Acuity Brands Inc (AYI) 2010 Q3 法說會逐字稿

Good morning.

Welcome to the Acuity Brands 2010 third quarter financial conference call.

(Operator Instructions).

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 third quarter results are Vern Nagel, our Chairman, President, and Chief Executive Officer; and Ricky Reece, our Executive Vice President and Chief Financial Officer.

We are webcasting our financial call at www.acuitybrands.com.

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

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

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

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

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.

First, let me say, we are very pleased with our results for the third quarter of 2010.

We achieved unit volume growth in an environment where non-residential construction continued to decline.

I believe this is strong evidence that the execution of our strategies to extend our leadership position in North America is succeeding.

As we will further elaborate later in the call, these strategies include the continued introduction of new, more energy-efficient products and solutions, expansion in key geographies and important channels, and further gains in productivity.

Our profitability and cash flow is similarly strong, while we continued to invest heavily in a number of areas representing significant growth potential.

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.

First, net sales for the quarter were $407.6 million, up 3%, compared with the year-ago period.

Operating profit was $39.2 million, down about $2.3 million, or 5% from the third quarter last year.

Diluted earnings per share from continuing operations was $0.48, compared with $0.52 from the year-ago period.

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

I will expand on this point in a moment.

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

We have been able to produce these results because of the dedication and resolve of our 6,000 associates and the progress they have 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 and sustainable and energy efficient products, and Company-wide productivity.

Let me share some additional information with you regarding our net sales in the third quarter.

On a consolidated basis, our net sales grew 3% compared to the year ago.

If we exclude the impact of acquisitions and foreign currency, net sales increased approximately 1%.

We estimate unit volume grew approximately 4% in the quarter, driven largely by our continued expansion in certain geographies, where we added greater selling representation in channels such as home improvement and renovation and relight.

.

Also, we continued to see growth in certain product groups such as lighting control devices and more energy efficient luminaires.

Additionally, we believe the impact of product pricing, and changes in the mix of products sold reduced our overall net sales by approximately 3%, compared with the year ago period.

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 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 value perspective in the mid teens as a percentage from a year ago.

Certain segments of the market, such as commercial building in 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 was up more than 4%, again, a remarkable accomplishment.

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

With regard to product pricing, we experienced agressive price competition in many markets and channels.

This is not unusual, and was anticipated.

As you can see from our gross profit margin, which expanded 140 basis points over the year ago period, 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 decline in net sales due to the mix of products sold is mostly channel mix.

Again, this is primarily due to the decline in demand for fixtures in new construction projects, particularly commercial buildings sold through the specification channel, partially offset by share gains in other channels, including home improvement.

This channel mix shift also had a somewhat negative impact on gross margin dollars and percentages.

From a commercial perspective, the third quarter was, of course, challenging, particularly for commercial buildings, as new construction continues to be scarce.

However, I must say, again, we are very 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 expect these areas will provide growth opportunities for the balance 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 margin was about 9.6%, down about 90 basis points from the year ago period.

Similar to what we explained in our second quarter call, our operating profit margins could have been higher, particularly given our robust profit margins.

Let me explain.

Selling, distribution, administrative expenses increased approximately $12 million, on an increase in net sales of 3%.

About three quarters of this increase was for incentive compensation, given our substantial outperformance to the market, and increased sales and commissions to support our selling efforts.

The balance was for incremental investments to drive future growth.

We believe these incremental investments reduced our operating profit margin in the quarter by over 100 basis points.

We continue to invest heavily in key areas of the Company, including technology and innovation, record setting pace for new product introductions, sales and marketing, renovation, 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 more than doubled, compared with last year, we have invested at a faster pace than our current sales growth, because of the future opportunity.

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

Lastly, our controls platform is expanding rapidly, 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 much offsetting revenue.

However, we expect they will pay dividends later in our fourth quarter and beyond, in the form of additional revenues.

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

Thank you, Vern, and good morning, everyone.

Vern covered the third quarter's earnings results, so I'll focus my comments on our third quarter cash flow and financial condition, as well as an update on our streamlining activities, and the news regarding registering our notes, before turning the call back to Vern.

First, on cash flow, we generated $97 million of net cash from operating activities during the first nine months of fiscal 2010, an increase of almost $70 million, compared with the prior year period.

The primary driver for this impressive increase in cash flow was significantly lower incentive compensation cash payouts, and severance payouts in the first nine months of this fiscal year, compared to last year.

Operating working capital, calculated by adding account receivables net, plus inventories, and subtracting accounts payable, decreased by approximately $7.3 million, to $215.1 million at May 31, 2010, from the $222.4 million in the year ago period.

Said another way, our net operating working capital days outstanding has decreased six days, or almost 12% since last year.

This illustrates the success our team has experienced managing the production moves, allowing us to begin reducing inventory we built to sustain our service levels, during the inevitable disruption of these production moves.

Capital expenditures for the first nine months of fiscal 2010 were $15.9 million, essentially flat with the $15.1 million for the prior year period.

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

We entered our third quarter of fiscal 2010 with a cash balance of $194.5 million, an increase of $175.8 million, compared with the $18.7 million as of August 31, 2009.

This significant increase primarily reflects the net cash proceeds from the changes in our debt structure, and the strong cash flow from operations in the first nine months of our fiscal year.

As of May 31, 2010, our total debt was $353.3 million, consisting primarily of the $350 million, 6% senior unsecured notes, which are 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 May 31, 2010.

This facility does not mature until October 2012.

Our debt, net of cash, is a mere 18% of total capital, and our leverage ratio of debt to adjusted EBITDA is under 1.7 times at May 31, 2010.

So clearly, we enjoy significant financial flexibility.

Let me spend just a few minutes updating you on our streamlining activities.

The activities related to the charges we took last fiscal year are nearly complete, and are approaching the anticipated annual savings rate of $50 million per year.

In the first nine months of this year, we have realized approximately $37 million in savings, compared with $18 million in the prior year period.

In addition to these activities, we announced in the second quarter of this year, further streamlining and manufacturing consolidating activities, which are expected to yield approximately $10 million in additional annualized savings.

We have initiated these activities, and should have minimal savings in our fourth quarter, but plan to ramp up the savings, such that we are at that annualized rate by the second quarter of next year.

Let me conclude my prepared remarks, by discussing the other news contained in today's press release.

As part of the sale of the $350 million of notes last December, we agreed to exchange the notes for SEC registered notes.

Accordingly, earlier today, we filed a registration statement with the SEC, in order to complete the registered exchange offer.

In connection with this filing, certain financial information of the issuer, Acuity Brands Lighting, and guarantors of the notes, is required by the SEC rules.

Therefore, in addition to filing the registration statement, we updated our 2009 Form 10-K today, to include this additional information.

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

Thanks, 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, 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 comments about expected market conditions.

Without a doubt, the economic environment continues to be very challenging, especially with unemployment still hovering around 10%, and credit availability for real estate lending scarce.

How long will these turbulent economic conditions prevail, only time will tell.

So 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 the available market for the balance of 2010, while residential construction is showing early signs of growth from very depressed levels.

This is all widely known.

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

This suggests that headwinds will continue for all companies serving the construction markets in North America for the foreseeable future, 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.

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

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

Our gross margins in the third quarter just ended, again, suggests we have handled this challenge well, though it did 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 technologies.

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.

Next, we see some worrisome signs that costs for certain commodities, such as steel and aluminum, could be an issue in our fourth quarter, and into fiscal 2011.

We expect to be as vigilant as possible in our pricing strategies, protect our margin from potential cost increases.

Lastly, the global lighting industry is experiencing disruptions from the supply of certain electronic ballast and drivers, due to a worldwide shortage of certain electrical components, generic to many products, including ballast.

Obviously shortages in the ballast and driver supply chain can and will have an impact on the industry's ability to ship fixtures on a timely basis.

We are monitoring this situation very carefully.

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

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

We continue to see opportunities in this environment, including benefits from the government stimulus program, growing renovation and 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.

Our product portfolio in this area is expanding rapidly.

Our strategy is straightforward, expand and leverage our industry-leading product portfolio 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 technologies, and expanding into new markets, geographies, and channels, including renovation, 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, allows 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 future opportunity.

We believe the continued execution of these longer-term strategies 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 does come from Glen Wortman of Sidoti.

Sir, your line is open.

Yes, good morning, everyone.

Good morning.

Just on the share gains, do you think you guys were at the full run rate there in the third quarter, or are those gains ongoing?

Can you just talk a little bit about that, please?

Well, again, the overall market, we believe, was down mid teens.

So if you imagine, that put us in roughly a $50 million hole.

So to imagine that we had, what, $11 million of sales increase, we, we overcame quite a bit of obstacles.

The markets that we see growing are really several-fold.

Controls continues to grow nicely, and that marketplace is probably expanding, well, I would guess in the mid-20s, somewhere in that range.

I think we're doing better than that.

Renovation and relight continues to be an opportunity for us.

We believe that we have gained share there.

Just to put a little color around that, our revenues in the third quarter, in that renovation and relight market, were up more than double.

We added about $10 million of revenues in the quarter.

Home improvement continues to be an opportunity for us.

And we believe that, in the project world, while large projects, medium size projects, continue to contract, we believe that we continue through service differentiation and product differentiation, continue to gain share there.

So I believe that we still have run room left, to continue to gain share in the markets that we serve.

And you also alluded to gains in certain geographies.

Can you talk about that a little bit?

Yes.

We continue to put investments into various areas around the country, where our sales representation -- we have improved sales representation, both through the, what we'll call the commercial and institutional sort of sales force, but in other channels as well, such as home improvement.

So both of those areas continue to be opportunities for growth.

We continue to expand our capabilities in New York City, where just two years ago we had de minimus share.

So these are the types of examples of investments that we continue to make, to expand our growth potential.

Just a quick comment on renovation, again, because I think people will have a question around the investments that we have made, incremental investments in our operating expenses, we have significantly ramped up our renovation in relight capabilities.

This means people.

And so, you invest today for expectations of future revenues.

I think you're seeing the benefits of the revenue growth, but we've added considerable investment into that area.

Similarly, technology and innovation, we've expanded our technology and innovation group by over 12%.

And so those types of investments, you incur today, but the products that we're rolling out continuing to drive share gains, we think are really wise investments today.

Okay, and then just on the ballast shortage, have you had to delay shipments yet?

Can you quantify any impact there?

Yes, the impact currently, and I believe that we've seen from some of our other industry participants, it's really creating a supply disruption.

In our third quarter, it did not necessarily impact our ability to serve or ship, but it really did create chaos within the supply chain, of being able to ship on a timely and an efficient manner.

I expect that to continue in our fourth quarter as well.

Okay, and then finally, just on the announced price increase, any early indications on success?

So our price increase, not inconsistent with the industry, in sort of the 3% to 5% range, depending on the product effective to the end of May.

So we're now starting to roll that out.

And, as you know, it's really one month into it, is essentially too early to tell.

But we have been very diligent over the last handful of years of, when we put through a price increase, realizing the benefits of that price increase.

So our expectation is that we will continue to do that.

As I mentioned in my earlier comments, for those competitors that attempt to use price as their only point of differentiation, they will find out just how formidable we can be.

Costs are increasing, and we think that it's appropriate that we pass along those costs, and where we have product differentiation, features, and benefits, we certainly charge for that, because we're redeploying those investments back into research and development technology, and innovation, new product growth.

So it's all part of the cycle, of continuing to bring greater value to the industry, and certainly charging appropriately for that value.

Thank you very much.

Thank you.

Matt McCall of BB&T, your line is open.

Okay, can you hear me, guys?

Yes, hi, Matt.

Okay, sorry about that.

So if I remember correctly, the last, the last quarter you talked, it seemed like there was more concern about the gross margin line than there was about the SD&A.

And I understand, Vern, the investments that you made there.

But I guess the first question is, was the gross margin -- I guess was the raw material impact less in the quarter, or did you quantify what that raw material inflationary impact was in Q3?

And then what's -- if we hold prices kind of steady from here, what's it look like relative to what you just saw in Q3 and Q4?

Well, a couple of comments.

One, we continue to drive productivity throughout our business.

And so as, as large projects are difficult to come by, we have used our strength, our supply chain capabilities, to continue to improve the margins of our business.

So we are very pleased with the 140 basis points of improvement on a period-over-period basis.

Our gross profit was, what, 40.1%, as I recall, Ricky?

Yes.

And I think that that is a pretty solid number.

We, as we commented just moments ago, have put through a price increase.

So our hope is, that that obviously will more than offset.

We hope it more than offset some of the cost increases that we'll see.

I just assume that, that's kind of a push.

I would hope that our gross profit margins will stay in this range.

Lot of it obviously depends on volume coming through.

So I think a pretty solid performance in that regard.

Ricky, any other comments on that?

Yes, I would say, Matt, the material impact was not that far off of what we thought.

Going forward, it may not be quite as dramatic as we thought, but now we're starting to see it come back up again.

So it's been a bit of a seesaw.

I think the gross margin improvement was more as Vern said, volume that we got and the incremental margins on that and the productivity gains, and then continuing to be diligent on the pricing front.

Okay, yes.

And just to be clear, I thought it was a good quarter from a margin perspective.

Just trying to understand what the, what the -- I was expecting a little more pressure, and sounds like you just did better than we expected.

On the investment front, you gave some good detail about where the investment dollars are going and why the SD&A line was up.

Can you talk about the expectation?

Is there further investment -- I'm assuming you're going to continue to invest, but is it incremental from here?

Or are we going to kind of level off at this level as well, outside of what's variable with the top line?

And so, Matt, as we explained in the last quarter, we believe that of our SD&A expenses, roughly 60% plus of those are kind of fixed.

And they include the investment that we've made.

The remaining portion is variable with sales, right?

So we said last quarter, that we were increasing our investment in a couple of key areas.

And I can go through those in a moment.

But my guess is that we have spent well north of $4 million in the quarter, as we kind of did ramping up in Q2.

And so I would expect us to sort of stay at this pace.

Now, the assumption is that the revenues will start to roll through.

And we are seeing the benefits of that.

Our controls business grew very, very nicely in the quarter.

And we expect it to continue.

Our renovation and relight investment continues to grow.

It doubled, compared to our revenues from the third quarter of last year.

I think that's both the investment that we made and the market coming back.

I think that institutional, excuse me, industrial building owners and commercial building owners are really starting to see the benefits of quality of lighting, coupled with energy savings.

So some of the smaller, more termite-type people that were out there, that are in that space, that just say I can give you energy savings, now that you have companies like ours, that are providing superior lighting solutions, coupled with energy savings, really are allowing us to grow in that space quite nicely.

So we added $10 million of revenues on a quarter over quarter basis in that space.

The home improvement channel continues to be an opportunity for us, as we use product innovation, new products into that market space to gain share.

Again, as I said earlier, we believe that the overall markets were probably down in mid teens.

So if you say that we just participate with the market, that was a $50 million plus dollar hole that we had to overcome, and did it quite nicely.

And on the home improvement front, Vern, the share gains, I know there's a rollout of some new product, at least for you guys in that channel.

Can you talk about how far along that rollout is, and how much more there is to maybe benefit from?

Yes, I would say that we probably have another quarter or two of continued rollout, where we'll be experiencing store-type resets, things of this nature, where you ship product in, but essentially the money you make off of it, simply goes to resetting the displays and things of that nature.

So you get a little bit of revenue, but you don't get much in the way of the expected profitability.

And that's very common in that channel.

So I would, I would expect another quarter or two there.

Our investment in technology and innovation, again, we -- that group, if you go back to three years ago, it had less than 10 folks in there.

And so today, technology and innovation is a very significant portion of our business and we continue to invest there.

It's very exciting, people talk a lot about LED-type products, and the future of just that solid state type technology.

We believe it to be true, but today, it represents a de minimus portion of the overall market.

But I think as you look out a few years, those types of products will become a very significant portion of the market.

What exactly, time will tell.

But it's our expectation that given the investment that we've made, given our size, given our access to market, that we will drive growth in that area very aggressively.

So we're investing today, for the opportunity of tomorrow.

Okay, thank you.

Thank you.

Peter Lisnic of Robert W.

Baird, your line is open.

Good morning, everyone.

Good morning.

Vern, I just wanted to square away some of these comments on the price pressure, in the context of your putting through price increases of 3% to 5%.

It sounds like your largest competitors have, or are doing the same.

So can you maybe give us a lay of the land, in terms of where the price pressure might be most acute and where the risk is I guess, going forward in terms of being able to realize that price?

Sure.

The industry is made up of many participants, right?

The top four participants have roughly a 55% market share, but there are, another 1,000 folks that are out there in different portions of the market, channels, and geographies.

So while I think that there are many folks who attempt to differentiate their products, based on features and benefits, when you have markets that are declining in mid teens, you're going to find some people who don't have the ability, either access to market, or strength of product portfolio that will attempt to use price as their only point of differentiation.

The cost increases are real, and so the ability of folks like ourselves to differentiate our capabilities to our end customers and justify those price increases, I think are very real.

We have a demonstrated track record of doing that.

Price pressures in the marketplace, again, as we said, we believe that price and mix, impacted our overall revenues by about 3 points.

Impossible to predict or to precisely calculate how much was price, how much was mix.

We're guessing roughly half and half to both.

And so, there's, there's no one specific channel where I could say it's there.

It's peppered throughout, whether it be channels, whether it be geographies.

And it just depends on who is strong in that particular area, or who is weak, and how we're responding to that.

I do, I do expect, just to be clear, that as the price increases get put out there, and you know it's usually -- there's a lag period, but I would expect us to realize the price increase as we go forward.

And I would expect it to more than fully offset any cost increases that we would see.

Okay, and I guess what I was trying to determine was whether -- just how pervasive it is, and it sounds as though at least that, majority piece of the pie seems to be, the competitive aspects seem to be still in pretty good shape, is what I think I'm reading in between the lines.

Well, I think 1.5 points of price competition, or price pressure, is not insignificant.

I mean, we had spent the last handful of years working very hard to change that trend.

I think that, again, technology and innovation, service, the ability to create a value proposition that makes sense, will allow us to continue to improve our margins on a go-forward basis.

But 1.5 points, or whatever the number exactly is, don't quite know, I would consider that to be pretty significant.

Yes, I would agree.

All right.

Just switching gears back to the ballast and supply chain issues, you had kind of mentioned that that was somewhat chaotic, but it didn't sound like there was a significant impact on either revenue or perhaps margin in the quarter.

I'm trying to get a better feel for what we might expect in the fourth quarter or into fiscal 2011, if indeed that you continue to see some of that quote, unquote, chaos in that particular supply chain?

Yes, it's -- obviously we're monitoring this situation very closely.

I mean, we're the largest purchaser of ballast in North America, so we have a pretty good handle on supply chain and all of that.

The problem is that this is a global issue, and it's a -- as I understand it, it's generic components that go into electronic-type products, not just ballast or drivers.

And a lot of these components are not very expensive, but they are integral to electronic-type componentry or product.

So it's difficult for me to precisely predict what the impact will be.

We're somewhat hand-to-mouth on some of these individual ballast, but we're working very closely with our, with our ballast and driver partners, to make sure that we are getting the products that we need so we can serve the customers the way they want to be served.

Now, having said that, we are -- it's not a smooth process.

And when something's not a smooth process, that usually means incremental costs.

I can't precisely quantify what it was in the quarter, or what it will be going forward, but it's just -- there's a lot of long hours to try and make this stuff work, so that our customers, our end customers don't feel the pain of the situation.

Okay.

All right.

Last question, if I could, on the investment spending, $4 million in the quarter, and sounds like there's some continued spending that goes on in the remainder of the year, into 2011.

I guess my bigger question on that front, is what sort of return should we expect from some of these investments?

In other words, some of the investments that you're making, are these for higher return relative to the legacy Acuity product in terms of margin of returns?

Just kind of what sort of return or payback should we expect from some of these investments?

That's a great question.

So imagine a year and a half ago, we continued to streamline our business and the purpose of that streamlining activity was to really redeploy assets and investment into areas where we think there is higher return potential.

Obviously our Company is very focused on both its market share, its ability to serve its customer base, and our profitability.

I think that if you go back and look at the profitability of this Company, in this kind of environment, I mean, we are shooting the lights out.

We are more than double, what we were before, and yet we're still making these investments that are reducing today our margins by more than 100 basis points.

So when you think about where we want to be in terms of a Company that has, that can deliver upper quartile-type margins, you can do that math in terms of what we would expect and more, in terms of the kind of revenue growth.

And I think that you're going to see it over the next couple of quarters start to kick in at that higher rate so that we realize the full return, or the return on those investments, so that I'm not telling you that I'm investing, but you see the margin potential in the business.

So, again, I think that these investments today are critical and as these markets come back, the full leverage capability of this organization is huge.

Okay.

Ricky, any comments on that?

Well, I would just -- in a way of giving you some sense, Peter, obviously to the extent these are incremental business, the incremental margins that we would enjoy on that, particularly given the productivity improvements, and our ability, as Vern just said, to leverage our supply chain, to continue to improve those incremental margins, make the payback extremely attractive.

The delay is what's a little bit painful.

But as our results highlight, we're starting to see the return on these.

I was very encouraged this quarter, because we've obviously been making these investments, as you point out, for several quarters now.

But the revenue growth this quarter, and then the modest decline we had last quarter relative to a much larger market decline, has given us the comfort that these investments are paying off, and the incremental margins that we're going to enjoy off of those added revenues are very significant.

Okay.

That is very helpful.

Thank you for your time.

(Operator Instructions).

Our next question does come from Craig Irwin of Wedbush.

Your line is open.

Thank you.

Vern, I was hoping you might be able to share with us a little bit of the breakdown of what's contributing to your high teens growth, compared to the rest of your market.

I mean, can you break down the relative contribution of things like energy efficiency, sensors, what you're doing in the LED market, and some of the other things that are contributing in there?

We haven't provided quite that level of detail, but I think that, again, the up markets for us have been controls, renovation and relight, home improvement.

And I -- we believe that if we continue to differentiate from a channel perspective, our ability to serve that small, medium, and even to the extent that there are large projects out there, our ability working in conjunction with our sales forces, depending on how we serve that channel have really, I think helped us gain some share.

From a product perspective, it's clear that on the renovation and relight side, that energy efficiency coupled with superior lighting performance, has allowed us to gain some share there, and will continue.

Last year, we introduced over 100 new product, product families, the most in our Company's history, and a lot of them were directed at superior lighting solutions, coupled with tremendous energy savings.

So I think that, as Ricky pointed out earlier, those investments are paying off.

I think the overall market for commercial office buildings, or industrial spaces, or retail, just new construction, it's off, and it's widely known.

I mean, if you look at the government numbers for construction put in place, some of these areas, again, like office buildings, I mean, down 30% plus.

So I think where we're winning is, because of our ability through product and service to differentiate ourselves.

In terms of LED or technology, we really have just started to -- I think as an industry, see the ramp-up of that.

And I'm talking about more in the ambient lighting spaces.

I think some of the new product introductions that we have had, these are hugely, or highly specifiable-type products, so the specification cycle just takes a while.

But I think as we get into that 2011 period, maybe in the middle of our fiscal 2011, I think you're going to start to see some of those investments really start to take off, as those products now find their way into that new construction cycle and/or the renovation cycle.

So the good news is that there is a lot of good news yet to come.

Great.

And you mentioned the residential channel.

Obviously you have one primary customer there, or at least you have historically.

Can you give us a little color on whether or not there are additional stores for you to start selling incremental SKUs into over the next several months, or whether or not you pretty much rolled out all of their assets?

No.

So as I mentioned earlier, we serve the home improvement channel, and that's really one of the key channels where we touch the residential market.

But we have other channels as well, through electrical distribution, through show rooms.

There are a number of channels where we touch the residential market directly.

Then obviously you have the indirect of you build a strip mall -- once you build a neighborhood, you build a strip mall, you put in street lights, you do all sorts of things.

So, our business is obviously influenced by residential construction.

So the fact of the matter is, that our housing starts to annualize 600,000, down from I think a peak in 2006, of like 2.2 million.

So I'm actually kind of bullish on the longer term of what the residential markets mean for us.

And I really like the products that we are -- that have introduced, and will continue to introduce that are really around better lighting solutions, with superior energy savings.

I mean a lot of the story that we have to sell today is, you can have great quality of light, while getting a payback, because of the energy savings relative to other products that are out there.

So I think that over the next, I don't know what it is, three years or so, you're going to see as the residential market comes back, our participation in that grow, and grow nicely.

Great.

And then if we could get a little bit more specific about the LED fixtures, spoken to a number of customers that have installed these, that have been pretty impressed with the performance.

But I understand that the 2 by 2 format of the RTR, that you introduced, is not the predominant format in the market.

I was wondering if you had plans for more product introductions throughout the course of this year, if you might be able to give us some color there?

Yes.

The 2 by 2 format is not the 900-pound gorilla, obviously it's the 2 by 4.

And our expectation is to release our 2 by 4 product here, within I believe it's the next quarter.

So we will have the full, a full gamut, a full offering in that ambient white lighting for various types of commercial use.

And while the markets are down, I think that as, as these buildings start to come back up, a lot of the see-through buildings, these fixtures are going to be the fixtures of choice because of the energy savings, coupled with the superior lighting.

And the energy savings will justify on a payback basis, the incremental investment that a building owner would make, relative to that.

And again, given our lens technology, and our ability to drive optics, these are very compelling financial stories, in addition to superior lighting.

I think the 2 by 4 may be later this calendar year.

I'm not sure.

It's going to be this fiscal quarter--.

Calendar, yeah.

--later in the fourth calendar quarter.

Great.

And then if I could just change, change topics a little bit.

Backlog, I noted that this is your first quarter backlog growth since before the credit crisis.

So I guess I should say congratulations there.

It's good to see.

But sequentially, backlog was up (inaudible) 38% and change.

And I was wondering if there was anything specific in the sequential increase in backlog, because I have to go back many, many years to see an increase like this in the past.

Yes, I believe that our backlog is becoming less of an indicator of our future business, particularly as we reduce our cycle times.

We look at what the incoming order rates are, and where and how we manage either by various channels, what our sales forces are seeing, and our ability, because of reduced lead times, to respond very quickly to customer orders.

Backlog has become -- it's important obviously, but less important.

So, we have not said this, but we, again, focus very carefully on that daily order rate.

And for the third quarter, we saw an uptick that was consistent with us, our results, our top line growth, that 4% volume growth.

And so it does give us some indication that our fourth quarter, we have some momentum going into it, as we go forward.

So that order rate is confirming, I think what you see vis-a-vis the backlog.

And I would just comment, Craig, that some of the sequential improvement is the seasonality that we do experience in our business, when you compare the end of February, when you're coming out of winter, versus May when you're coming into the busier summer, construction cycle.

So, again, you point it's more maybe than we've even had sequentially in prior years, but a big part of that sequential, is the seasonality that we would see due to the summer construction cycle.

And was there any contribution from the ballast shortage?

Minimal.

Minimal.

Yes, again, just to be clear on the ballast shortage, at this point in time, it's a, it's a nightmare to manage through, right?

So it's just a lot of people having to do extra work to make sure that we're providing to the sales the appropriate products so that we can manufacture.

There's just a lot of juggling that's going on, because it's not a smooth supply chain.

How long this situation will last, I just don't know.

So -- just, if we could talk about that a little bit, so almost exactly a year ago at this time, I learned from some of the private participants in the market that there was also a ballast shortage last year, that was really quite short.

I mean, it only lasted a period of just a handful of weeks, maybe, maybe as much as two months.

So it was over pretty quickly.

And what some participants in the industry said, is they thought that it might have been a little bit of hoarding of people anticipating a ramp-up in some of the relight projects.

Is that possibly what's, what's contributing to the shortage?

Or do you see this more as sort of a supply issue, where one of the suppliers has been down and needs to bring capacity back up to serve the market?

As we understand it, and, again, we spend quite a bit of time traveling the globe, that this is more of a global component shortage for certain components that go into various types of electronic gear.

And I really -- I don't have more information than that.

I wouldn't be a good source of knowledge there.

Great.

Thank you for taking my questions.

Thank you.

Jim Kieffer of Artisan & Partners.

Your line is open.

As is a tradition, oddball questions happen towards the end of the call, and this is certainly going to land in that category.

I want to at least gain some understanding on it.

In your Q's, for the past few quarters, you've had a note that accounting standards have to be adopted.

In particular, there's one about multiple deliverable revenue arrangements.

I'm not -- I don't want to get caught up in understanding the minutia of how the accounting works, but I do want to make sure I understand, what in the way you operate your business causes this to come into play?

Yes, yes, this would not likely have a material impact on our current business.

We do have some service components and some of our outdoor products, the ROAM product that we sell, we sell a monitoring capability and all around that, and then the technology around that.

And that standard could impact how much revenue you recognize when you sell the product versus how much revenue is associated with the service component, and so forth.

It's not anticipated to be a material impact, given that we're predominantly sell single components and once they ship, we recognize the revenue.

But we do have a few areas of the business, where we have some multiple revenue components in service.

But today it's pretty minimal.

Yes, I didn't expect it was significant.

I just want to make sure I understand what drives that to come into play.

So it's where there's a service contract component to the product?

In our case, that's where it would be applicable.

Yes.

Where we would sell the component, but also have an ongoing monitoring service capability, and how you segregate the revenue and earnings between those various components.

Okay, and so it doesn't come into play in any form with the sales of finished products manufactured by others or independent sales force, any of those sorts of things?

For our fixtures and all today, it does not.

Again, it's mainly around some of these control, the ROAM control where, again, it's a de minimus part of our sales.

Today, it's an opportunity and we want to grow that, and we are seeing growth in that business, but that's where we -- it's an asset management system, wireless mesh network.

And so to the extent that we are selling that ongoing monitoring service, we segregate that component and that FASB would address that requirement.

Okay.

Warned you it was quirky.

Thank you.

All right.

Glen Wortman of Sidoti, your line is open.

Just a quick follow-up, couple of quick follow-ups here.

Can you just give a sense of the relative gross margins on these lighted control products, and the renovation to the relight market to the rest of your business?

No.

Okay.

Also, on renovation and relight and lighted controls, were those up, I don't know if they were up year over year, but were those businesses also up sequentially, discounting for seasonality?

Yes.

And so on the renovation business, it was up probably about, what, 20%?

20%.

A little more -- so last quarter to this quarter, and on the controls business, we continue to show nice growth there as well, market or above type growth rates.

Again, and then lastly, just your cash position grew again.

Can you just update us on your priorities for cash?

Yes, we are, as you can see, are investing first and foremost into our business, and the investments we talked about, we certainly plan to continue.

So that organic growth in product development and so forth, is easily funded out of our cash flow from operations.

But that will be a source.

We do continue to look for acquisitions, bolt-on, fill in the gap type of acquisitions, both in our luminaire business, as well as the control.

Most of those would likely be smaller type acquisition companies in the $20 million to $50 million revenue, or even smaller, but there are a few larger ones that might come along.

We're certainly going to continue to pay our dividend.

Have no plans at this stage to change that.

And then stock repurchases, that has been a use of cash in the future, if the opportunities to either invest organically or strategically, are not as robust as the opportunities to reinvest in buying back our stock, then that's an area we have certainly done in the past, and would look at another avenue.

We really don't see much deleveraging at this point.

We just put the $350 million debt that's extended out there.

So that would be an area of last resort at this point, because of the penalty of prepaying those types of commitments.

Okay.

Thanks a lot.

I would 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 -- for our key stakeholders.

Our future is bright.

Thank you for your support.

Today's conference has ended.

All participants may disconnect at this time.