Acuity Brands Inc (AYI) 2010 Q1 法說會逐字稿

Good morning, and welcome to the Acuity Brands 2010 first quarter financial conference call.

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

(Operator Instructions) Today's conference is being recorded.

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

Now I would like to introduce Mr.

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

Sir, you may begin.

Thank you.

Good morning.

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

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

I would like to remind everyone that during this call, we may make projections and 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 projections or forward-looking statements.

Now let me turn this call over to Vern.

Thank you, Dan.

Good morning, everyone.

Ricky and I would like to make a few comments.

Then we would be happy to answer your questions.

Our results for the first quarter of 2010 reflect the ongoing turmoil in residential and nonconstruction markets caused by the depressed economic conditions throughout most of the world.

We are not immune to these conditions.

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.

In fact, our results for the quarter were better than our internal expectations.

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

Additionally, we continued to achieve success on a number of strategic priorities including the continued introduction of new, more energy efficient products and solutions, expansion in key geographies and important channels, further gains in productivity and substantial improvements in cash flow.

I know 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 $392 million, down 13% compared with the year-ago period.

Operating profit was $42.7 million, up $9 million from $33.7 million reported in the year-ago period.

As you know, we recorded a special pre-tax charge of $22.1 million in the first quarter of last year to accelerate the streamlining of our organization, for which we are now realizing full benefits.

Operating profit margin in the quarter was a remarkable 10.9% in spite of the decline in net sales.

Adjusting for the special charge in the first quarter last year, we are very pleased that our operating profit was off only 23% on a decline in sales of 13%, reflecting our tactical successes, including improved productivity throughout the company.

Diluted earnings per share from the continued operations were $0.53 compared with $0.47 from the year-ago period.

The special charge reduced diluted EPS by $0.34 in the first quarter last year.

Lastly, net cash provided from operating activities this quarter was a healthy $41 million.

In the year-ago period, we used $8 million to fund operating activities and expected a significant turnaround.

While we are disappointed at our sales and profits decline compared with last year's results due to the continued falloff in economic activity, we see the rate of decline slowing as we gain from the execution of our tactical strategies to provide greater value for all stakeholders.

In addition, we are very pleased with our operating margins and cash flow performance, particularly in this demanding and fiercely competitive environment.

We have been able to produce these results because of the great dedication of our 6,000 associates and progress made in four key areas of strategic focus: customer service, pricing and margin management, geographical, channel and product portfolio expansion, including significant additions to our stable of sustainable and energy efficient products and companywide productivity.

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

We are up approximately 13% from the year-ago period, or about $60 million.

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

Overall, we estimate that unit volume, excluding acquisitions, was off about 13% in the first quarter compared with the year-ago period.

Benefits from acquisitions, which added more than 3% to our sales change, were more than offset by negative price and channel mix changes.

For us, this was the fourth 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.

The hardest hit areas continue to be those where housing -- the housing collapse was most severe, including California, Nevada, Arizona and Florida.

The first quarter a year ago still had some strength in certain channels as projects were completed, though residential and retail were falling off at a precipitous pace providing a glimpse of what was to come for all construction in North America.

Additionally in the current quarter, we continued 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 stagnates.

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

Having said that, we are starting to see some glimmers of opportunity in certain areas such as renovation driven by energy savings, projects funded from the government stimulus program and share gains in certain geographies and channels such as the home improvement.

While the impact from these areas did not significantly contribute to the current quarter, we are hopeful they will provide growth opportunities for us in the second half of 2010.

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

I would like to now turn the call over to Ricky to make a few brief comments in our overall financial performance before I make some remarks regarding our focus and efforts for the second quarter and the balance of 2010.

Ricky?

Thank you, Vern, and good morning, everyone.

I will highlight a few additional items regarding our income statement.

I then will discuss our cash flow and financial condition as well as a summary of the new debt issue and the tender of our 2010 public notes that we completed in December before turning the call back to Vern.

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

Net sales declined 13.3% in the three months ended November 30, 2009, compared with the prior year period.

As Vern said previously, this decline was primarily due to reduced shipments and negative price and product mix, partially offset by the contribution from last year's acquisitions and slightly favorable foreign currency exchange rate movement.

Gross profit for the third quarter was 41.2% of sales.

This gross profit margin reflects an increase of 250 basis points compared with the year-ago period.

This favorable gross profit margin comparison reflects the continuation of the price to cost parity we achieved last quarter following the end balance we incurred in the first three quarters of last year when you might remember we experienced a rapid rise, then a few months later, an equally rapid fall in material and component cost which we were not able to recover through pricing.

Additionally, contributing to this improved profitability performance were savings from the streamlining actions, contributions from recent acquisitions and benefits from ongoing productivity improvements.

Selling, distribution and administrative costs in our first quarter of fiscal 2010 was essentially flat with the prior year period.

Reductions in costs that tend to fluctuate with volume such as freight and commission as well as benefits from the streamlining actions taken last year were mostly offset by higher incentive compensation accruals, selected investments in sales and marketing and added resources for development of new products and services.

While these investments are negatively affecting our short term performance, we believe they will improve our market position and accelerate profitable growth opportunities, enabling the company over the mid and long term to create greater value for all our stakeholders.

Operating profit was $42.7 million for the three months ended November 30, 2009, an increase of 26.7% over last year.

Operating profit margin increased 340 basis points to 10.9% of sales in this quarter compared with the prior year.

The prior year period included a pre-tax special charge of $22.1 million for streamlining actions.

Excluding the special charge from last year's results, adjusted operating profit would have decreased 23.3% in the first quarter of fiscal year 2010 compared with 2009.

These streamlining actions generated savings in the first quarter of fiscal year 2010 of more than $11 million compared with approximately $2 million in the first quarter last year.

We estimate these actions will generate annual savings of approximately $50 million, and we believe we are at this run rate now beginning with this second quarter.

You may remember we realized approximately $28 million of savings from these actions in fiscal year 2009.

Interest expense net was $6.7 million for the first quarter of 2010 compared with $8 million last year.

The reduction is primarily due to the lower average borrowings.

Miscellaneous expense, which is due primarily to the impact of exchange rates on foreign currency items, in the first quarter of physical 2010 we had expense of a half a million dollars, which is in stark contrast with the income of $4.2 million we earned last year as a result of the significant strengthening of the dollar in the first quarter of the prior year.

The effective tax rate this quarter was 34.4%, yielding a net income of $23.3 million and diluted EPS of $0.53 per share.

We were required, effective this quarter, to adopt a new accounting standard regarding participating securities which reduced basic and diluted EPS for the first quarter of 2010 and 2009 by $0.01.

Now let's look at the cash flow for the quarter ended November 30, 2009.

As Vern mentioned earlier, cash flow provided by operations for the quarter was an impressive $41 million, a strong improvement over the prior year period when we used $8.2 million of cash.

The primary drivers for this huge turnaround was significantly lower incentive compensation payout in the current quarter compared to last year as well as no repeat this quarter of the large decline in accounts payable which occurred in the prior year's first quarter, attributable mostly to a reduction in purchases last year in relation to lower anticipated sales volumes.

Operating working capital calculated by adding accounts receivable plus inventory and subtracting accounts payable decreased by approximately $4.5 million to $201.4 million at November 30, 2009 from $205.9 million at August 31, 2009.

We ended the first quarter of fiscal 2010 with a cash balance of $48.3 million compared with $18.7 million as of August 31, 2009, an increase of almost $30 million.

As of November 30, 2009, our total debt was $229.3 million, consistent primarily of the 200 million 8.375 public notes due next August.

As most of you already know, in December, we strengthened our liquidity position and extended our debt maturity profile following the issuance of $350 million senior unsecured notes at 6% interest rate due in fiscal 2020.

A portion of the net proceeds from the issuance of the notes was used to retire approximately 175 million of the 200 million 8.375 publicly traded notes due in August, 2010.

Additionally, we expect to retire without premium or penalty the remaining $25.3 million outstanding balance of the three year 6% unsecured promissory note.

We will record a loss of approximately $9.5 million in our second fiscal quarter of 2010 related to the costs associated with the tender offer of the public notes, and we will capitalize approximately $2.9 million of deferred issuance costs related to the new notes that will be amortized over the 10 year term of the notes.

In addition to this strengthening of our capital structure, we also have availability under the revolving credit facility of over $242 million as of November 30, 2009.

This facility does not mature until October, 2012, almost three years from now.

So clearly, we feel very good about results of recent capital structure transactions and the financial flexible it provides us.

With this added liquidity, our prioritized use for this cash as well as our expected strong future cash flow remains as follows: First, investments in organic growth as evidenced by our increased focus over the past years on new product and service development and enhancing our market presence; second, strategic acquisitions in alliances to address product gaps or opportunities to leverage capabilities with our technology partners; and lastly, stock repurchases, primarily to offset dilution from stock issued for recent acquisitions or as part of our long term incentive programs.

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 a very challenging economic environment, especially with unemployment hovering around 10% and credit availability still scarce.

How long will these turbulent economic conditions prevail?

Only time will tell, though it seems certain sectors of the economy are beginning to show positive growth reflecting a cautionary uptick in consumer and business confidence.

However, key indicators for our primary market, nonresidential construction, continue to signal a decline in available market for 2010, though as I noted earlier, the rate of decline seems to be slowing somewhat while residential construction is showing early signs of growth from very depressed levels.

This is all widely known.

Forecasts by independent third parties continues to suggest that unit volume for construction put in place in construction market in North America could be down in the mid-teens in 2010 compared with 2009.

This suggests headwinds will continue for all companies serving the construction markets in North America, and we believe Europe is in a similar situation.

Next, while we have done an excellent job of price and margin management, we do expect pricing to continue to be very competitive in many channels and geographies.

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

However, the actual impact in timing is difficult to predict.

Our margins in the first quarter just ended suggests we have handled this challenge well.

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

However, as I have said before, we will defend our position vigorously from competitors should they attempt to use price as their only point of differentiation.

Lastly, we expect costs for key materials and components to remain relatively constant in the second quarter compared with the first quarter of this year.

However, as we look beyond the next quarter, we see some worrisome signs that costs for raw materials such as steel and certain component costs could be an issue in the second half of our fiscal year.

We expect to be as vigilant as possible in our pricing strategies to protect our margins from this potential cost erosion.

Looking more specifically at our company, we are excited by opportunities to enhance our strong platform.

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

We continue to see opportunities in this environment, including benefits from the government stimulus program, expansion and underpenetrated geographies and channels and new product introductions, both in lighting and controls.

As the industry leader in North America, we are working diligently to expand our relationships with key suppliers around the globe to bring greater and more unique value to our customers, including products to provide superior lighting quality and sustainable energy solutions.

In addition, as Ricky noted earlier, we took proactive steps to significantly enhance our liquidity in addition to our already strong cash flow.

Our strategy is straightforward; leverage our industry leading product portfolio and market presence as well as our considerable financial strength to capitalize on market growth opportunities.

As part of this strategy, 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, geographies and channels including renovation in 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.

We continue to enjoy success in building our lighting controls platform, enhancing our product offering and greatly expanding our access to market.

While the specification cycle for lighting controls is longer than average for fixtures, we are now starting to see the benefits of our investment in this exciting and fast growing market.

Our collective controls businesses, now under the banner of Acuity Brands Controls, working in conjunction with Acuity Brands Lighting, the largest luminaire business in North America, will allow us to fully 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 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 handful of 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 second quarter of 2010 and the balance of the year.

First, the second quarter for us is typically our weakest quarter due to the seasonal nature of the construction market as well as inconsistent demand from certain customers as they balance inventories at their year-end.

Second, we expect unit volume in the second quarter for the new construction portion of the market to be down compared with the year-ago period.

How much we don't know, but our backlog at the end of November for lighting fixtures was down about 14% 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 services which we are doing at a record pace for us.

Lastly, as I noted earlier, we expect pricing in many markets to become more competitive than usual potentially, putting pressure on margins beyond our ability to raise price, 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.

While we have a demonstrated track record of successfully executing our strategies, the uncertainty and volatility in certain -- 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 in lighting control solutions, expand our market presence in key geographies, channels and sectors and enhance our services to customers will provide growth opportunities which will enable to us outperform the markets we serve in 2010 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) And our first question today is from Chris Glynn from Oppenheimer.

Thanks, good morning.

Hi, Chris.

How are you?

Good, thanks.

That top line came in pretty good it looks like, but you also talked about some of your initiatives not really kicked in yet, expecting more in the second half.

So just wondering if the end market pressure here is sizing up a little bit more moderately than you might have thought three months ago.

I would say no to that.

I believe that we have had success in penetrating certain channels where, for example, the home improvement channel, the declines there have been significantly less than the declines in other portions of the business.

We believe we're taking share there, but nonetheless, they're still declines.

I think that the overall market, and there's a lot of information coming in from whether it's the government or its dodge or global insights suggesting that the market is down further than what our overall sales decline has been.

So I don't know that we're seeing a lot of change.

Having said that, there are some channels such as homes, home starts are starting to tick up a little bit, but they're clearly at very depressed levels.

So I still am a little bit, if you will, bearish on the overall market, extremely bullish on our opportunities to gain share over the next handful of quarters.

If I look at relight, for example, our activities in the quarter were down compared to the year-ago first quarter, but were sequentially up from the fourth quarter, which is a glimmer of hope because if you go back, we sort of hit for us kind of a nader in the third quarter.

When I look at what our results are, we haven't reported this, but we're up double almost from that third quarter period.

So we're starting to see some activities out there.

On the stimulus bill side, our sales forces are quoting projects that we believe are directly related to stimulus dollars.

So I would expect those to start to impact our business, really in the second half of our fiscal year.

Vern, did you say the relight was up 2X what it was at the nader?

Almost.

Almost 2X, and that was in the third quarter of last year.

Right.

And then at the end of the August quarter, I think backlog was down 23% and yet you reported sales down 13%, now backlog down 14%.

Is this favorable kind of forward sales year-over-year to backlog dynamic kind of with us here?

That's a great question.

We are working very diligently to improve our backlog dynamics vis-a-vis what's late, so on and so forth.

So I think in the year-ago period, you would have had a little bit more late backlog than what we have today.

We are -- our cycle times, our productivity, our capability in the marketplace continues to improve every day and as a consequence of that, we're shipping, very, very quickly.

As orders come in, we're turning those things around.

So backlog becomes a little bit less of a leading indicator compared with say, years ago.

But it was a favorable trend.

It's a great question.

We were down significantly, and we've come back.

We are fighting for every single order and every single channel, and we're doing it with product differentiation, service differentiation and it's pretty competitive out there right now, but I believe we're doing a good job of price and margin management in that respect as well.

Great.

Thanks for your help.

Thank you.

Our next question is from Peter Lisnic from Robert W.

Baird.

Good morning, gentlemen.

Good morning, Peter.

Good morning.

I guess first question to break down the profitability a bit better or more, if I look at the sequential gross margin improvement, 210 basis points, gross profit's only down $4 million and sale's down $30 million or $31 million.

You point out in the Q, I guess, that year-over-year materials costs was a big driver of that.

But from fourth quarter to first quarter, I wouldn't think that materials costs would be a significant driver.

So can you help us get behind what's driving that gross margin improvement outside materials costs, maybe help quantify that?

And then is that 40-ish percent gross margin something that is a new bar going forward for Acuity?

Sure.

Let me answer most of the question and I won't answer the last portion of the question, and then I'll turn it over to Ricky to answer the rest of the first portion of the question and not the last portion.

Anyway, the fourth quarter of last year and the first quarter of this year are really the first couple of quarters where we believe the price -- the market price relationship relative to cost was in parity relative to what had occurred in the first three quarters of 2009.

As Ricky pointed out in his comments, price esca -- excuse me, cost escalation really started to occur significantly in the summer of 2008 and carry forward into our first quarter, which would have been the fall of 2008.

We absorbed all of those costs, if you will, because as prices exploded for raw materials and component parts, the market demand fell off dramatically.

You may recall that we attempted to raise price in August of 2008.

I don't believe that much of that price really stuck.

We had previously increased prices in May of 2008.

I believe that we're kind of at that level of pricing today.

When we look at our cost indices, we are pretty close to where we were around that May time frame of 2008.

So I believe that the relationship that you see and the margins that you see are reasonably reflective of current conditions.

Having said that, and I will allude to your question about a go forward basis, we do see clouds on the horizon vis-a-vis raw material costs and certain component costs.

For example, steel.

Steel starting to tick up a little bit, and I think Ricky made comment on that.

So we are watching that very, very carefully.

Petroleum, $140 a barrel down to $40, now back to about $80.

So we're watching these things very, very carefully, and we will respond with pricing, and we believe that to the extent that material costs move up in a significant fashion, we will put through pricing.

How much will we be able to hold of that?

We don't know.

We won't know until we get there.

Obviously, our track record is pretty good of holding and realizing price.

So we will watch that very, very diligently.

Ricky, maybe you can comment as well.

Yes.

Peter, a little more on the sequential.

I think Vern talked well about year-over-year.

The sequential improvement, we are seeing additional benefits from the streamlining actions, not huge, because we're pretty much at the full rate but at about $10 million last quarter, we said over $11 million this quarter.

So we got some benefit, and some of that's in SG&A, but most of that is up in cost of goods sold as the production that we moved and so forth is now behind us, and we're starting to hit all cylinders in the new locations.

We did see a little bit of benefit sequentially from material and component costs.

Material and component costs actually dipped a little below where they are today and have now are come back up a tad.

As Vern said, we're watching that carefully to see where it may go.

So sequentially, there's a modest benefit there.

Productivity gains, we continue to test the organization for that, and that contributed sequentially and hope to continue to see that trend.

And as I say, the efficiencies for moving production and so forth are now starting to tick in and some of the disruption of that relocation of production is behind us.

And then the acquisitions that we made, as they become -- gain more traction in the marketplace and as we convert sales channels over to selling our controls and so forth, they're higher profitability at the gross profit line and as we continue to grow that business, or at least not see it decline like we've been seeing the fixture and luminaire side of the business, that's helping our gross profit margin as well.

So it's no single item that's used individually, but you look at a variety of things that are beneficial and add it up.

That's contributing to some of that improvement.

And, Pete, Ricky, I'm going to ask you to comment on this.

The controls business also has higher SG&A.

Yes.

You can comment a little bit on that.

Yes.

Their overall operating profitability is higher than our average and as we've never quantified that, and I'm not going to do that today either, but it is noticeably higher.

But the gross margin, its business model would result in much higher gross margins than our average, but much more costs to serve in the SG&A line, a lot more quoting activity, more engineers as the customization of these solutions are done, we tend to pay higher commission on these types of products.

So the SG&A component is higher, too.

So as that becomes a bigger part of our business, it will influence the percent of sales in both gross profit in a favorable way and operating costs in a negative way.

Okay.

And that actually gets to my next question, and that's whether or not you can give us maybe order of magnitude in terms of what incremental incentive compensation costs were year-over-year and what the marketing and spending was as well, because it looks like the SG&A number, relatively speaking, the control there wasn't -- I mean, the comparison I should say wasn't as great as it was on the gross margin line.

Yes.

First the acquisitions clearly contributed to that amount.

I won't quantify that exactly, but that contributed.

Incentive comp was under $3 million, $2.5 million to $3 million type increase year-over-year in this first quarter compared to the year-ago quarter when we, of course, saw the dark clouds forming and realized that.

And then the investments we're making are in that same level of magnitude, in the low, low to mid-single digits of millions of dollars.

We're adding engineering talent in the production area.

We continue to add feet on the street in the renovation area and the government in selling government opportunities.

So that's the other contributor to the essentially flat SG&A.

So the benefits we got from the streamlining and productivity gains were mostly offset by these investments as well as the acquisitions.

Okay.

And do you expect the investments to continue through the rest of the year or --

I'm not seeing incrementally sequentially from this quarter, meaningfully more investments, no.

We'll have some, but not meaningfully But we will have another quarter or two of the acquisitions before we anniversary their acquisition that we anniversary the LC&D acquisition which was completed the end of December, and then we completed the Sensor Switch on April 20.

So that impact relative to year-over-year comparison we will have for the next quarter or so, but I'm not looking at meaningful additional investments.

Some, but not meaningful sequentially.

Pete, this is Vern.

I would like to make sure that all folks on the call understand that we are continuing to hold the spend levels for key areas of technology and innovation.

We're adding to our sales and marketing capabilities because we feel that with the kind of product developing capabilities and products that are coming out, we cannot pull back on those levers.

So we're asking the other portions of the organization to continue to drive productivity improvements, cost saves where we can so we can make these types of investments.

So when you have sales that are down 13%, but you're holding those kinds of spend levels, typically folks would look to cut back in those areas, and we think that that is short sighted.

And so we are continuing to drive that value, and we think that it will yield benefits obviously for us in the second half and beyond.

Okay.

Thank you for the color and happy new year.

Same to you.

Thank you.

Our next question is from Matt McCall from BB&T.

Thanks.

Good morning, everybody.

Good morning, Matt.

Let's see.

Vern, it was interesting, you've said that you've seen the rate of decline slow a bit in some of your end markets, and I think you specifically referenced housing.

It sounded like you were talking about multiple end markets.

Was there anything else that has shown improvement?

Well, improvement is really -- I don't know if that's the right way to say it, but the notion of slowing decline, you have to start there --

Right, right.

-- as a base, and so we're seeing that.

I would say that in certain markets, institutional work, healthcare work, government spending, those areas continue to operate at a level that's better than commercial office buildings which are still in the doldrums, and we expect to be for a while.

Warehousing, we're actually starting to see some of the retailers come back more on the renovation side.

So there are pockets of opportunity that are working their way to offset areas that are still declining.

But it's tough to piece it all together other than to say that, let's go after those areas that do show opportunity where we can add value.

Another area again, not huge for us, but did contribute to some (inaudible) down and sequentially some optimism is in the international side.

Some of that is currency, but also Spain, for example, the stimulus money that they've put into the deal were very infrastructure focused in Spain, and we're seeing that impact quicker there than we've seen it here.

So that was another area where we've saw some less down than we have been experiencing in prior quarters.

Okay, yes.

Less down, not better.

That's what I should have said.

And, Vern, on the change in the trends in relight, you talked about approximately doubling from the bottom in Q3.

Is that a result of our release of more projects?

Is it the impact, if there has been any integration of your new controls offering, is it the market getting better, or is Acuity taking more, or is it both?

I would say that it's probably a combination of both.

But if you recall, the third quarter of last year, our fiscal year, I mean, people were completely paralyzed.

No one was spending any money on anything.

So it was projects that we're finishing up.

We're now starting to see businesses come back to the floor and say, I need to do things that are right for my business.

I can save energy.

I can have better lighting.

I can do things that help make my business better and I'm willing to invest in that.

So I think that the renovation markets, like other markets, people are starting to look at investment opportunities and are spending money again, albeit at a slower pace.

Because our first quarter in that renovation relight on a consistent basis measuring on a consistent basis is still down from the first quarter a year ago, but it's up from the bottom, almost a doubling, not quite.

Alright.

Okay, and then I wanted to hit the controls.

Not trying to get too specific on this number, but you that said you estimate the controls market, your addressable controls market, is about $800 million.

If I remember correctly, I think we were talking about a $700 million market when I guess the acquisitions occurred.

Again, not trying to pinpoint a number, but is that an area that has continued to see growth in this environment and kind of post the timing of the acquisitions?

Yes.

I believe that first of all, our numbers on market size are becoming more honed, and so we think we understand that a bit better.

But the controls businesses for us actually showed a decrease kind of in that earlier, that second and third quarter sort of stuff.

If I look at their -- put the acquisition dates aside, if I look at their business, we actually saw a flattening of their growth.

In some instances, a decline.

I believe we're now starting to see that business come back.

So you have two things working.

One, you have greater access to market because of their association now with Acuity Brands and our multiple sales forces.

You're now starting to see the specification cycle start to dig in.

So that's a positive.

And I think you're also now starting to see the marketplace come back, and so all three of those factors I think are influencing our business.

And so therefore, we believe that the second half should start to see a return to actual unit volume growth in those -- in that particular market or those three (inaudible).

Okay, that's helpful.

Then one other one.

Again, not trying to get too specific on the number, but not a huge change.

but your CapEx guidance, I believe we had it at $35 million before.

I think that was in our model, I think that came from you.

Now it's 30 million.

If that was the guidance and you pulled it back a little bit, anything that we should read into that number just pinpointing that number better or any change in your outlook for spending?

I would say again, Ricky and I are looking at each other here, and we've not turned down a single capital expenditure request.

We're becoming smarter about how we spend our money, how we invest our money, how we work with our partners on a global basis, the investments that they make versus the investments we make.

And so it's how the business is flowing.

Most of that investment is going to be for tooling for products and for capabilities that allow us to better serve our customers.

So I don't think you should read too much into that number at all $30 million to $35 million feels like the right number.

Maybe a little higher, maybe a little lower, but it won't be materially different than what we've provided.

Okay, okay.

Thank you all.

Congratulations on another good quarter.

Thank you.

Thank you.

Our next question is from Craig Irwin from Wedbush Securities.

Thank you for taking my question.

I wanted to dig in a little bit into the impact of the makeshift boards residential as far as the overall pricing and mix impact on the company.

Vern, I think you mentioned that Acuity on a whole is approximately back to May, 2008 pricing levels.

Does this indicate that the vast majority, if not all of the negative pricing that we would calculate, backing out currency and acquisitions, et cetera, would be coming from that mix shift?

While it's very difficult to precisely calculate price versus mix, our guesstimate is that it's a little bit more than half of the price mix's price.

Ricky, I think that's kind of what we're guesstimating right now.

Right.

I think that as we look on a go forward basis, that relationship of price mix probably becomes -- well, it really depends on market conditions and the pricing in marketplace that we see.

It's difficult to predict.

The mix shift that is going on is really primarily channel mix.

If it we look at our sales as a percent, so 100% is the total, we probably saw a point or two of mix shift going to the home improvement channel in our international business.

And it's not that those businesses are less profitable in terms of return on investment or even operating profit, but they just have mix differences in terms of what they do on sales.

Our selling prices through the home improvement channel are just simply less on a per unit basis than they would be in potentially other channels where we're selling into very large projects, very high value add products.

The products that are going through the home improvement channel really have -- are targeted towards features and benefits that are consistent with that channel and the way those customers want to be served.

But our profitability, we work very hard to make sure that we structure each of those channels to serve them in a way that contributes to our overall profitability in a favorable way.

So that's -- I think Ricky, I captured the sum essence of it.

Maybe --

Yes.

And I just want to make clear, and maybe I didn't fully hear you, Craig, but what Vern was saying in his prepared remarks is not so much the price has improved since then.

It's just the cost where we had the negative cost parity, price cost parity, we've now gotten back to where it was third quarter, not that price changed materially between then and there.

It's the cost that changed.

More the cost that changed than the price.

I just want to clarify it was more the cost Vern was talking about in his prepared remarks versus pricing changing materially over the last 12 months.

Thanks for that clarification, and just one thing to confirm on this.

So the SG&A, Vern, for sales through the home improvement channel, I would expect those to be substantially lighter than the rest of the corporate average.

I mean, is there something maybe you can quantify, or maybe you can give us a little color there?

We have not quantified that and won't, but the way that that channel wants to be served is dramatically different than the way other channels want to be served.

And so the cost structure and the -- both in the gross profit line as well as in the G&A line are very different.

So the mix, when you have a point movement as a percentage of your total sales, it does skew that a little bit.

But when you see the bottom line, the operating profit line and you see the cash flow that comes off and that return on investment, it's very important to have the balance that we do, and we've managed those portions of the businesses very differently.

Great.

My next question was about your new products.

I saw that the license agreement fairly recently signed with Phillips, know that you've been working to introduce a broad number of LED and fluorescent-based products for areas of the market that are more likely to grow over the next few years, probably offer customers some pretty attractive economics.

Was hoping you might be able to give us a little bit more color on the contribution of these products to your overall sales mix and the approximate number of product introductions in each of these categories and what we could potentially look for from these products in the next couple years.

Sure.

Very good question.

In 2009, we introduced approximately 100 product -- new product or product families, I'm guesstimating just off the top of my head around 60% of those are roughly in the LED space.

In 2010, we will continue at that rate of introduction and maybe actually even accelerate that given the opportunity within the controls space to provide not only components, but solutions to customers.

So very, very excited about that.

The contribution off of those, you would expect to be somewhat higher than say, products that have a little bit longer or have been around a bit longer, but the investment that we make in terms of the engineering talents, so on and so forth, consume some of that.

So there's a crossover point in the product lifecycle when the volumes start to reach a significant point where that contribution is now obviously paying back.

Our vitality index as an overall company is probably slightly north of 10%.

So, sales in the current period from products introduced over the last three years, and that number in our specialty businesses is considerably higher, but we are doing, I think, quite a good job of moving that, and I think that over the next three years, you'll see that vitality index move up and as a consequence,we would expect not only from better margins off of those products, but continuing to drive productivity, both in terms of how we manufacture as well as material costs productivity.

We would expect to see our margins continue to move in a favorable way.

By the way, I would point out, and those on the call may find this interesting, the last time we generated $390 million of revenues, I had to go back to the first quarter of 2005.

Our margins now, I'm doing a little bit of an apple and an orange here, but our operating profit margins were around 6%.

We're up almost 500 basis points more than where we were during that same period in 2005.

So it's a significant change both in mix, productivity, manufacturing footprint, how our associates do things, and we're now taking that investment and putting it back into the business in more R&D, more marketing, more sales folks.

So, we like what we're doing.

We just don't like the environment that we're in.

Great, that's fair.

And just a follow-up on that line, the relight business is obviously very much an ROI-based sale.

It may be a refurb sale, but a lot of the transactions that happen out there are based on specific financial returns from lower energy consumption.

When I talk to people in the LED market, a number of sales are actually being made now based on returns to customers.

Some of those are getting down below two years.

Do you think that this business starts to really make economic sense for your customers over the next couple years as far as offering a pretty strong payback like the traditional fluorescent relight business?

Yes.

Two things.

One, we have great capability to provide folks varying levels of good, better, best in terms of the value proposition.

Folks who are interested in just payback and not quality of light, we have capabilities there, though the -- that's probably not as attractive as folks who actually do understand quality of lighting and energy payback.

So it depends on where you are on the spectrum, but we feel that the opportunity for renovation.

So that is someone who owns their space, they're staying in their space and they want to renovate it.

Most folks are interested in quality of light as well as energy savings, and we see that opportunity, particularly as energy costs continue to rise, to be a growing market, and we actually internally have structured our business and created a vertical and a team that is going after that market in a very aggressive way, just like we have a team going after government, just like we have a team going after other verticals in those markets.

So I do see this as a growth market on a go forward basis.

I also see the opportunity in terms of the tenant fitup world.

There's a lot of buildings out there that are vacant today that will go through refinancings, probably new owners and as those new owners come in with different capital structures, you're going to see them incenting people to move into their space.

So while new construction for commercial buildings is going to be soft for quite some time, it's my expectation that as the economy moves back as a lot of these buildings find new owners, you're going to see a lot of activity.

That's different than renovation, but that tenant fitup world will have the same economics and the same opportunities for us.

And I would add on the LED side, we are beginning to see meaningful reduction in the cost of the LED package, both the chip and the board and in some cases, all the way through to the engine.

Plus we're seeing the efficacy move up very aggressively, so not dissimilar to what you've seen in many other electronic industries and Moore's law is starting to play here in terms of productivity and efficacy going up and costs coming down, that is making that ROI for LED attractive.

But on the fluorescent side as well as other technologies, electronic HID and so forth, we're seeing them move the bar as well.

They're not stagnant.

So we're seeing longer life.

We're seeing better opportunities there.

So as Vern says, we got a good, better, best proposition and looking at what the solution best for the customer is and feel that we can meet many of their return on investment hurdles and products today.

And as you point out, I think over the next handful of years, more products will come into that ROI hit rate.

Great, thank you.

And my last question was about the lighting controls market.

I believe I'd heard you say in the past that share in your channel of existing distributors, your existing customers was an opportunity there, and I was wondering if you had a little bit of an update for us.

I didn't quite hear the question.

He's talking about the share in the control market where our channel partners, particularly our agents and so forth, enjoy a much greater share of the market than the businesses we acquired had historically had, and Vern spoke to that in his prepared remarks regarding the opportunity to leverage all of our various sales channels and accesses to market to grow that business at a rate greater than the market.

So, Vern, you may want to elaborate more questions around that.

Yes.

And to us, I think I mentioned this earlier, three key opportunities: one, that market is going to grow.

Number two, our access to that market because of the strength of our various sales forces, the share that our agents, as Ricky mentioned, is more consistent with our overall share of the lighting fixture market, if you were to apply that to the controls world.

So we've got quite a bit of head room and opportunity there.

And then lastly, I believe that as we move and migrate more to integrated lighting and control solutions, new products will help us drive share gains because of the capabilities that we have as both a lighting and a controls company.

So we are very optimistic if you look out over the next handful of years about the growth potential of our organization in this space.

Great.

Thank you very much.

Congratulations on the solid quarter.

Thank you.

Thank you.

Thank you.

(Operator Instructions) Our next question is from Glen Wortman from Sidoti.

Yes, good morning, guys.

Good morning.

Can you just comment on the timing and size of the market share gains that you're seeing in the home improvement channel?

No, actually.

All right.

Part of the reason is because it's difficult on a single quarter basis to say this is what this number looks like.

But what we believe is that based on that channel's same store sales, and they're doing well, where we see what our comps are doing and the opportunities that we have in that channel with new products going into, again, that channel, we think that we're getting more space and therefore, our numbers in that channel are not down anywhere near what we are as a company average.

So we're still down period over period.

For example, and I'll just use this as an example, Home Depot, which represents about 11% of our revenues, and that's published in our 10-K, we kind of guesstimate that we were up a little bit from that in this -- we're talking a point in this particular quarter.

Again, one quarter does not necessarily make a trend, but as a percentage of our total revenues, we were up a little bit more than that.

We've enjoyed getting additional SKUs, more shelf space in the home center channel, and that's contributing to our growth in that marketplace as they like what we're doing, the service we're providing, the product innovation.

We introduce many new products every year into that channel, and that's afforded us the opportunity to earn more business from them from either house brands or competitive brands that they have that's accelerating our performance there relative to the overall market.

Okay.

And then just to follow up on the SG&A expense, just to be clear, so going forward, excluding any impact from sales commissions, we should not really expect any material change up or down over the next several quarters?

No significant new investments we're looking at.

You will see some benefit where we were, I said over $11 million in savings from streamlining.

A portion of that's in SG&A.

A portion of that is, of course, is in cost of goods sold.

We're now at, call it over $12 million run rate to get to that $50 million annual.

So we'll call it $12.5 million to make all the mass things.

So you're going to see a little bit of improvement there, but -- and then as I highlighted, Glen, we do need to think through for the year-over-year comparisons, not sequentially, will have the control business as with higher SG&A in there.

But sequentially, a little bit of improvement is more the streamlining, but not materially.

But nothing significant from a run rate sequentially on the fixed costs.

You're right to point out for both commission and freight, which is in that number, which isn't an insignificant portion of our overall SG&A.

That is pretty variable, and will fluctuate with sales.

Okay.

And just in the relight market can you just maybe comment on where you're generating most of your sales today and then where you see maybe the biggest opportunity going forward, whether it's in offices, retail stores or whatnot?

I would say that we have a reasonably balanced model.

Certainly large retailers are an opportunity, schools are an opportunity, healthcare facilities are an opportunity and very, very specifically, the industrial warehouse market is a huge opportunity and continues to be.

So I would say that it's those basic areas that we have been participating in and we will accelerate our opportunities in those markets by directing some of our sales forces to more specifically some of those verticals that I just mentioned.

What I would add to that is government, that's an area where a fair amount of the stimulus money has been focused specifically on that.

Government buildings, military installations and so forth, and we have added capability internally as well as working with our channel partners to more aggressively seek at least our fair share, if not more, in that market, and that's an area we have not been as focused on historically and could be a delta improvement to us going forward.

Okay.

And actually, finally one more question.

You did allude to some improvement maybe on the international front.

Do you think that maybe you can -- are you going to focus on perhaps gaining share internationally and penetrating those markets?

We have -- I mentioned in our last call that we see opportunities internationally.

We do not -- our business, we're probably in the -- 3% to 4% of our total revenues come from international.

We've restructured our international group to become much more local in terms of what they do, and I would see it as a growth opportunity on a go forward basis.

We haven't specifically quantified, that but if we could start getting a little bit more out of that 3% to 4% and the team that we have focused on it are experts in international business.

So we're very excited about what that future will bring for us.

One caution I would put, just feel I need to, is Spain is doing very well, as I highlighted before.

I actually saw a consensus forecast that was put out by economists from each of the Wall Street firms, and I think Spain was forecasted to have the worst GDP growth over the next year.

So that's an area where we're doing fairly well at the moment based on stimulus.

Not a big part of our sales, but want to suggest it's going to move the needle much, but would want to highlight that's a benefit that may evaporate as we look forward because we're benefiting from some stimulus money that once that's spent, we could see a meaningful dropoff in that.

Again, it's a percentage point or two of sales.

Not a big part, but did want to be clear on that since we're separating out international.

Okay.

All right.

Thank you for your time.

Thank you.

Thank you.

Our next question is from Steve Gambuzza from Longbow Capital.

Good morning.

Good morning.

I wanted to ask a follow-up on the new product introductions and the product vitality.

I think you mentioned earlier in response to an earlier question that you had approximately 100 new products introduced in 2009, 60% of which were in the LED space.

I was wondering if perhaps you could comment on what percentage of your fiscal year 2009 sales approximately these new products or similar products introduced in 2008 contributed to overall revenues this past year?

Yes.

Are you specifically asking about LED-based products?

If you could talk to LED specifically, that would be great.

And then more broadly, just overall new product introductions.

Yes.

I would say that the LED-based product, and let's exclude emergency, because we were the first company almost two decades going to introduce LED capability into emergency-type equipment or products, I would say that it's de minimis.

We are using LEDs and have been for quite some time in our in grade line.

We're introducing LEDs.

So the impact and this, I believe, would be true of most companies, is quite de minimis, and a company of our size is very de minimis at this point in time.

When I think about 2010, when I think about the opportunities of that and beyond, we're seeing a great deal of interest and for us, it rounds out our portfolio of good, better best.

But we're continuing to, as Ricky pointed out earlier, introduce new products, new capabilities and new solutions that are not just LED-based, but they're part of a broad family that may have that, so --

de minimis, is that like below $20 million of sales, or could you just put a ballpark around it?

I would say de minimis.

I prefer not to put a ballpark around it.

Okay.

Okay.

And what about just broadly new products as a whole?

So new products in general, our vitality rate has been moving up very nicely over the last handful of years and, gosh, if I had to look at us as an overall company, I would say that we -- you go back five or six years ago, we were probably low single digits in term of that product vitality.

We have over that time period dramatically changed, and it depends on how you measure it.

We've dramatically changed our portfolio.

A significant percentage of our portfolio is now energy star, energy efficient products.

So that vitality rate is changing, and I would say that you'll see us as an overall company as our mix changes from volume-based products or more light good type things to becoming more specialty products.

Even in the light goods area, you're going to see that vitality mix move up.

Is it double-digit vitality rate currently?

It's a double-digit vitality rate currently, but it's in the low teens.

I would see that moving into the 20s.

We've got a target to get it into the low to mid-20s, again, recognizing a big part of our business is volume light goods.

So it will be much lower bring bringing the average down.

You look at controls, you look at the specialty products, would expect it to be much higher than that.

And the way we measure that Steve, is based on sales from products that we introduced over the last three years, just to be clear what percent of our sales or products we introduced over the last three years (inaudible).

So I think some of your earlier comments about the growth potential of the lighting controls market as some kind of third parties have speculated this could double or triple over the next several years, that would kind of be baked into your objective of reaching a 20% product vitality ratio?

Not just the market growth, but the new products that are there.

We've introduced, for example, out of the Sensor Switch company end light, which is a new product that's gaining traction.

It's a holistic energy management system capability continue to put in new products in our relay as well as in our sensor line.

It's not just the market growth, but it's also us introducing new products to win in that marketplace.

And Steve, I would also say, and I think this is very important, the specification cycle or the number of the types of products that are LED-based fixtures would be targeted towards -- have a fairly long specification cycle.

And so as a consequence, as we're introducing these things, we're ramping these things up in a dramatic way.

But what I'm excited about is it's about the whole portfolio.

I mentioned in previous calls, we introduced our contractor select version, which is to be very competitive in that good category where we had product that we were trying to use that had features and benefits at price points that probably were a little too high.

Well that portion of the marketplace, at least for us, our business is up 140% on a quarter-over-quarter basis, meaning first quarter of this year to first quarter of a year ago.

So while it's not a huge number relative to our overall revenues, these are the kinds of areas and in the things that we're targeting where we see opportunity to protect and build out our franchise in LED-based fixtures is just another example of that opportunity.

But I think that as we look out over the balance of 2010 and into 2011, as that specification cycle takes hold, as these products are introduced into the marketplace, you're going to see a dramatic shift in terms of our mix towards those products.

Thank you very much for that.

I think a lot of these LED-type products are more focused on new construction, although there's certainly a renovation story.

There ain't a lot of new construction going on.

Great.

Thank you very much.

Thank you.

Thank you, and I'm showing no further questions at this time.

I would now like to turn the call back over to Mr.

Vernon Nagel for closing remarks.

Thank you for your time this morning.

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

Our future is bright, and thank you for your support.

Thank you, and this concludes today's conference.

You may disconnect at this time.