Acuity Brands Inc (AYI) 2010 Q2 法說會逐字稿

Good morning and welcome to the Acuity Brands 2010 Second 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.

And now I would like to introduce Mr.

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

Sir, you may begin.

Thank you.

Good morning.

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

We are Webcasting today's Conference Call at www.acuitybrands.com .

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

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

Please refer to our most recent 10-K 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

Thanks, Dan.

Good morning everyone.

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

Our results for the Second Quarter of 2010 continue to reflect the impact a very weak economic environment is having on the residential and non-residential construction markets throughout the world.

While our adjusted results for the quarter were essentially flat compared with the year ago quarter, upon closer examination, I believe we actually executed very well overcoming a number of challenges precipitated by the economic environment.

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, new important vendor relationships, further gains in productivity, and substantial year-over-year 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 $383.5 million down less than 1% compared with the year ago period.

Operating profit was $27.8 million down about $800,000 or 3% from the Second Quarter last year.

Diluted earnings per share from continuing operations was $0.16 compared with $0.34 from the year ago period.

Included in our Second Quarter results was a pre-tax special charge of $5.4 million or $0.08 per share.

The charge was primarily for consolidation of certain facilities including the non-cash impairment costs associated with the closure of a manufacturing and warehouse facility as part of our previously announced actions to streamline the organization structure.

We took these additional steps in light of the challenging economic environment and to reduce our fixed cost.

We expect to realize a payback on these actions in less than 12 months.

In addition in the Second Quarter of 2010, we concluded the early refinancing of $200 million of bonds as Ricky will explain later in the call resulting in a pre-tax loss on the early extinguishment of debt, totaling $10.5 million or $0.16 per share.

As you recall, we took a pre-tax charge of $4.6 million in the Second Quarter of last year as part of our streamlining actions.

I find it useful to add back these special charges in both quarters to make our results comparable between periods.

Doing so, I see our operating profit was the same at $33.2 million in the Second Quarter of 2010 and 2009 respectively.

Operating profit margin as a percentage of net sales improved 10 basis points to 8.7% in the current quarter over the margin reported one year ago.

Similarly, diluted earnings per share from continuing operations excluding the impact of the special charges and the refinancing cost was $0.40 for the Second Quarter of 2010 compared with $0.41 in the year ago period, a decline of only 2%.

These results are impressive especially when one considers that many of the commercial construction Markets we serve are still declining due to the weak economy.

We continue to be very pleased with our operating margins and cash flow performance particularly in this demanding and fiercely competitive environment.

Additionally our Second Quarter results exceeded our internal expectations as we continued to gain from the execution of our tactical strategies to provide greater value for all stakeholders.

We have been able to produce these results because of the dedication of our associates and the 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 Company-wide productivity.

Let me share some additional information with you regarding our net sales in the Second Quarter.

On a consolidated basis our net sales were essentially flat compared with the year ago down less than 1%.

If we exclude the impact of acquisitions and foreign currency, net sales were down approximately 5% or about $20 million.

We believe this decline was primarily due to changes in product prices in the mix of products sold as our total unit volume was off only about 1%.

While it is impossible to precisely determine the separate impact of price and product mix changes on net sales, we believe more than half of the decline associated with price mix was due to changes in product pricing.

Looking at all this a bit more closely, there are some interesting points to note.

We believe the markets we serve were down from a volume perspective in the mid-teens as a percentage from a year ago.

Certain segments of the market such as commercial office buildings and certain geographies, such as the southwestern portion of the United States, were off by more than 30% compared with the year ago period and yet our volume is down about 1%.

We believe our channel diversification as well as our strategies to better serve customers with new, more innovative products and the strengths, the strength of our many sales forces have allowed us to gain overall market share.

With regard to product pricing, we experienced an increase in price competition.

This is not unusual and was anticipated.

As you can see from our gross profit margin, we have managed this challenge well maintaining our pricing discipline in areas where service and product features are differentiated while responding to competition as appropriate when competitors attempted to use price as their only point of differentiation.

The balance of the decline in net sales is due to the mix of products sold, mostly channel mix.

Again, this is primarily due to the decline in demand for new construction such as commercial office buildings sold through the specification channel, offset by share gains and other channels including home improvement.

This channel mix shift also has an impact on gross margin dollars and percentages which we will touch on in a moment.

From a commercial perspective, the Second Quarter was of course challenging particularly for commercial buildings as large projects continue to be scarce.

However, we are pleased with our top line results.

We are starting to see some glimmers of opportunity in certain areas such as renovation, where we continue to gain share, projects funded from the government stimulus program, and share gains in certain geographies and channels such as home improvement.

We hope these areas will provide growth opportunities for us in the second half of 2010 and beyond.

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

Before I turn the call over to Ricky, I would like to comment on our profitability.

Operating profit adjusted for the special charge was 8.7% essentially the same as last year.

This exceeded our internal forecast but could have been higher, particularly given our robust gross profit margin.

Let me explain.

Operating expenses increased approximately $11 million and essentially flat sales.

More than half of the increase was for incentive compensation and increased sales commissions to support our selling efforts.

The balance was for investments to drive future growth.

We continue to invest heavily as we staff up in key areas of the Company including technology and innovation, sales and marketing and lighting controls.

Each of these areas represents huge opportunities particularly as we develop new, more innovative products including those Incorporating the latest LED technology.

We continue to search the world for the best technology furthering existing relationships with key suppliers while establishing new ones all to extend our position as the market leader.

Additionally, we are aggressively expanding into new channels such as renovation.

While our revenues in this channel were up 33% compared with last year, we have invested at a far faster pace because of the future opportunity.

The same is true in the home improvement channel as we reset stores with our product displays incurring up front cost in anticipation of future revenue growth.

Lastly, our controls platform is expanding nicely and we continue to invest in people and new products today to meet expected growth opportunities in the future.

These investments are an expense in our P & L today without offsetting revenue.

However we expect they will pay huge dividends later in 2010 and beyond.

I would like to now turn the call over to Ricky to make a few brief comments on our overall financial performance before I make some remarks regarding our strategic plans and the outlook for the balance of 2010.

Ricky?

Thank you, Vern, and good morning, everyone.

I will highlight a few additional items regarding our Income Statement, including the special charge and loss of an early debt extinguishment.

I then will discuss our cash flow and financial condition before turning the call back to Vern.

Let's now turn our attention to a few key items regarding our Second Quarter results.

Net sales declined $2.6 million or 0.7% in the three months ended February 28, 2010, compared with the prior year period.

As Vern said previously, incremental sales from our recent control Company acquisitions contributed approximately 3.5 percentage points to Fiscal 2010 Second Quarter sales.

Additionally, the impact of the stronger dollar on translating international sales contributed approximately one percentage point to current quarter net sales.

So, excluding the impact of acquisitions in foreign currencies, net sales were down approximately 5% compared with the prior year period.

This decline was primarily due to negative price and product mix as Vern described previously.

Baseline sales volumes of lighting fixtures decreased approximately 1% in the current period compared with the same period last year, which we believe highlights how the execution of our strategies are allowing us to outperform the overall non-residential market during these challenging economic times.

Gross profit for the Second Quarter increased $10.9 million or 7.7% compared with the prior year period.

Gross profit margin of 39.7% reflects an increase of 310 basis points compared with the year ago period.

Contributing to this favorable gross profit margin was lower material and component costs compared to the prior year Second Quarter which you may remember was negatively impacted by the rapid rise of material costs for which we were unable to recover in higher selling prices because of the subsequent rapid decline in such cost.

This quarters gross margin improvement also reflects savings from the streamlining actions taken last year, contributions from recent acquisitions, and benefits from ongoing productivity improvements.

These benefits were partially offset by the unfavorable price and product mix which we have discussed previously and higher pension costs.

Selling, distribution and Administrative costs in our Second Quarter of Fiscal 2010 increased $10.9 million or 10.1% compared with the prior year period.

This increased expense required some analysis especially when you contrast it with the modest decline in sales volume and increased benefits from streamlining actions taken last year.

First as Vern said, over half of this increase is due to higher incentive compensation and convention costs compared with a reduced level of the prior year period which reflected the significant decline in the market.

Second, as Vern described earlier, we made certain investments in sales and marketing resources, product development and enhanced services during this quarter, which we believe 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.

Lastly, we continue to add cost as we buildout our control capabilities and these recent acquisitions have structurally higher operating costs than our lighting fixture business.

Vern previously discussed in detail our operating profit results on a GAAP and an adjusted basis, so I'll not repeat him, but I did want to provide a little more information regarding the $5.4 million pre-tax special charge we recorded in our Second Quarter of Fiscal 2010.

This charge includes a $3.7 million non-cash asset impairment charge associated with the facility we plan to close.

The remainder of the charge is for severance and related employee benefit costs associated with the consolidation of certain manufacturing facilities and a reduction in force.

We anticipate annualized savings from these additional actions of approximately $10 million which we will begin to realize in Fiscal 2011.

The prior year period included a pre-tax special charge of $4.6 million for streamlining actions.

We have generated savings from these and other previously taken streamlining actions of more than $12 million in the Second Quarter of Fiscal Year 2010 compared with approximately $6 million in the Second Quarter last year.

We estimate these previous actions will generate aggregate annual savings of approximately $50 million and we believe we are essentially at this run rate as we exit the Second Quarter.

You may remember we realized approximately $28 million of savings from these actions in Fiscal Year 2009 with approximately $20 million in the second half of the prior Fiscal Year.

So we would expect minimal incremental benefits from year-over-year from these actions in the future.

Net interest expense was $8.1 million for the Second Quarter of 2010 compared with $7.5 million last year.

The increase is primarily due to the higher average borrowing, partially offset by a lower effective borrowing rate.

As most of you already know, in December 2009, 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 early the $200 million, 8.375% publicly traded notes which were due in August 2010.

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

We recorded a pre-tax loss of approximately $10.5 million in this second fiscal quarter of 2010 related to the cost associated with the early retirement of the public notes, and we capitalized 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.

Miscellaneous expense is due primarily to the impact of exchange rates on foreign currency items.

In the Second Quarter of Fiscal 2010, we had income of $0.6 million compared with income of $0.1 million in the prior year period.

The effective tax rate this quarter was 26.5% compared with 32.1% in the prior year Second Quarter.

This quarters effective tax rate was positively effected by various discrete items.

We estimate the effective tax rate for the Fiscal Year of 2010 to be approximately 33%.

Vern previously discussed income from continuing operations.

We also had income of $0.6 million or $0.01 per diluted share from Discontinued Operations as a result of revising the estimate of certain legal reserves established at the time of the spinoff of Zep, Inc.

We were required effective last Fiscal -- or this Fiscal Year, to adopt a new Accounting Standard regarding participating securities, which retroactively reduced basic and diluted EPS for the Second Quarter of 2009 by $0.01.

Now let's look at the cash flow for the quarter ended February 28, 2010.

Cash flow provided by operations for the first six months of Fiscal 2010 was an impressive $47.4 million, a strong improvement over the prior year period when we used $3.9 million of cash.

The primary driver for this huge turnaround was a significantly lower incentive compensation and severance payouts in the first half of this Fiscal Year compared to last year.

Operating working capital, calculated by adding Accounts Receivable net plus inventories and subtracting Accounts Payable, increased by approximately $9.1 million to $215 million at February 28, 2010, from $205.9 million at August 31, 2009 due primarily to increased finished goods inventory, added primarily to improved service levels and normal seasonal fluctuations.

Capital Expenditures for the first half of Fiscal 2010 were $9.5 million compared with $11.7 million for the prior year period.

We currently expect to invest approximately $25 million during Fiscal 2010 for new plant equipment, tooling, and new and enhanced information technology capabilities.

We ended our Second Quarter of Fiscal 2010 with a cash balance of $155.8 million, an increase of $137.1 million compared with $18.7 million as of August 31, 2009.

This significant increase primarily reflects the net cash proceeds from the change in our debt structure and the strong cash flow from operations in the first half of our Fiscal Year.

As of February 28, 2010, our total debt was $353.3 million consisting primarily of the 350 million 6% senior unsecured notes due in Fiscal 2020.

In addition to this long term maturity debt, we also have availability under the revolving Credit Facility of over $242 million as of February 28, 2010.

This facility does not mature until October 2012, so clearly, we feel very good about the results of the recent capital structure transactions and the financial flexibility it provides us.

With our strong liquidity position, our prioritized use for this cash as well as our expected strong future cash flow remains as follow.

First investment in organic growth is evidenced by our increased focus over the past few years on new product and service development and enhancing our market presence.

Second, strategic acquisitions and alliances, to address product gaps, or opportunities to leverage capabilities with technology partners.

And third, 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.

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 longer term financial goals on a consistent basis, we do have a few observations which may provide you with insight into our focus for the balance of 2010 and into 2011.

First, 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 for Real Estate lending 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 signs of growth reflecting a cautionary uptick in consumer and business confidence.

However, key indicators for our primary market non-residential construction continued to signal a decline in available market for 2010 while residential construction is showing early signs of growth from very depressed levels.

This is all widely known.

Forecasts by independent organizations continue to suggest unit volume for construction put in place in North America could be down in the mid-teens in 2010 compared with 2009, though certain segments like office buildings and certain geographies like the southwestern US and Florida will be down considerably more.

This suggests the 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 pricing margin management, we do expect pricing to continue to be very competitive in many geographies.

As I noted earlier, this is not unusual, particularly from competitors with lesser valued products and limited access to market.

However, the actual impact and timing is always difficult to predict.

Our gross margins in the Second Quarter just ended suggest we have handled this challenge well though it does have an impact.

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

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

Lastly, we see some worrisome signs that costs for commodity raw materials, such as fuel and aluminum, could be an issue in the second half of our Fiscal Year.

We expect to be as vigilant as possible in our pricing strategy to protect our margins from potential cost increases.

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

As I noted in our last Conference Call, our strategy to drive profitable growth remain intact.

We continue to see opportunities in this environment, including benefits from the government stimulus program, growing renovation in tenant improvement projects, further expansion in underpenetrated geographies and channels, and growth from 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 that incorporate advanced technologies providing superior lighting quality and more 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.

Expand and 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 our 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 utilizing leading edge technology, and lastly, expanding into new markets including geographies and channels, including renovation and relight and now lighting controls.

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

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

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

Our lighting controls product offering, now branded 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 including leading edge technology through multiple channels to provide customers with superior integrated systems to enhance their lighting environment while significantly reducing their energy costs.

This all takes investment and focus.

We are investing today even though the current environment is challenging because we see great opportunity in the future.

We believe the execution of our longer term strategies to focus on productivity improvement, accelerating investments in innovative and energy efficient products and lighting control solutions, expand market presence in key geographies, channels and sectors, such as the renovation and relight market, and enhance services to our customers will provide growth opportunities which will enable us to outperform the markets we serve in 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 positioned well to fully participate in this exciting industry.

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

Thank you.

(Operator Instructions) Our first question comes from Peter Lisnic, Robert W.

Baird.

Your line is open.

Good morning, everyone.

Good morning, Pete.

Good morning.

I guess first question, if you could talk a little bit about volume being down only 1%, maybe get behind.

I guess where you saw the share gains?

And then Vern, I think I heard you say that retrofit was up, or renovation as you call it, up around a third or 33%, give us a little color to the trends there, how that is sort of shaking out and what the forward look might look like in that segment of the market?

Sure.

First of all the market in general, we still see very challenging times out there.

If you look both geographically and you look in certain sectors of the non-residential construction market you'll see significant declines on a year-over-year basis.

Southern California, Nevada, Arizona, Florida, all of these markets continue to be impacted, again, by the fallout from the residential decline, and we're no different.

So our gains, if you will, relative to the market really have to do mostly with our channel diversification.

We saw opportunities in industrial, for example.

I think many of the electrical distributors would tell you that the industrial space is starting to find its way back.

We're also starting to see opportunities internationally where some of our international businesses have done okay relative to the environment, the economic environment.

When it comes to the renovation market, we're seeing a bit of growth there again from depressed levels.

Second Quarter this year compared to Second Quarter of last year, we were up about a third, so you're starting again to see some of the retail players come back into the space as they look for better lighting, better quality of lighting, and certainly energy savings.

And then lastly for us, we continue to expand in the home improvement channel as we continue to gain share there.

So, all in all, I believe it was because of our broad diversification in the end Markets that we serve that we were able to withstand the difficult economic environment, and quite frankly, I'm very pleased with how we are serving our customers, the notion of productivity within our business helps us continue to drive a service level where I think we have differentiated that and have gained some share even in our traditional markets.

Okay, is there a way to maybe call out how much controls had in terms of impact on that volume number for the Second Quarter?

Well we said that acquisitions, and we're almost at the point of anniversarying our acquisitions, we said acquisitions contributed, Ricky, about 3.5%--

3.5% year-over-year improvement was due to the incremental contribution of the acquisitions.

And no, we don't break down --

Was there any impact just from the legacy portfolio controls?

I'm just trying to get a sense as to whether or not you're seeing more of a packaged sale to your customers with the solution, or a control product and a fixture.

We believe that that will represent a growth opportunity in the future and some of the investments that we are making today in terms of people and capability are really directed at providing a system type solution.

But today, that is still really in its infancy.

The controls business, I believe in general, is growing nicely.

It's actually demonstrating positive growth.

But again, we don't break that out because eventually it will be all part of a system-type cell and it won't have as much impact, excuse me, it won't have as much differentiation as an individual device as it will in terms of control technology embedded in the fixtures.

Okay, and just quickly on materials cost, where -- things sit where they are today, what sort of impact on gross margin do you expect on the second half of the year, just ballpark figure?

So we're doing that analysis now.

We believe that steel, aluminum, and fuel costs are problematic and we're evaluating carefully the notion of how we manage through that, whether it be our own productivity capabilities and/or price increases, and we'll be out shortly with our thoughts around that.

I think it's difficult to say precisely what the impact will be, but again, we're buying 200 million pounds of steel a year and when that goes up a couple of cents, it does have an impact, a significant impact.

Okay, thank you for your insights.

I'll get back in queue.

Thank you.

Our next question comes from Craig Irwin, Wedbush Securities.

Your line is open.

Hi, this is David for Craig.

I've got two questions, please.

I'm interested about the impact of rising residential mix on pricing and if you could break that out?

And then also, if you could update us on anticipated product introductions with Samsung, please?

Sure.

On the residential side, I mean we have -- we still guesstimate that our share of market is probably in that 10% or less arena.

I would say that pricing in that space to date has been relatively constant.

I mean we haven't -- that's not where we have seen some of the pricing pressure.

That doesn't mean it's not competitive, but unduly so.

So I would say that from our perspective, and again we're not the largest resi player out there, that that hasn't had that material of an impact overall.

Yes, I would just add that it has more of an impact at the gross margin line, the cost to serve the way we access that market is a lot less than it is in our non-residential area.

So at the operating profit line, it's not that big of a difference but it does have a negative impact to gross margin line, but then we don't have near as much SG&A.

And then of course the selling points are, just given some of the less features and benefits than those type of products tend to be lower in the commercial side as well.

And David, with regard to your question, I think you specifically asked about product introductions with Samsung.

We are, as we speak, rolling out a considerable portfolio of products, training our sales forces, working with key customers, on training around all of our product capability both traditional lam ballast technology with new advancements, if you will, as well as LED based products with a number of different new vendors both for indoor and outdoor, of which Samsung is a supplier to that.

So over the next 60 days, you will, the marketplace will see a number of products both indoor and outdoor with componentry provided by, not only our own internal capabilities, but as well as our vast vendor base, including Samsung.

Thank you.

And we're very excited about that too by the way.

Our next question comes from Christopher Glynn, Oppenheimer.

Your line is open.

Thank you.

I'll echo striking top line.

Just digging into that a little bit in the third growth and renovation, Vern, when you say the term renovation, does that cut across the contractor select home center channels and the re-lighting, or what's the diction there?

Sure.

For us, renovation is truly where the product can be identified of going into an existing facility where the current occupant is staying in the facility, but yet they are renovating that facility to enhance the quality of their lighting environment while reducing their energy costs significantly.

So we look at specific products.

Contractor select would be a small portion of contractor select we would consider targeted for, if you will, the renovation.

But we have a number of products that are specifically renovation type products and we're increasing that portfolio, so that's what we're tracking on a relative basis.

Right?

And the increase, while significant in terms of percentages, probably didn't have a huge impact, it probably contributed a little bit more than a point to our overall top line, if you will, meaning the incremental increase as a percentage of renovations becoming larger and larger, and we expect it to continue to become larger and larger.

Part of the investment that we made in our operating expense line was to enhance our sales capabilities and our go to market strategy specifically for this area, because we do, again, continue to see positive opportunities for growth here.

Okay, and then looking at the energy efficient re-lighting separately, I think last quarter you commented that the last couple of quarters it had improved nicely sequentially.

Can you update on that front?

Yes.

That was the 33% increase quarter-over-quarter.

So in other words, this Second Quarter compared to the year ago Second Quarter, that renovation relight portion was up a third for us.

Okay, got that, and then as far as some of the share gain, is this an environment where all of the majors benefit, notwithstanding the fact that you have some specific drivers that you're executing on?

I believe, and this is my belief, I believe it depends on where people have strength and/or weaknesses both in their product portfolio as well as the geographies that they serve.

If you're overweighted in Florida, if you're overweighted in the Southwestern portion of the United States, you're finding those markets to be very difficult, and we have distributer customers for example, who do have overweights in those particular areas and their declines are reflective of the commercial and industrial markets of being down, again, 30% plus.

So I think it really depends on how you play and where you play.

Again, our diversification around the channels that we serve including home improvement, including the industrial sector, the utility sector, all of these have helped us balance out some of the impact of that decline in that commercial and industrial space.

We have a strong portfolio in institutional capabilities, so we think that that has helped us through that but I also believe that we have gained share.

I really can't tell you if I've gained share from the majors or from some of the smaller industry participants.

My guess is, is that we are taking share from the smaller industry participants because we have strength, we have access to market, we've continued to invest in our sales forces.

I mean, our Commissions are up because we are wanting to make sure that our agencies and our people are out in the space and working to serve the customers for the available business.

You know, it's a difficult environment and some peoples strategies are different in terms of how they want to go to market.

Ours is to aggressively invest, and so we're doing that.

That's great color.

Thanks.

Last one, so within a lot of the share gain, you referred to the pricing dynamic as you'll respond in certain markets and products where necessary.

Are you using price proactively at all in instances?

Well, we believe that the industry should get paid for the value that it brings, or the industry participants, and we need that investment, or that margin, to invest back into our businesses.

The world of LED technology, lighting controls embedded in fixtures to provide superior systems that create the kind of solutions that customers are after to really take advantage of the technology that's out there is expensive.

I mean, our technology and innovation group, as I've said on previous calls, is up sixfold over the last three years.

That investment is significant.

So in markets where we have the ability to differentiate futures and benefits and extract our full price, we do that.

In markets where people really don't either have good access to market, or don't have the product portfolio, and they're using price as their only point of differentiation, we're using our size and scale to say, you know, we don't believe that's the right way to play the game.

Great.

Thanks a lot.

Thank you.

Another question from Matt McCall, BB&T.

Your line is open.

Thanks, good morning, everybody.

Hi, Matt.

Good morning.

I want to start with the SG&A line, you gave a lot of color on the year-over-year increase there.

Can you talk more sequentially and let us -- I'm assuming some of that, there was some incremental spending there on some of these growth initiatives, so to maybe compare to the 118 you reported, 118.5 you reported in Q1, you saw a little bit of a sequential top line decline as the spending went up?

And then what's the outlook as we move into the second half?

Is there incremental spending from here that you expect?

Or, I think you referenced in the release, that you expect to see some returns from these investments.

Does that mean there's not incremental spending expected?

So the investment rate that we have put in place, we would expect to continue.

I guess the way I would look at this is about 2/3, roughly about 2/3 of our SD&A is fixed, if you will.

Obviously we have incentive compensation in there and that has a variable element to it.

But if you sort of imagine 2/3 being fixed and the other third being variable, because it's sales commissions and freight, things of that nature, we would expect to leverage that 2/3 as our volumes move up and we would expect our volumes to move up seasonally.

Right?

We have that.

Our second half is usually a couple points stronger from a top line perspective than the first half and we're expecting that, if you will, to play out again.

So you should expect to see some leveraging of the investments that we've made in terms of incremental revenue.

You should expect us to again continue to be diligent on those costs that we have.

We've realized the $50 million of annualized savings that Ricky pointed out earlier in the call, we're now strategically investing back in the business, again technology and innovation, sales and marketing and just some incentive capabilities to help drive our salespeople to higher levels of performance.

Okay, that's helpful, Vern, so the normal seasonal pattern will be a couple points H2 over H1 and -- but it sounds like there's expectations of incremental benefit from some of these initiatives, would that be the case?

Or is that, is that a couple points inclusive of those benefits?

Yes, I would expect there to be some benefits, but again, as the investments that we're making, for example, in renovation, it will take us a while to buildout that platform to get after that market.

The investments that we're making in our controls business to really enhance our market presence, a lot of that is going to benefit, really, 2011 and beyond.

So I think it's fair to say that when you look at this quarter, the Second Quarter, if you kind of look at that $119 million of SD&A, without the special charge in there, I think it's not a bad rule of thumb to say 2/3 is kind of a fix and 1/3 kind of rolls --- is variable.

Okay, thank you, and then you talked about your controls business actually growing.

Can you talk about -- I know when this initiative really gained, started to gain momentum, you talked about hoping to take some share in your existing agency footprint.

Can you talk about the progress there?

And is the growth you're seeing from share gains with the agents?

Or are you starting to see some actual -- or you're actually seeing market growth in that business?

We think that the market is starting to come back.

It was growing at a 30% CAGR if you look at the three years prior to if you will 2009 decline.

So we're starting to see some positive unit volume growth again and that's the market in general.

Don't have a good number around that, frankly.

And we're also now starting to more fully penetrate our agents and that process is slow, simply because of the specification cycle and -- but perfectly in line with our expectations.

We have a few markets where we're seeing out sized performance which is exciting.

We have a few markets where we wish we were performing a little bit better.

But, all in all, I would say that we are very comfortable with where we are and the trajectory that we're on.

And Matt, we don't provide the level of detail in terms of sales on that.

Yes, yes, no, directionally is fine.

That's fine.

But the same, along the same lines you talked a lot about retail share gains, and I think, Ricky, you talked about some of the up front costs there.

Can you talk about how far you're along in that process of that rollout and what the outlook is for further penetration or share gains?

Yes.

I would say in the home improvement channel, we are continuing to, if you will, gain share there.

I believe that we're kind of in the middle innings of the game in terms of at least this initiative that we have right now, so I would expect that Third Quarter still to kind of be investing and then start to see some of the real opportunities in the Fourth Quarter and then into 2011.

Okay, and then finally, Vern, just wondering.

You mentioned new vendor relationships in your earlier remarks.

I just want to make sure I know what you're talking about there.

Could you just tell what you're referencing?

Well, yes.

We continue to travel the globe to understand people's capabilities to provide us, whether it be with LED chips or technology, that allows us to enhance the products that we bring to the marketplace.

So we are continually looking to not only work with our existing vendor base, and we have very strong vendors, some of them are competitors actually, and as well as adding to our vendor base with additional capabilities whether it be LED chips, LED drivers, whether it be control devices.

So we're continuing to look at and explore these vendor relationships to bring capability not only in components, but on services as well as in some instances, product, to the marketplace.

Okay, perfect.

Thank you.

Thank you.

(Operator Instructions) We have a question from Glen Wortman, Sidoti & Company.

Your line is open.

Good morning, everyone.

Good morning.

Good morning.

On the renovation and relight business, can you just give us a sense of maybe how big that business is for you today?

And then just looking over the medium term and long term, just maybe talk a little bit about the opportunity there and how fast you think that part of your business can grow?

Yes.

The way we are attempting measure it, and it's still an evolving science, if you will, because not always do we know where these products end up, because a lot of them will end up on distributer shelves which can be used in a number of multiple applications, we believe that that business is today probably on an annualized basis north of $70 million would be my guess.

It's down from where we were, because we sold a lot of product into various retail spaces and those retailers are just now starting to, if you will, find their sea legs again in terms of investing back into their stores for better quality lighting, energy savings.

So that market took a little bit of a hit, but what we're seeing, and I think that other players are seeing in terms of industrial, the industrial manufacturers are coming back as their businesses are starting to pick up.

So they are interested better quality lighting and energy savings.

So for us, on an annualized basis, that business is probably in that range.

My guess is is that we'll see nice growth.

We don't have an absolute number that we want to share, but we'll see growth in that market over the next 24 months.

Okay, and then just also just looking sequentially, there's a little bit of the gross margin contraction, was that just mostly due to the price and mix changes?

Well also, a bit of volume decline, right?

And as we think about what our markets -- I mean that has some impact, but also mix change as well would -- channel mix change would influence that a little bit as well.

Okay, thank you very much.

Thank you.

Showing no further questions I'd now like to turn the call back over to Mr.

Vern 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 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.

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time.