balance sheet or at least that's the intent that the market stay well and have plenty of dry powder to take advantage of the opportunities that may be out there.

Okay.

Thank you both for your time and incite.

Thank you.

Next question, Craig Irwin with Wedbush.

Thank you for taking my question.

Congratulations on the solid quarter, gentlemen.

First question, in the residential markets do you expect these markets to contribute an increasing portion to your overall sales mix in 2010?

In fact we do.

Again, one of the opportunities, as we pointed out, I'll call it a bright spot, was further penetration of the home improvement channel.

And a portion of that has to do with product, new products that we are bringing to the marketplace that are really directed towards the residential market.

As you know the residential markets have been down so significantly.

I mean, you hear different housing start numbers, but we are probably now in that 450,000 to 550,000 range.

We do see that as that comes back to a more normal level over the next few years us having nice participation in that.

Will that significantly change our mix?

I don't know that it will significantly do that but it should be accretive to the things that we are doing.

So it is a strategy of ours to increase our exposure to the residential, direct residential markets over the next handful of years.

Excellent.

And you mentioned new product introductions for residential.

Roughly what portion of the 100 new products that you are going to introduce in 2010 should we look for in residential markets?

I don't have that exact number.

I apologize.

But I would say that it's probably in the 10% or less range.

Excellent.

Then I'm going to guess given that you're pushing into this market that this is going to be something outside of your major customer in that market.

Can you describe the primary customers for these products?

Would this be something through a new set of distributors or is this something through pre-existing channels?

No, it would be through pre-existing channels.

While our share is not large relative to our share in the non-residential portion, it is still a significant business.

We estimate that our number is something slightly less than 10% in terms of our exposure to residential debt.

Very difficult to precisely know that number because of sales through the home improvement channel, where in fact it's a multiple use product, right?

It can be used for light, industrial, it can be used for light commercial, it can be used for residence are residential.

We have a through showroom, home improvement channel.

We will be looking to just simply leverage technology and innovation and selling more through the existing channel that we have.

I would add a bit that we have is we have a very strong product offering in the fluorescent line that we service both the home center as well as the showroom and as synergy market comes to the forefront not only through commercial but for home use that fluorescent capability I think serves us well in that channel.

We are a strong Energy Star partner.

All of our products have superior energy efficiency capabilities as well as quality of lighting.

So it's very consistent with our value proposition at price points that are reflective of the features and benefits that we bring to market.

So we are excited about that.

But as you know the marketplace is, it's decelerating less.

But we do believe that the housing market and current level of development is truly unsustainable over the longer term.

So our positioning of our organization now through new products and services and technologies should give us an opportunity to fully participate in a large market.

If I could move on to the next subject.

I really appreciate your general conservatism, but when I talk to some of your competitors out there they are a lot more optimistic about the potential for the opportunity, the lighting and fixtures and lighting controls opportunity in the stimulus plan.

Can you frame out for us really what gives you the conservative view there and if you think you will keep the high teens share in this business as these products are purchased for execution on the stimulus plan projects?

Yes, my view is that our shares depending on how you measure it and we tend to look at it both in terms of our share in the nonresidential markets and then the residential markets, our share in nonresidential is higher than what you suggest and I would expect that we are in a very solid position in terms of how we go to market and our various channel partners to fully participate in stimulus activity, whether it be for indoor, whether it be for outdoor, I'm just not, as I think facts come out it's just the total amount of stimulus that is available or what they said they ultimately what to spend and what they are currently spending is a far cry, so it's just taking a while to get out there.

So my conservatism is just that I don't have a great deal of confidence that the money finds it's way into the marketplace as quickly.

I actually belief in free market so that's a political comment, and I believe that the economy is starting to find its footing on its own as it always has and so I'm more optimistic that over the next 36 months the economy will find its way back in a fairly strong way.

And that's where we will more fully participate.

I also believe that the government will implement some type of energy bill then energy bill just along with the natural rising of energy costs as well as people becoming more socially conscious around sustainability, I think that that those are all strong contributors to a very robust lighting market over the next decade frankly.

Understood.

Thank you for your answers.

Thank you.

Glen Wortman with Sidoti.

You mentioned that your backlog was down 23% year over year at the end of the quarter.

Can you give us a sense of how it has been tracking since the end of August?

I would say that orders have been slightly favorable to that.

Though again one month does not make a quarter.

So we tend not to look at -- we look at it daily just to be very clear, but we don't sit there and try and react on a daily basis.

Backlog is a very fluid thing.

I've been spending a tremendous amount of time traveling in front of customers, industry things and it's -- you feel like you are bouncing on the bottom here.

But one month someone will say, boy, I see optimism and the next month they will say that they are down and their phone stopped ringing.

It's difficult to predict.

I don't take our backlog as an absolute, but I think it's a piece of data that I think is useful for folks to understand in terms of where we are.

Okay.

Thank you.

And then can you just also give us maybe a breakdown where you stand today between new construction versus maybe renovation, the relay market, just give an overall.

Sure, that's a great question.

We say in our K.

and I believe that we are in the process obviously of updating that but the previous K., Ricky, we were what, kind of 85, 15, 85% new construction, 15% renovation, tenant fit up type thing.

Your question is very insightful because I believe that what you will see over the next several, several quarters, and taking us out well beyond our fiscal 2010, is that that tenant fit up, that renovation work will become a bigger percentage as employment starts to improve and vacancy rates come down.

So new construction putting up new shelves of buildings what they will started to is fill out and absorb, if you will, the space that exists today.

So the prognosticator of construction put in place may not necessarily be indicative of how our sales or those who participate in the lighting industry; you would tend to see typically us not falling as far during that phase because the tenant fit up work starts to kick in.

So how much will that change in 2010?

Difficult to predict but I do believe that that ratio will change more balanced towards the tenant fit up world.

I think, in addition to just the economic swing, the greater focus today on energy management and sustainability and green will accelerate this renovation market relative to what we've seen in the past, as well as the, just the new products and the paybacks that they offer make a value proposition that can be very compelling.

So it's hard to predict, as Vern says, but I do think that we will see renovation and relight continue to be a bigger percentage of the overall market for those reasons.

Okay.

Thank you there.

Just finally on the relight market, specifically, I know you said it was down year over year, but maybe less so versus the prior quarter on a year over year comparison.

Can you give us maybe some more precise numbers?

We haven't really provided that yet.

We are still really trying to get clarity around definitions so that we can be a little bit more precise in that.

But today it represents not a huge portion of the business.

And the other issue around that is we need to really break out what is flowing into tenant fit up versus renovation and given that we have multiple accesses to market we just, I hate to give you information right now that may not be as accurate as it should be for me to do that.

All right.

Thank you very much.

Thank you.

Our next question comes from Christopher Glynn with Oppenheimer, sir, your line is open.

Thanks, Vern, you are a little hard on yourself, I will give you at least a C minus as an economist.

No, don't do that, it was pretty bad frankly.

I don't know about that.

You talk about the opportunity for the lighting controls market to triple overtime.

Also interested in the share of opportunity, given your share in the fixtures market, the opportunity to bring the acquisitions through the agency channel.

Do you see a pretty decent pathway for the control share to track towards your fixtures share overtime?

We do and I think that that could, would be a road map or referendum for what our expectations are, that or better.

On the nonresidential side of the world our share is north of 20% we estimate.

And yet in, in lighting.

And yet today because a very significant channel to market is through the C&I agency for us we do not enjoy, we as the Company do not enjoy that share that our agents in the marketplace actually enjoy.

So we would see an opportunity there to earn their business and to grow our share at a fairly dramatic rate.

That's because, again, of features and benefits of controls with lighting.

Features and benefits just of the controls package that we have.

And the ability to bring solutions together that offer customers something that's unique in the marketplace.

I do, Chris, see us getting to our overall share position relatively quickly.

I would add that a benefit on the other side is in the renovation relight world.

The controls seems to be something that you can lead with, that's something that's pretty obvious to most customers as a way to conserve energy is by controlling the lights, the most efficient light is the one that's out, so if you can put occupancy sensors or daylight harvesting, time delays, all of the things that the recent acquisitions brings that capability not only would we hope to bring our control share up as a result of our strength on the lighting fixture side, but I think the controls will help us pull along some more of our lighting fixture business, particularly in that renovation and relight area.

So it's a two-way street.

And, Chris, just one other comment as you might imagine controls in certain aspects, new construction, things of that nature have a fairly long specification cycle so it won't happen overnight, but yet we will work very diligently to the further penetration multiple channels and then use the opportunity to sell both fixtures as well as controls to provide value to the end customer.

Very interesting.

And then you mentioned more pricing pressure in fiscal '10.

I wonder a few things.

Is that inclusive of mix and then on the pricing side are you seeing that in backlog because it seems like it's been all mix thus far.

I would say that we are seeing pockets.

And this is normal.

You would expect in this kind of significant decline in market demand that some folks who are lesser positioned vis-a-vis their product portfolio will attempt to use price to win an order.

So there's just no doubt that it's out there.

We are working diligently to maintain our pricing posture in areas where again we believe we are selling the features and benefit difference and trying to create that value in the eyes of the end customer.

It doesn't mean where we see irrational behavior that we are going to necessarily let that behavior continue without some response from us.

So we are anticipating that.

We've seen that in some geographies.

But is there a pattern?

It's impossible to say at this point in time.

We are just being cautionary in terms of our comments.

Something I would want to add, Chris, is that on the positive side we've scene some decline in our cost for raw materials, particularly if you go back a year from now.

We saw that spike that we've been talking about for quite a number of quarters, in material costs that we had to absorb.

Now, we are seeing at least if you go back a month or so steel, aluminum, other commodities which we purchase a significant amount of, have come down significantly from that peak.

We've seen a little pick back up but even oil is at a much lower level than it was a year ago and obviously freight is not an insignificant part of our cost.

So some of the pricing pressure we see is related to the benefit we are seeing in some of the input costs coming down and certain people sharing that with their customers.

Chris, I would also say that when you look at products that have been introduced over the last again 36 months, our product mix is improved.

Hence, that's helped our profitability.

But the other thing that I would point out is that if you go back to 2005, which is the last time we had a year where we delivered about $1.6 billion of revenues our productivity as mentioned by sales per associate is up almost 50%.

So the fact of the matter is that we continue to work very diligently to the make sure that we have the kind of cost structure where we can compete a good, better, best value proposition in the marketplace so it's having the right products, it's having the right value proposition along with the right cost structure that we think will allow us to not only survive this environment but to thrive in it.

We see opportunities and we are going after those.

Thanks a lot for the answers.

Thank you.

(Operator Instructions).

One moment, please.

Bob Cornell with Barclays Capital, your line is open.

Hi, everybody.

Following up, Chris' question on pricing, have you begun to see the beginning of the price pressures or is this anticipatory?

You know, Bob, again, as I've tried to comment we typically see certain geographies, certain competitors and there's never a sustained pattern to folks using price as a way to win an order.

We have seen a little bit more of that activity as the year progressed.

So I would say that the answer to your question is, yes, we are seeing some of that so we are expecting that kind of behavior to continue.

But I don't think that that's abnormal in this type of environment, frankly.

You go back to the other part of this decade the last downturn I would characterize some undisciplined pricing on a couple of your major competitors where there's been significant management changes in both instances.

Is there a reason to think that the whole business among the majors at least would be more disciplined in this cycle.

Bob, as I understand it we were one of those folks.

So.

I think everybody was pointing figures, it's true but I wasn't thinking of you guys.

I think as I understand it our whole product portfolio was different and we've done a lot of work over the last handful of years to really change our product portfolio.

So I think the way folks viewed us, again, a decade ago, we are a different company today.

And again I think that we contributed significantly to that price leadership potentially downward and our pricing posture over the last handful of years has changed pretty dramatically by design.

We feel very strongly that we need to generate sufficient return to continue to invest in new products.

Now, we are mindful of the product lifecycle, so we've worked very hard to take cost out of our products where they don't necessarily have features and benefits that are different from someone else's, so that we can generate a reasonable return on those products at those price points.

And have done a good job with that.

So I believe that you have others who maybe were more like us a decade ago, where they tend to use price in some markets and there are a lot of dynamics working.

I am not being accusatory of anybody.

But I'm saying we see it from time to time and I would expect with the markets being down well north of 20% in many key markets that price for some will be the only way they can differentiate.

Some people talked about the fact there hasn't been pricing in the downside so far is because the implementation of prices doesn't make any difference in these kinds of market declines, and you begin to see pricing as a strategic weapon as you start to see markets strengthen.

Do you buy into that argument?

Not entirely.

I think your comment was right, look on the residential side, we saw some price pressure but not nearly as much as you would imagine given the market falling off by 75% and 80% from peak.

Material costs and all of this stuff play heavily into it.

I think that for the most part the market while it's not an oligopoly, there are four folks that make up 55% of the market, most all of us have public shareholders and are reasonably disciplined.

Again that can doesn't mean that some people aren't using price as an opportunity to win that incremental order.

One final question for me.

For modeling purposes and I would stand that a lot of these things are uncertain and you are being cautious, if you were to sort of figure what would be the gross profit margin compression anticipating market response on price and the cost savings you've taken out what would be the likely compression of gross profit margin over the next 12 months as a result of price cost.

Well, I think from the information that we've provided you can take our $1.65 billion of revenues and our margin adjusting for streamlining charge, we are in that 10.9% on $1.65 billion plus, so if we are down 15-point our variable contribution margin you can use whatever you think a typical manufacturing would be, 25%, 30% doesn't matter, so now you have a base case, right, and so from that base case we have a pretty good track record of outperforming, if you will, our expected 70 basis points or more of improvement on margin.

I do feel that there are opportunities in the marketplace for us to claw back some of that.

We pointed out our acquisitions.

We pointed out other areas from new products.

So I think you have an ability to create a model that will allow you to have some view into our business, you may be a person who thinks the markets are going to be down less, the same or more.

So I think all folks could create their model and understand what we are attempting to do here.

I think that our past is really a prolong for our future in terms of our ability to manage the business around margin.

Material costs, we said we expect to be flat, though that's always subject to change.

So the headwinds have more to do with the market dynamics than they do on the volume side than really anything else I would say.

Ricky?

No, I would agree with what you've said.

I don't know too much more I'd add.

Thanks and good luck.

Thank you.

At this time there are no further questions.

I will now turn the call back over to Vern 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 very bright.

Thank you for your support.

This is will conclude today's conference call.

You may now disconnect.