Acuity Brands Inc (AYI) 2011 Q4 法說會逐字稿

Good morning and welcome to Acuity Brands' 2011 fourth-quarter and full-year 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, all.

With me today to discuss our fiscal 2011 fourth-quarter and full-year results are Vernon 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 answer your questions.

First, let me say we are very pleased with our results for the fourth quarter and full year 2011.

We've reported strong top- and bottom-line growth in spite of continued soft market conditions.

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

I believe this is strong evidence our strategies to diversify the end markets we serve and extend our leadership position in North America is exceeding succeeding.

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

Our profitability for the quarter and the full year was strong while we continued to fund areas representing significant future growth potential, including the expansion of our solid-state luminaire and lighting controls portfolio.

As you know well, the economic environment continues to be challenging as job growth remains anemic and lending practices for real estate continue to be restrictive.

These factors, coupled with weak housing demand, continue to impact new commercial construction.

Having said this, we believe the many channels and markets we serve have either bottomed out or are on the road to recovery.

Others, like renovation and lighting controls, continue to grow nicely.

Also in the quarter, we continued to encounter rising costs, particularly for inputs based on certain commodities like oil and steel.

Overall, we estimate our pricing initiatives recovered all but approximately $2 million of these higher input costs.

I mention these macro factors because it provides a backdrop against what you can see the outstanding performance of our Company, both for the quarter and the full year.

I know many of you have already seen our results, and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights.

First for the quarter, net sales for the quarter were $496 million, up almost 12% compared with the year-ago period.

This level of growth is significant given industry conditions.

It is also our second quarter in a row of double-digit growth.

Operating profit was $55.8 million, up 16% from the fourth quarter a year ago.

Operating profit margin was a strong 11.2% in the quarter, up 40 basis points from last year.

In the year-ago period, we incurred a special pretax charge of $3.3 million, or about $0.05 per share, for streamlining activities.

Diluted earnings per share were $0.79, up more than 27% compared with the year-ago period, and up 18% excluding the impact of the special charge in the year-ago period.

For the full year, net sales at Acuity Brands were $1.8 billion, up more than 10% from fiscal 2010.

Consolidated operating profit margin was 10.5%, up about 30 basis points from the year-ago period, excluding the special charge.

We made about $106 million of income from continuing operations in 2011.

Diluted earnings per share were $2.42, up 16% from 2010, again excluding the impact of the special charge.

In addition, we generated $161 million in net cash provided by operating activities.

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

While Ricky will talk more about our strong financial position and uses for our cash later in the call, I would like to note we repurchased 1.2 million of our shares, or about 3% of the total outstanding, in the quarter.

The volatility in the stock market provided us with a unique purchasing opportunity as we see our stock as a compelling value.

Additionally, our Board has authorized us to purchase up to 2 million additional shares, a strong affirmation of our belief in our future.

Lastly, I'm pleased to report that in 2011 we continued to earn much more than our cost of capital, and our cash flow return on investment was again a robust 20% in spite of these challenging economic conditions.

These results for the quarter and full year were significant improvements over the year-ago period.

We believe this momentum gives us positive insight into 2012, which we will discuss later in the call.

We believe you will find these results even more impressive upon further analysis, so let us review the quarter.

On a consolidated basis, net sales grew by $52 million, or almost 12% compared with a year ago.

Excluding the impact of acquisitions and foreign currency, which added approximately $23 million to our top line in the quarter, net sales grew over $29 million, or almost 7% compared with the year-ago period.

We estimate approximately 5 of the 7 percentage point increase in net sales was due to unit volume growth in North America, partially offset by declines in certain international markets, particularly Spain, which reduced overall volume growth by about 1 percentage point.

Most of the growth in North America occurred in our commercial and industrial channels with emphasis on higher value-added luminaires, renovation, small- and medium-sized projects of various types sold through our distribution -- our distributors' stock and flow capabilities, and lighting controls, as well as growth in certain geographies, all of which is 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 the remaining 2 percentage points of net sales growth was largely due to previously-announced price increases to recover rising input costs, where we believe we realized the bulk of our increases on those fixtures most impacted by these costs.

This, we believe, was partially offset by less favorable mix of products sold through certain channels.

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

We believe spending for U.S.

nonresidential construction was essentially flat in the quarter compared with a year ago.

We believe the lighting market experienced modest growth in our fourth quarter.

This is in contrast with our unit volume growth in North America, which was up 6%.

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

With regard to product pricing, as you will recall we implemented price increases on those products most impacted by the significant rising commodity costs in February 2011 and announced a new increase effective mid-September.

Therefore, we did not -- we did enjoy the benefits of the current -- in the current quarter from the previous price increases.

The September increase had no impact on the fourth-quarter profitability.

We estimate the increase in input costs for which we were not able to recover from higher selling prices reduced our gross profit by approximately $2 million in our fourth-quarter 2011.

Before I turn the call over to Ricky, I would like to comment on our profitability in the quarter and our strategic accomplishments in 2011.

Operating profit margin was a strong 11.2%, but down about 30 basis points from the year-ago period, excluding the impact of the prior year's special charge.

There are a couple of key points to note.

First, price increases, which serve to offset some of the higher input costs, added more than $9 million in sales while having no impact on gross or operating profit.

This, plus adjusting for the higher input costs of $2 million not covered by previous price increases, reduced gross profit and operating profit margins by approximately 120 and 90 basis points, respectively.

Second, we launched a new line of retrofit lighting fixtures through the home center channel, which contributed approximately $4 million in net sales with no associated operating profit, due to upfront stocking and display costs.

Third, sales of our LED-based luminaires quadrupled in the quarter from a year ago -- yes, quadrupled, and now represent almost 5%'s of total net sales.

The profit margin on most LED products is currently dilutive to the Company's overall profit margin and is expected to remain so in the near future.

We anticipate that LED fixtures will become accretive to our overall profit margins as the expected decline of LED component costs outpaces the expected decrease in the selling price of these fixtures.

Ultimately, we expect the average selling prices of most LED-based luminaires to be higher than traditional fixtures, largely due to the higher value-added benefits and functionality of our fixtures, including improved energy efficiency and quality of lighting due to embedded controls.

Lastly, as we have explained in our previous investor calls, we have increased spending to fund initiatives for future growth, such as technology and innovation, as well as strategic acquisitions for the development of new products and solutions.

As a consequence, our operating profit margins are impacted somewhat, so let me explain.

Selling, distribution, and administrative expenses increased $11.5 million, almost 9%, on an increase in net sales of almost 12%.

Of the $11.5 million increase in SD&A, approximately 70% was due to variable costs to support higher net sales and acquisitions, which are now starting to contribute nicely to our overall profitability, but are still dilutive to our operating profit margin due primarily to the amortization of intangibles resulting from purchase accounting.

As I explained in our last few conference calls, the remainder of the increase in fixed SD&A is primarily related to funding activities focused on longer-term growth opportunities, including market diversification, expanding our fast-growing lighting control businesses, and investing in innovation and technology primarily for solid-state luminaires and intelligent lighting solutions.

In addition, we incurred one-time expenses for the store resets in the home-improvement channel for our new retrofit products.

We expect to continue funding these important and strategic activities, which are mostly an 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 anticipated peak sales.

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

For the full year, we performed exceedingly well in spite of the challenging economic environment, delivering solid results and making meaningful progress on our strategic objectives.

Just to note a few of the key highlights.

Sales grew over 10% to $1.8 billion in 2011, while margins expanded about 30 basis points.

This is against a decline in U.S.

nonresidential construction of about 5% for our 2011.

Our solid growth in a declining market is due in large part to our focused strategy to diversify our portfolio to be less reliant on the new building construction, and much more focused on renovation and lighting control to enhance the visual environment while optimizing energy usage.

Next, we announced price increases in an attempt to recover rapidly-rising input costs.

While we had success raising selling prices, we estimate we were unable to recover about $15 million in higher costs in 2011.

The impact of these higher costs reduced operating profit margins by about 100 basis points and diluted EPS by about $0.22.

On the strategic front, our accomplishments in 2011 were considerable.

Over the last 12 months, we completed five key acquisitions, adding great talent while diversifying our product portfolio in the end markets we serve.

Two of our more recent acquisitions were the additions of Horizon lighting control and Pathway Connectivity, announced just yesterday.

Both are premiere providers of high-performance lighting control products and solutions.

We are very pleased to welcome the Horizon and Pathway teams to our growing family of great brands.

We continued our record pace of introductions of new products, again creating more than 100 new product families for the third year in a row, significantly expanding our industry-leading portfolio of energy-efficient luminaires, lighting control solutions, and now LED-based lamps.

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

As I mentioned earlier, our LED-based portfolio is expanding rapidly, as are our sales of these luminaires, and we continue to fund the development of other light-source technologies, such as organic LEDs.

In 2011, we won numerous awards for our innovation in luminaires and lighting control solutions, including Most Innovative Product of the Year at Light Fair, again demonstrating why we are and will continue to be the leading solutions-providing company in North America.

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 each tailored solutions from our industry-leading portfolio.

Customers understand it takes more than just an LED chip, which is quickly becoming commodities, or a fluorescent lamp to have the right quality lighting and energy solution.

Acuity Brands has a distinguished history of leading and innovating during years of technology disruption.

Today is clearly no different.

Acuity Brands is leading the evolution to intelligent lighting solutions with its broad and deep portfolio of indoor and outdoor solid-state and conventional energy-efficient luminaires and lighting controls.

And we are delivering profitable growth while making these important investments.

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

These accomplishments have diversified and strengthened our foundation and will further serve as a robust platform for future growth that is less reliant on the new commercial construction cycle.

We have been able to produce these results because of the dedication and resolve of our 6,000 associates and the progress they have made in four key areas of strategic focus -- customer service; pricing and margin management; geographical channel and product portfolio expansion, including significant additions to our industry-leading stable of sustainable and energy-efficient products and solutions; and Company-wide productivity.

I will talk more about our future growth strategies and our expectations for the construction market later in the call, but I would 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 2012 and beyond.

Ricky?

Thank you, Vern, and good morning, everyone.

Vern covered our fourth quarter and full year's earnings results, so I'll just add a few additional comments on the earnings and focus most of my comments on our cash flow and financial position, as well as our recent acquisitions of Horizon and Pathway, before turning the call back to Vern.

The income tax rate for the fourth quarter of fiscal-year 2011 was 31.5% and was 33% for the full fiscal year.

The lower rate in the fourth quarter was primarily due to the release of income tax reserves on certain discrete items.

We anticipate the effective tax rate for fiscal-year 2012 to be approximately 34%.

Other income in the fourth quarter of $1.7 million was primarily due to the benefit of foreign currency items, due to the relative strength of the U.S.

dollar in the period.

For the full fiscal year of 2011, we experienced other expense of $1.1 million as the U.S.

dollar for most of the fiscal year was weaker than other relevant foreign currencies.

Orders remained strong throughout the fourth quarter, and we are encouraged that comparable orders continued to nicely outpace the prior year in September.

However, some of this increase was likely due to orders placed ahead of our mid-September price increase.

Our comparable backlog at August 31, 2011, was down approximately 2% compared with the prior year, as shipments slightly exceeded orders in the quarter.

Looking at our cash flow, we generated $161 million of net cash from operating activities in fiscal 2011.

Free cash flow, which we define as cash flow from operations after capital expenditures, was over $138 million in fiscal-year 2011.

The contribution of this strong cash flow enabled us to spend $90 million on four key strategic acquisitions, $61 million to repurchase shares of our common stock, and pay almost $23 million in dividends, while still maintaining a strong and flexible financial position.

Operating working capital, calculated by adding account receivable net plus inventory and subtracting accounts payable, increased by approximately $16 million to $225 million at August 31, 2011, from $209 million a year ago.

This increase in operating working capital is primarily due to the working capital of the acquired businesses.

Our net operating working capital days outstanding stayed constant at 37 days, and are 12.5% of net sales at August 31, 2011, which we believe is industry-leading.

We are pleased to report that at August 31, 2011, our inventory days decreased by over a day to 52 days, compared to the prior year-end.

We were able to accomplish this decrease despite rising material costs, in-sourcing certain production, and the ongoing transition to higher-cost LED and other technology-related components.

This illustrates the opportunities through lean principles and continuous improvement to decrease our investment in inventory, reduce lead times, while improving service levels to our customers.

Capital expenditures for fiscal 2011 were $23 million, essentially flat with $22 million in the prior year.

As Vern mentioned earlier, during the fourth quarter of fiscal-year 2011, we returned to repurchasing our shares on the open market.

We repurchased 1.2 million shares, or 3% of our outstanding shares in the quarter and year, at an average price of approximately $48 per share.

Since fiscal year-end, we have completed the share repurchase under our previous authorization.

Accordingly, the Board of Directors has authorized the Company to repurchase an additional up to 2 million shares on the open market as management deems appropriate.

Since we began repurchasing shares in fiscal-year 2006, we have repurchased 12 million shares.

We ended our fiscal-year 2011 with a cash balance of $170 million.

As of August 31, 2011, our total debt was $353 million, consisting primarily of the $350 million 6% senior unsecured notes due in fiscal 2020.

In addition to our sizable cash balance, we also have availability under the revolving credit facility of over $240 million as of August 31, 2011.

This facility matures in October 2012.

We will likely enter into a new multi-year facility early next calendar year.

Our debt net of cash is a mere 19% of total net capital, and our leverage ratio of debt to adjusted EBITDA is under 1.5 times at August 31, 2011.

So clearly, we continue to enjoy significant financial flexibility.

With our strong liquidity position, our prioritized use for this cash, as well as our expected future strong future cash flow, remains as follows -- internal investments in areas where we see significant growth potential, as evidenced by our increased focus over the past few years on new products and services developments and enhancing our market presence; strategic acquisitions and alliances to address product gaps or opportunities and to leverage capabilities with technology partners; and lastly, stock repurchases.

I'll conclude my remarks by making a few comments on our two most recent acquisitions.

We recently completed for cash the acquisition of Horizon lighting controls and Pathway Connectivity.

Together, these acquisitions broaden our product portfolio and capability in theatrical and high-performance controls.

Horizon is a lighting control research and development company specializing in PC-based lighting control systems.

For over 15 years, Horizon and its management team have developed and licensed products to the entertainment and architectural lighting control markets.

Professional lighting designers and integrators use Horizon control technology and lighting control consoles worldwide for theater, theme park, convention centers, hotels, museums, cruise ships, and numerous other public spaces.

Customers using this technology embrace the power and ease of use that Horizon control products and services provide, and supporting those customers will continue to be an important focus.

Pathway Connectivity is a leading manufacturer of network data communication and interface equipment for architectural and entertainment lighting control applications worldwide.

Established in 1985 and based in Calgary, Alberta, Canada, Pathway designs and manufactures innovative electronics that enable lighting control systems to communicate with intelligent lighting fixtures and power devices, even when those products utilize different communication protocols.

Pathway is strategically positioned at the intersection between architectural and entertainment lighting.

Its established management team and product portfolio support a diverse customer base and serve a broad range of applications from auditoriums and conference rooms to theater and television, theme parks, cruise ships, and concert tours.

Pathways' innovative product portfolio provides interoperability solutions for sophisticated lighting control systems.

These real-time applications demand the highest degree of network reliability and performance in order to deliver spectacular visual experiences for live audiences, as well as occupants in dynamic architectural environments.

The Horizon and Pathway teams bring advanced networking products and engineering capability to Acuity Brands that fits into our strategy of expanding the opportunities associated with integrating lighting and control solutions.

We welcome these talented teams to the Acuity Brands family.

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

Thank you, Ricky.

As we look forward, we see huge long-term growth opportunities, while short-term economic challenges have become the norm.

While we don't give earnings guidance, I would like to offer three observations about what we see for 2012.

First, we expect 2012 to be another challenging year with continued volatility.

Key indicators for non-residential construction appear to be stabilizing, but housing starts continue to languish.

Forecasts by independent organizations suggest unit volume for new construction put in place in the U.S.

will be down slightly in our fiscal 2012.

Interestingly, however, sales of lighting fixtures are expected to be up low single digits in 2012, mostly due to renovation and small projects.

Additionally, we feel the lighting controls portion of the industry will continue 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 in North America and we expect Europe to continue to be impacted by sovereign debt concerns.

Lastly, we sense our end customers are cautiously optimistic about future business opportunities, which is very encouraging.

With regard to the first quarter of 2012, we expect growth, as incoming orders have been favorable.

Second, the industry continues to experience volatility with respect to input costs, particularly for items based on steel and oil and now rare-earth metals.

We increased prices on those products most affected by these rising input costs yet again in September.

Our current estimate is that the price increase announced in September will be sufficient to recover higher input costs currently in effect.

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

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

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

Third, we expect to outperform the markets we serve just like we did in 2011, which was a strong performance given market conditions.

Looking more specifically at our Company, we are excited by the many opportunities to enhance our already 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 like renovation, 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 our five strategic acquisitions in the last 12 months, 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 investment in this exciting and fast-growing market.

(Technical difficulty) so it 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 that many markets we serve as part of our broader lighting industry could grow by 70% by the year 2015, providing Acuity with significant growth potential.

As we look beyond the challenges of the current environment, we believe the lighting and lighting-related industry will experience significant growth over the next decade, particularly as energy and environmental concerns come to the forefront, and we are now positioned well to fully participate in this exciting industry.

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

(Operator Instructions).

Glenn Wortman, Sidoti & Company.

There's been just a lot of talk of a slowing economy and even a potential recession.

Are you not seeing any slowdown in your orders?

Orders for the fourth quarter were favorable.

I think as we commented, the fourth quarter represented our second quarter in a row of double-digit growth.

Unit volume growth in both the third and fourth quarter were kind of in the mid single-digit range.

We are seeing, obviously, difficult and challenging economic conditions, but yet I think that through renovation, through lighting controls, which driven in large part by better quality of lighting and energy savings, are allowing us to show growth in this environment.

My second question was, I'm sorry if I missed the number, but you referenced some upfront stock and display costs for a new line of lighting fixtures.

Can you quantify that again?

And were those all one time or is some of it recurring?

What we said was we had about $4 million of sales in the quarter for which we generated no operating profit because of the upfront cost for store resets and things of that nature.

And those typically are one-time costs.

We don't expect those to repeat themselves.

We have a little bit in the first quarter, but we should return to our normal profitability on that business.

Okay.

The good news there is that we are gaining share in that channel.

It's just that the revenues in the fourth quarter provided no operating profit, and they will as we go forward, of course.

Thanks for taking my questions.

Christopher Glynn, Oppenheimer.

LED obviously moving pretty quickly, so I wanted to dive in on that a little bit more.

On the quadruple, could you just comment -- is that predominantly organic?

And then, what was the organic kind of change from the third quarter, just sequentially?

So, we said that LED products in our fourth quarter represented almost 5% of total.

We said we quadrupled over the year-ago quarter.

And on a sequential basis, we were up by about one-third over the third quarter.

And all of that would have been mostly organic.

Some came with the Winona acquisition.

Okay.

And with LED eventually accretive to the operating margin, interested in any thoughts on the timeline.

And as a corollary to that, with the growth would we expect that to be a bigger mix headwind near term, but before it starts to become more accretive?

Or does the deflation sort of offset the higher mix from here?

To us, LED-based products represent again a huge opportunity to add greater value to our end customers, both in the form of better quality of lighting, the ability to manage the lighting and the lighting environment, as well as providing superior energy savings on a go-forward basis.

So we view the opportunity of LED-based products again to add more value, therefore we would expect our margins to be accretive as the volumes start to tick up.

We are seeing, obviously, and I think the industry is, cost decreases as LED chips become commoditized.

Those folks that have the right infrastructure to be able to support that obviously will be the cost leaders, so we see pricing for component costs coming down on some curve.

There are many estimates out there.

At this point in time, I wouldn't care to offer what that estimate is, whether it's accurate or not.

I believe that these costs will decline on kind of a Moore's Law basis.

I think pricing ultimately doesn't decline as fast as people are able to offer greater value.

But let's be frank, in many instances, the alternative fixture, that fluorescent fixture, which today is very efficacious and very cost-effective, for many people provides a very good cost alternative to the more expensive LED products today.

We see that market changing over the next handful of years.

Various estimates are out there.

By 2015 whether it's 30%, 40%, 50%, 60% of the market converts to LED by, say, 2015, we don't know, but as a lighting company we want to offer our customers the opportunity of good/better/best lighting solutions that best fit the needs of their solution.

So we are not beholden to any one specific lighting source.

Okay.

And then, as LED ramps and considering the SKU breadth in traditional, does maintaining your SKU formidability require a mountain of internal investment and acquisitions to replicate where you are in the traditional space?

No, actually, I think that -- you know, there was someone who actually wrote a comment in one of these analyst reports that -- it referred to Acuity Brands and its peers will be challenged to replace legacy products with new products in order to maintain revenue and market share.

It said that there are two examples that come to mind -- digital photography and the transition of CRT to LCD.

That is just a wrong analogy.

Look at the automobile going from gasoline to electric.

The automobile still provides the value add of transporting someone from point A to point B.

A luminaire is to provide quality of lighting in a space.

It will continue to do that.

The light source is really -- it only provides additional opportunities to differentiate and add value.

But at the end of the day, the industry is still about providing quality of lighting in a space so human beings can use that space in the most effective way possible.

New technologies are allowing us to further pay for these investments through better energy savings.

Okay.

Thanks.

Just last one, a clerical.

What (technical difficulty)

Please stand by.

Mr.

Glynn, your line is open.

The last one was just what percent of sales is Europe?

Europe represents probably less than 4% of our revenues.

But disappointingly, the folks in Spain are just having a real tough go, and we have a nice operation there, but the environment there is just tough.

Peter Lisnic, Robert W.

Baird.

Good morning, gentlemen.

Ricky, I guess first question, the CapEx uptick in 2012, up to $40 million versus the low 20s this year.

Can you just give us a sense as to what that incremental investment is?

Most of that would be in tooling for the new product introductions as we continue to ramp up our launching of new products, both in the luminaire space as well as in the control space and the solution area.

So most of that increase year over year is in anticipation of tooling and capital investment around new product introductions.

Okay, but not necessarily new footprint or entering new international geographies, as an example?

No.

All right, and then, Vern, I guess if I could ask the LED margin question a bit differently and maybe this applies more broadly than just LED.

But the incremental margins for the business, you've always talked about the 70 bps of productivity and then 30% incrementals on the volume.

Can you give us a sense as to how that equation changes near term, and then maybe what the equation looks like longer term as the market improves and your market opportunity is 70% bigger, for example?

Sure.

So let me kind of just give all of you a little bit of backdrop.

If you take our fourth quarter as it was reported, $496 million of revenue, 40%, 40.4% gross profit, 11.2% operating profit, if you adjust for the roughly $9 million of increase in revenues that essentially went to offset higher input costs, and then you adjust for the $2 million of input costs that weren't recovered because we believe that going into our first quarter, we now have that price/cost relationship.

We've caught up, if you will.

And if you further adjust for the investment that we made in the home improvement channel, again about $4 million of revenues with no profit, that adjusted fourth quarter reflects a gross profit of about 41.7% and an operating profit of about 12%.

So that 12%, compared to, if you will, what was reported in 2010, is about a 50 bps improvement over what we are doing.

I think if you further adjust and look at what the acquisitions have contributed, at a pre- -- or if you exclude amortization, the profitability of our acquisitions are now about on par with our overall business.

Unfortunately, amortization needs to be reduced.

It reduces operating profit, but we picked up probably another 10 bps of OP.

So I feel like our fourth quarter really gives us pretty good insight into what the future is going to hold on our business in terms of our ability to add additional investment.

If we look at our SD&A, in the fourth quarter we are up about $11.5 million.

About 70% of that was either for higher volume or acquisitions.

So the other about $3 million or so was primarily -- let's call it $4 million, was for investment really to add people.

We are becoming a more, if you will, intellectually capital-intensive business and less a fixed-asset base business.

And I think that we have that mix pretty right.

We just added a couple of smaller acquisitions.

What we really acquired there were tremendous people.

And their knowledge about how to take Acuity into that high-performance lighting solutions business for which we believe that over the next handful of years is going to be a dramatic growth opportunity in the market because what you can do with that is not only provide quality of lighting, but provide superior energy savings to help support that.

So our view is is that we should, as we develop growth, getting past some of the shorter-term issues with LED, but as we develop growth where those products will have higher variable contribution margins, I think we will be well on track to add both productivity as well as very solid variable contribution fallthrough on that incremental sales dollar.

I still think that, as we pointed out in our comments, in the current term or the shorter term, LED-based products while providing higher profit dollars because of the higher selling price are dilutive somewhat to the margins.

We haven't described what that is and we're not going to because we think that this transition probably lasts another three or four quarters until that volume starts to ramp up and the prices for components continues to drop rather significantly.

I hope that's helpful.

That is very helpful.

Just one clarification on that $3 million to $4 million of growth costs in the fourth quarter, does that continue through fiscal 2012?

Or kind of give us the ramp on that funding there.

So that's a very good question.

I think what's important for everyone to see is that our gross profit numbers, we feel comfortable that they will oscillate between, say, this 41.5 and 42, maybe a little bit above that, depending on the mix and the volume that goes through.

What we've said in the past is that our variable costs associated with freight, commissions, and that type of thing are probably in the 11.5% to 11.7% of revenues range.

And then on the fixed SD&A, and it's not all fixed because product samples, for example, and other things that go through there that have some variability, we're guessing that that number on a quarterly basis is in the $87.5 million range, plus or minus a couple million dollars either side.

So I think what you think about our business in your model, you can get a sense of what that fixed investment is, what some of the variable piece is, what we think gross profit is going to look like.

And I would point out that as we think about our 2012, we said that we expect the luminaire market in North America to probably grow in that low single digit.

We have had a strong track record of outperforming that level of growth.

So we're expecting growth.

We're expecting to outperform that level of growth.

The other thing that I think is important for people to know is that the acquisitions that we made, we'll now have them for the full year, and that number probably could be approximately $40 million of incremental revenue.

So, I think in terms of how people build their models, 2011 is a solid base, and then you can factor in your own level of unit volume growth.

We believe that price will go to offset what we currently see as raw material costs.

I don't know that we're going to get a lot of pullthrough there, but I think that I've captured that in our sense around what our gross profit margin ought to look like.

Thank you.

That is very helpful.

Carter Shoop, KeyBanc.

First question on gross margins.

If we think about the first quarter here, I know you guys don't provide guidance, but if gross margins were to decline sequentially in the first quarter versus fiscal 4Q, what would be some of the reasons for that potential decline?

It sounds like the upfront costs might not continue.

You also have the price increases coming, so what are some of the offsets there, potential offsets?

Well, I think it would be true of any quarter.

Mix has an impact on our profitability, at least some of our margin.

I also believe that what we saw in 2011 is not dissimilar from what we kind of saw in 2009 were dramatic spikes in input costs.

Our industry and our business has the ability, I believe, to put through price increases.

The problem is that it takes time.

You have a lag factor, so while we are not anticipating any additional large spikes up, it is impossible for us to predict that.

We don't hedge by using hedging techniques.

We do acquire -- we have inventory on hand, and so we are able to protect somewhat, but the fact of the matter is is that these shocks to the system likely incurred in 2011 where we estimated in fourth quarter we were unable to recover about $2 million of material costs in the fourth quarter and about $15 million for the full year.

Those could be areas where it could contribute to a potential shortfall.

With FIFO accounting, though, don't we already have a very good idea of what your raw material inputs are going to be for fiscal 1Q?

Well, but our inventories on a finished-good basis are turning exceedingly rapidly on the stuff we procure, so some of that stuff is a one-month turn.

So, I don't know that from that perspective it's that intuitive.

I know that our overall inventories turn a couple of times, but there's a lot of mix going on there.

That's helpful.

My next question is on acquisitions, and kind of a two-part question, I guess.

First, clarifying the $40 million for acquisition revenue in fiscal-year 2012, is that for all of the acquisitions you have done in fiscal-year 2011 which haven't already anniversaried?

And then, the question is how do you think about the acquisition pipeline going forward?

How robust is that?

Compare and contrast where it stands now versus, say, a year ago.

So, it's an estimate of approximately $40 million, but in that $40 million, there is growth beyond what those acquisitions would have done on their topline had they been standalone.

So that's kind of just what we're estimating so that folks like you can create your models appropriately as to what an anniversary piece, but that would be the anniversary piece.

That's not contemplated.

And that's for all the acquisitions, not just the two that were recently completed?

Correct.

Okay.

So just to be clear, that would be a full year of Sunoptics, a full year of Healthcare Lighting, a full year of Winona, and then the two most recent acquisitions, which again are very small and are very technology-based companies with tremendous talent in them.

Matt McCall, BB&T Capital Markets.

So I just want to get back to -- you've given a lot of good detail, Vern, about the expectation.

I know the outlook range for gross margin, you said 41.5 to 42, something like that.

I just want to understand how to apply that to next year.

Just looking at the price cost environment today, apparently if we carry this forward we would be about at parity.

I understand the impact of mix and we've mentioned a lot about LED.

I think controls is growing pretty fast, too, and has a better margin, so netting those two out, and then baking in volume, is next year -- were you trying to say that next year we should return to that range because of those e items?

Or are we still going to be a tick or two below that range because of the mix issues?

No, hopefully what I did was give you insight into the fourth quarter so that you could see when you take into account the price/cost relationship and its impact on the margin percentage, as well as the investment of about $4 million worth of new product going into the home-improvement channel for which there were no margin -- no operating profit margin, primarily due to the upfront cost of store resets and things of that nature, I think when you adjust for that, you get a fairer reflection of what fourth quarter looks like.

And when you do that, our guess is is that those margins were approximately a gross profit of 41.7%, so that's up about 130 bps over what was reported, as well as about 80 bps improvement at operating profit.

So I think that gives you a foundation for which to then look forward into 2012 and beyond.

I think that those margins are pretty solid, and what I also tried to do was give folks insight as to what our fixed investment is.

Yes, we're becoming a more labor-intensive, more intellectual property-driven type company than we are being a capital-intensive business, so we have ticked up our fixed operating expenses.

Again, the most recent acquisitions that were made with Horizon and Pathway bring great talent, not tremendous revenues.

That talent will help us drive more effective intelligent lighting solutions into the future where we believe the market size of that is just huge.

So, we see huge leverage points on a go-forward basis.

I think that we were pretty clear about kind of what that variable piece is for freight and commissions, and that number also fluctuates a little bit based on mix.

And then what our current view around what fixed costs are within that SD&A area, I think, give you some insight as to how you could build your model.

What we haven't done is said what ultimately we think share gain and all of the topline opportunities that we see.

I think you have to look at our past track record to give you some insight as to our success of outperforming the market, and I think there's a pretty strong track record there.

All of you may have varying views on Ben Bernanke and our leaders -- I don't know if that's the right word, but the people in Washington, on what they may or may not do to the economy going forward.

I talk to a lot of customers.

People are cautiously optimistic about their businesses, and so they continue to do things.

That doesn't mean that it can't change on a dime, but we came into 2011 with the same concerns and the same issues, and I think that we performed well in 2011.

I think that that is a prologue to our future.

Okay.

Thank you, Vern.

One more question.

So we talked a lot about LED.

I don't think you've given us any type of, maybe, numbers or directional insights into what's going on with controls, the trajectory there, and also the re-light effort.

In the past, you've given some of the growth numbers behind that.

Can you at least help us -- give us an update on where those stood in the quarter or how they did?

Sure.

So your first question on controls, we haven't given that and we won't give that because, again, as controls become more and more embedded into the overall solution, it's impossible for us to say was it a control or was it a luminaire?

It's both, and so we just aren't going to go down that path because we cannot distinguish the full value.

We know what the full value of the solution is and we know what our costs are within that solution, but to say whether it was control based or this, that's just not an argument or a discussion worth having.

When it comes to the renovation side of the world, it's a great question.

For products that are specifically targeted towards replacement activity, it's easy to measure that and we can do that.

Our business has been growing very nicely.

I think in the past, we have typically said that we've had growth in the 20% range, and that is consistent with what 2011 looked like.

But here's the real challenge.

Imagine that in a community, a school that has been around for 30 years says, you know what, it's time to upgrade or update our physical plant, and so what they do is they hire an engineer or an architect or someone that then says, okay, we're going to gut the space and we're going to put in new carpet, new whatever, and new lighting solutions.

The fact of the matter is is that they built nothing.

There was no building, but they put in all new lighting luminaires.

For us, there's no difference between that kind of project and someone who built a brand-new brick-and-mortar building and are going to put in luminaires.

So it is impossible for us to track and give good information about what the real renovation number is because I would argue that the school renovated.

They didn't move out.

They stayed in the space.

They updated it, and so they added new fixtures.

They didn't add replacement fixtures.

They added new fixtures, but clearly it was a renovation.

If we look at the retail space today, very little in the way of new store construction, but there is a lot of activity by many folks to update and modernize their stores because of better quality of lighting, primarily, and energy savings to help pay for that.

So we have difficulty precisely saying what the overall growth rate is in renovation, but we think we are participating well and that is helping us offset things like commercial office buildings where we know that new construction there is down fairly dramatically.

Okay, thank you very much.

Craig Irwin, Wedbush Securities.

Obviously innovation is really a focus at Acuity these days.

And in the past, you have framed out for us certain things that helped us understand the velocity of innovation at Acuity.

Can you maybe give us some color on the number of new product introductions you expect in 2012?

And maybe an update on your vitality revenue and where you are tracking versus your longer-term targets?

Yes.

So, good questions.

I think if you go back to 2008 where Acuity's focus, and I think much of the industry's focus, was on traditional lighting sources because the cost of alternative lighting sources, whether they be LED or lead, and there are others out there, was just so significantly higher that it was just a very de minimis amount of folks who wanted to be early adopters.

Probably not dissimilar, again, from the electric car analogy.

Those automobiles were extremely expensive when they first came out.

As they've gained more acceptance, as component costs have come down, so have prices, and they have allowed for greater adoption.

We expect that to play out very clearly here.

Again, I don't know whether half the market is going to be LED-based by 2015 or 30% or 60%.

Thus it's not really important because we continue to be a lighting solutions provider.

We know it's going to be meaningful.

We know that the other portion of the business is going to continue to be meaningful, so our investment today and a lot of what we continue to add to is really our capability around what we will call digital lighting, the notion of solid-state lighting, but not just as it relates to an LED chip, but more as it relates to an entire holistic lighting solution.

So lighting controls has been a huge area of investment for us, both tactical, meaning feet on the street to sell more, but customer service pre- and post-sales support, engineering talent, all of that investment I think has been -- it's really the key driver in our growth, in our fixed SD&A expense, offset by productivity.

So today, when we think about on an apples-to-apples basis, we've probably increased by a factor of seven or eight times the number of folks that we have dedicated towards technology and innovation.

The acquisitions of companies like Horizon and Pathway are really adding additional human capability to provide greater value-added products into the future.

So again, investing today for the real potential of tomorrow.

On our website, if you look at again a prognostication of what 2015 could look like in terms of mix, what you'll see there is lighting controls, lighting solutions, incremental renovation.

All are going to be significant contributors of market availability where we think the whole thing is -- the whole pie available to us will be up by about 70%.

Maybe more.

Great, thank you.

So my second question is when we strip out the $23 million for FX and acquisitions, and adjust for the growth from LEDs, it looks like your core business is seeing some deceleration, under 3% growth.

Do you absolutely need the LED growth to drive your growth over the next few years?

Or do you expect your core business to reaccelerate?

I think the answer is we expect the core business to -- again, in verticals that we would serve, the commercial office building market we know continues to be down significantly.

With underemployment being rather significant, I hear numbers between 15% and 20% unemployment [since, what,] nine.

As the economy moves back, we see, and I think some of the other prognosticators out there see, commercial office building coming back into vogue in latter 2012, 2013.

Those, for us are only going to be accretive to our topline growth opportunity in a significant way.

We think that the LED growth that we are experiencing is accretive as well, but it's very difficult to say that the person that bought that LED luminaire would have bought something else.

In many instances, they are converting over because that they want to be viewed in a more green fashion.

I think as these prices come down, both selling prices as well -- driven by component cost decreases, you're going to see further adoption.

And for us, we think that that's very good because higher selling prices -- as that cost structure continues to decline, we expect that we are going to be generating a greater variable contribution off of those products, both in terms of real dollars and margins because of the overall solution in value add that it provides.

Kathryn Thompson, Thompson Research Group.

In light of the September price increase, also coupled with falling commodity prices, how effective could the September price increase be in light of overall falling costs?

How do your customers respond to that and how did you manage that dynamic?

Kathryn, as you know, these costs are very volatile.

As you also know, while the price of a barrel of oil has declined, certainly diesel costs have not.

Now, maybe ultimately they follow if it stays down over a longer term, but that has not been the history over the last 36 months.

We have seen great volatility in all of these input costs.

And now, the situation is being further exacerbated by rare earth metal issues, particularly as they impact fluorescent lamps and certain other components.

So, while you can isolate today that potentially the barrel of oil has gone from $100 to $70, whatever it is, how that ultimately translates into lower diesel fuel cost or lower lenses, some of the increases that we have incurred haven't been just for diesel.

The input of oil into other components that go into the luminaires has been brutally expensive.

So we continue to take price increases from suppliers at this point in time.

I believe that we have been effective at getting full capture of those products where we have raised prices.

We haven't raised prices on every product because we do a pretty thorough review when we look at it, so I feel that, again, the mid-September price increase will have success in helping us offset these higher input costs.

Okay.

Any update on the non-res repair and remodel trend?

Are you seeing any change in the quote activity?

Just color on that trend, which has been strong, as to how we should think about it going forward.

You know, again, as I said earlier in the call, it's very difficult for us to put a number around what is renovation.

We use gross numbers and we think today, and this is pretty typical actually in this type of -- this portion of the cycle, in other words, when you've had a run up as you did in 2008 in non-residential construction, people build a lot of infrastructure -- or, excuse me, a lot of buildings.

Many of those buildings today remain vacant.

As we look out our window here in Atlanta, we see two.

As employment comes back, people will move into those spaces and they will then put in, obviously, luminaires.

Contrast that with, again, retailers, schools, buildings where people are owner-occupied, industrial spaces, where they are putting in more efficient fixtures for better quality of light, paid for by energy saving.

In that school example I gave, we would track that just as a new construction project.

We have great systems, but we have little ability to determine whether that is renovation or new.

So we believe the overall renovation market continues to grow and have success, and that has done more for me and [to go to] by talking to the various sales channels that we sell to.

In the last quarter, you estimated it was growing at around an 18% growth rate, if you had to guess.

Would you say that (multiple speakers)

And so this year for us, we guess that 2011 collectively was about 20%-plus.

Finally, what is the, in terms of dollars, backlogs at quarter-end?

We're about $130 million of comparable backlog at the end of the year, comparable being adjusted for some of the acquisitions and all.

To be clear to everyone, as we continue to drive service capability into the marketplace and sell that differentiation, our backlog is becoming less and less a leading indicator of business.

We looked at that incoming order rate for the month of September, our incoming order rate was favorable.

Some of that was driven by mid-September price increase.

If we look at our backlog between the end of August and the end of September, it's up by, again, kind of low double digits.

That's not inconsistent with the growth that we've seen over the last couple of quarters.

Just to be clear, that backlog, and as I mentioned in the comments, Kathryn, that's about 2% down from a year ago.

Obviously we have seasonality throughout the year in the backlog.

Great.

Thank you for taking my questions today.

Thank you, and for us, I'm sorry, we're going to have to conclude our remarks today.

I have a plane to catch, so we're going to do that.

Everyone, 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 and thank you for your support.

This concludes today's conference.

Thank you for participating.