Acuity Brands Inc (AYI) 2010 Q4 法說會逐字稿

Good morning and welcome to the Acuity Brands 2010 fourth-quarter financial conference call.

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

(Operator Instructions).

Today's conference is being recorded.

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

Now, I would like to introduce Mr.

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 fourth-quarter and full-year results are Vern Nagel, our Chairman President and Chief Executive Officer and Ricky Reece, our Executive Vice President and Chief Financial Officer.

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

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

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

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

Now let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

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

First, let me say we are very pleased with our results for the fourth quarter and full-year 2010.

In the fourth quarter, we, again, achieved unit volume growth in an environment where nonresidential 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 elaborate later in the call, these strategies include the continued introduction of new, more energy-efficient lighting products and solutions, expansion in key geographies and important channels and gains in productivity.

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

With the conclusion of our fiscal year, it is fair to say that the economic challenges that began in 2009 continued throughout 2010.

These conditions linger today; although somewhat less severe.

Unemployment in the US continues to hover close to 10%.

Lending practices for commercial real estate continue to be restrictive and asset values for commercial real estate continue to fall.

These factors, coupled with weak housing demand, continue to negatively impact growth for new commercial construction, particularly in certain markets such as the Southwest and Southeastern portions of the US.

For example, this is the second year in a row where construction spending for commercial buildings was down this year nearly 34% after being down 30% a year ago.

Having said this, we believe our key markets served have either bottomed out or are on the road to recovery.

Additionally, opportunities such as renovation and lighting controls are emerging growth markets.

We will talk more about these opportunities later in the call.

I mentioned these macro challenges we faced in 2010 because it provides a backdrop against which you can see the outstanding performance of our Company in the fourth quarter and full-year 2010.

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, for the fourth quarter.

Net sales for the quarter were $444 million, up 5% compared with the year-ago period.

This level of growth is very significant given that, according to NEMA statistic, shipments for lighting fixtures have been down for eight calendar quarters in a row.

Operating profit, excluding the special charge for streamlining activities which Ricky will discuss later, was $51.3 million, up 2.6% from that reported in the fourth quarter last year.

Operating profit margin, excluding the special charge, was a strong 11.5% in the quarter, about 30 basis points below last year due to the acceleration of key strategic investments, which we will discuss later.

The alluded earnings per share from continuing operations, excluding the special charge, were $0.67, almost 2% greater than the year-ago period.

For the full-year 2010, net sales at Acuity Brands were $1.63 billion, down a little less than 2% from fiscal 2009.

Consolidated operating profit margin, excluding the special charge, was 10.2%, down about 70 basis points from the year-ago period.

On a GAAP basis, we made about $80 million.

Excluding the after-tax impact of the streamlining charge and the costs associated with refinancing our bonds earlier, net income was $91 million, or $2.08 per diluted share.

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

In addition, we generated almost $160 million in net cash provided by operating activities.

This is up significantly from the year-ago period due primarily to the timing of payments for incentive compensation and strong balance sheet management.

This is the sixth year out of the last seven where we have generated more free cash flow than our net income, a significant accomplishment.

Rick will talk about our strong financial position later in the call, but I am pleased that our debt position net of cash at the end of August was about $162 million, down from $213 million a year ago while making a number of key investments.

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

Lastly, I am pleased to report that we continued to return much more than our cost of capital in 2010 and our cash flow return on investment was again a robust 20% in spite of these challenging economic conditions.

We are particularly pleased with our fourth-quarter results as we believe it gives insight into 2011.

So first, let me share some additional information with you regarding our net sales in the fourth quarter.

On a consolidated basis, our net sales grew 5% compared with the year ago.

We estimate unit volume grew approximately 6% in the quarter driven largely by our continued expansion in certain geographies where we had a greater selling representation in channels such as renovation, traditional stock and flow and home improvement.

Also, we continue 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 overall net sales approximately 1% 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 the decline associated with price mix was due to the changes in product pricing.

Looking at all this a little 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 buildings 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 6%.

Again, a remarkable accomplishment.

We believe our channel and product diversification, as well as our strategies to better serve our customers with new more innovative products and the strengths of our many salesforces have allowed us to gain overall marketshare.

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

This is not unusual in an economic environment such as this.

As you can see from our gross profit margin, which expanded a very robust 240 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.

To lessen the impact of pricing, we continue to drive productivity improvements and cost reductions throughout the Company.

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 and new construction projects, particularly commercial buildings sold through the specification channel, partially offset by share gains in other channels, including lighting controls and home improvement.

We are starting to see 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, including our stock business and home improvement.

We expect these areas will provide growth opportunities in 2011 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, excluding the streamlining charge, was 11.5%, down only 30 basis points from the year-ago period.

There are a couple of key points to note.

First, we estimate there is about $3 million of expense in the quarter related to additional incentive compensation and acquisition activity.

The additional incentive compensation was a catch-up due to the performance, (technical difficulty), our operating profit margins could have been higher, particularly given our robust gross profit margins, so let me explain.

Selling, distribution and administrative expenses increased approximately $18 million on an increase in net sales of 5%.

More than three-quarters of this increase was for incentive compensation given our substantial outperformance to the market and increased sales commissions to support our selling efforts and the sale of higher margin products.

The balance was for incremental investments to drive future growth.

We believe these incremental investments, which we expect to continue into at least the first half of our 2011, reduced operating profit margin in the quarter by almost 50 basis points.

We continue to invest heavily in key areas of the Company, particularly as we lead the revolution of digital lighting.

These include technology and innovation, record-setting pace for new product introductions, sales and marketing, renovation and lighting controls.

Each of these areas represents huge opportunities for future growth, particularly as we develop new, more innovative products, including those incorporating leading-edge technologies.

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

While our revenues in this channel were up more than 33% 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 certain other areas of our business.

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

These investments are an expense in our P&L today.

Revenues are ramping up in these areas, though nowhere near expected peak sales.

We expect they will pay dividends later in 2011 and beyond.

When considering our fourth-quarter performance, another point you may find interesting is that the last time we had this level of sales volume was in the second quarter of 2007.

Our operating profit is up almost 30% and our margins are 130 basis points higher.

Again, remarkable when you consider the accelerated investments we are making today.

Same is true for the full year.

The last time we had similar revenues was in 2005.

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

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

We have been able to produce these results because of the dedication and resolve of our nearly 6000 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 of sustainable and energy-efficient products and companywide productivity.

On the strategic front, our accomplishments in 2010 were considerable.

The following are some of the more noteworthy.

We introduced almost 100 new products or families in 2010, consistent with our record-setting pace in 2009.

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

We continued our expansion into new markets such as renovation and increased our penetration in important channels such as home improvement, which served to offset some of the market decline in certain commercial industrial markets.

We made great strides in enhancing product quality, improving delivery and driving productivity throughout the Company.

Lastly and most importantly, we significantly accelerated our strength in our presence in the fast-growing lighting controls market.

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

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

I would like to now turn the call over to Ricky to make a few brief comments on our overall financial performance before I make some remarks regarding our focus and efforts for fiscal 2011.

Ricky has a cold, so I am going to apologize in advance on making him sit far away from the phone here.

Ricky?

Thank you, Vern and I apologize for my scratchy voice, but hopefully you will be able to understand me and good morning, everyone.

Vern covered our fourth-quarter and full-year's earnings results, so I will focus my comments on our cash flow, financial position, as well as an update on our streamlining activities before turning the call back to Vern.

Starting with our cash flow, we generated over $160 million of net cash from operating activities in fiscal 2010, an increase of almost $68 million compared with the prior year.

The primary driver for the increase in cash flow was significantly lower incentive compensation and severance payouts in fiscal year 2010 compared to last year.

Operating working capital calculated by adding account receivables net plus inventories and subtracting accounts payable increased by approximately $3 million to $209 million at August 31, 2010 from the $206 million a year ago.

Because of the growth in revenues during the second half of fiscal 2010, our net operating working capital days outstanding has actually decreased five days or almost 12% since last year and that operating working capital is under 13% of net sales at August 31, 2010, which highlights the success of our team in managing our working capital in this volatile market.

Capital expenditures for fiscal 2010 were $22 million, essentially flat with the prior year.

During the fourth quarter of fiscal year 2010, we returned to repurchasing our shares on the open market.

We repurchased just over a million shares, or 2% of our outstanding shares, in the quarter and year at an average price of approximately $37 per share.

We still have approximately 1.5 million shares remaining under our current authorization.

We ended our fiscal year 2010 with a cash balance of $191 million, an increase of $172 million compared with the $19 million as of August 31, 2009.

This significant increase primarily reflects the $109 million of net cash proceeds provided by the changes in our debt structure and the strong cash flow from operations in our fiscal year, partially offset by the share repurchase, dividends and investments in fixed assets and acquisitions.

As of August 31, 2010, our total debt was $353 million, consisting primarily of the $350 million 6% senior unsecured notes, which aren't due until fiscal 2020.

In addition to our sizable cash balance, we also have availability under the revolving credit facility of over $242 million as of August 31, 2010.

This facility does not mature until October 2012.

Our debt, net of cash, is a mere 19% of total net capital and our leverage ratio of debt to adjusted EBITDA is under 1.7 times at August 31, 2010.

So clearly, we continue to enjoy significant financial flexibility.

With our strong liquidity position, our prioritized use for this cash, as well as our expected strong cash, strong future cash flow remains as follows -- internal investments in areas where we see significant growth potential as evidenced by our increased focus over the past few years on new products and service development and enhancing our market presence; strategic acquisitions and alliances to address product gaps and our opportunities to leverage capabilities with technology partners and stock repurchases, primarily to offset dilution from stock issued for recent acquisitions or as part of our long-term incentive programs.

Now let me spend just a few moments updating you on our streamlining activities.

The activities related to the charges we took in fiscal 2009 are essentially complete and are slightly ahead of the anticipated annual savings rate of $50 million.

This year, we realized approximately $49 million in savings compared with $18 million in the prior year.

In the fourth quarter of fiscal 2010, we realized almost $13 million in savings compared with almost $12 million last year.

In addition to these activities, we announced in the second quarter of 2010 further streamlining and manufacturing consolidating activities, which are expected to yield approximately $10 million in annualized savings.

We have initiated these activities and had about $1 million in savings in our fourth quarter and plan to ramp up the savings such that we are at the annualized rate by the second quarter of next year.

In the fourth quarter of 2010, we recorded additional special charges of $3.3 million.

This charge consisted of $1.6 million of employee severance and benefit costs related to additional streamlining actions, including actions related to the recent acquisition of Renaissance and at $1.7 million for the write-down of certain assets, primarily the value of a closed facility.

Since most of this charge relates to our asset impairments in the Renaissance acquisition, we expect to realize minimal savings from these actions.

To summarize, special charges for the full fiscal year 2010 were $8.4 million with expected annualized savings of over $10 million and for fiscal year 2009 were $26.7 million and we are already realizing annualized savings of over $50 million.

We also recorded an after-tax loss in fiscal year 2010 of $6.8 million related to early extinguishment of debt.

These special items negatively affected EPS by $0.29 and $0.40 in fiscal year 2010 and 2009 respectively.

Thank you and I will now turn the call back to Vern.

Thank you, Ricky.

I am glad you made it through that.

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

While our company policy is not to give earnings guidance because we feel it is more beneficial to concentrate on those strategic and tactical actions that can best help us achieve our long-term financial goals on a more consistent basis, we do have a few observations which may provide you with insight into our focus for 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%, tight credit availability and falling asset values for commercial real estate.

How long will these turbulent economic conditions prevail?

Only time will tell.

Key indicators for our primary market nonresidential construction seem to be stabilizing.

Residential construction is showing early signs of growth from very depressed levels, and the overall economy is growing, reflecting a cautionary uptick in consumer and business confidence.

Forecasts by independent organizations continue to suggest unit volume for new construction put in place in North America will be flat, but possibly slightly down in 2011, while certain segments, like commercial buildings and certain geographies, again like the Southwestern US and Florida, are expected to be down considerably more.

Interestingly, the sale of lighting fixtures is expected by some to be up low single digits, mostly due to renovation.

Additionally, we feel the controls portion of the industry will continue to significantly outpace the growth of luminaires.

This suggests that the significant headwinds that have prevailed in our markets over the last two years will begin to abate, though the recovery is expected to be slow and inconsistent in both North America and Europe.

This suggests to me Acuity Brands will continue to face a declining market in the first half of our 2011, albeit at a much slower rate, to then be followed by market growth in our second half.

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 value products and limited market access.

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

Our gross margins for the quarter and year just ended again suggest 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.

Additionally, we expect to benefit from our previously announced price increase in 2011, though the expectation is that any price increase will mostly offset rising costs.

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 continue to see some worrisome signs that costs for certain commodities, such as steel and aluminum, could be an issue in fiscal 2011.

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

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

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

We continue to monitor this situation very carefully.

Looking more specifically at our Company, we are excited by the many 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 fixtures and controls.

As the industry leader in North America, we continue to work diligently to expand our relationship 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 and solutions portfolio in this area are expanding rapidly.

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 technologies, and lastly, expanding into new markets, 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, marketshare gains and upper quartile 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.

We are now starting to see the benefits and synergies of our investment in this exciting and fast growing market.

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 2011 and beyond.

As we look beyond the challenges of the current environment, we believe the lighting and lighting-related industry will experience significant 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.

(Operator Instructions).

Matt McCall, BB&T Capital Markets.

Thanks, good morning, everybody.

I wanted to try to get an idea of what the SG&A leverage or SD&A leverage, in this case, looked like in fiscal year '11.

Trying to get a better handle on the puts and the takes.

You talked about incentive comp and you talked about some of the growth spending maybe ending or not seeing incremental spending in the back half of next year.

And then you also discussed the streamlining benefit.

So putting all those together, can you give me an idea of what the trajectory of the SD&A line will look like next year relative to sales growth?

The short answer is no, but we will try to help.

I think if you look at the fourth quarter, I think it gives you great insight into the activities of the business that we expect to continue.

So when you look at our fourth quarter, you see our gross profit margins with $444 million of revenues around 41.5%.

When you look at the SD&A, we spent about $133 million.

My estimate or our guesstimate is that about, and we said this on the last conference call, that approximately 60% of that is probably fixed, but it will ebb and flow.

In other words, as we do more aggressive marketing, the number could be a little higher.

As we have less product introductions one quarter versus another, the number could be a little lower.

But I think that the trajectory of taking that SD&A number at around 60% calling that fixed, the remaining portion being variable, probably will give you good insight into what a run rate for your models could look like on a go-forward basis.

Go ahead, Ricky.

Another item I would mention, you talked about the restructuring or streamlining savings, the $10 million, $9 million incremental, if you will, next year.

Most of that, Matt, is going to be in the gross profit line related to production and consolidating production.

Some of it is SD&A because we are streamlining some overhead and all, but a majority --.

And Ricky, when do you expect that?

We should hit that annual rate by the end of the second quarter, call it $2.5 million a quarter.

We should be at that rate by the end of our second quarter, ramping up from the $1 million we realized this quarter.

Okay, okay, that's helpful.

And then Vern, just to be clear, the 60% fixed, the impact from the incentive comp that you broke out in your commentary, you are including the impact of that.

We are not going to see any variability.

Any variablity would include the impact from incentive comp going forward from that 60% roughly.

So again, I will try to be clear.

In the fourth quarter, because of the performance of our plans, and we focus on generally period-over-period improvement, obviously with the market being down so much in 2010 compared to 2009, our incentive compensation program was built around plans.

The fourth quarter was obviously a very important quarter for us and what it did, based on the very strong performance, is it upticked the overall total incentive plan for the year.

So we recorded, if you will, a bit of catch-up and so that was part of that $3 million number that I spoke to earlier.

On a full-year basis, when you look at what incentive comp is expected to be, we feel that the notion of say around a 60% fixed number of the fourth quarter's SD&A is probably a pretty good run rate, including what incentive comp would be expected to be next year.

Okay, perfect.

And then you talked about the growth initiatives and the four categories.

You broke those out.

Specifically, I wanted to reference or ask about controls.

When you look at your controls initiative, do you ever talk about the targets there, a goal or the potential for the controls business maybe as a percent of sales when we look at fiscal year '11 or maybe even longer term, how big could that be?

And then I guess directionally, what the impact is going to be on overall operating margins?

So just a bit of insight into the market.

We believe that the controls market -- for us, the addressable controls market.

There are many portions of lighting controls where we don't specifically play.

So I don't bring that into the numbers I am about to share, but we guesstimate that, in 2007, the lighting controls market that we would participate in is roughly a $900 million market.

We think it's growing -- excuse me -- 2010, a $900 million market.

Our guesstimate is that that market is growing probably in the kind of mid-20% range and should continue to do that for awhile.

I actually think that the market has the potential to more than double over the next three, four years and our participation in that portion of the lighting market we would expect to be consistent and/or above what our general share of the lighting luminaire market is.

So we don't break it out specifically because it is really all part of the same package.

The world is converging.

This whole notion of digital lighting and how one controls digital lighting and how one controls lighting in general just to optimize the lighting environment while providing an optimal energy savings environment, controls are an integral part.

We are selling more and more fixtures with controls embedded, so it is difficult to break that out and therefore, we don't.

We see it as just an overall adder to the market.

Another comment that I would make just to give you more insight, as we think about the markets that we serve over the next handful of years, we see new construction coming back during that time period and adding significantly to, if you will, the market pie.

We see renovation growing at probably a doubling or maybe even more over the next handful of years along with controls.

It is entirely possible that the marketplace, the relevant marketplace that we address today could be 50%, 60%, 70% greater by 2015.

These are huge opportunities and where we have positioned the Company is to fully participate both new construction, lighting controls, as well as renovation.

And all of these things are very blurred when you get out into the end market, but very exciting over the next handful of years.

Matt, on your comment on the margin opportunity as controls grows and becomes a bigger part of the overall mix, we have not provided specific operating margins for the control business, but have indicated it is above our average margins.

So as that becomes a bigger piece of the pie, it should enhance our margins, everything else being equal.

Okay.

Thank you very much.

Shawn Severson, ThinkEquity.

Thank you, good morning, gentlemen.

A question on kind of the bidding activity in retrofit.

What are you seeing in terms of the number of projects that you are bidding on and what do you think your typical win rate is in the projects that you bid for?

Sure.

The renovation market is very interesting.

The way it's served today is primarily through various types of lighting management companies.

We believe that the sales cycle is very long.

So from the initial knocking on their door, all the way through the energy audit, lighting assessment process and then competing on those jobs, we are trying to actually figure it out.

But that sales cycle could be anywhere from 12 to 24 months.

Some projects are obviously shorter, but it is fairly lengthy.

So we are seeing a significant increase in our quote activity given how we are going to market and the investments that we have made.

I don't have that information in front of me.

We probably wouldn't make that available anyway.

But suffice it to say, that it is -- our quote activity is up dramatically.

And when you look at what is happening in our business in the fourth quarter, our revenues through that channel or into those types of activities was up by more than a third over the year-ago period.

And if I had to look at what we did in the quarter, I would say that we were near our record sales, if you will, into that channel with an expectation that this is now ramping up pretty dramatically.

Okay.

In the typical retrofit, can you, I guess, maybe break out the relative importance of things like controls and sensors versus LED and maybe how much of the retrofit is LED?

I know it is more important to figure out how to turn things on and off first, but just how does LED fit into that retrofit business?

Yes, I would say, again, did it very much depends on the project and what the individual is attempting to do.

Today, in sort of the industrial space, there is such great value in terms of the traditional lamp ballast technologies that are out there that LEDs, in some instances, just aren't competitive given their pricing and in other markets or other opportunities, LEDs are becoming very important.

Our view is that we are agnostic, if you will, to the lighting source.

We are very focused on providing our customers with the right solutions for what they are attempting to do.

So the whole notion of good, better best and we are seeing our LED business really across the board increasing dramatically.

And when I say dramatically, you are getting doublings, but you are getting them off a fairly small base and those numbers, I would guess over the next handful of years, will become very, very important both for new construction, as well as (inaudible) and renovation.

On the controls piece, controls is very important in the, if you will, renovation space because, obviously, the most efficient light fixture is the one that is off.

So if you can put some type of control device in the space, you can better monitor when the lights are in use and how they are being used.

So we are seeing growth in our controls business for devices that help primarily sense, if you will, occupants in a space and we expect that market to continue to grow, both because it makes sense economically, as well as legislative mandates.

So I hope that gives you some insight as to why.

Yes, definitely.

And then just, lastly, you have done a great job of positioning yourself to take advantage of some of these trends, but is there anything else that you feel you really need to develop from a technology standpoint or possibly purchase going forward that is going to be kind of a key component in the lighting side or do you think your portfolio is fairly complete today?

No, we continue to look at acquisition opportunities that will help us do many things, expand our product portfolio, allow us to leverage our technology and innovation team.

Again, in our fourth quarter, we have added incrementally another 10 folks in our sales and marketing, our LED technology and just technology in general.

And so the ability and the knowledge that we possess to drive innovation, to really drive some of these opportunities is huge.

So we are looking to attract more businesses into our portfolio where we can take advantage of that, take advantage of our access to market.

So we will continue on the lighting side to look for acquisitions that make sense.

On the control side similarly, to the extent that there are technologies that we find interesting, we are very aggressive.

Our recent acquisition of Renaissance is a clear example of technology both in lighting fixtures, LED in this case, as well as lighting controls.

Very interesting portfolio that will allow us to leverage our capabilities going forward.

And lastly, we believe that really where the world is going to go in a fairly significant way is lighting solutions, the ability to sell a complete lighting system into a space and have the owner optimize, if you will, their energy savings while providing a superior lighting solution is really going to be a nice growth area going forward.

Great.

Thank you.

Christopher Glynn, Oppenheimer.

Thanks, good morning.

You mentioned the expectation to continue to grow the controls position relative to your share, which brings me to the question, right now, are you getting more growth from the controls as you are filling out your agency channel or is it more from the market at this point?

It is a combination of both.

As you know, on new construction, the opportunity to put controls in that has just a longer leadtime due to the specification cycle.

So we are seeing that ramp up very nicely.

I think, as Ricky mentioned in the last call, and it is true on this call as well, we've continued to operate and perform ahead of our acquisition case.

And that acquisition case when we acquired the various controls businesses was to double the business within an 18-month time period and we continue to be on track or actually slightly ahead of that pace.

And that is both market-driven, as well as selling -- taking advantage of our various access-to-market capabilities.

Okay.

And in the description of the $900 million addressable market, what are some of the thoughts and way to think about what additional acquisitions in the controls space, how big could the addressable market become?

I don't have that information in front of me, but I believe that if we are saying that today in 2010, we are defining our addressable market as about a $900 million addressable market.

I am guesstimating here that it is about $1.5 billion, Dan.

Is that what we are --?

Yes, correct.

About $1.5 billion is the more fulsome market today.

Okay.

And is that -- are you looking to be able to address that full market or is the $900 million kind of the sweet spot within the controls space?

It is clear that the $900 million is a sweet spot and a very rapidly growing portion of the market because it has a lot to do with the notion of providing superior lighting, in general ambient lighting, as well as controlling that from an energy perspective.

Some of the ancillary opportunities are very specific to unique applications where there is not necessarily huge growth.

And I think that the other addressable area where there could be growth, and we are only touching on that today, is more of that residential market.

We continue to observe that market and think that there are opportunities both on the luminaire side, as well as the controls side.

So again, when we think about the overall markets first within the geography of North America, we see opportunities for acquisition growth, as well as organic growth, residential being one of those.

As we think about geographical growth outside of North America, there are markets that we are participating in and beginning a more aggressive participation, but it is really local.

And those investments that we are planting the seeds today we expect will have opportunities, more opportunities in that two to four years from this point in time.

Okay.

Thanks for that.

And on the CapEx side, a big step-up versus the past many years, just looking for a refresher on what you are thinking your maintenance CapEx level is and if there are specific projects that place in fiscal '11?

So Ricky, let me just take a quick stab and then you do it as well.

I would have to say that our baseline capital is probably in that $20 million to $25 million range.

We are stepping it up into a couple of key areas, a little bit more investment in our industry-leading IT capabilities.

We see just unique opportunities going forward there.

We are making investment in hard tooling around certain types of fixtures that are both current, traditional lamp ballast technologies, as well as LED.

So we are ramping up that capability.

What we are trying to do is be conservative here too.

As we come into the year, we really look at where can we leverage our opportunities.

So it is really a target, but I think it is kind of the upper end of the target range.

Ricky?

I mean in there is too and all around the new products, as Vern highlighted, and we do see a continuation of launching of a lot of new products next year in this solid-state world where adding some equipment and capability to be more diverse in our opportunity to participate in the solid-state part of the marketplace.

Okay.

And just last one.

The material and components costs down a bit, a little tailwind.

I guess there was little surprise to see that given the general commentary of headwind across most companies that use a lot of these similar materials.

Yes, I think if you look at steel, steel is one of our major -- steel and aluminum is one of our major commodity raw materials and we did see a dip in the cost of that.

We tend to trail the spot price of when it runs through our cost of sales by a quarter to two.

So the dip that occurred beginning in the summer and into the fall is helping us a bit.

As you look out, most people are forecasting it to come back up.

Hence, the price increase we announced at the end of May.

We would hope to be able to offset what we think will be some increases in the future in that steel and aluminum area.

Ballast, as you know, has been in short supply.

Haven't really seen much pricing pressures there, but ballast has been in short supply.

And our guesstimate is that we are going to continue to experience higher costs.

Hence, the price increase that -- our expectation is it will start to roll through probably sometime mid this quarter, but all of the prognostications are around steel prices increasing.

As Ricky points out, ballasts are an issue.

They are an issue for everybody.

We are experiencing pressures in that area.

So how we manage that will continue to be a challenge, but that is true of everyone I think in the industry at this point in time.

Okay.

Thanks a lot.

Jed Dorsheimer, Canaccord Genuity.

Hi, Vern and Ricky.

This is actually Josh Baribeau who is in Asia right now.

Very straightforward, great quarter, just a couple questions, maybe on the cost reductions.

You have done a great job of finding ways to reduce your costs over the last couple of years.

Do you see any more opportunities or any other low-hanging fruit in terms of things you can do to reduce your costs further?

That's a great question.

Our goal internally has for years now been to improve on a static base our operating margins by a minimum of 70 basis points.

And so as Ricky pointed out in the call, we took actions that will lower gross profit -- excuse me -- will enhance our gross profit by $10 million in 2011.

It is those kinds of actions of continuous improvement that help us do these types of things.

Low-hanging fruit, no.

I think that everything that we do and have been doing has really been the focus and dedication of our 6000 folks.

And I'm talking about the lowest person on the totem pole, which is me, all the way to the most important person in the pyramid and that is the hourly associate that is right next to the customer, are focused on driving productivity in our business every day.

So our hope is that as we see 2011 that we continue to see growth and what we will do is look to really drive productivity so we don't have to add capability to be able to service that.

We think we have the capability through continuous improvement to do that, but in turn take that variable contribution and keep investing it back into new product development, investing it into customer-facing capabilities, which is allowing us to gain share.

The other point I would make is if you look at our business and it is hard for you out there to do this, but we focus on it very carefully and that is to see what our fixed cost structure looks like.

We have decreased that dramatically over the last handful of years.

Also, we have seen an improvement in our variable contribution on our base business because of, again, continuous improvement around various products.

If you introduce new products, you expect a higher margin, so we are spicing the stew both ways, but it is not low-hanging fruit.

It is blocking and tackling and hard work.

One item I might add to Vern.

Vern mentioned earlier some of our capital investment is around the IT and some of the capability there.

We are seeing opportunities and have enjoyed opportunities to take cost out, not just out of our business, but also out of our channel partners and customer-facing folks, as well as our supply base.

So that is an area we will continue to focus on is to enhance productivity in these transactional areas and use IT to where we are not having to touch as many of the orders and take advantage of the progress that has been made in that area.

Okay, great.

And then you touched on this a little bit earlier in terms of LED demand, either marketwide or as it pertains to your own sales.

Could you provide just a little bit more color on maybe what you're seeing in terms of growth rates or even a percentage of sales, either over the past year and certainly looking forward?

Well, so there are other lighting luminaire companies that are out there that are large that aren't involved in, if you will, the componentry side of the LED world.

So I can only comment on our business as it relates to the sale of fixtures.

And first of all, just understand that our emergency business, which is significant and industry-leading, we have been selling those products probably for the last decade and a half where they have been almost 100% LED.

So we are well versed in the LED world.

When I comment on what is happening in LED, I am going to comment only on the fixture side.

We have seen significant ramp-up in inquiries regarding LED-type fixtures.

And so the various salesforces that we have are out pitching not only our LED capabilities, but what LED means relative to other technologies.

Because, again, being source-agnostic, we want to make sure that the customer is getting the best value for what they are attempting to do.

I would say that our business, our LED business has been on kind of a doubling pace over the last, I am going to say, 18 months.

So it is ramping up and ramping up significantly.

The expectation on quote activity that is out there, particularly in that white ambient sort of general illumination space, is significant.

So while our revenues today represent probably around 2%, slightly less, we expect that to change over the next 12 and 24 months rather dramatically.

Great, that's it for me.

Congratulations, again, on the quarter.

Glenn Wortman, Sidoti & Co.

Good morning, everyone.

You guys have been taking a lot of share over the past few quarters, maybe the past year.

Can you just start -- can you talk a little bit about when you start to anniversary some of those large share gains, particularly maybe in the home-improvement channel?

Well, the home-improvement channel has been helpful to us.

It has been a very good market.

We expect it to continue to be a good market where we will gain share.

But I think our share continues to be broad-based, not just in the home-improvement channel, but in, again, indoor, outdoor, the control side of the business.

So I would say that the notion of anniversarying, it is our hope that we never anniversary those.

We continue to gain share and continue to show growth.

And so I am pleased with where we are, but our expectation is to continue to do that through the differentiation of product and service capabilities.

Okay.

And then just second with the retrofit market, you said that can potentially double.

What was the timeframe on that and how large is that market today?

That's a great question.

We are still trying to, if you will, get our arms wrapped around the definition of the market so that we -- and make sure that we are getting good data that allows us to measure our progress against that.

A lot of the information that we use, whether it is Global Insight or Dodge or NEMA or some of these other organizations that collect information and prognosticate, it is not necessarily clear how they are capturing all of that.

So we believe that the market today for renovation is well north of $1 billion, but to be absolutely precise on that is a tad bit difficult.

We will get better clarity around that, and I think that the market is going to double over the next three to five years simply because, as energy costs, as well as regulatory requirements are going to say to folks, hey, look, we can incent you to do these things.

If I am a utility and I have little ability to put more generating capacity in my market, it is a heck of a lot cheaper for me to incent people to better utilize energy.

Well, we know that lighting is the number two consumer of energy in most buildings, only behind HVAC.

So that whole renovation market, renovation being that, hey, I live in my space or I have this space, I don't intend to move, but by making this investment, I can do two things.

One, I can improve the quality of my lighting environment, so if I am a school, I can give better environment to teach children.

If I am a retailer, I can give a better shopping experience.

If I am an office building, I can improve my productivity of my associates who are working there.

The same thing is true for industrial spaces.

So quality of lighting is hugely important being paid for by energy savings.

Energy savings and more efficient lighting, whether it is moving from, if you will, T12-type capability, to more much more efficient T5 or whether it is an LED application, all of which would have a control element to it.

So you can really see that the opportunity to justify the investment in renovation based on energy savings and getting the benefit of quality of lighting is just a huge opportunity.

Okay, and just to be clear, when you talked and you said retrofit or renovation was up 30% year-over-year, you guys are talking just about fixtures, right?

Correct.

Our renovation business is up about a third, maybe actually even a little bit more.

Still trying to get our data around our controls piece.

We will add that in when we have that better situated.

It is still a little bit of a challenge to understand where some of those products actually end up.

So we just want to make sure that we're measuring it on a consistent basis.

And just to illuminate a little more on that, pun intended, we tend to track that based on products we have designed for that market.

So it is retrofit kits, it's very efficient, high bay type fluorescent fixtures and so forth, as well as when we know specifically because of the national account and so forth that it went into renovation.

As you could appreciate, someone going into a distributor, then buying products or going into Home Depot or a home center of another type or wherever, we wouldn't know necessarily whether that went into a new strip mall or whether that was a renovation.

So we are just doing the best we can with the data that is out there.

All right.

Thank you very much.

Andrew Abrams, Avian Securities.

Congratulations on a good quarter.

I just wanted to ask if there is any change in your view of seasonality.

First quarter tends to be I guess a weaker quarter.

Is the new product cycle or some other external force making that any different than you would normally expect or are we still kind of in that same category until maybe the construction market, the commercial construction market starts to pick up?

I would say that the notion of seasonality in our business is still pretty true.

It is really our second quarter that is historically our weakest, followed by our first quarter, third quarter and then our fourth quarter is our strongest.

And I don't have exact data in front of me, but typically we have been 52%, 53% of revenues in our second half, kind of that 47%, 48% of revenues in the first half.

So I don't see a meaningful change in that.

Is there any improvement on what you guys are sensing from the ballast issues?

I mean the electronics industry has quieted slightly maybe from where we were a quarter ago.

Has that affected that at all or are you still kind of seeing the same kind of shortages that you saw last quarter?

So just by way of a comment that, last evening, we were with senior folks at the Home Depot.

Quite proud to announce that Acuity Brands won Vendor of the Year for our category yesterday.

And so during this conversation, there were a number of CEOs there.

One particular individual that was there runs a very large appliance company.

That individual said that the disruption, because of the ability to attain boards for their electrical componentries that go into these appliances, has wreaked havoc on their business.

We have been fortunate that, while it has impacted our supply chain, but working with our partners, we have been able to reasonably get supply, but it has just been very inconsistent.

So I am not seeing a great deal of abatement, if you will and I expect the componentry issues to be with us for a while given what I understand from just different folks in many different industries.

Got it.

Just lastly on the LED side, the requests for information that you are getting, are they coming from, let's say, the spec world, the architects of the world who are saying, gee whiz, I need this and price isn't as much of an issue as it might be for someone in the kind of more toward the construction side of the world?

Is it coming from one specific side of that where the guys who are actually building the buildings are looking for it or is it from the architectural side where they can spec anything they want?

I would say that it is broad-based and I think that probably most folks who participate in the industry would say that it is broad-based.

The intellectual curiosity of LED and the appeal of it is quite strong.

So what you have are lots of folks saying can you tell me about it.

When you tell them about their -- and you discuss with them applications, price points, so on and so forth, it is really across the map.

It is more folks really wanting to understand not only the education, where are we in the process, what are the opportunities and do those big fixtures compare to other opportunities for the need that the particular client has.

So I would say that it is a broad-based curiosity around what and how can I do it.

You have many folks who are very progressive, that are interested in LED because of the fulsomeness of what it represents and sometimes price is less important.

But I would tell you that as people in this environment, particularly as the stimulus dollars wind down, you are starting to see people who are going to be spending, if you will, their own money being very price-conscious about what am I investing in and why and geez, I here the environmental opportunities of LED could contrast and compare that to other technologies that are there.

So it has really been a very exciting time and will continue to be to educate those end consumers, which, again, are varied -- the building owner, the engineer, the architect, the lighting designer, the contractor, the distributor.

All folks are interested in really making sure that they understand the opportunities of new technologies, including controls by the way, which is really fascinating to see.

Right.

And just lastly on margins, do you think we are now kind of at a sustainable level in gross margins both from the perspective of the cost savings you will be doing in 2011 and your ability to source kind of a little better than maybe in the past?

Should we kind of look at this as a sustainable level or are we still going to be up and down between kind of the range that we have seen in the last couple of quarters?

Well, I think part of the issue has to do with volume.

Obviously, we have a very leverageable model.

I think that as we put more volume over our fixed base, and we have the capacity, I believe our notion around continuous improvement will allow us to add incremental volume without having to match, if you will, the expense.

So there is leverage points here.

Yes, we look to continue to improve and take cost out, but I still think that volume is key.

So as you think about your models going forward, how and what you assume for the market growth rate, our ability to take share, so on and so forth, will have an impact on margins.

Now having said that, I would say that our margins kind of in this 40 point something or other, kind of getting up to the 41.5%, I would say that we have pushed the kind of high watermark or now the low watermark up into those levels.

But to precisely say can you extrapolate 41.5% into it for each quarter, I would say I wouldn't do that because there is still some variability around sales volume.

Thank you very much.

I appreciate it.

Peter Lisnic, Robert W.

Baird.

Good morning, guys.

I guess first question, Vern, if you could maybe give us a little qualitative commentary on the price competition.

That seems as though that might be a little bit of a risk for fiscal '11.

Just wondering kind of what you're seeing there trendwise on the price competition front.

Well, I think that looking at this quarter is probably a reasonably good example.

Our volumes were up six points in unit volume and we felt that price mix reduced that by about a point.

So the price -- and we said that while it is impossible to precisely predict, we guessed a little more than half of that point down was price.

I continue to look at price in the marketplace as simply being competitive.

It will continue to be that way.

We still have lots of folks bidding on the same jobs and so on and so forth.

But I am kind of feeling that we have been able to manage our way through that and I guess, if I were building a model going forward, you would be conservative if you said price increases offset cost increases.

Though we continue to drive some incremental benefit or we expect to drive some incremental benefit in terms of our productivity to help get that 70 basis points of margin improvement that we talked about.

Okay, all right that's helpful.

And then I guess if I go back to the last question on the gross margin and running at 41.5% here in the fourth quarter, you get controls growth, retrofit growth, you have got the restructuring savings.

It just seems to me that you get a little bit of better volume and better mix next year running at a low 40%s gross margin.

It's a relatively safe or conservative assumption.

Am I missing something that could impact the gross margin for fiscal '11 or beyond?

Well, I think if you look our fiscal '10 and you go back and look quarter by quarter, it was really Q2 where we just barely missed hitting that 40 point deal.

Our expectation is that we won't face as much headwind.

Our Q2 is always our softest quarter, so Q2 is probably a little bit of the outlier there a tad bit.

But I think the rest of the way, you saw margins that were north of 40% and it is our focus and objective to continue to improve those margins as we go forward.

It is always a risk around material spikes and disruptions to supply chains and cost increases and stuff, but I think if folks don't try to get to precise and read into 10 or 20 basis points here or there, I think for the overall year, you should see us perform at better than 40% margins.

Just to add a little bit to some of the puts and takes, the $10 million savings, $9 million incremental, as we talked about, most of that is gross profit.

So you are right.

We have got that benefiting us and then the control business tends to have a higher gross margin given the structure of that business and so forth.

Some of the takeaway, LED today, while the gross profit dollars are very interesting because the component costs are more expensive than we would have with a traditional lamp ballast or other technologies, the gross margin percentage is less today.

Now we think that will quickly change as the component costs come down and they are coming down pretty rapidly, but today the gross profit dollar, gross profit percentage is less.

So as that becomes a bit of the mix, more of the mix, there are some puts and takes in all that just to kind of give you a little more clarity around some of the moving parts.

Okay, that is perfect.

And I guess before we let you go get some chicken soup, on the renovation side, you mentioned that, and I know the numbers are somewhat opaque, but about a $1 billion market, is it safe to say that you are fully represented sharewise in that $1 billion piece or is there an opportunity here to go, just like on the controls business, increase your share?

Can you give us some color commentary on that?

I believe that while our business, if you will, in that renovation world is significant probably relative to others out there, we have yet to scratch the surface.

I believe that there is a tremendous amount of opportunity before us.

To the question that was asked earlier about the sales cycle, it is longer, so on and so forth, but our quotation activity and how we have structured the business, the folks that we have invested in, we are in that marketplace and we have really yet I think to see the full potential of what our business could be.

I, one, expect the market side today is probably north of that $1 billion.

Number two, I would expect it to grow at a significantly faster pace than even what new construction will do over the next three to five and I believe that our ability to gain share in that marketplace will be significant as well.

Is it safe to think about that market as being something that will be more consolidated than your standard or core fixture market simply because there is some technology and distribution that you need to have to kind of participate in that retrofit market?

I would say it is the opposite.

I would say that, today, it is a very fragmented market.

There are many people who actually are chasing and there is no clear -- not just on the fixture side, but those folks that actually provide that service.

So I think that the market is very fragmented, underserved and represents, again, quite a growth potential for companies like ours.

I am wondering over time that that market actually becomes more consolidated than your standard fixture market, if you will?

In other words, are you going to have three or four big players that sort of dominate retrofit?

I don't see that.

I still see -- I mean I see it playing out kind of like the market is today a little bit.

What do you have?

You have four players that have a 55% share give or take and then you have more than 1000 that represent the rest.

You're always going to have people that are going to get a one-off job.

Okay, all right, that is helpful.

Thank you all very much.

(Operator Instructions).

Brad Safalow, PAA Research.

Thanks for squeezing me in here.

Two quick questions.

First, on the ballast shortage, and our checks with agents suggest there is product shortages kind of across the interior fixtures landscape as well.

How much of a drag is that on your revenue growth or it was in the quarter and how much of an impact did it have potentially on your gross margins?

So we really didn't provide that information.

I am not entirely certain that it was significant.

I mean there was some impact, of course, but we really didn't go down the path on the top line.

Number two, the disruptions into the supply chain were meaningful in terms of how we had to have greater over time, how we had to expedite, how we had to do some of these things.

Again, we didn't really quantify that, just simply attempting to work our way through it.

But there is no doubt that it had some impact.

And you feel this will last for at least several more quarters?

I don't have a crystal ball, but just my gut feel, articles that I have read, people that I've talked to, it just feels to me like, given the ability for that industry to bring on capacity, it just doesn't happen with a snap of a finger.

If you're going to build some type of transformer or power source plant, it is a $1 billion investment.

So my guess is that we are going to be into this -- 2011 will have it probably throughout the year.

Though my hope is that as we get into the second half, obviously, we will see some serious abatement in these issues.

And then my second question, just on the new product side, what percent of your revenues in fiscal '10 came from new products, what percentage of the new products were in LED or lighting controls and what are your expectations for the number of new products in fiscal '11?

Our focus around that is really start to peak revenues and for much of that, we are early in the process.

Given our large base of $1.6 billion, we are probably somewhere slightly less than that, 20% of products that have been developed over the last three or four years and how they have spiced our revenues.

And as far as your expectations for the number of new products in fiscal '11 and kind of mix between, I would say, energy-efficient luminaires, LED, lighting controls?

My guess is that our path forward will be consistent with where we have been, the level of output, which is significant.

The products that were introduced in 2010 have the ability to be true game-changers in terms of what they are targeted towards, sort of that ambient light market or light market.

So what we would be looking to do with new products is to extend out the product portfolio, but some of the big horses have been developed.

So now it is time to really let that specification cycle in the market run with those and with our partners who have helped us, if you will, bring these products to market in a way from a cost point are meaningful, we would expect to see some tipping over, if you will, or conversion of the marketplace into these LED areas.

So for us, it is really now about driving what we have introduced to peak sales.

Okay, perfect.

Thank you for the color.

Thank you.

We are showing no further questions.

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

Vernon Nagel for closing remarks.

Thank you for your time this morning.

We strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the 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.

This market represents a tremendous opportunity over the next decade.

Thank you for your support.

Thank you.

That does conclude today's conference.

You may disconnect at this time.