Acuity Brands Inc (AYI) 2012 Q1 法說會逐字稿

Good morning and welcome to the Acuity Brands 2012 first-quarter financial conference call.

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

(Operator Instructions).

Today's conference is being recorded.

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

Now I would like to introduce Mr.

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

Sir, you may begin.

Thank you.

With me today to discuss our fiscal 2012 first-quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer, and Ricky Reece, our Executive Vice President and Chief Financial Officer.

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

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

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

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

Now let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

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

First, let me say we are very pleased with our results for the first quarter of 2012.

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

This is the seventh 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 strategy to diversify the end markets we serve and extend our leadership position in North America are 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 important acquisitions.

Our profitability and cash flow for the quarter were strong even though we continued to fund areas with significant future growth potential, including the expansion of our solid state luminaire and lighting controls portfolio.

As you well know, 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, continued to impact new commercial construction.

Having said this, we believe the many channels and markets we serve are on the road to recovery.

Also in the quarter we continued to encounter rising costs, particularly for inputs based on oil and various metal types including rare earth.

Overall, we estimate our pricing initiatives recovered all of these higher input costs.

I mention these macro factors because it provides a backdrop against which you can see the outstanding performance of our Company for the quarter.

I know many of you have already seen our results, and Ricky will provide more detail later in the call.

But I would like to make a few comments on the key highlights.

First, net sales for the quarter were $474 million, an increase of approximately 12% compared to the year-ago period.

This level of growth is significant, given industry conditions.

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

Operating profit was $50.6 million, or 10.7% of net sales.

We took a special charge in the current quarter for streamlining actions which reduced operating profit by $2.7 million.

Ricky will talk more about the special charge later in the call.

I find it helpful to add back this special charge to the current quarter's results to make them comparable with the prior year.

Doing so, one can see operating profit was $53.3 million, up 17% from the year-ago period, while operating profit margins improved 50 basis points to a strong 11.2%.

Diluted earnings per share were $0.70, up 25% compared with the year-ago period.

Again, adding back the impact of the special charge, diluted EPS for the current quarter was $0.74, up 32%.

In addition, we generated almost $28 million in net cash provided by operating activities, $22 million more than in the year-ago period, due to excellent inventory management by our team.

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 another 252,000 shares of Acuity stock this quarter, at an average price of a little over $36 per share.

Additionally, on September 30, our Board authorized us to purchase up to 2 million additional shares, a strong affirmation of our belief in our future.

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

We believe you will find these results even more impressive upon further analysis.

On a consolidated basis, net sales grew by $49 million or almost 12% compared to the year ago.

Excluding the impact of acquisitions, which added approximately $13 million to our top line in the quarter, net sales grew over $36 million or approximately 8.5% compared to the year-ago period.

We estimate approximately 7 of the 8.5 percentage point increase in net sales was due to unit volume growth in North America, partially offset by a decline in Spain, which reduced overall volume growth by about 80 basis points.

The growth in North America was broad-based with gains occurring in virtually all channels.

Our commercial and industrial channel grew nicely due to emphasis on higher value-added lighting solutions, especially LED-based luminaires which grew by 150%, as well as renovation and smaller, medium sized projects of various types sold through distributor stock and flow.

We also enjoyed solid growth in other important channels including home improvement and national accounts, all of which is very encouraging.

As we have noted before, it is impossible to precisely determine the separate impact that price and product mix changes have on our net sales.

Having said that, we estimate that more than 1.5 points of sales growth from price and product mix changes was due to the benefit from previously announced price increases to recover rising input costs, partially offset by a less favorable mix of products sold in certain channels.

We estimate our pricing actions helped us offset all of the approximately $11 million in higher input costs for materials and components compared with the prior year.

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

While we believe spending for US nonresidential construction was essentially flat in the quarter compared with a year ago, we believe the lighting market experienced modest growth this quarter.

This is in contrast with our unit volume growth in North America which was up almost 8%.

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

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

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

Excluding the impact of the special charge, operating profit margin was a strong 11.2%, up about 50 basis points from the year-ago period.

There are a couple of key points to note.

First, as I mentioned earlier, sales of our LED-based luminaires are up 150% in the quarter, compared with the year-ago period and now represent more than 5% of our 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 margin as the expected decline in LED component costs outpaces the expected decrease in the selling prices of these fixtures.

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

Next, 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 lighting solutions.

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

Selling, distribution and administrative expenses increased $9.8 million, or more than 7% on an increase of net sales of almost 12%.

This quarter virtually all of the increase in SD&A was due to variable cost to support the higher net sales and the additional operating expenses from acquisitions, which are now starting to contribute nicely to our overall profitability.

Productivity improvements offset other increases in SD&A expenses which were primarily related to activities focused on longer term growth opportunities, including market diversification, expanding our fast-growing lighting controls business, and investing in 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 expensed 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 the future.

On the strategic front, we completed another important acquisition with the addition of Pathway Connectivity.

Pathway is a premier provider of high-performance lighting control products and solutions.

Pathway brings great talent and technical know how that will help us diversify our product portfolio and the end markets we serve.

We continued our rapid pace of introductions of new products, significantly expanding our industry-leading portfolio of energy-efficient luminaires and lighting control solutions.

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 the sales of these luminaires.

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

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 are quickly becoming commodities, or a fluorescent lamp, to have the right quality lighting and energy solution.

Acuity Brands has a long and distinguished history of leading and innovating during eras 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 presence in the fast-growing lighting controls portion of the market.

These accomplishments have diversified and strengthened our foundation and will serve as a robust platform for future growth that is less reliant on 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 areas of strategic focus.

First, 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 lighting products and solutions.

And lastly, Company-wide productivity.

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

I would now like to turn the call over to Ricky before I make a few comments regarding our focus for 2012 and beyond.

Ricky?

Thank you, Vern.

And good morning, everyone.

I will highlight a few items regarding our income statement.

I then will discuss our cash flow and financial condition, as well as a summary of a special charge before turning the call back to Vern.

Vern covered the primary drivers for our strong sales growth in the first quarter and our operating profitability.

So I'll not repeat these items.

But I would like to provide a bit more color on certain aspects of our first-quarter results.

Let's start by looking a bit more closely at our gross profit.

Gross profit margin for the first quarter was 40.8% of sales.

This gross profit margin reflects a decrease of 60 basis points compared with the year-ago period.

This unfavorable gross profit margin comparison was primarily because of higher material cost, and a somewhat less favorable mix of products sold, partially offset by the incremental margins on the increased sales volume, improvement in pricing, and manufacturing productivity gains.

Examining the price and cost relationship in the quarter, as Vern said earlier, we believe our previously enacted price increases allowed us to offset the approximately $11 million of higher material and component cost experienced in the first quarter compared with the prior year.

While we were pleased that we were able to recover these increased input costs, the impact of recovering these higher costs without significant additional margin dollars reduced our gross margin percentage by approximately 100 basis points, and our operating profit margin by approximately 30 basis points.

As we begin to realize the full impact of the September price increase, we could yield some further improvements in our profit margins in future periods.

Of course, this assumes we do not see inflationary cost pressures going forward, which is far from assured.

The less favorable mix of products sold is due primarily to the explosive growth in LED sales, which as Vern mentioned earlier, diluted our gross margin percentages.

We expect this dilution to abate as volume increases and component costs decline.

On the positive side, we were pleased with the continued improvement in manufacturing productivity as we leverage our growth in sales volume and continue our lean journey of taking waste out of our processes.

This provides a good segue to discuss the streamlining activity we implemented in the first quarter.

We took a pretax special charge of $2.7 million in the first quarter of fiscal 2012, which relates primarily to efforts to further streamline the organization by realigning responsibilities within various selling, distribution and administrative departments.

The special charge consisted primarily of severance and related employee benefit costs associated with a modest reduction in workforce.

We expect to realize annualized pretax savings of approximately $5 million related to these streamlining actions, with approximately $3.5 million to be realized in fiscal year 2012.

We are currently evaluating further cost saving measures that may result in additional charges this fiscal year, with additional related savings.

This latest income is due primarily to the impact of exchange rates on foreign currency items.

In the first quarter of fiscal 2012, we had income of $2.9 million, compared with a $1.2 million of expense in the prior year period.

This incremental favorable swing of $4.1 million is primarily associated with the Mexican peso, which declined approximately 10% against the US dollar during the first quarter of fiscal year 2012, contrasted with an approximately 6% appreciation against the US dollar in the prior year first quarter.

The effective tax rate this quarter was 34.7%, 100 basis points higher than the prior year quarter.

The increased rate is due to higher pretax income which causes a lower rate impact on favorable permanent tax items, and lower anticipated research and development tax credit due to the failure of Congress to extend this credit at calendar year-end.

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

Now let's look at the cash flow for the quarter ended November 30, 2011.

Cash flow provided by operations for the quarter was $27.7 million, an increase of $22.4 million compared with the prior year period.

The higher level of cash provided by operations in the first quarter was due primarily to higher net income and improvement in inventory levels.

Inventory days decreased by 11 days compared with last year's first quarter end, as we were able to draw down inventories that were built last year in order to maintain service levels during transfer of production which are now completed, and strategic purchases of certain commodities and components, primarily ballast last year, that were not repeated this year, due to stabilization of supply.

Just as a note, our fiscal first quarter is typically a much lower cash generating quarter compared with our other quarters, because of the payout of incentive compensation earned in the prior year.

In the first quarter, we spent $4.2 million on capital expenditures, and $3.8 million on the acquisition of businesses.

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

Additionally, in the first quarter of fiscal year 2012, we spent $9.2 million repurchasing 252,000 shares of our common stock at an average price of $36.31 and paid dividends of $5.5 million.

We ended the first quarter of fiscal 2012 with a cash balance of $172.7 million, and total debt of $353.4 million.

We also have availability under the revolving credit facility of over $240 million as of November 30, 2011.

This facility matures in October 2012, so we are in the process of entering into a new five-year revolving credit facility which we expect to consummate in the next few months.

The new facility will likely have both higher drawn and undrawn costs than the current facility, reflecting current market terms for syndicated revolving credit facilities.

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

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 a few observations about what we see for the balance of 2012.

First, we expect the macroeconomic climate for the balance of 2012 to be influenced by continued volatility, both in demand and in cost.

Forecasts by independent organizations have not really changed much over the last quarter, and continue to suggest unit volume for new construction put in place in the US will remain relatively flat during the remainder of our fiscal 2012.

Further, sales in North America for lighting fixtures are expected to be up low to mid single digits in 2012, mostly due to renovation and smaller type projects.

This is consistent with the previous outlook in our 10-K.

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

It seems that 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, while we expect Europe to continue to be impacted by sovereign debt concerns.

Further, as has been historically the case, we anticipate our second fiscal quarter, which is typically our weakest quarter, will be influenced by normal seasonality and the potential for year-end inventory rebalancing by certain customers.

Importantly, we sense a level of cautious optimism about future business prospects from our broad and diverse end customer base, which is very encouraging.

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, which are used in lamps.

We increased prices on those products most affected by these rising input costs 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 in our pricing posture.

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

Additionally, as I have 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 have over the last several quarters.

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, 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, which incorporate advanced technologies.

This provides superior lighting quality and more sustainable energy solutions.

Our product and solutions portfolios are expanding rapidly, including the addition of five strategic acquisitions in the last five quarters 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, employing superior technology, enhancing our product offering, and greatly expanding our access to market.

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

This all takes focus and resources.

We are funding these activities today because we see great future opportunity.

Through these investments we have significantly expanded our addressable market.

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.

We continue to believe that the many markets we serve as part of the broader lighting industry could grow by 60% by the year 2015, providing us with significant growth potential.

As the market leader, we are positioned well to fully participate in this exciting industry.

Thank you.

And with that we will entertain any questions you have.

(Operator Instructions) Matt McCall of BB&T Capital Markets.

The first question, you mentioned, Vern, one of the comments was cautious optimism by your broad and diverse customer base.

One of the areas that we've been concerned about, and clearly the concern's been a little overstated given the results, is your government exposure.

Can you talk about what you're seeing in the government?

First of all, how much direct or indirect exposure do you see there?

And are you seeing the same type of cautious optimism out of that segment of your business -- are you seeing the same type of optimism there?

I can't speak about whether the government feels that they should be optimistic or not.

They've done a pretty poor job to date.

Anyway.

Our belief is that the stimulus programs really did not materially benefit our business over the last few years.

So we don't believe that any change in the federal government spending will have a material impact on our business on a go-forward basis, save whatever it does for the broader economic environment.

I think that the cautious optimism that we are seeing from our very broad and diverse customer base is because they do touch so many different aspects of the broad economy.

And I do think that people feel in general that things are starting to improve, albeit at a very slow pace.

You saw job growth last month was a couple hundred thousand jobs, so that's a sign that we are starting to recover, though this recovery, from what I read, is much slower than most.

So we are not really anticipating government spending to meaningfully influence our business on a go-forward basis.

And then on the incremental margin side, I think last cycle I can remember some pretty specific details on what the expectations should be.

You talked about 70 basis points of improvement and incremental margin of 25%, I believe, on growth.

The last few quarters have been a little bit below that and you broke out some of the reasons.

Obviously you're investing.

You talked about that and the price/cost mismatch.

As we go forward, as those get back on track, can you give us some kind of direction on how we should look at the incremental margin on sales with the impact of LED and all the other things that will impact that?

First off, as Ricky pointed out in his comments, the impact of higher pricing recovering or covering the $11 million plus of incremental input cost on a quarter-over-quarter basis, that has the impact of diluting our operating profit margin by about 30 bips.

So if you look at the notion of us producing 11.5% operating profit compared to the 10.7% in the year-ago period, you start to get a better reflection of the type of variable contribution.

Mix did have a little bit of a play.

A little bit difficult for us to precisely determine mix and the impact of it.

As Ricky pointed out, LED products, which now represent more than 5% of our total revenues, increased about 150% in the quarter or roughly a $13 million increase.

Those margins are dilutive.

We don't intend to provide that level of detail because over time here, we believe it will abate and actually go away.

So our expectation is that on a go-forward basis you will start to see the benefit of what revenue growth will be relative to incremental margins, which should be consistent with what we've done in the past.

For folks who are attempting to create models, I think that if I understand what people are looking at, our fixed SD&A -- relatively fixed -- in the quarter was about $85 million, $86 million.

Our expectation is that we're probably in that range, $84 million to $86 million of fixed SD&A, with freight commissions and that type of thing.

The variable portion being in the 11.5% to 11.7% of sales.

So I think that as you look at volumes going forward, you'll be able to create your own models as to your own volume expectations.

My belief is that relative to gross profit margin, as Ricky pointed out, the impact of raising prices to cover raw material costs had about 100 basis points of impact on gross profit, the margin itself.

Where we reported 40.8%, that margin on an apples-to-apples basis would have been more like 41.8%.

Having said that, the SD&A expenses and the variable cost as a percentage would have been higher to sales.

So, I think that we are starting to find a point where our SD&A, excluding any future acquisitions, is starting to find its base and we're starting to leverage off of that base.

As Ricky pointed out, we've implemented some streamlining activities.

And this is really so that we can continue to fund growth in some of these areas that represent huge future opportunities.

So the notion of what Acuity has been about -- continuous improvement, driving productivity into the business throughout the entire Company -- continues to be alive and well.

So what you're seeing is the benefit of strong financial performance while making significant investments.

And those investments are people.

The talented people that we bring onboard to help us drive new lighting solutions, that's where we believe the future is.

So I hope that gives you some sense of what we see on a go-forward basis.

Jed Dorsheimer of Canaccord.

Congratulations in a tough environment.

The first question I have is, Vern, could you provide a little bit more color?

My questions are going to be focused mostly on the LED portion of the business which I know is only 5% but seems to be growing at the fastest rate.

So could you provide a little bit more visibility into where you're seeing the greatest uptake in terms of end market application?

Is it, for example, in the outdoor?

Is it for bollards or is it street lighting or parking garage lighting?

The same question in C&I.

Just a little bit more color on, if you have that visibility, where you're seeing the growth there.

Sure, Jed.

Thank you for the question.

First off, our LED revenues today are now north of 5% of our total revenues.

More interestingly, quotation activity is ramping up significantly greater than that.

So it gives us a strong sense that the portfolio that we have created, both indoor/outdoor, both targeted for new construction, targeted for renovation, is starting to gain traction.

And you know that specification cycle, particularly for new construction, it takes a while.

So these lighting solutions that we are developing and introducing to the market are starting to gain traction.

We believe that as that volume continues to ramp up, and whatever that ultimate percentage of LED to the total, whatever that's going to be, we believe that the cost of the components that make up LEDs will decline at a faster pace than the actual selling price of the unit, allowing us to at that point in time have margins that are at parity or slightly above.

So whether that happens by the end of 2012 or into 2013, I think it's going to happen relatively quickly.

We are seeing end uses now more broad-based, both in terms of existing facilities where they're attempting to renovate, whether that's commercial or institutional or on the industrial side.

Outdoor, we expect outdoor to continue to have great application for LED, though I think that that is an area where government spending may impact those folks who have maybe a bit more share in that LED outdoor market.

Our share is growing nicely there but we believe it's not being influenced for us as much by government spending as it is by just having a better value proposition.

Parking garages continue to be an important use or end market for LED-based luminaires.

So we are experiencing broad-based growth at this point in time.

I have one more question, then a follow-up, then I'll jump back in the queue.

We found that there's roughly 130 subsidies.

These are not from the government but actually from the private sector with public utilities that are working both on the C&I and on residential.

Yet, there doesn't seem to be a common denominator in terms of what classifies.

It seems to be a one-off where the manufacturer really has to argue with the -- or not argue, but propose to the utility that your product meets the specifications they're looking at.

And then you'll get the buy-down which on average I think is about $12.50 across the country.

So I'm curious, do you have a program and can you give us any quantitative metrics in terms of how many of your products are subsidized right now?

Again, not by the government, but by the utilities?

And then, as my follow-up question, I see that you partnered with Megaman on the replacement bulbs business.

Just curious if we should look at that as just a replacement of the bulb business that you're now selling in the traditional products or if you view that as more of a growth engine going forward.

Thanks.

So the last question first.

We see the opportunity to provide value-added solutions in the LED lamp side of the world as a growth engine for our Company, because of the high value-add capabilities of these lamps.

These would not be your traditional replacement lamp for your home.

These are very targeted to very sophisticated, high end users of lamp and fixture technology.

So we see this as another value-add opportunity for our many sales forces to sell.

The answer to your first question is I don't know myself specifically how many different government agencies our products have been approved by, but let me tell you about the process.

Our access to various channels throughout North America is the largest in the industry.

And so what typically happens is, depending on who is knocking on whose door from Acuity, they are working with that local municipality, that local utility in some form or fashion, to make sure that our products meet the type of specification that would qualify them for some type of rebate.

And I would tell you that that happens throughout the country and that is happening throughout our various sales forces.

So I believe that we are well-positioned to continue to drive that opportunity.

In addition, there are many groups that are also qualifying manufacturers' products.

And we have ramped up our capabilities to make sure that our products have approvals from these types of organizations.

Ricky, any other additional comments?

I think the key is, it is very local.

And as you point out, Jed, there's 130, based on your count and each of these utilities and all.

And having our local sales forces very well attuned to what those requirements are.

And then steering us, as Vern said, to ensure that our products meet those requirements, get the approval, get on their websites and their listing to qualify for that.

So it is something that, while we manage it centrally, we really execute it very locally.

Carter Shoop of KeyBanc.

The first question is on market share.

First, congratulations on a pretty strong quarter here, continuing to take market share versus it sounds like your tier 1 and tier 3 competitors.

I was curious what your expectations are going forward.

Do you think this rate of share gain is sustainable in the second half of 2012?

And if so, where do you see that coming from?

We're a little bit concerned that maybe the channel turnover at one of your large competitors might start to moderate a little bit, and also hearing more about GE coming into the market.

If you can touch on those two, that would be helpful.

Sure.

We do see opportunities to continue to grow aggressively in even this environment.

We see opportunities to continue to take share because of the investments that we are making, both in the product portfolio, but also the investments that we are making to expand our access to market.

Better selling activities, more people on the street, things of this nature.

So our objective is to continue to grow.

Where our share gain is coming from is difficult for me to know and to say.

Truthfully, I don't have visibility to what others report.

And in terms of the data that we get, it's really our information being compared to the broad population.

So I'm able to with confidence say that we are gaining share and that the share gain is broad-based.

Who specifically are we gaining share from is very difficult to even guesstimate at.

So much of the business that we do is channel-specific.

It's geographically specific.

And our focus is really on bringing greater value-add to the marketplace.

You can tell by the pricing initiatives that we have, we are getting price.

And so we are using product differentiation, service differentiation and bringing value-add to the customer as our point of differentiation, not price.

And just to clarify that last question, when you look at your model now, do you think that the rate of current share gains is sustainable?

That was a follow-up to the first question.

The second question relates to the margin implications from the LED upgrade cycle.

Last quarter you suggested that we had three to four more quarters where LEDs would be coming on at a lower margin.

Today it sounds like you might be backing away from that a little bit.

Am I looking at this too closely?

Is something going on?

How should I be thinking about that?

I think you're looking at that a bit too closely.

I said three or four more quarters and that essentially takes us to the end of our fiscal 2012, maybe into the first quarter of our 2013.

We work hard every day to change that equation.

And we're looking at our entire cost structure.

As volumes ramp up, we see clear opportunities to improve the margins on the LED lighting solutions that we're providing.

So please don't be so specific there.

We think that the general trend is operating properly.

With regard to market share gains, our expectation is to continue to gain share and to grow at a faster pace than the markets we serve.

And I am very optimistic we can continue to do that.

It doesn't mean that we'll do that every single quarter and every single way.

But I think that the longer term trends bode exceedingly well for Acuity because of the product portfolio that we have, because of our access to market, the types of service that we provide, and our continued drive in terms of quality and delivery.

I think we will continue to gain share.

Jesse Pichel of Jefferies.

Congratulations on your results.

You alluded to commercial LED growth possibly surpassing outdoor lighting, given the government exposure of the outdoor category.

Are you seeing any signs that the muni street lighting programs are done?

And are there still any available stimulus related retrofit programs available?

I'm not 100% certain on the latter.

Again, it's very local, very specific.

But let me be clear, I think that the municipal opportunities for outdoor LED continue to be significant.

And I think that as the price points of products, both LED and conventional make these types of products a very strong value proposition for energy savings, service, long life.

Plus when you couple that with our ability to manage these long-lived assets and the services that we provide there through our controls business, we have a very compelling value proposition both for new as well as replacement in the outdoor side of the world.

So I see continued growth, not necessarily needing to be funded by government stimulus.

On the indoor world, which is just a huge market, we see great opportunities to bring value-add, both conventional lighting as well as LED-based lighting solutions into that space.

And we are showing growth in those areas.

It's interesting to me, if you look at the commercial and office space of what it made as a percentage of the industry in 2008, compared to where it's at by the end of 2011, that market has declined precipitously over those handful of years.

So just imagine Acuity is getting the kind of growth that it is, and yet one of its main markets has actually been on the decline.

So as the markets come back, employment coming back, and so on and so forth, it's a huge leverage opportunity for us to really show quite significant growth.

We just returned from Asia, [Lenthley] lighting show up there, and there's a quite robust demand for outdoor lighting solutions in the region.

Do you have a strategy on that?

And part two, it seems like the governments in Asia are asking for ESCO type financing programs so they don't have to fund the entire CapEx of the, say, street light program at once.

Are you seeing any type of financing ESCO, energy services type models emerge in the US?

Thank you.

Sure.

Ricky?

Clearly here in the US, to your point, Jeff, we are seeing the ESCO model or have seen it, obviously, in the industry for 10 or 15 years.

And we're starting to see it evolve further from just performance contracting to other types of areas.

We are looking at alternatives of that and participate today indirectly through the lighting management companies and the major ESCOs out there, but are also looking at opportunities to potentially participate more directly.

As far as our international opportunities in Asia, we do have a presence in Asia.

Clearly, a major area where we source components and certain materials.

And do have opportunities for major projects to participate and bid and are looking at ways to expand that.

Having said that, that market, as you know, for traditional lighting is very, very fragmented and a lot of -- thousands of players.

And while there is beginning to be demand for more of the specialty product and LED products for major projects and all, we are looking at ways to participate greater in that.

But with so much opportunity here in North America, we don't want to divert too much attention away from our core market either.

(Operator Instructions).

Christopher Glynn of Oppenheimer.

Vern, understanding we're not going to put too fine a point on the timing when margin contributions crosses over for LED.

I'm just wondering if, as you're seeing this adoption accelerate, are you seeing areas or channels where you've started to pull back the throttle on the pass-through of the component cost decreases?

I'm not certain I understand the question.

In the context where you expect to pass through component cost decreases at a decreasing rate so the margin ultimately becomes accretive, the question is, are you seeing areas where you're able to start pulling back that throttle in order to realize more of the benefits of the component cost decreases?

Chris, now I understand.

Unfortunately our line has a little static.

I understand now.

Absolutely, when you look at some of the capabilities and solutions that we are providing, both indoor and outdoor, to the marketplace, the price points, given what these luminaires can do, and how the energy costs can help pay for a great deal of the luminaire, we are starting to see pricing, if you will, firm up.

While the component costs, we continue to drive that down.

Primarily because volumes are increasing, but also because we continue to apply our lean principles throughout our supply chain.

So we are seeing areas where we think that pricing is probably relatively near where it should be for a while, especially compared to the alternative, and especially compared to the competitive offering.

We think that there are definitely signs where that crossover point or that opportunity for us to enhance that margin to be, again, more consistent, and then potentially above where our conventional lighting margins are, we think that's alive and well.

And on the energy efficient relighting, I think the utility rebates are a significant driver.

I'm wondering if you're seeing rebate programs expand meaningfully or does the existing scope of rebate programs put an efficiency on the energy efficient relighting demand in a given year?

Again, so much of it is so local.

But when you look around the country, particularly East Coast, West Coast, and in markets where you have high energy costs and where it's very difficult to expand the energy proliferation base, you are seeing folks that are continuing with their incentive programs for people to convert.

And so we would expect that to continue.

We don't see any reason why they won't continue to do that, particularly if they're using coal, particularly if they're using expensive energy sources.

So we think the rebate programs in many areas will continue.

I might also add that even the ones that are there, they're getting more publicity, people are becoming much more aware of them.

In certain jurisdictions it's becoming easier to access those because the rules are becoming better understood as we as a manufacturer can help aid, through our sales force, the end users on how to qualify and meet those.

So I think we're seeing greater use even though the programs may have been there a while.

Just awareness of them as well as the ease of how to access those funds are, I think, becoming better, as well.

And Ricky, my understanding was that a utility or region has a finite amount per a given year, and it gets used up or it doesn't.

So is your implication there that currently they don't all get used up in a given year?

Again, it's very, very local, as Vern touched on, and I think it varies.

Certainly there are those that have a finite amount but I'm not able to answer precisely, Chris, on the magnitude of that holistically.

Peter Lisnic of Baird.

First question, Vern, on the $84 million to $86 million that you talked about for fixed SD&A cost, you also alluded to potentially some incremental actions there.

Can you maybe give us a sense as to what the order of magnitude of what those costs might be?

And then how significantly that might allow you to take the fixed SD&A base down further from that $84 million to $86 million?

First I'll comment, then I'd like Ricky to make a comment or two.

The $84 million to $86 million is now a run rate including all of the acquisitions that we've made, all of the investments that we've made.

So continue to sequentially build up a little bit.

It has virtually all to do with people.

And so if you look at the investment that we have, it's probably a reasonable number.

There's some fluctuation within that, what we call fixed, so there is some variable in there.

But I think that that is a level of spend that is consistent with what we see on a go-forward basis.

We think we can leverage off of that.

As Ricky mentioned, we've taken some streamlining activities because we want to continue to fund these types of growth initiatives, whether it's lighting solutions or whether it's additional marketing programs targeted at very specific verticals within various industries.

So that we can sell these wonderful value propositions that really are differentiated in the marketplace.

So I think you will see Acuity continue to drive its productivity on a go-forward basis.

Our supply chain in the quarter improved its productivity very nicely.

Folks haven't asked, but if you look at what has typically happened in this Company, usually we build inventories in the first quarter.

So that has the benefit of actually improving profitability.

Because of what we've been able to do with our lead times, because of what we've been able to do with our supply chain, we were actually able to hold our inventory levels essentially flat with year-end, even though we're investing heavily in LEDs, and LED components are more expensive.

So what you're seeing is this transformation of Acuity becoming a much more, if you will, intellectual property intensive business.

So the increase in that fixed SD&A to around that $84 million to $86 million I think is a good number.

You'll start to see us leverage our gross profit number.

Obviously we had some just math issues by raising prices to cover rising material costs or component costs, had some impact on the actual margin percentage.

But we're optimistic on a go-forward basis that we can continue to drive that productivity and drive the enhancements to our margin.

Ricky, do you have any more comments?

The only add-on to that would be to highlight that we need to continue to do those productivity and that streamlining and all as a way of better ensuring that.

Because obviously there are inflationary increases that we see in those base costs, whether it's wage increases, whether it's healthcare costs being higher, whether it's professional service firms' fees going up, and so forth.

So we feel good, as Vern said, about maintaining that kind of range of cost despite some of these inflationary increases, due to the productivity gains and streamlining activities and others that we can do to keep those costs pretty fixed.

Then second question, just going back to the commentary about the channel being a bit more optimistic.

Can you maybe give us a sense as to whether or not that is true and to what degree in the stock and flow part of the business?

Just trying to square up that comment with potential inventory reductions that customers might be putting through here at the end of the year.

The inventory reductions at the end of the year have a lot to do with how people pay taxes on inventory, more than it does the expectation of future business.

Unfortunately for us manufacturers, when they are bringing inventories down so that they show very low inventory base, and then the snapback effect because they need to have inventory on their shelves to serve their customer base, obviously it creates a bit of angst in a less lean supply chain.

I feel very good that we continue to make progress to lean out our supply chain.

One of the reasons -- and you didn't ask but I'm going to say -- one of the reasons that we really don't talk a lot about our backlog anymore is because of how we have shrunk our lead times and our ability to serve our customer base with less and less inventory.

So our backlogs continue to be less important to us.

They are less of a percentage of a total quarter's revenues.

But I'll just provide you with some quick numbers here.

Total backlog at the end of first quarter 2012 was $136 million.

This is up about 20% from the year-ago end of the first quarter.

Now, obviously there's acquisitions in there.

If I back out the backlog associated with acquisitions, my backlog is still up about 6%.

But yet each quarter -- and this has been happening for the last several quarters going back three and four years -- our backlog becomes less and less important of a number in terms of how we look at the marketplace going forward.

Kathryn Thompson of Thompson Research Group.

And tagging along that backlog question which I was going to ask, appreciate the clarity on that.

Digging a little bit further, are you seeing any mix changes in that backlog, any other color about your non-res repair and remodel trend?

Not a huge change in the mix of the backlog, necessarily.

But we continue to see this renovation relight as an engine to our growth, as Vern commented.

New construction continues to be flat to down a little bit for commercial.

And we're not seeing much of it come back in residential as well, although that's not as big a driver.

So the renovation relight tenant fit-up is where we're seeing it.

Certainly seeing it stronger in the areas where there are higher utility costs and so forth.

And are seeing a lot of the LED going into that.

In fact, we believe much of the LED that is being put into the marketplace is into that renovation relight market.

And again, we're up 150% in our LED sales, of which the vast majority of that's going into the renovation relight.

So the trends there continue to be good.

They're choppy at times so it's not consistent week after week, month after month but the overall trends are still good in the renovation area.

Kathryn, I would also comment that our backlog of $136 million, which includes the acquisitions that we've made, is also reflective of the diversification that we have made away from just being reliant on new construction.

So if you look at daylighting, if you look at controls, if you look, as Ricky's pointed out, tenant fit-up and renovation, our backlog is more broad-based in terms of the end markets that it's touching.

But what I'm particularly excited about is our backlog, while it's growing, represents a smaller portion of, if you will, next quarter's revenues.

And it's because of our ability to serve our customers very quickly with the type of products that they're after.

And not having to have a great deal of inventory to be able to do that.

So you saw the benefit of that this quarter in terms of our cash flow which was up meaningfully over the year-ago period.

And my final question, I think at some point in time the last quarter you said that you were looking for maybe 41.5% to 42% gross margin potentially for '12.

Fiscal '12.

Is that still a target for the Company?

So Kathryn, again, as we pointed out, coming into the first quarter, looking at what the impact of higher selling prices did relative to higher cost, what we wanted to do is make sure that we provide to all of you this $11 million figure so you could see, you could do the math yourself around what that did to the percentages, per se.

It's important for us more around the operating profit side.

But we see the opportunity to improve our gross margins above what we reported that 40.8%.

Volume notwithstanding.

So if you look at it over the course of a full year, I don't know that we would get to that 42% number but we are comfortable in seeing our margins in that 40.8% to something above that.

I don't know that we'll get to 42%.

It just depends on how the math works this year.

And a big driver, as you know, is mix.

And while we had some unfavorable mix, as we commented on, this quarter, as new construction comes back -- and hopefully that's sooner instead of later -- we tend to see better mix when it's new construction, major projects, where they put more specialty type lighting and all.

And then the renovation portion we hope continues to improve as costs come down for the LED components, as we talked about, and so on.

So mix is just, I want to punctuate, that's a huge driver of whatever gross margin we end up with.

And, Ricky, I would add to that, new construction, many folks say that means a new building has to go up.

Where we have a challenge in terms of collecting data is that, for us, it doesn't necessarily need to be a new building.

If someone is renovating an existing space, it looks as if it's new construction to us.

And new construction allows us to add much higher value-add into those types of situations.

That's whether it's a commercial building, an institutional building, an industrial space.

We like both renovation as well as new construction.

But in the middle there is this tenant fit-up world that makes a lot of -- huge opportunity for us, as well.

Next, is the mix that you saw that was impacting in Q1, are you seeing that spill into Q2?

We very well could.

Particularly as LED ramps up as a percentage.

The second quarter is always a little bit of a wild card for us just because it's the weakest in terms of construction.

And so a lot of it depends on weather throughout the country.

So far weather has been somewhat favorable.

I would rather comment on what the full year could look like.

When you look at a full year, not just a specific quarter, we believe that mix will ultimately be favorable, even with LED working its way through there.

So we'll do one more question.

Glenn Wortman of Sidoti & Company.

I just have one question.

You were able to grow your North American lighting volumes by 8% in the quarter despite still weak non-res construction.

And just given the large market opportunity still in front of you tied to the adoption of more energy-efficient lighting solutions, along with perhaps an improving environment for non-res building activity, what do you see as the greatest risk or impediment to continued, if not even accelerating, volume growth in North America for the rest of the fiscal year?

And related to that, can you provide what your order growth was in December?

We did not provide what our order rate was in December.

I think that the backlog and the period over period excluding acquisitions I think is probably not inconsistent.

That 6%-plus improvement in the backlog I think is indicative of the incoming order rates.

Acquisitions will add to that, pricing will add to that.

Rickey, any other?

I would agree.

I think the biggest risk I would comment on is more macro type factors, macroeconomic we continue, whether it's from Europe.

It seems Europe has settled down but you're never certain of that.

Just the macroeconomic environment is still not on as strong a footing as I would like.

I feel better about it today than I did probably two months ago, in the employment rates that are coming out, some of the macro indicators we look at.

But certainly the biggest risk I would see to the growth in our industry this coming year are more macro than anything specific to our focused marketplace.

And you saw that from a number of external or third party forecasters, whether it's Dodge or whether it's Global Insights, and there are many others.

So six months ago they had an expectation for 2012, and three months ago they ticked those down.

So they, de factor, kicked the can down the road.

And their explanation around most of their downgrade of their forecasts for growth had to do with again, as Ricky points out, these macroeconomic factors.

And so I, too, would voice that.

It was encouraging to see some job growth, but yet we just have a long way to go for our country to get back on the right track.

I believe it's happening.

And Acuity will not only continue to benefit from its efforts to win in this environment, but it will get the benefit of that growth, which I think will be significant when it does happen.

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

Vernon Nagel for closing remarks.

Thank you.

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.

Thank you for participating in today's call.

You may disconnect at this time.