Acuity Brands Inc (AYI) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Acuity Brands 2011 first quarter financial conference call.

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

(Operator Instructions).

Today's conference is being recorded.

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

Now, I would like to introduce Mr.

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

Sir, you may begin.

Thank you.

Good morning.

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

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

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

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

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

First, let me say we are very pleased with our results for the first quarter of 2011.

This is the third quarter in a row where we achieved unit volume growth in an environment where nonresidential construction continued to decline.

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

These strategies include the continued introduction of new, energy efficient lighting products and solutions, expansion in key geographies and important channels, and improvements in customer service.

Our profitability was similarly strong while we continued to invest heavily in a number of areas representing significant growth potential, including the acquisition of Winona Lighting, a truly exceptional specialty lighting company.

The economic challenges that began in 2009, and continued throughout 2010 linger today, although somewhat less severe.

Unemployment in the US continues to hover close to 10%, lending practices for 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.

Having said this, we continue to 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 mention these macro challenges because it provides a backdrop against which you can see the outstanding performance of our Company.

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 for the quarter.

Net sales for the quarter were $425 million, up 8.5% compared with the year ago period.

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

Operating profit was $45.5 million, up almost 7% from that reported in the first quarter last year.

Operating profit margin was a strong 10.7% in the quarter, about 20 basis points below last year, due primarily to the acceleration of key strategic investments, and the impact of acquisitions, which we will discuss later.

Diluted earnings per share were $0.56, up almost 6% compared with the year ago period.

We are pleased with our first quarter results, as we believe it gives insight into the balance of 2011.

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

On a consolidated basis, net sales grew 8.5% compared with a year ago.

Excluding the impact of acquisitions, which added more than $6 million in sales in the quarter, net sales grew over $27 million, or 7% compared with the year ago period.

We estimate most of the 7% increase in net sales was due to unit volume growth driven largely by our continued expansion in certain geographies and channels, such as renovation, stock and flow, and home improvement.

While it is impossible to precisely determine the separate impact of price and product mix changes on net sales, we estimate the overall combined impact was negligible in the quarter, as benefits from more robust product mix largely offset lower product pricing in certain channels.

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

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

Certain segments of the market, such as commercial building, and certain geographies such as the southwestern portion of the US were off even more compared with the year ago period, and yet our volume was up 7%, a remarkable accomplishment.

We believe our channel and product diversification, including lighting controls as well as our strategies to better serve 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 continue to experience aggressive price competition in many markets and channels.

This is not unusual in economic environments such as this.

As you can see from our gross profit margin, which expanded 20 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.

We continue to see opportunities in certain areas, such as renovation, where we continue to grow, share gains in certain geographies and channels including our stock business and home improvement, and to a lesser degree projects funded from the government stimulus program.

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 was 10.7%, down only 20 basis points from the year ago period.

There are a couple of key points to note.

First, acquisitions added a little more than $6 million in net sales, with an immaterial impact on operating profit due to purchase accounting adjustments, and related transaction costs.

Eliminating the impact of acquisitions, operating profit margin would have been about 30 basis points higher, or about 10 basis points above that reported a year ago.

We expect these acquisitions in the aggregate to be a contributor to our profitability in the second half of 2011 and beyond.

Next, we estimate that higher material and component costs, as well as expediting costs due to the ballast shortage issue, reduced our gross profit by more than $2 million in the quarter.

Unfortunately, we expect these conditions to impact our second quarter as well.

To counteract these negative factors, we have announced a 5% to 7% price increase on most products effective the end of February.

Additionally, as we explained in our previous investor calls, our operating profit margins could have been higher, particularly given our robust gross profit margins, so let me explain.

Excluding the impact of acquisitions, selling, distribution, and administrative expenses increased approximately $9 million on an increase in net sales of 7%.

As I explained in our last conference call, most of this increase was for additional headcount for technology and innovation, marketing funds for our accelerated new product introductions, 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.

Much of this investment was put in place in the second and third quarter of 2010.

The level of spending for fixed SD&A in our first quarter was consistent with our spend rate in the fourth quarter of 2010.

As I noted on that call, we expect to continue this level of spend.

In fact, if you adjust for the impact of the normal seasonal decline sequentially in net sales between the fourth quarter of 2010 and the first quarter of 2011, our margins would have exceeded those reported in the fourth quarter due to mix and productivity improvements.

This is significant.

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

These areas 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 continue to develop new, more innovative products including those incorporating leading edge technology.

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

While our revenues in this channel were up more than 36% 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.

We continue to be very pleased with our top line growth and operating margins, 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 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 of sustainable and energy efficient products, and lastly, Company-wide productivity.

On the strategic front, we again made excellent progress on our key initiatives, the following are some of the more noteworthy.

We completed the acquisition of Winona Lighting.

Winona is well known for the design and quality of its architectural indoor and outdoor products.

We are very pleased to welcome the Winona team to our growing family of great brands.

We continued to introduce new products at an accelerated pace in the quarter.

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 of important channels such as home improvement, which served to offset some of the market decline in certain commercial markets.

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

Lastly, and most importantly, we significantly accelerated and strengthened 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 will talk more about our future growth strategies, and our expectations for the construction market later in the call.

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

Ricky?

Thank you, Vern, and good morning, everyone.

I'll highlight a few items regarding our income statement, I then will discuss our cash flow and financial condition, as well as a summary of the acquisition of Winona before turning the call back to Vern.

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

Net sales increased 8.5% in the three months ended November 30, 2010, compared with the prior year period.

As Vern said previously, this was primarily due to increased shipments.

Acquisitions added about 1.6% to the sales increase, and there was minimal impact of foreign currency, price, and product mix.

Gross profit margin for the first quarter was 41.4% of sales.

This gross profit margin reflects an increase of 20 basis points compared with the prior year period.

This favorable gross profit margin comparison is primarily due to the incremental margins on the increased sales volume.

Also contributing to this improved profitability performance was savings from the streamlining actions, greater contribution to sales from lighting control products, and benefits from ongoing productivity improvements.

Partially offsetting these improvements in gross margins were higher material and component costs.

As Vern said earlier, we recently announced a price increase designed to recover these rising costs.

The lag in realizing these price increases is expected to result in continued pressure on our margins in the second and third quarter before we see full relief.

In fact, we estimate the gap in recovering the increased commodity costs could negatively impact second quarter's profitability by at least $4 million compared with the prior year period, due to the anticipated continued rise in commodity costs, and the margin impact as we turn this higher cost FIFO inventory.

We expect to offset this negative impact in our third quarter from actions to reduce costs, and improved productivity.

Assuming no further significant rise in commodity costs, this shortfall is expected to be temporary, as the benefits of the announced product price increases should be fully realized by the end of the third quarter.

Operating profit was $45.5 million for the three months ended November 30, 2010, an increase of 6.6% over last year.

Operating profit margin was 10.7%, down 20 basis points from a year ago, primarily due to increased sales and marketing costs, higher freight due primarily to higher rates, and expediting costs caused by the ballast shortage, the impact of purchase accounting adjustments, and transaction costs on our recent acquisitions, and our continued strategic investments, which Vern previously discussed in detail.

Streamlining actions initiated last year contributed approximately $1.7 million in incremental savings in this quarter compared to the prior year period, partially offsetting these increases in selling, distribution and administrative cost.

We are slightly behind our planned savings rate due to certain delays in production moves in order to maintain customer service levels.

However, we still expect to realize an incremental $10 million of annual savings from these actions, and hope to be at this run rate sometime during our third fiscal quarter of this year.

Interest expense net was $7.5 million for the first quarter of fiscal year 2011, compared with $6.7 million last year.

This increase of almost $0.8 million is primarily due to higher average net borrowings based on the bond offering we did in December of 2009.

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

In the first quarter of fiscal 2011, we had incremental expense of $700,000 compared with the same period last year.

The effective tax rate this quarter was 33.7%.

We expect the effective tax rate for the year to be approximately 34%.

Net income for the first quarter was $24.4 million.

And diluted EPS at $0.56 per share, which is $0.03 better than last year.

Now let's look at the cash flow for the quarter ended November 30, 2010.

Cash flow provided by operations for the quarter was $5.3 million.

Our fiscal first quarter typically is a much lower cash generating quarter than our other quarters, due to payment of incentive compensation earned in the prior year.

The other primary reason for the low level of cash provided by operation in this quarter was because of adding almost $18 million to inventories excluding the impact of acquisitions.

This increase in inventory was due primarily to increased raw materials and finished goods inventory.

The increase in raw materials was due primarily to strategic purchases of certain commodities and components to better support customer service, and the relocation of production.

The Company expects to begin drawing down the raw material inventory in the second half of fiscal 2011, once the production moves are completed, and the supply of ballasts stabilizes.

Additionally in the first quarter, we spent $36.2 million on the acquisition of businesses, and $6.7 million on capital expenditures.

We expect to spend about $40 million this full fiscal year on capital expenditures.

We ended the first quarter of fiscal 2011 with a cash balance of $152.2 million, and total debt of $353.4 million.

We also have availability under the revolving credit facility of over $243 million as of November 30, 2010.

This facility does not mature until October 2012.

I'll conclude my prepared remarks with a few comments on the October 14th acquisition of Winona Lighting.

Minnesota based Winona Lighting is a premier provider of architectural and high-performance indoor and outdoor lighting products.

Recognized throughout the architectural design community, Winona Lighting serves the commercial, retail and institutional markets with a product portfolio of high quality and design-oriented luminaires suitable for decorative, custom, asymmetric, and landscape lighting applications.

Winona Lighting provides many of these products utilizing the latest LED technology for superior performance, long life, and energy savings.

Winona Lighting will continue operations in its existing facility, focusing on key customers and competencies.

We did not disclose the terms of the transactions.

We owned Winona Lighting for only six weeks in the first quarter, and it had an immaterial impact on our financial results, as Vern described previously.

We expect Winona Lighting to be accretive to our overall operating results and margins beginning in the second half of fiscal 2011, after the negative short-term impacts of purchase accounting adjustments run through our results.

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

Thank you, Ricky.

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

First, a few comments about expected market conditions.

Our view of the market has not really changed since our last conference call.

The economic environment continues to be challenging.

Key indicators for our primary market, nonresidential construction, as well as for residential construction, appear to be stabilizing 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 or possibly slightly down in 2011.

Though certain segments like commercial buildings, and certain geographies like the southwestern US and Florida, are expected to again be down considerably more.

Interestingly, the sales of lighting fixtures are 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.

It seems the significant headwinds that have prevailed in our markets over the last two years have begun 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 slow market growth in our second half.

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

As I noted earlier, the industry is experiencing rising costs due to inflationary pressures on many commodities and components.

We estimate that on a comparable basis, our material costs will be higher by more than $4 million in the second quarter compared with the year ago period, impacting our profitability.

Therefore, we announced a price increase of 5% to 7% on most products effective at the end of February.

While we expect the price increase to primarily offset these rising costs, there will be some lag creating margin pressure on our third quarter as well, though we expect to offset much of the negative impact of any lag effect through cost reductions and improved productivity.

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.

Lastly, as I noted last quarter, 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 the ballasts and driver supply chain can and will have an impact on the industry's ability to ship fixtures on a timely basis.

The impact to us so far has been availability of certain ballasts, and significant expediting costs in an attempt to serve customers.

We expect these conditions to continue, at least through our second quarter.

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 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 relationships with key suppliers around the globe to bring greater, 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 portfolios in this area are expanding rapidly, including strategic acquisitions like Winona, and we expect to make more.

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.

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 your questions.

(Operator Instructions) Your first question comes from Christopher Glynn with Oppenheimer Funds.

Thanks.

Good morning.

Just a question on the price.

Was there a prior pricing increase as well or is this kind of the first one of the inflationary cycle?

And then relative to announce, what would be some thoughts on what degree of realization would be typical?

I believe that our last price increase, which was only on a very limited number of SKUs, was at the end of May.

Correct.

And we did realize our full pricing on those.

But Chris, what we've experienced here over the last I'm going to say 90 days has again been somewhat reminiscent of 2008 where prices for commodity costs have risen pretty dramatically, not quite at the levels of 2008.

So our expectation on the 5% to 7% price increase is full realization, though most of that will go to recovering costs.

We are seeing some of our other competitors follow suit and we would expect essentially all of them to follow suit, frankly.

Okay.

And then the Winona, it sounds like that's really all specification types of products.

So would we think of that as higher margin than base Acuity once it's integrated?

I would say that it would be accretive to our margins as the industry for new construction comes back.

Obviously the -- those markets that it would serve are still trying to find their bottom and in some geographies they are starting to show an uptick.

We're very excited about what Winona brings strategically to our product portfolio and yes, I think that over time as those, again, new construction markets come back, you should expect Winona to be accretive to our margin.

It's not a large business but it's an important business.

Okay.

And then on the renovation channel, I think you mentioned up 36% earlier in the call.

But could you just kind of give us an idea of what the run rates are for the renovation and the controls business separately or some way to think about that?

And then just where you are on the curve of the controls filling out through your agency channel.

Sure.

I'm going to answer two of the three questions that you asked there.

On the run rate for renovation, and again, we're still struggling with definitional issues because we, again, don't precisely know where all of our products end up.

But what we can measure on a consistent basis we are showing nice growth.

That run rate probably now, Ricky is approaching $100 million, somewhere in that range.

And a lot of it, again, depends on definition and so we know that we have other products that are finding their way into renovation, but again, it's difficult for us to follow that all the way through to end application.

On the controls business, again, we have not provided that information.

And it's very difficult, because controls units themselves and fixtures are converging and so we're selling more and more fixtures that have control devices affixed to them, so it's very difficult to precisely say what's the value of the control or the fixture when you are selling a complete solution.

And then lastly, I think that the notion of where the controls market is going, today we estimate the addressable market for us is about a $900 million market.

I think by 2015, you'll see that market exceed a couple of billion dollars.

But again, it's going to be very skewed or very convoluted because I think that you're going to see fixtures being sold with more and more control devices.

Ricky, do you have a comment or two?

Okay.

No, nothing to add.

Okay.

Thank you.

Our next question comes from Peter Lisnic of Robert W.

Baird.

Good morning, gentlemen.

Good morning.

I guess first question, if you could talk a little bit more about the pricing environment which I guess you described as aggressive.

Just where is the -- where exactly is the pressure and then how comfortable are you being able to realize the 5% to 7% price that you're planning on putting through?

Well, Pete, as you know, various channels, various geographies from -- I mean, all have their own dynamics.

And so to say where is the pressure coming from, there's always those competitive dynamics that are out in the marketplace.

I would say that there's nothing remarkable or notable that's different than where it has been in the past.

And again, it just depends on your strength, your product offering, your capability in terms of access to market, as to how you compete in that individual marketplace or individual channel.

I believe strongly that we have and will continue to realize when we put through a price increase, we expect full realization.

And I would expect that this will be the case here as well.

As Ricky pointed out in his comments and I pointed out in mine, we expect there to be a little bit of a lag factor in the third quarter but our expectation is to hopefully offset any lag effect that may exist or occur through productivity and better mix of products sold.

The second quarter, it's clear that we will have some cost or some material cost impact.

We're guesstimating that amount to be about a $4 million number on a period-over-period basis, but yet in our second quarter we would expect also there to be incremental contribution from higher volumes compared to the year ago period.

Okay.

All right.

And then that $4 million, I just want to make sure, that is pure commodity.

Is there any impact from ballast shortage that would be incremental to that number?

I believe that we have appropriately factored in those costs that we have incurred as a consequence of supply chain challenges due to ballast shortages.

Okay, perfect.

The (inaudible) impact of that is, it's been this expediting cost and all and we're hoping most of that is behind us.

But yes, from what we can see, that would include the ballast issue as well.

Okay.

And then just one more, if I could.

I just want to square away sort of the end market commentary on the demand side, still choppy or volatile I guess would be the take away.

But your order growth was up 10% in this quarter on a like-for-like basis.

So it sounds as though there are pockets and maybe some larger pockets where growth is accelerating or you're gaining some market share.

Can you just give us a little bit of color on sort of that improved top line acceleration that we're seeing?

Sure.

So there are certain channels, home improvement would be one, stock and flow for example another, where we're seeing benefits of our strategies to win in those markets.

Renovation continues to be incrementally higher on a period-over-period basis.

Control devices are also up from the year ago period, so all of these various channels and product offerings going into those channels are contributing to what appears to be a flattening out now of that commercial and industrial construction market.

Okay.

That is helpful.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Jed Dorsheimer of Canaccord Wealth Management.

Hi, thanks.

Canaccord Genuity.

But couple questions and thanks for taking them.

I guess the first, Vern, that I have is you made a comment in terms of the attach rate of the controls to some of the newer products.

And I was wondering if there's any way to dig into that a little bit deeper?

In particular, can we look at -- is there a certain percentage of the product that's flowing through the independent network of representatives that we're seeing a direct attach of controls and fixture products?

Is it, say, 40% or 50%?

How should we look at that and monitor that growth?

Yes, it's challenging.

I mean, it's challenging for us as well.

Again, we believe that when we acquired and developed our controls platform, starting two and-a-half years ago, we knew that this convergence would occur and will continue to occur.

So instead of selling just a single fixture, you're now going to be selling fixtures that are part of broader lighting solutions so that you can, again, bring better lighting into the space and also control that vis-a-vis optimizing energy savings.

So what we're challenged with is how do we separate the value and we don't, actually.

That's why we're reporting our Company essentially as a single segment because that convergence is occurring.

What we're trying to track is how many products are now going out more and more that have certain types of control elements attached to them.

And so if you look at industrial high bays, where three years ago it was a de minimis number that went out with control devices and today that number is growing rapidly.

If I had to guess, we're probably 30%, maybe more, in terms of those types of fixtures going out.

A lot of the LED fixtures that we're now offering for sale have control capability affixed with them.

So it's growing and gaining traction and ultimately these things will be tied into fully integrated solutions.

So unfortunately today we can't give you precise numbers on that and it's going to only get even more difficult down the road.

And Jed, I would say to all shareholders, I think that this is a fascinating area because what's going to happen is the value of light fixtures being sold per square foot will grow.

Whereas the industry had been in a decline for really quite some time on the value of light fixtures per square foot, we think that starting even just a few years ago with volumetric lighting when we introduced RT5, now RT LED, so on and so forth, these solutions will actually create more value per square foot, allowing us greater margin and it will allow the customer the ability to pay for higher value added lighting solutions through energy savings, daylight harvesting, things of this nature.

So it's a pretty exciting arena on a go-forward basis here.

Great, that's helpful.

And I agree with you.

The -- on the LED or the solid state lighting, what percentage is that of the business now and any idea on what your expectations are sort of end of year?

Because as you mentioned, I guess it's somewhat important in monitoring that attach or the incremental dollar content and value proposition, is you have the integration there.

Yes.

We're probably not terribly dissimilar from other larger luminaire manufacturers where our revenues from LED products are sub 5%, probably more in the 2% to 3% range.

But what's interesting about it is there's that crossover.

Price for the luminaire will come down as costs for the components come down.

Today they're very expensive.

So in fact, while margin dollars may be higher on those fixtures today, the margin percentage is actually lower than what our overall average is.

We would expect that as prices of componentry comes down and as the price of the products come down that it will become more normal, if you will, from a margin percentage.

But what's going to then happen is you will be selling higher value again per square foot because you'll be able to justify that better lighting solution through energy savings because of how these fixtures can be controlled.

So our guesstimate, and it's just a guesstimate, and I think you guys actually do a fabulous job in your estimate of where the convergence and where the conversion is actually going to occur and does the market -- is it 50% LED and in five years?

Could be.

Could very well be.

And so again, the challenge that we have as a Company, being North America's largest luminaire Company, is managing that existing base that we have while transitioning to new technology.

So it represents a management opportunity.

Great.

And last question, I'll jump back in the queue.

On that newer portion of the business, I know you had talked about the general supply constraints in ballasts.

Any supply constraints on LED components and can you just update on pricing trends that you are seeing?

Have you seen that ease a bit compared to 2010 or any updates there so we can get a better idea of how this ramp will occur through the year?

Sure.

From a ballast perspective, the supply chain is still spotty.

We're achieving or we're receiving the ballasts that we need, but as Ricky pointed out there's a great deal of expediting cost.

Our guess from what we hear from the industry and it's their guess in terms of what they hear from their component supplier, is that it's probably still going to continue for the next three or four months in terms of the choppiness of supply.

So would expect that to happen.

When we talk about pricing on LED components, the pricing is coming down.

Not as rapidly as probably would all would like, but it is coming down and so, therefore, you're seeing that benefit being put back into the market in terms of pricing on those LED luminaires.

But the LED luminaires are still I think priced at a point where conversion and adoption is still at a slower pace.

It will ramp up as those component costs come down.

Thank you.

Thank you.

Our next question comes from Kathryn Thompson of Thompson Research Group.

Good morning, this is Jamie Baskin on the line for Kathryn.

My first question, what commodities are specifically impacting you the most?

And within your 5% to 7% price increase, do you leave any room for kind of a continued uptick in those commodity prices?

So, steel obviously a key component, copper, another key component, aluminum, plastics because of oil, fuel costs, those would be the key items.

And those are not just in materials that we buy, but how they also impact the cost of components such as electronic ballasts, things of that nature.

And those costs are very easy to track.

Have we left room?

We've left some room, but I wouldn't say that -- if steel continues on the torrid pace that it is, I think you would see the industry coming back out again with another increase.

Okay.

And then key indicators of non-res that you were following you're seeing stabilizing, could you kind of talk a little bit more to what you're really tracking?

So we look at Dodge, we look at Global Insights, we use NEMA statistics.

Ricky's on the board at NAM, so we use their statistics to help sort of create a collage of where we think the industry is heading.

Obviously we buy other reports that are available from private sectors.

And so I think most folks are saying that construction put in place, contract awards are -- the rate of decline is dramatically slowing and in some instances it's picking up.

When you start to take into account tenant fit-up and renovation, you have folks who are actually saying on the luminaire side that there will be some favorability.

And understand that when you have construction put in place, we're here in Atlanta in an ice storm and so when we look around and we see a number of buildings that are see-through buildings, in other words, there's no one in there, that building has been constructed.

What's last to go in is obviously lighting fixtures, carpeting, walls, things of that nature.

So as employment improves, we would expect those places to begin to fill up.

So you'll see a little bit of divergence when you come out of a recession where construction put in place numbers will be soft, but companies like ours will actually start to show a ramp-up because of that tenant fit-up work that's out there.

We also are tracking architectural billing index which is a pretty core indicator and we have seen improvement in that and actually seen it get above 50 for the first time in quite a while, which once it gets above 50 suggests growth.

Another key metric we've been looking at is vacancy rates gets to Vern's point on these see-through buildings and all.

And we have seen some improvements.

Certainly in-- it's spotty geographically but we are seeing some improvement in vacancy rates which would bode well for us since typically when a new tenant comes in, the tenant fit-up work would require some new fixtures and controls, potentially coming into that.

So those are some other metrics we've been following as well that are a bit encouraging.

Okay, great.

Well, thank you for answering my questions.

Our next question comes from Matt McCall of BB&T.

Thanks, good morning, everybody.

Good morning.

Vern, you gave some good insight into the SG&A spend.

And I believe in the past you provided maybe some dollars to go along with that.

And I think the comment in the past was that you're investing ex million if my memory serves and you're really not seeing any revenue from those investments.

I try to put the pieces together what you are saying about the sequential increase with SG&A, adjusting for seasonality, but if you go back through those comments and are we seeing any of the revenue associated with some of the investments you've made over the past few quarters?

We definitely are.

I mean, again, I think to show, excluding the acquisitions, 7% unit volume growth is one heck of an achievement in a marketplace where, again, we are still influenced significantly by nonresidential construction which by all estimates was down again.

So nine quarters in a row of decline in those environments and yet we're showing unit volume growth of 7%.

Our investments are starting to pay off rather significantly.

And so I think as investors think about our business, as these markets come back, plus we've expanded the markets that we defined in terms of lighting controls and renovation, we're getting after that in a very different way, we are starting to see the leverage.

Our spend on our fixed SD&A was actually down slightly from the fourth quarter productivity, just timing of some issues.

So I think that the guidance that we gave around that fixed spend number of being kind of in that $78 million to $80 million range is a good range.

And again, it fluctuates a little bit depending on the timing of product introductions, some of our marketing programs, all those get expensed in the period in which you deliver those.

Our variable costs, freight and commissions, pretty consistent at, again, that 11.6% kind of number.

So I think that as investors look at the volume ramp and the leverage of the Company, we're leveraged to some pretty good growth numbers.

Now, that's not going to happen next quarter.

Right.

Our second quarter is sequentially our most difficult quarter.

But I think as these markets come back over the next 12 to 24 months, we've positioned the Company well to really leverage off of that.

Okay, okay.

And then you mentioned the opportunity with stimulus next year.

Can you talk a little bit about maybe -- I don't know if you can break out government total versus stimulus or parse those numbers a little bit, but what the trends have been like this year, what the outlook's like for next year and have you seen any changes in the pipeline activity based on some of the talks of budget cuts for 2011?

Matt, it's been difficult for us to precisely track what we would call a government stimulus project.

We're aware of some of them that were specifically related to government stimulus.

I'm certain that there were others that are out there.

But again, as we've said in the past, we did not feel that the government stimulus program meaningfully impacted our business.

I think there'll be continued projects out there, specific ones that we're aware that will provide some benefit.

But I believe that it's going to be the private sector.

It's going to be people who are -- employment.

It's going to be lots of these things that will drive the consumption of our various products.

And it will be because people will be after energy savings while still enjoying a great lighting experience where folks will move to our product portfolio.

And do you have a breakout what percent of your business is government and if so or if not, was that business up in calendar 2010?

I don't have the specific breakout.

Yes, we do not provide that.

Okay.

That's fine.

And then so finally, on the CapEx side, I think you said $40 million, Ricky.

If I look back you've spent about half that the last year, can you give us an update on where some of that incremental spending is going to be aimed?

A lot of that is around tooling for the new product introduction.

All of our various brands and products are aggressively continuing their march of coming out with new products around energy efficiency and embedding these control capabilities that Vern was talking about.

So much of this increase is around the tooling for that.

We still have some spend in IT area as we rolled -- rolling out the last modules at least in the current plan of some customer-facing capabilities in our IT area that works with the distributors and the agents and all, and so there's some spend increase this year or at least slightly increase incrementally over the prior year but most of the increase is in the tooling area.

And, Matt, that's a great question.

As Acuity changes the markets that it is going after, for example, controls and things of that nature, we will be spending more on people than we will on capital.

And so if you look at year-over-year, we've added about 20 folks into our technology and innovation and into that LED area and these are engineers and people who have the skill to develop software that helps drive these products.

And so capital, as you know it, becomes a little less in terms of what we'll spend to help drive our revenue growth going forward, versus adding capability in terms of that human capability.

Got it.

Okay.

Thank you all.

Our next question comes from Craig Irwin of Wedbush Securities.

Thanks for taking my question.

So I just wanted to ask broadly about your relationship with OSRAM given the supply chain issues in the quarter.

Was hoping maybe you could give us an idea on the breadth of your overall supply chain, how much OSRAM contributes?

And you're probably well aware that there's a lot of chatter in the industry about OSRAM and the assets there being for sale and if you could foresee any implications if there really was an asset sale over there?

And then the second part of my question is if you would ever consider an international acquisition or an acquisition that was with revenue north of $1 billion, given the strategic importance of some of the assets out there?

So two-part question.

So the first part of the question, we enjoy a very strong relationship with OSRAM and we enjoy a very strong relationship with many suppliers of the types of products that OSRAM provides.

So I feel that we are well positioned to continue those types of favorable relationships, given our size and our access to market.

So what OSRAM decides to do as a Company, or what Siemens decides to do with OSRAM, I don't think will have any meaningful or direct impact on our relationship with them.

The second part of your question, we do see the international markets as being interesting to us.

Obviously, our first and foremost, if you will, focus is on North America because we see the North American market for both nonresidential construction, residential construction ticking up.

If you look out over the next handful of years, these markets we believe will come back.

But in addition, we've expanded our access to market through lighting controls, we talked earlier about that, as well as the incremental benefits of renovation.

So we see the markets for North America over the next handful of years probably growing in total by close to 70%.

That's huge and so we are positioned well to really take advantage of that kind of growth.

When we look at the international markets, we too see opportunities and we are aggressively looking at greenfielding some of those opportunities.

But we would consider acquisitions in the international arena if they fit and make sense with what we're doing.

We like our businesses in Europe, though Spain currently is really feeling the effects of some of their economic issues.

But yet, that's a very good business for us and so we could see various geographies, South America, Asia and a little bit more in Europe as opportunities.

But first and foremost, I just want to be clear, we see the North American market as really representing huge growth potential over the next handful of years.

Okay.

And then the size question, would you ever ponder an acquisition that had more than $1 billion in revenue?

Is that something that would be in or out of the range of what you think Acuity could potentially pursue?

I just want to be clear, did you say $1 billion?

Yes.

Yes, it's difficult for me to precisely see what assets would be available to us that we would find attractive at that level.

I believe that there are assets that are out in the marketplace that are both -- could potentially be available and would be attractive to us.

There are assets that are out there in the marketplace that would be attractive to us but I just don't believe that they would be available.

So.

I guess you buy what's attractive.

So great, congratulations on the strong quarter.

Thank you.

Thank you.

Our next question is from Shawn Severson of ThinkEquity.

Thank you.

Good morning, gentlemen.

Hi, Shawn.

Good morning.

I wonder if you could elaborate a little bit on what happens to your margin profile as controls business becomes more and more significant and you are becoming a -- more of a solution provider instead of just a component provider, and kind of where you are today and where you'd expect that to be just on the addition of controls and a greater percentage of sales?

Well, I think if you go back and look at the Company over the last three years, and you look at the volumes of what's happened, in 2008 where we were primarily a luminaire business and our revenues were around $2 billion, our adjusted operating profit margins were near 14%.

So you got a good glimpse of what the leverage capability of the Company was.

If you then imagine those markets have contracted but yet we are now building up other aspects of the business, whether it be renovation, luminaires and controls, controls, devices on its own, control devices being embedded into fixtures, you're seeing our gross profit margins improve over what it, say was a few years ago.

So you're getting a sense of what that mix change is doing.

So I feel that you as an investor can track that change and see what that looks like.

I would expect the leverage capabilities of our business as well as the mix change, the next time we hit a $2 billion mark, you should see our margins exceed what they were in, say, the 2008 time frame.

Okay.

And then just could you elaborate a bit more on the market share commentary?

I mean, is this market share kind of taking from the smaller players around the country or is there something specific going on there with some product lines and assets that you have that are causing that market shift -- market share shift?

Yes, market share is -- you look at it in total and so it's somewhat helpful.

But we look at it by channel, by geography and really try to understand where we're winning and what we need to do to win in markets where we'd like to win more.

And I think that as you think -- as one thinks about our business, we are investing heavily in renovation, so that's giving us some legs up on folks who may not be there or may not have the complete product offering to participate there.

And I would say that would probably be the smaller players.

We continue to invest in our controls business as it relates to luminaires, so I believe that we are gaining capability there.

Certainly, in the home improvement channel, we continue to add new product and new capabilities there that are allowing us to gain share.

So -- and then if you look at geographies, we continue to invest in New York City for example.

I think that we're gaining share there.

I like what we're doing out on the West Coast with our access to market, it's just in a tough market, but yet we seem to be growing there.

And with acquisition of Winona and having those folks join our portfolio of brands really will allow us to I think gain additional share because their products are really highly sought after by the specification community.

And typically if you have companies like that you're able to win more projects.

So excited about what they bring to our future.

And has that been from any big additions on the agency network?

I mean obviously you spent a lot of time and money last year on improving their competitiveness through training.

But has it been really the existing agency force or has it been some key additions there?

We've had two additions and I would say that on balance, those two additions are still ramping up their capability.

I don't know that we have seen any incremental opportunity because of those additions, but I do believe that our agency sales force, which is a key strength, they and we have continued to invest in those capabilities, making sure that we retain our people, making sure that we're training our people, and adding more field resources to help support how we go to market, have been I think key elements in terms of our ability to grow the top line in an environment where the marketplace overall is still probably declining.

Great.

Thank you.

(Operator Instructions) Our next question comes from Glenn Wortman of Sidoti & Company.

Yes, good morning, everyone.

Good morning.

You have provided us with some specifics on the size of the lighting controls market, can you just please do the same for renovation and relight, the size of that market today and where you see it by say 2015?

Yes, I think that the overall size of the renovation market, estimates would suggest that the installed base is north of $100 billion.

Our guesstimate is that that market right now is converting at about 1.5 points a year, so that's about $1.5 billion.

Estimates that we have seen would suggest that there's probably an incremental $1 billion to $1.5 billion over the next handful of years as -- to convert that market.

And I think that's going to be driven largely by energy savings, people using energy savings to help procure better lighting.

And whether it's government mandated or just straightup economics, I think both of those will be key drivers.

And that's -- Ricky, do you have any -- that's probably a pretty good number from what we--.

Yes, again, that's the North American market that we're serving here and yes those are the numbers based on government statistics that we've seen.

Okay.

And then on the US share repurchase plan, can you just update us on your plans there, please?

Yes, we have not purchased any additional shares in this first quarter.

We still have shares available under the previous Board authorization and we'll certainly look opportunistically to buy in the open market as appropriate, compared with other uses of cash that we might have and where we see the best return to shareholders.

Yes, all right, thank you very much.

Thank you.

At this time, there are no other questions.

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

Vernon Nagel for closing remarks.

Thank you, everyone, for your time this morning.

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

Our future is very bright.

Thank you for your support.

This does conclude today's conference call.

You may disconnect your phones at this time.