Acuity Brands Inc (AYI) 2011 Q3 法說會逐字稿

Good morning and welcome to the Acuity Brands 2011 third 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 fiscal 2011 third quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer, and Ricky Reece, our Executive Vice President and Chief Financial Officer.

We are webcasting 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 will be happy to answer your questions.

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

We reported strong top and bottom line growth in spite of significant macroeconomic issues confronting our industry.

This is the fifth quarter in a row where we achieved unit volume growth in an environment where spending for non-residential construction was down.

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, expansions in key channels and geographies, improvements in customer service, and completing another important acquisition.

Our profitability was strong, while we continue to fund areas representing significant future growth potential, including the expansion of our solid-state luminaire and lighting controls portfolio, greater penetration of the renovation market, and the introduction of our line of specification grade LED lamps.

The economic environment continues to be challenging, job growth remains anemic, 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 new commercial construction.

Having said this, even though the commercial construction market continues to struggle, we believe other key markets we serve have either bottomed out or are on the road to recovery.

Also in the quarter, we continued to encounter rising commodity costs, particularly for inputs based on oil and steel, which increased at an aggressive pace.

Overall, we estimate our costs for these items increased $7 million from the year-ago period.

Further, we were able to offset this impact in the quarter with higher selling prices due to our February price increase.

Unfortunately, input costs are continuing to increase as we will explain later in the call.

I mentioned these macro factors 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 of the quarter.

First, net sales for the third quarter of this year were $458.3 million, up 12.4% compared with the year-ago period.

This level of growth is very significant, given the turbulent industry conditions.

Operating profit was $50.2 million, up 28% from that reported in the same quarter last year.

Operating profit margin was a strong 11% in the quarter, up 140 basis points from last year.

Diluted earnings per share were $0.62, up almost 30% compared with the year-ago period.

These results were a significant improvement over the year-ago period.

We believe this momentum gives positive insight into the balance of 2011, which we will discuss later in the call.

We believe you will find these results even more impressive upon further analysis, so let's start by reviewing our net sales.

On a consolidated basis, net sales grew over $50 million or 12.4% compared to a year ago.

Excluding the impact of acquisitions and foreign currency, which added approximately $17 million to our top line in the quarter, net sales grew almost $34 million, or over 8% compared with the year-ago period.

We estimate more than 5 of the 8 plus percentage point increase in net sales was due to unit volume growth, primarily in our commercial and industrial channel with emphasis on higher value added luminaires, renovation, small and medium-sized projects of various types sold through distributors stock and flow, and lighting controls.

The remaining 3 percentage points of growth was due to a more favorable mix of products sold and higher selling prices as a result of our recent price increases to recover rising input cost.

From a geographical perspective, revenue growth was particularly strong in the US and Canada.

We also saw growth from our continued expansion in certain geographies and channels in North America, which is all very encouraging.

While it is impossible to precisely determine the separate impact that price and product mix changes have on our net sales, we estimate that the growth from overall price mix in the quarter was mostly due to higher product pricing in certain channels, which essentially offset higher input costs as mentioned earlier.

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

We believe spending for US non-residential construction was once again down in the quarter.

This time nearly 10% from a year ago.

In spite of this significant decline, we believe the lighting market experienced very modest growth in our third quarter.

This was in contrast with our unit volume growth, which was up more than 5%.

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

With regard to product pricing, as you will recall, we announced price increases on those products most impacted by the significant rising commodity costs, effective the end of February.

Therefore, while we did not enjoy any benefit of this increase in our second quarter, we were able to recover our rising input costs in the third quarter just completed.

However, we expect this price/cost relationship to once again be a challenge in our fourth quarter, as we will explain later in the call.

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

Before I turn the call over to Ricky, I would like to comment on our profitability and strategic accomplishments in the quarter.

Operating profit margin was a strong 11%, up 140 basis points from the year-ago period.

There are a couple of key points to note.

First, acquisitions in foreign currency added $17 million in net sales, while having minor impact on operating profit.

We expect these acquisitions in the aggregate will be strong contributors to our profitability next year and beyond.

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

So, let me explain.

Selling, distribution and administrative expenses increased $14.8 million, or almost 12% on an increase in net sales at essentially the same percentage.

Of the $14.8 million increase in SD&A, about 70% was due to acquisitions and higher expenses for freight and commissions, which are variable based on the growth in net sales.

The remaining 30% of the increase, or about $4.3 million, was due to higher fixed SD&A over the year-ago period.

As I've explained in our last few conference calls, most of the increase in fixed SD&A was primarily related to funding activities focused on longer-term growth opportunities, including market expansion, our fast-growing lighting control systems, and innovation and technology primarily for solid-state luminaires and intelligent lighting solutions.

We expect to continue funding these important and strategic activities, which are mostly in expense in our P&L today, because they represent huge future growth potential over the next decade.

While revenues are ramping up in these areas, they are nowhere near expected peak sales.

We expect they will pay significant dividends in 2012 and beyond.

We continue to be very pleased with our top line growth and our operating margins particularly in this demanding and fiercely competitive environment.

We've been able to produce these results because of the dedication and resolve of our 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 industry-leading stable of sustainable and energy-efficient products and solutions, and of course, Company-wide productivity.

Lastly, 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 Healthcare Lighting.

Healthcare Lighting is a premier provider of high-performance lighting products and solutions for the fast-growing healthcare industry.

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

We continue to introduce new products in lighting solutions at an accelerated pace.

Rapid 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.

For example, LED-based luminaires represent less than 5% of our total revenues today.

Sales from this portion of our product portfolio have tripled in the last 12 months.

Yes, tripled.

And, we continue to fund the development of other light source technologies, such as organic LEDs.

Our success at introducing new products was on full display at the recent LIGHTFAIR trade show in Philadelphia, where the Acuity team won numerous awards for innovation.

These awards included most innovative product of the year for the Revel, an organic LED luminaire, which is commercially available today.

In addition, Lithonia Lighting RTLED luminaire received platinum level honors in both the general and in lighting in most innovative optical controls categories.

And, we earned many other awards for innovative new products.

Again, demonstrating why we are and will continue to be the leading lighting solutions company in North America.

Also in the quarter, we introduced our Acculamp product line, our first ever offering of LED lamps.

This new product line consists of a broad range of LED lamps for specification-grade commercial and industrial applications, including retail, hospitality and education; all strong markets for us.

Acculamp is another example of why Acuity is a clear leader in digital lighting solutions.

It is because we understand the sophisticated needs of our expansive customer base and are able to offer tailored solutions from our industry-leading portfolio.

Customers understand it takes more than just an LED chip, which are quickly becoming commodities, to have the right lighting and energy solutions.

Acuity Brands has a distinct history of leading and innovating during eras of technology disruption.

Today is clearly no different.

While some companies -- while some competitors use hype and claim to be innovative because they have a niche LED product or two, Acuity Brands is leading the evolution towards intelligent lighting solutions with its broad and deep portfolio of indoor and outdoor solid-state and conventional energy-efficient luminaires and lighting controls.

Also in the quarter, we continued our expansion in new geographies and markets, such as renovation, and increased our penetration in important channels, such as C&I and distributor stock and flow.

Importantly, we saw meaningful increases in some of the most hard-hit geographies, like the Southwestern portions of the US.

We made great strides in providing more differentiated services to our customers and driving productivity throughout the Company.

Lastly, we continue to enhance and expand our presence in the fast-growing lighting controls portion of the market.

These accomplishment 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'd like to now turn the call over to Ricky to make a few comments on our overall financial performance before I make a few comments 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 and then we'll discuss our cash flow and financial condition as well as a summary of the acquisition of Healthcare Lighting before turning the call back to Vern.

Vern covered the third-quarter earnings results.

I'll not repeat this information, other than to highlight a few additional items.

We were able to get our price/cost relationship pretty much back in line this quarter, as a result of our February price increase.

This is a primary contributor to our 41.4% gross profit margin for the third quarter, which is 130 basis point improvement compared with the prior year, and 200 basis points higher than last quarter.

As Vern mentioned, we continue to incur cost pressures for steel, aluminum, plastic, fuel, and components containing rare earth metals among other commodities.

Maintaining price/cost balance will continue to be a challenge in our fourth quarter.

While the February price increase should be more fully realized in the fourth quarter, compared with only partially realized in the third quarter, we believe virtually all of this benefit could be offset by incrementally higher cost.

Since we are on the First In, First Out method of inventory accounting, there is a lag between the increases experienced in procuring material and components, and when we incurred the higher cost in our earnings.

Therefore, even though cost for certain commodities, such as steel and oil have stabilized recently, due to this lag, we expect to incur incrementally higher cost in our fourth quarter compared with our third quarter.

The $1.9 million increase in net miscellaneous expense to $0.9 million in the third quarter of fiscal 2011, compared with $1 million of net miscellaneous income in the third quarter of fiscal of 2010 was due primarily to the unfavorable impact of exchange rates on certain foreign currency items, primarily associated with the Mexican peso-denominated exposures.

This negatively impacted the third quarter of fiscal 2011 results by $0.03 per diluted EPS, as compared to the prior-year period.

Fortunately, at least for now, the devaluation of value of the US dollar to the Mexican peso, which drove this unfavorable outcome, has ceased.

We are exploring tax-efficient methods to reduce this Mexican peso-denominated exposure in order to lessen this income volatility.

The effective income tax rate was 35.2% and 35.3% for the third quarter of fiscal 2011 and 2010, respectively.

We estimate that the effective tax rate for fiscal 2011 will be approximately 34%.

Now, let's look at the cash flow for the nine months ended May 31, 2011.

Cash flow provided by operations for the first nine months of fiscal 2011 was $81.6 million, compared with $97 million in the year-ago period.

This lower cash flow from operating activities compared with the prior year primarily relates to higher inventory levels and the impact of a larger incentive compensation payment made in fiscal 2011 related to fiscal 2010's above target performance, compared with the payment made in fiscal 2010, based on fiscal 2009 below target performance.

Inventory increased $29 million for the nine months ended May 31, 2011, compared with the prior-year period.

Almost half of this increase is due to the acquired businesses.

The remainder, which negatively affected cash flow from operations, is primarily due to higher costs to procure raw materials and components due to inflation and the more expensive components required to manufacture newer technology solid-state luminaires.

We also made certain strategic purchases to better support customer service and the relocation of production, including insourcing activities previously performed by third-party manufacturers.

In the first nine months of fiscal 2011, we spent $90.4 million on acquisitions of businesses, and $17.4 million on capital expenditures.

We expect to spend about $25 million this full fiscal year on capital expenditures.

At May 31, 2011, we had a cash balance of $160.8 million and total debt of $353.4 million.

The total debt net of cash to capital at May 31, 2011, is less than 20%, providing us considerable financial flexibility.

We also have availability under the revolving credit facility of over $240.5 million as of May 31, 2011.

This facility does not mature until October 2012.

We are currently looking to replace this facility early next calendar year.

I will conclude my prepared remarks with a few comments on our May 11, 2011, acquisition of Healthcare Lighting.

Fairview, Pennsylvania-based Healthcare Lighting is a leading provider of specialized high-performance lighting products for healthcare facilities.

Since its founding in 2003, Healthcare Lighting has been dedicated to the design and manufacture of medical lighting products that enhance the visual environment in healthcare settings, thereby improving the level of patient comfort and aiding caregiving staff in the performance of their duties Independent third party forecast and Company estimates suggest that the size of the North American market for lighting and lighting controls of new healthcare facilities exceeds $1 billion annually.

While the renovation opportunity for existing healthcare facilities is as much as $20 billion.

The Company's existing product portfolio, combined with the specialty medical product portfolio of Healthcare Lighting, provides the opportunity to further enhance and develop complete lighting solutions for the healthcare industry.

Healthcare Lighting will continue operations in its existing facility, focusing on the development of lighting solutions for healthcare facilities.

We did not announce the terms of the acquisition and it is not expected to materially impact our fiscal 2011 consolidated financial 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 is not really changed since the beginning of the year.

The economic environment continues to be challenging, but improving, but not with a steady cadence.

Key indicators for our primary market, non-residential construction, appear to be stabilizing from very depressed levels.

The housing starts continue to languish at a half-century low, and this is concerning.

Forecasts by independent organizations continue to suggest unit volume for new construction put in place in the US will be down in the fourth quarter of our fiscal 2011.

Interestingly, sales of lighting fixtures are expected by some to be up low single digits for the full year, mostly due to renovation and small projects.

Additionally, we feel the lighting controls portion of the industry continues to outpace the growth of luminaires.

It seems the significant headwinds that have prevailed in our markets over the last two years or so have begun to abate, though the recovery is expected to be slow and inconsistent both in North America and Europe.

We expect to see continued growth in the fourth quarter of our 2011, though the level of growth will be difficult to predict, because incoming orders have been inconsistent.

Our backlog stands at $165 million.

Excluding acquisitions, our backlog is down approximately 3%, compared with the year-ago period.

We believe the decline in backlog was primarily due to weak order months in April and May as industry demand appear to be soft.

For Acuity, this was followed by a rebound in orders for June, which is up approximately 10% from the year-ago period.

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

We increased prices on those products most affected by these commodities in February.

While we are now receiving the full benefit of the price increase, which primarily offset rising cost, we are again experiencing rising input cost particularly for items based on steel and oil, and now rare earth metals, potentially creating margin pressure on our fourth quarter as well.

Looking ahead, we will continue to be vigilant in our pricing posture.

As commodity and material costs continue to rise, we will again increase our selling prices to recover these inflationary costs.

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

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 the introduction of new products and lighting solutions.

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 and more unique value to our customers, including products such as Acculamp, which incorporate advanced technologies providing superior lighting, quality, and more sustainable energy solutions.

Our product and solutions portfolios are expanding rapidly, including the addition of strategic acquisitions like Healthcare Lighting this quarter, and Sunoptics and Winona earlier in the year.

And, we expect to make more.

Our strategy is straightforward.

Expand and leverage our industry-leading product and solutions portfolio, coupled with our extensive market presence, and our considerable financial strength to capitalize on market growth opportunities.

We continue to enjoy success in building our lighting controls and solutions 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 investments in this exciting and fast-growing market.

This all takes focus and resources.

We are funding these activities today, even though the current environment is challenging because we see great future opportunity.

Through these investments, we have significantly expanded our addressable market.

We now believe the many markets we serve as part of the broader lighting industry could grow more than 50% by the year 2015, providing us with significant growth potential.

Further, we believe the continued execution of our long-term strategies will enable us to outperform those markets we serve both today and in the future.

As we look beyond the challenges of the current environment, we believe the lighting and 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)

Kathryn Thompson, Thompson Research Group.

Good morning.

This is actually Jamie Baskin on the line for Kathryn.

With the weakness in backlog in April and May, can you talk more of whether -- how much of a function that was of pre-buying in front of the price increase, and then looking at the June, do you think that's more a better representation of demand going forward?

I suspect that there was some impact on incoming orders for April and May, based on the pre-buying of price due to price increase.

However, I would say that in discussions with other industry participants, electrical distributors, other people who had participated more broadly in the industry, I would say that many folks commented that there seemed to be a downdraft in demand.

I don't know how much of that was related to, if you will, price increases, or just general activity.

It's also a bit difficult for me to comment on what's happening industry-wide, relative to our June orders.

I know our order book is up relative to the year-ago period, and we continue to see opportunities there.

I think that June is probably more reflective, but again as I said earlier in my comments, the market is very spotty.

It's choppy right now.

Okay.

And then with the SD&A increase, can you talk a little bit more of whether this is a function of some of the acquisition cost or is this a better representation of SD&A going forward?

The answer to that is yes in total.

If you look at our SD&A and I have to go back probably a couple of calls ago.

We said that our fixed SD&A, fixed, was probably in that $78 million to $80 million range.

The variable portion for freight commissions and a few items like that probably was in the 11.5% to 11.7% range.

We believe that the acquisitions have added probably another $4 million a quarter or so of SD&A, the variable portion should stay relatively consistent.

We've also been investing in our technology and innovation group.

Again, if we look at where our technology and innovation team in terms of number of engineers of various types existed three short years ago, we probably had less than 10 folks focused on technology and innovation.

Today, we have well north of 60.

So the investments that we have been making to really accelerate our product portfolio proliferation, particularly around new technologies, such as LEDs or organic LEDs, have now come to the fore.

My feeling and our feeling is that this notion of fixed portion of our SD&A, probably now with the acquisitions will be in that more $85 million to $87 million range.

Again, please understand that there are some variable elements in there, such as when we introduce new products, and we have samples, and we have marketing activities, those at times are a tick up, and then you come back down to a more normalized level.

So, it's a little bit of a misnomer to say it's absolutely fixed and therefore very steady.

But I think that that range of $85 million to $87 million, maybe even a little higher depending on the quarter, will impact that.

I will give you another example.

LIGHTFAIR occurred in our third quarter.

And a great deal of the expense associated with travel, the booth, things of that nature, are incurred in the quarter.

So, I hope that helps everyone as they try to understand their models going forward.

It definitely does.

I appreciate that.

And then my final question.

Can you speak to which end market you are seeing the best strength and what kind visibility you have in those?

I would say that -- you have to look at both ends marks and channels.

I would say that from a channel perspective, our growth in our C&I world, that commercial industrial, which if focused on various types of projects, or various types of verticals, whether it's schools, healthcare, industrial spaces, those would be the three key markets where we are seeing growth.

Renovation is contributing to our growth model.

I think in the past we have said that we've been growing somewhere in the range of between 15 and 20 points, I think this quarter.

We estimate -- very difficult to estimate by the way in renovation, but we estimate that we were up 18% in renovation over the year-ago period.

So, geography, US, Canada did well.

Europe, Mexico, kind of flattish, a little bit of growth in those markets.

Verticals, healthcare, schools, industrial, I think contributed nicely to what we were doing.

Those are traditional strengths for us.

And, then of course renovation.

And then you couple both luminaires and controls in terms of our total portfolio.

Both saw nice growth.

Obviously, the controls business for us is a significant growth platform.

We don't break that out.

So, please don't ask me questions on that.

But it continues to grow at rates -- actually, rates in excess of what we said when we first announced the original acquisition case, which was that we expected to double that business in 18 months.

So we are slightly in excess of that and are very excited about the potential of that business.

Great.

That's all I have.

Thanks.

Thank you.

Carter Shoop, KeyBank.

Good morning.

Thanks for taking my call.

The first question has to do with gross margin.

You showed some nice sequential improvement there over 200 basis points.

Can you talk a little bit about opportunities in the near and medium term to drive further expansion in the gross margin line?

Sure.

Ricky, why don't you?

Yes.

We continued to push our productivity in the manufacturing operation, and I think there is still quite a bit of opportunity as we are in our lean journey of improving that productivity.

And, that can add basis points a year.

We target 70 basis points improvement a year on flat margin with some benefit coming from mix.

And, that's the other big opportunity is the mix.

As Vern just indicated, our control business is growing faster than our average growth.

And, the control business is more profitable than our luminaire business, especially so with the gross profit area.

So the mix will continue to provide opportunity to improve the gross profit margin.

And then lastly, which can go either way, is on this price/cost variable.

We've talked quite a bit previously on why we think we've got in balance here in the third quarter.

Hopefully, we'll retain that balance here in the fourth quarter, but the inflationary cost we're seeing on commodities and some of the components that we have acquired could put pressure on the gross margins in the short term.

At least to date, our industry has been pretty successful at passing on increases in these commodity costs.

And certainly as Vern said, we're committed to continue to do that, but there can be short-term swings in the gross profit margin as we saw back in the first half of this year as we try to catch up sometimes.

But overall, productivity mix should be contributors to our gross profit margin, and then hopefully we can keep a balance on the price cost.

Can you maybe elaborate a little bit on the pricing pressure that we are seeing and the lag effect that we will see in the fourth quarter?

Is there a way to quantify what the headwind is going to be fourth quarter versus third quarter as a result of the FIFO accounting?

Yes, a little bit.

We indicated in the queue that we filed this morning that the material cost increase were around $5 million year-over-year in our third quarter.

Also in there, there's the freight increase that gets us to a total of $7 million of increase.

If we look into the fourth quarter, I would expect that to be higher.

Probably a couple of million dollars or so higher.

It's hard to predict, but could be that much higher.

But on the positive side, as I mentioned in my prepared comments, we should get the full-quarter benefit of the February price increase, where as we only partially realized that.

So we think we will be able to overcome that higher cost.

And the reason it's higher is as I said, with us being on FIFO, there's about 60 days or so of inventory on average that we have.

So you're looking at a two plus month lag between when we incurred increase and when it runs through our P&L.

So, we saw increases throughout most of our third quarter, even though it subsided some here in June.

Hopefully, that gives you a little bit of color around that.

That is helpful.

Thank you.

One final question if I may.

On the renovation market, can you give us a little bit of an update on the progress in penetrating this market over the past year, and any kind of numbers you can give us in regards to growth there or relative growth due to the rest of the Company.

And then how meaningful that segment is becoming for Acuity?

Well, renovation in the eyes of, if you will tenant improvement, have always been important contributors or important markets for us.

We've never really specifically broke out renovation specifically, but our guesstimate, and it's very difficult, by the way, because so much of our product finds its way into different projects for which we don't have visibility.

For example, products that we sell to distributors for their resale, we really don't know what types of projects those things will end up on.

So, we tend to try to not include that.

Look at our sales through the home improvement channel.

One could argue that the bulk of that would be for some type of renovation.

We don't, so we are not including that in these numbers.

But, we said earlier in the call, we guesstimate that our renovation on an apples to apples basis in the third quarter over the year-ago period grew by 18%.

We guesstimate that in total, and it fluctuates.

But, as we've said in our 10-K, we guesstimate that what about 25% of the product is sold into distribution.

Just as an example, the other 75% is project based, that there's a different shift to address.

And then with regard to just our mix of overall new construction versus renovation, that can fluctuate between 70/30 and 80/20.

So, we see renovation right now in this environment being a key contributor.

As we said, many are calling for the lighting industry to be up very, very low single digits relative or compared with what's happening in non-residential commercial construction, which is down again in 2011.

I think the primary contributor to that positive growth relative to other more traditional benchmarks is due in large part to renovation opportunities.

And those renovation opportunities are driven by not only energy savings, but in certain segments like retail, quality of lighting.

Retailers have always been very focused on how do they enhance the merchandising capabilities of their stores while deriving energy savings.

So I hope that's helpful.

That's very helpful.

Thank you.

Glenn Wortman, Sidoti & Company.

Good morning, everyone.

Good morning, Glenn.

Just to ask the gross margin question a little differently.

Last year, in fiscal 2010 from 3Q to 4Q, the gross margin increased 140 basis points sequentially.

And this year from 3Q to 4Q, would you expect to see any increase in gross margin?

We haven't forecasted that.

We don't provide a forecast, and I think Ricky has provided some good insight into what the impact of increased commodity costs being covered by increased prices.

Our expectation is to show growth in our business in Q4, but just how much this rising commodity cost will impact that margin remains to be seen.

We are very hopeful and expectant to get the variable contribution on any increase in volume.

So that should come through in a favorable way.

But we think that this notion of rising prices, simply to cover rising commodity costs will obviously in the calculation have a dilutive effect on margins.

Okay, and just a little bit of a longer-term question.

Back in FY '08, you guys posted I think what your record-high operating margin on a little more than $2 billion in sales.

Can you just talk about maybe your longer-term targets or goals?

If and when you hit $2 billion of sales again, do you think you can match that operating margin?

What are your expectations in there?

That's a terrific question.

Our expectation -- 2008, I think the industry had an expectation that new technologies, such as LED, would come into the marketplace in a more measured pace.

And, so you had folks out there trying to guesstimate what would 2020 look like.

It's clear to us that the acceleration of additional light sources and market opportunities based on technology is happening faster than what I think the industry had expected.

And so as a consequence, we have significantly increased our investment, as I mentioned earlier, in technology and innovation.

So, as I said, this is having a draw or a negative impact on our overall margins, but the funding of -- and what we are focused on in terms of future growth potential is just huge.

We guesstimate that our marketplace, originally defined based on what we served in 2008, that market today is probably roughly a $10 billion market.

If you look at how we have expanded our addressable market, lighting controls, Acculamp, daylighting, different channels such as renovation in a way that we didn't really call in that marketplace before.

We think that by 2015, that market could be well north of 50% larger than what it is today.

So the investments that you are seeing today are really to capture that market tomorrow.

So, I think that relative to our previous high watermark of $2 billion of revenue, our margins, as a percentage, will probably be slightly below that.

But the potential of our Company in terms of what our growth could be, in terms of our size when you look out 2015, is dramatically larger and dramatically brighter than what it was in 2008.

And I would believe, and have a high expectation based on how we're improving the variable contribution margin off of the revenues that we have, going to fund both growth that you see in our operating profit dollars and our operating profit margin, but also funding technology and innovation opportunities that we see.

So, I hope that gives you an insight to what we are investing in today, because of the huge potential that we see literally tomorrow.

Yes, it does, and thanks for taking my questions.

Matt McCall, BB&T Capital Markets.

Good morning.

This is actually Jack Stimac, filling in for Matt.

If I could ask a quick follow-up question.

I know it's been beat to death so far, but from the inflationary standpoint, just looking at the ability to get price increases ongoing with demand slowdown.

How accepting is the market right now of multiple price increases in a six-month period or a year?

Do you think with demand continuing, with ultimate end markets still declining?

Is that going to be a problem or where do things stand?

So Jack, I think you and the other folks that follow Acuity and others in our industry can look to other participants in the outer electrical industry and what they've had to do, because many of these same input costs are impacting their components as well.

And so you see other types of folks putting through prices increases into the marketplace to recover cost.

So I don't think that the lighting folks are different in that.

The inputs around steel and oil, and now rare earth metals.

You read the newspapers everyday what China's attempting to do.

And, it will have an impact.

From what we're hearing from a lot of the lamp manufacturers, is that the phosphors that they use in terms of what goes into some of the fluorescent lamps and other materials are becoming very expensive.

So, I believe that the industry, including the lighting industry, is able, and we were able to pass along these costs.

Cost increases are obviously, or price increases are never easy.

But when you see these types of inflationary inputs, you have to respond.

Our industry, the lighting industry, unfortunately, operates on a bit of a lag.

You put quotations out, even though the quotations could be only for 30 days, you have backlog, you have other items, some contractual arrangements, so this is why it takes us, and I think this is probably true of other lighting companies, a while.

Whether that's 90, 120 days, it really depends on the mix, to fully implement that price increase.

So, again, I hope that's helpful in understanding how the industry works.

And again, Acuity has been successful in putting through price increases in large part because we have a very differentiated value proposition that we are able to use those features and benefits, not just price.

Okay, and then Philips did a profit warning recently and cited lighting as one of the main causes of non-resident construction.

Do you think with your June orders being as strong as they were, is that a mix issue between you guys?

I mean I know they have more commercial areas -- more consumer exposure.

But what do you think that they're not -- that you're kind of seeing some strength and they're actually getting a little nervous?

In truth, I really can't comment.

I don't know Philips mix of business.

I too read the release and difficult for me to ascertain how my business and their business, which are very different.

They sell components around the globe, they sell into the automotive industry, they sell much more heavily skewed into Europe.

So, I really cannot provide a great deal of insight into the Philips versus us.

I can only say that April, May, I think for the industry in North America was, the demand was soft.

I think all of us saw that from what I've heard.

Again, through other industry participants, not in lighting but other components.

So, I just think it was demand in the marketplace.

I don't know that June necessarily represents, or one month does not make a quarter.

But it was favorable to see at least in June that our order rate uptick compared to the year-ago period.

And so, we are optimistic that we can continue to show growth in the fourth quarter over the year-ago period.

And then from an M&A standpoint, you guys still have a lot of cash on the balance sheet.

You actually increased cash despite acquiring a company during the quarter.

Where should we look to for M&A?

Philips announced an acquisition this morning.

It sounded like it was decent size at least in terms of top line.

Do you think that there will be any consolidation with some of the big four buying, some kind of mid-level guys?

Or will you continue to look at where you can add a new vertical or a new product to put through your existing distribution?

Again, I can't comment on other peoples' acquisition strategies, but ours I think is pretty clear.

We are looking to not only -- well, two key areas.

Technology and innovation; what can help us leverage the portfolio there.

And then tuck in acquisitions that allow us to strengthen our focus around those verticals for which we feel represent good growth opportunities.

So, I think Ricky and team feel optimistic that there will continue to be opportunities for these types of things.

But, I believe that the industry participants that I see all have slightly different strategies.

I don't know that we will be tripping over each other for opportunities.

And then lastly, a quick one.

At LIGHTFAIR, it sounded like some of the LED chip manufacturers were seeing some supply chain disruptions from what was going on in Japan.

Has that impacted your supply chain at all?

Has any business been pushed back because of that so far?

No, not at all.

Okay.

That's it for me.

Thanks.

Thank you.

Craig Irwin, Wedbush Securities.

This is David Giesecke in for Craig.

Most of my questions have been asked, but as we're entering the second half of the year, do you guys -- are you guys claiming growth for fiscal year 2012?

It is our expectation to grow in 2012.

It is our expectation that the lighting market will show modest growth.

And so as we have said, it is our expectation to outperform the markets we serve.

We believe from, you see all of the economist reports and forecasts around what 2012 means for non-residential construction.

I think folks are calling for finally a positive uptick, but it's often very low base.

And as we continue to point out, I think the economic environment, employment, interest rates, credit availability, real estate values, these are all important items for us.

Clearly, employment is a key driver of our business.

So, I think we are doing well in this current environment.

We're fighting for every order just like everyone is, and we're having success because of the portfolio we have, the access to market that we have.

But, there really hasn't been much benefit, if you will, from new construction.

So as that comes back and it will, obviously that's going to have a very positive effect on our future growth.

Great.

Thanks.

And, final question, or second question.

Can you give us an update on lighting controls, please?

Our lightings controls business as the entire platform has been growing nicely.

As we said when we acquired Sensor Switch and LC&D, almost a couple of years ago, our expectation was that we would double that business every 18 months.

As I said earlier, we are ahead of that pace.

We've added daylighting to our portfolio of controls and lighting solutions companies.

That's a very exciting business, a very exciting future for what it represents.

It's the premier company.

Sunoptics is the premier company in daylighting.

So as we think about our controls platform, not only from a device perspective, but as it migrates and brings intelligence into the luminaire, for us to deliver what we are referring to as intelligent lighting solutions, it's just a huge potential.

Our expectation is that that market will go from roughly a $900 million market to well over a $2 billion market by 2015.

And more importantly, the notion of lighting solutions we think will be an important element of the market.

Very difficult to predict today, but we showed our lighting solutions capability in its full glory at LIGHTFAIR in Philadelphia.

And, it was received exceedingly well.

Just because of the value that it brings to the consumer, the customer in that particular case, and how they use quality of lighting while deriving superior energy solutions.

So, huge growth because of the investments in our controls business and how we are integrating it into our lighting luminaires.

Thank you.

That's all I have.

Jed Dorsheimer, Canaccord.

Hi.

Thanks for taking my question and congratulations on doing well in a tough environment.

Thank you.

First question that I have is digging into the margin comments a little bit deeper.

Ricky, if I take the 70 basis points, give or take on an annual basis of improvement there, and then Vern, if I look at the fixed component of SD&A coming down from that $85 million to $90 million level, it should result in about a 300 basis point improvement on the operating line, unless there's something else that the variable components are spiking.

Is that the right way to look at it?

Your comments seem to be a little bit more on the conservative side, so I just wanted to dig into that a little bit more.

Well, let me take the first stab and then Ricky if you'll chime in.

Q3, $458 million of revenue, 41.4% gross profit.

If you look at the SD&A mix between fixed and variable, give you all some insight.

It's pretty consistent with what we've said in the past.

The variable component that we measure for freight and commissions is probably in that 11.5% to 11.7% of sales.

And then the fixed SD&A component, given the acquisitions.

Now, acquisitions are not contributing significantly yet.

And the answer, by the way, to that is very simple.

As we transition away from some of their sales forces to ours, which are considerably stronger, there's just a transition period.

It just takes time.

Right?

So, if you look at that fixed SD&A in that 87ish range, and again it has some variability in there, I think you then can say, okay, what do I expect growth to be in Q4?

Two elements of growth; one is volume growth.

Let's just leave it at volume.

The other one would be the price relationship to cover costs.

That will have obviously a dilutive effect on the margin percentage, right?

Because essentially what we are saying is whatever those material cost increases are, price will cover it.

Ricky gave some insight.

It's difficult for us to precisely predict that number right now.

We used $7 million in Q3, but that was only a partial number.

It could easily exceed $10 million.

It might be on the $12 million or $13 million range.

Volume growth, a little bit of a wild card, around the vitality of the market.

So as you look at sequentially Q3 going to Q4, what could that be?

And I would expect us to get a reasonable if you will variable contribution off of that.

And we've said in the past, we are probably no different than any typical manufacturer, kind of in the mid-20s around that variable contribution.

So Jed, I hope that helps you in your model.

It does.

I was actually speaking more from a time frame of more of an annual perspective versus a sequential improvement.

I'm sorry if I -- I should have clarified, but that is very helpful.

Thank you.

I think it plays out on an annual perspective as well.

Obviously, we have increased the investment in our business through these acquisitions.

So the fixed portion of the SD&A, and again to all of those of you who are listening, that has some variability to it.

When we go to LIGHTFAIR, and all that comes into this thing called fixed, but it's completely variable, right?

So how we introduce products, the pace, as not all products are the same.

Some have bigger launches than others, and a little bit of noise within that fixed portion.

But I think then as you think about 2012, and what the growth rate could look like, acquisitions, volume, I think all of that.

Each of you can have your own view about what that's going to be.

Our expectation is that the overall lighting market will show modest growth, low single digits, and our expectation would be that we would help perform that, and I think that our past track record indicates that we've done a pretty good job of that.

Jed, the only other item I might add, just one, two items.

One Vern talked about; delayed purchase accounting and how it works when we make acquisitions, even though they are pretty small and immaterial.

Initially, don't tend to be as profitable as you have to write up inventory and other types of items to current cost.

So that can have a factor.

And then secondly, while it's still as Vern indicated, less than 5% of our sales.

So it's not moving the needle much.

But as LED and solid-stated lighting becomes a bigger portion of the mix, at least today, while the operating profit dollars, are very attractive and arguably above our traditional fixtures, the margin percentage can be less just given the much higher sales price and the higher costs for the components.

As those component costs come down and they are coming down pretty rapidly, we think that will reach an equilibrium two, three, four years out, wherever that crossover point is.

But that's another factor as solid-state lighting continues to grow and become a bigger mix of our business from a margin percentage standpoint.

That's helpful.

Two more questions.

I guess just one clarification.

Vern, what are you buying, or how are rare earths affecting your business?

I get the use of phosphors and euro bromine, cerium and terbium, but that would be in the components, that were the bulb side of things.

So how are those impacting your business?

Sure.

We are a large purchaser of lamps.

We sell many fixtures and lamps.

And so we do that for national accounts, we do that in the distribution.

So, we are a very significant purchaser of lamps.

And what folks are now saying is that those rare earths are impacting the traditional lamp business.

Got you.

And then last question on the tripling of the solid-state lighting sales.

Could you help in terms of -- I know it's difficult to see what end market, but I'm curious in terms of channel.

Did this occur evenly in terms of stock and flow and on the reps, or was it more skewed to the reps?

A little bit more color there would be helpful.

Sure.

It's I think very balanced.

On the higher-end specification products where you have very sophisticated lighting solutions, which incorporate solid-state lighting luminaires, those are a very high-end spec sale.

And then when you look at a number of our downlighting products, which are more stock and flow, we're having great growth there.

The performance of our products, not using what many in the industry are trying to just use as a lumen per watt performance, but how you experience lighting and how it performs in your pace, our performance capabilities are really significantly better than others.

And so, as that ability to sell that differentiation with consistent pricing, we're starting to see quite a nice ramp up.

So, I would say the model is very balanced.

Our outdoor luminaire business is moving up nicely.

You saw an announcement on Mall of America.

It was a huge parking garage order for our LED luminaires.

So, the market is now being ceded.

And you have this sales force that is significant in terms of its capability now selling these differentiated products.

And so, we would expect that kind of growth rate to continue, and I think that folks like yourselves, who have some prognostication of what does the conversion look like by pick a date, 2015.

As component costs become much more commoditized, the tipping point makes it easier and folks are able to then decide, if you will, what their view of good, better, best is between traditional lighting sources and LED.

And as you know, fluorescent is really a marvelously efficient lighting product.

So, we are seeing growth in both of those.

I think that our LED sales are very diversified in the end markets that they're touching.

That's great.

Thanks.

I'll jump back in the queue.

Thank you.

Peter Lisnic, Robert W.

Baird.

Good morning, gentlemen.

Good morning.

First question.

I just want to make sure I understand the materials cost and pricing environment.

In the third quarter, $5 million plus $2 million for freight.

I think you were originally looking at a number that was closer to $3 million, so can you give us a sense as to where the increment was?

Was it price realization not coming through where you thought it would?

I realize that when you're talking about looking forward a quarter that it's still a guess, but I'm just wondering where the increment was relative to previous expectations on that number?

We saw so many increases across the board.

Steel; all of these fluctuate pretty rapidly; fuel costs; things of that nature.

So I guess I didn't really think of it in the context of based on previous comments.

It's a bit of a guess as to what that number is going to look like.

As you know Pete, it can change very rapidly.

So we are quite pleased that we were able to offset the $7 million of increases that we experienced.

Again, as Ricky pointed out earlier, we think the number is going to be even larger, not just because of FIFO, but because we continue to see cost increases in the marketplace.

So, I don't know if that number is going to be $12 million next quarter or $10 million or $15 million.

But our expectation is that at this point in time, the pricing, and Ricky, as you pointed out, realizing the full benefit of the price, we would hope to offset the cost.

Okay.

So you're effectively neutral by the fourth in terms of how we understand it.

Things are moving around quite quickly and all over the board, so I wanted to see if anything caught you off guard in that number relative to what you previously disclosed.

Pete, real quick, one quick point.

We covered the cost in Q3 as well.

That $7 million is not the uncovered amount.

That was the gross amount of which we think we recovered in price.

Okay, I was looking at the Q where you had a $5 million impact from materials costs.

We did have that increase in cost of goods sold, but we think we recovered it in price.

All right.

Fair enough.

This is important for everyone to understand.

It has a dilutive effect on the margin calculation.

Yes.

So when people look at our profitability as a percentage of revenues, just understand that when we're increasing prices and we're simply recovering cost increases, it's having a dilutive effect on margins.

Okay, got it.

And then second question.

If I normalize things to the extent that's possible for commodity cost headwinds, some of the dilutive impact from acquisitions, your incremental margins in the third quarter, and actually for the last four quarters, have been accelerating.

And that incremental margin in the fourth quarter, I mean or the third quarter, to the best that I can do the math is higher than I think what you've classified as being quote-unquote normal.

So my guess is, or at least the way I'm looking at it is that we are seeing early evidence that your structural profitability profile is better than it has been historically.

I know you talked about this a bit earlier, but I'm wondering if you'd care to throw out a bogey as we get to a more normal market environment of where margins could be or how we should think about incrementals as we look at the longer-term profile of the business.

Well, again, an interesting comment, and we too believe that the opportunity to drive incrementally higher margins is contingent upon adding greater value in terms of the products that we sell.

And we think that we are pushing several ends of the market.

One, the ability to innovate and create lighting solutions that have higher incremental margins, is a key element of what we are doing.

Making sure that we are paying attention to our traditional business, in terms of whether it be stock and flow, but more conventional light sources.

Because again, that represents more than 95% of our revenues today.

Where we are going with this and where we see the market going, is investing today, using some of the incremental margins Pete that maybe you have described to fund continued acceleration in the procurement of talent, access to talent in terms of innovation, access to market, different markets that we want to sell to.

Renovation, we're going after that market through a multi-pronged approach, so we are investing there.

We continue to invest in our lighting controls business, because of the growth potential there.

And you saw us introduce Acculamp.

That line of products directed at the specification-grade marketplace represents a huge opportunity.

It's very consistent with the types of products that we sell to those customers who are very sophisticated buyers of luminaires, because they understand lighting, and they understand energy performance.

And this is what differentiates us from many of the new players that are coming into the market today.

They think because they put an LED chip on the board and shine some light at somebody that they are now a luminaire company.

And maybe they are.

But, that's not what Acuity does.

And so we are using and trying to drive incrementally higher margins with funding today, the ability to grow.

So I would expect that between now and say that 2015 timeframe, you're going to see the market grow, you're going to see Acuity outpace the growth of that market, and you will see us bring home the variable contribution margins the way we have in the past.

But in the shorter term, we are funding the technology and innovation to be able to participate fully in that market going forward.

I hope that helps.

Yes, that is very helpful.

Thank you, and enjoy the holiday weekend.

Thank you.

Andrew Abrams, Avian Securities.

Just two quick ones.

First, is there any change in your perception of seasonality in your business, given the oddball kind of construction markets, commercial construction market that we're in now?

I would say no, not material, not materially.

But it's a good question.

I would say no at this point in time.

You know what impacted us and I'm certain it impacted others in the industry, were these devastating floods that are occurring.

I mean you just can't build things in that environment, so I think seasonality still does have, still impacts our business the way it has in the past.

What that means on a go-forward basis, it could change a bit, but I don't have good insight into that at this point in time.

Got you.

And if we look at the LED business for you guys, how have your -- let's say, how have your internal margins improved over the last 12 months?

If you go back two LIGHTFAIRs, they were hard to find LED fixtures.

You had to go look for them, and the last one obviously was everywhere.

What has happened on the material side and on the margin side for you guys, especially given that LEDs are a little more complicated than your normal fixture stuff.

Has there been a substantial improvement there from your perspective, or is it just material costs have gone down?

Or is there no improvement and you are still working through the mechanics of actually building LED product?

I think that we are very efficient at building products that incorporate solid-state lighting componentry.

Clearly, there's opportunities to continue to improve.

But the supply base, the varied supply base that we have, I think is quite sophisticated in moving forward.

The cost of componentry within that environment is changing rapidly.

I think it's well chronicled in the industry that LED chip prices are declining dramatically for a multitude of reasons.

I guess I don't need to get into it here.

What that's having or allowing us to do is bring the luminaire price down to be more competitive if you will with more traditional light sources.

And as a consequence, you're seeing more movement, growth if you will, in sales of LED luminaires.

Our business, that portion of our portfolio, has tripled over the last year.

And, we would expect it to continue to grow at a very, very rapid pace.

The margin dynamics, as Ricky pointed out are still a bit of a challenge.

You're touching the falling knife here.

But our expectation is that as the price of these components comes in parity.

When that happens I don't have a great crystal ball, but comes in parity with traditional lamp sources, I think that you could expect to actually see higher margins, because the technology inside the luminaire will be dramatically different.

The luminaire will be able to do many, many more things than just be the dumb terminal in the ceiling today.

And as a consequence, you'll be able to differentiate that value.

And, this is why I make the point.

Simply because someone can put in an LED chip on a board and shine light at somebody, it doesn't mean that they're a luminaire company.

And we have lots of folks who are out there claiming they're a luminaire company simply because they put a chip on a board.

To us it's another light source that allows us to create a tremendous amount of different lighting solutions for our customer base.

Got it.

Just lastly, and this is a very quick question.

Have you guys sold any of the OLED fixtures yet, or is it still kind of the novelty that we would expect it to be for the next year or two?

Other than what you have in your house, if you do have them?

(Laughter) No, I can't afford them either.

They are commercially available.

The prices are coming down.

My guess is that this year, we will -- I don't know if we will sell any in our fiscal 2011, but I'm quite confident that the way our team has been pushing lighting design and cost that we will begin selling lighting.

They are available for sale.

We are selling them today.

I think that as the cost comes down in the applicability, it will change rather -- it will change in an interesting way.

The Revel product was just an outstanding product.

It won product of the year award at LIGHTFAIR.

So, quite a bit of buzz around that and I see some opportunities.

Like in anything, they'll be first adopters.

Right.

That's why I figured you had it at home first before anybody else gets the chance to buy.

Okay.

Thank you very much.

I appreciate it.

(Laughter) Thank you.

Christopher Glynn, Oppenheimer.

Thanks.

Wanted to revisit the volatility in the markets that you mentioned.

The revenues indicated sort of a lower rate of conversion of entering backlog than has been the pattern.

So, I think you said more volatility than pre-buy, but wondering about some other factors.

Are you seeing any change in the lead times in the mix of projects, or were the June comps much different than April and May were?

And maybe with their possible impact of timing of competitor price increases, some variability around who went when?

Again, all very good questions.

And postmortem on it, probably still need some more time to do a look back and answer that a little bit more clearly.

Again, we believe that the markets continue to be choppy.

We think that there is improvement going on, and you have to look within the verticals.

If you're a commercial office building person, you're not building new buildings.

But, if you're an owner of a building that has space, you're working very diligently to fill that space.

And so, for us, the bifurcation of looking at traditional measures to be a leading indicator of our business, this portion of the cycle tend not to be the best indicators.

And so again, this is why I think you're seeing forecasters calling for the lighting market to be up very low single digits.

Because you have renovation, you also have tenant improvement.

Again, you're not building new structures, but you are filling out the space.

So the notion of looking at absorption, which I think turned favorable in the quarter, those are encouraging signs.

Employment, just the raw numbers of people being employed, increasing are very important to this industry.

Okay.

Thanks Vern.

Thank you.

(Operator Instructions)

Anuj Mathur, Centurion.

It's Anuj Mathur of Centurion.

You guys made a few interesting comments about the benefit you guys get as LED component pricing comes down.

And the story we've consistently been hearing in the market is that eventually we'll get to an equilibrium price where demand elasticity really kicks in once LED component pricing gets down to a certain level.

So, maybe what would be interesting to understand is, one, understanding where component pricing generally is right now, and when you guys are speaking to customers, is there a particular pricing level that they are looking for?

Or a pricing level that you think will really start to encourage them to give increasing thought to replacing traditional lighting with solid-state lighting?

On the question of component costs, I would refer you to all of the chip makers.

Because I'm not going to say what my costs are, or even the trends necessarily on that.

Number two, I believe that as people look at comparable products, or if you look at products at price points, the ability to sell one product versus another is differentiated in my mind on features and benefits first.

And then what's the price for the incremental features and benefits.

I believe that solid-state lighting will allow people to do things that may be different than traditional fluorescent for example won't allow them to do.

But yet, fluorescent, in many applications is going to be still a very, very viable, and other light sources by the way, very viable light source or products for their application.

The tipping point, between if you're indifferent between a fluorescent and an LED, I think it really depends on who you are, and what you are attempting to do.

So, if you're, gosh golly, a municipality that has an inner-city school and your budgets are extremely tight, fluorescent is just an outstanding value proposition.

And the price becomes a parity, I think more folks are going to say I'll take LED.

But companies like ours, particularly ours, are going to be differentiating that luminaire because of other things that it will be able to do.

So, I think that the prognostications that are out there about how much will LEDs be at the market by some particular date, I'm not going to say that I agree or disagree.

I think it's going to be significant, and we are positioning our Company to continue to have not only a leadership role there, but to actually extend our leadership because of that technology and innovation.

I must add that a clear driver, take away the early adopters or the folks that for green sustainability emotional reasons would want to go to LED, the main driver would be the return on investment of this product versus the return on investment thing they get with the traditional lighting product.

And at least today, not only the efficiency and the energy savings, but you also have the maintenance costs in there as well.

And that's a moving target, because we're seeing the life of traditional sources such as fluorescent and all, extending to where that target is moving.

But, I think the thing that I would be looking at personally to be a big tipping point is when that return on investment, when you factor in the maintenance, you factor in the energy savings, and so forth starts to get to the parity of the traditional light sources.

It doesn't mean the cost has to be at parity, because there's other -- you maybe have a more efficient LED fixture or a longer life and so forth.

That's where I think -- it's not just the cost parity, I think it's that overall return on investment factored in the value that it brings and as Vern said, it's an intelligent fixture.

There's other values that it might bring that provide a return on investment for someone that would cause them to tip sooner than someone else.

Okay.

Thank you.

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.

Thank you for your support.

This does conclude today's conference call.

You may disconnect your phones at this time.