Acuity Brands Inc (AYI) 2012 Q3 法說會逐字稿

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

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

(Operator Instructions) Today's conference is being recorded.

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

Now I would like to introduce Mr. Dan Smith, Senior Vice President, Treasurer, and Secretary.

Sir, you may begin.

Thank you.

Good morning.

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

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

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

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

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

Now let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

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

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

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

This is the ninth quarter in a row where we achieved unit volume growth in an environment where spending for new nonresidential construction remained weak.

I believe this is, yet again, strong evidence our strategy to diversify the end markets we serve and extend our leadership position in North America is succeeding.

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

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

As you well know, the economy in North America continues to be fragile as consumer confidence lags and job growth remains anemic.

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

Also in the quarter, we continue to encounter rising costs, particularly for lamps.

Overall, we estimate our pricing and initiatives have allowed us to recover most 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 again.

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

Net sales for the quarter were $488 million, an increase of more than 6% compared with the year-ago period.

This level of growth is significant given general economic and industry conditions.

Operating profit was $57.3 million, or 11.8% of sales.

We took a special charge in the current quarter for previously announced streamlining actions which reduced operating profit by $1.9 million.

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

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

Doing so one can see adjusted operating profit was over $59 million, up almost 18% from the year-ago period, while adjusted operating profit margins improved 110 basis points to a strong 12.1% of sales.

Diluted earnings per share were $0.78.

Again, adding back the impact of the special charge adjusted diluted EPS for the current quarter was $0.82, up 32% from the year-ago period.

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 more than 6% compared with a year ago.

More than 5 of the 6 points of growth were due to greater product shipments with the balance coming from the benefits of better price and product mix.

The impact of acquisitions and foreign currency on net sales were not significant and essentially offset each other.

All of the increase in net sales occurred in North America.

Our growth was broad-based with gains occurring in most channels.

Growth in our largest channel, commercial and industrial, was due to continued emphasis on selling higher value-add lighting solutions, especially LED-based luminaires, which grew by almost 250% compared with the year-ago period, as well as continued focus on smaller- and medium-sized projects of various types sold through distributor stock and flow.

We also continued to enjoy solid growth in other important channels, including home improvement and infrastructure, all of which is very encouraging in spite of the variability in demand within nonresidential construction.

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

Having said that, we estimate the positive impact on sales from price mix was primarily due to the benefits from previously announced price increases to recover rising input costs.

We estimate our pricing actions helped offset most of the approximately $8 million in higher input costs compared with the prior year.

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

We believe spending in key segments of the US nonresidential construction market was up modestly in the quarter compared with a year ago, as was the lighting market.

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

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, outperform the markets we serve.

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 new building construction and more focused on growing portions of the market, including renovation and lighting control solutions that enhance the visual environment while optimizing energy usage.

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

Excluding the impact of the special charge, adjusted operating profit margin was a strong 12.1%, up 110 basis points from the year-ago period.

In fact, we earned more adjusted operating profit this quarter than any quarter since 2008 and this was our highest operating profit margin in the last 14 quarters.

Further, I would like to highlight a couple of key points.

First, as I noted earlier, we believe our price increases covered most of the higher cost for materials and components.

However, as you know, this dilutes our margin percentage.

Next, selling, distribution, and administrative expenses increased only $3.4 million, or a little more than 2%, on an increase in net sales of more than 6%.

The increase in SD&A this quarter was due to the incremental variable cost to support growth in net sales and additional variable compensation marketing expenses.

Productivity improvements helped to offset other increases in SD&A expenses, which were primarily related to activities focused on longer-term growth opportunities, including market diversification, expanding our lighting control portfolio, 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 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 the future.

As a point of reference, SD&A that is not directly variable with sales volume was approximately $89 million this quarter, in line with our expectations noted in our last quarter's earnings call.

On the strategic front we continued our rapid pace of introduction of new products, significantly expanding our industry-leading portfolio of innovative, energy-efficient luminaires and lighting control solutions.

The rapid introduction of innovative or energy-efficient products and services have been key contributors to our improved performance over the last few years.

This, contrary to the view of some analysts, has allowed us to extend our market leadership position and is one of the cornerstones of our growth strategy going forward.

As I mentioned earlier, our solid-state lighting portfolio is expanding rapidly as are the sales of these luminaires.

Today LED-based products are nearly 10% of our sales with margins generally in the range of other fixtures with traditional light sources.

And we continue to fund the development of other light source technologies, such as organic LEDs, where we continue to expand our own award-winning portfolio of these innovative products.

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 has quickly become a commodity, for a fluorescent lamp to be a true lighting company like Acuity Brands.

At Acuity we offer customers superior quality lighting and energy-efficient solutions for virtually every indoor and outdoor application, regardless of the light source.

This is again why we are expanding our leadership position.

Our organization has a long, distinguished history of leading innovation 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 traditional energy-efficient luminaires and lighting controls.

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

Our formidable strength and innovation was on full display earlier in the quarter when Acuity won a total of 11 awards at two key industry events for its indoor and outdoor LED lighting solutions.

These awards included the prestigious best-in-class designation at the Next Generation on Luminaires Solid-State Lighting Design Competition.

No other competitor even came close to this level of success at these events.

Again, we are a lighting company.

We are extending our leadership position because customers understand it takes more than slapping a chip on a board and shining it in someone's eyes to be a leading lighting company.

These accomplishments have diversified and strengthened our foundation and will further serve as a robust platform for our 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 that 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 lighting solutions, companywide productivity.

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

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

Vern covered the primary drivers for our sales growth in the third quarter and our profitability, so I will not repeat these items, but I would like to provide a bit more color on certain aspects of our third-quarter results.

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

In the third quarter of fiscal 2012 we had miscellaneous income of $2.7 million compared with $900,000 of miscellaneous expense in the prior-year period.

This incremental benefit of $3.6 million is primarily associated with the favorable impact of exchange rates on certain foreign currency items, primarily Mexico peso-denominated exposures.

The effective tax rate this quarter was 35.8%; this is 60 basis points higher than the prior-year quarter.

The increased rate is due to higher year-to-date pretax earnings, which causes a lower rate impact on favorable permanent tax items, nondeductible losses in Spain, and the expiration of the research and development tax credit which occurred at the end of calendar year 2011.

We now estimate the effective tax rate for fiscal year 2012 to be 35%, which is a full percentage point higher than our previous estimate and is due largely to those same factors.

Now let's look at the cash flow for the nine months ended May 31, 2012.

Cash flow provided by operations for the nine-month period was a strong $102.8 million, an increase of $21.2 million, or an impressive 26%, compared with the prior-year period.

The higher level of cash provided by operations in the first nine months of our fiscal year was due primarily to higher net income and improvement in working capital levels.

Inventory days decreased by seven days compared with last year.

We were able to achieve this improvement despite the need to support our growth and sales of solid-state lighting and temporarily building certain inventories in order to maintain service levels during the production moves associated with our closure of the Cochran, Georgia, plant.

In the first nine months of the fiscal year we spent $18.8 million on capital expenditures and $3.8 million on the acquisition of businesses.

We currently expect to spend approximately $30 million in capital expenditures in this full fiscal year.

We ended the third quarter of fiscal 2012 with a cash balance of $228.3 million and total debt of $353.5 million.

Net debt to total capitalization at May 31, 2012, was only 13%.

On January 31, 2012, we executed a new five-year $250 million revolving credit facility.

At May 31, 2012, we had additional borrowing capacity of $243.8 million under the new facility that does not mature until January 2017.

So we continue to maintain a significant amount of financial flexibility.

I will conclude my prepared remarks providing a brief update on the special charge.

In the third quarter of fiscal 2012 we recognized a pretax special charge related to the previously announced closing of the Cochran, Georgia, production facility of $1.9 million, or $0.03 per diluted share.

The closure of this facility began in the third quarter and is expected to be principally completed by the end of the first quarter of fiscal year 2013.

We expect to incur additional costs of approximately $7 million associated with this closure, most of which will be recognized during the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013.

This will bring the total estimated pretax charge to approximately $14 million.

Annualized pretax savings associated with this closure are currently estimated to be approximately $8 million and are expected to be realized beginning in the first quarter of fiscal 2013 following the completion of the transfer of production and closure of this facility.

You may recall, in addition to this special charge for the Cochran closing, we recognized a $2.7 million pretax charge in the first quarter as we continued our streamlining efforts, which are expected to yield annualized savings of roughly $5 million, and a $1.2 million pretax charge in the second quarter associated with a reduction in work force, primarily at our operations in Spain, which we estimate will generate annualized pretax savings of approximately $1 million.

We estimate that these actions in total will generate annualized savings of approximately $14 million, of which approximately $1 million was realized in each of our second and third quarters of fiscal 2012, and we expect to realize approximately $2 million in the fourth quarter fiscal of 2012.

We hope to be at the full annualized savings rate by the end of the first quarter of fiscal 2013.

Thank you and I 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 environment for the balance of 2012 to continue to be influenced by external concerns, including fiscal and monetary policy in the US and the European debt crisis.

This is eroding business and consumer confidence, causing continued volatility in demand.

Forecasts by independent organizations have not really changed much over the last few quarters and continue to suggest unit volume for key segments of the construction put in place in the US will grow slightly during the remainder of 2012.

Further sales for lighting fixtures in North America are still expected to modestly outperform overall nonresidential construction in 2012.

This is consistent with the outlook in our previous filings.

All this seems to suggest that while the significant headwinds that have prevailed in our markets over the last few years or so have begun to abate, the recovery continues to be slow and inconsistent in North America.

Additionally, we expect the European economies to remain weak, particularly Spain.

On the good news front, we sense a level of cautious optimism about future business prospects in North America from our broad and diverse customer base, which is encouraging.

But many believe, as do we, that continued fluctuations in demand will be the norm for the foreseeable future.

Our order rates for the fourth quarter reflect these modestly improving conditions.

Again, we still see wide variability in demand amongst channels reflecting the tepid economic recovery in the US.

Second, the industry continues to experience volatility with respect to input costs, particularly for rare Earth minerals mostly used in lamps.

While some commodity costs have waned recently, others continue to rise.

Of course, we will continue to be vigilant in our pricing posture should component material costs continue to rise.

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 done 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 several conference calls, our strategies to drive profitable growth remain intact.

We continue to see opportunities in this environment, including benefits from growing portions of the renovation market and tenant improvement projects, further expansion in underpenetrated geographies and channels, and growth from the introduction of new lighting solutions.

As the industry leader in North America, we are uniquely positioned with key suppliers around the globe to bring greater and more differentiated value to our customers incorporating advanced technologies, providing superior lighting quality and more sustainable energy solutions.

Our product and solutions portfolios are expanding at a record-setting pace for us, including the addition of five strategic acquisitions in the last year-and-a-half, 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.

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.

As I have said before, 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 the many markets we serve as part of the broader lighting industry could grow by more than 50% 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 that you have.

(Operator Instructions) Matt McCall, BB&T.

So, Vern, I guess a lot of puts and takes on the margin front.

I guess I am trying to get an outlook or some kind of view into next year, so if you can maybe talk qualitatively about the net impact that you expect from price and mix as you introduce more LED products, as controls become a bigger part.

And contrast that with pressure from any ongoing growth spending in the next year.

Matt, we do not provide guidance so I will just comment on the quarter.

I think that the results speak for themselves.

The mix of our business was pretty consistent with what we have enjoyed.

We were able, through our pricing initiatives over the last 12 months, to help offset the almost $8 million of additional cost increases that we incurred this quarter.

I think that these gross profit margins are consistent or in the range of what we would expect from our business.

Again, it's an ebbing and flowing.

As we look at the investments that we have made at the gross profit level into our business, we continue to really drive the proliferation of new products.

So the investment is -- you will find that a lot in the SD&A area, but what it's allowing us to do is to continue to sell higher, more value-added lighting solutions.

As we think about LED we said that the margins are generally in the range of our other traditional products.

So I think when you look at the overall profitability of the quarter what I find particularly fascinating is when I look at this level of volume I go back to our second quarter of 2008.

If you remember, in 2008 it was a record year both for the industry and for Acuity Brands, and the second quarter volume was about the same, roughly $480 million kind of range.

Our operating profit margin in that quarter was 12.6%.

If one were to back out, if you will, the impact of Spain this quarter, our overall margins would have been about 12.4%.

So to me it's pretty fascinating.

In 2008 we didn't have one nickel of sales of LED-based product.

Today those numbers are nearing 10% and yet the overall profitability of the business is roughly in line with the same level of revenues.

The other thing I would point out to everybody is our cash flow return on investment is near 24%, so we continue to provide very strong returns to our shareholder base while we drive real value and changing value, if you will, in our portfolio for our customers.

I hope that gives you some insight as to what we see about the margin dynamics of our business.

It does, Vern, and thanks.

And I will just use my second question as a follow-up to that.

So you have talked in the past and I think you gave some detail about the fixed SD&A, so is the expectation that that growth spending -- and I think, Ricky, you talked about $30 million in CapEx, which was a little elevated relative to previous years.

Are we going to see continued spending at those levels out into 2013 and 2014, or is there a period where you could see some better leverage?

That was kind of the point of the question.

Sure.

I would expect -- we spent approximately $89 million in fixed SD&A this quarter.

That was in line with a point that we had made last quarter.

I would expect -- again this SD&A it's not completely fixed; it's a little bit of a misnomer to call that.

We have marketing expenses that go through there for new product introductions; we have incentive compensation that flows through there, so I would expect it always to have some fluctuation.

But I think that this level of spend, again, is consistent with what you would expect on a go-forward basis and we will look to leverage that level of spend as we continue to expand our revenues with these new products.

As I said in my prepared remarks, we have yet even to come close to peak sales on a lot of the investments and, therefore, new products that we have introduced.

So I think you are going to see good leverage going forward, assuming that the markets continue to expand and I think that they will.

I think by 2015 we will get past some of these issues that are influencing the overall economy and we will once again see growth in the industry that is favorable.

And I think Acuity is well-positioned to really leverage into that growth cycle.

Jed Dorsheimer, Canaccord.

Congratulations on the quarter.

My two questions; Vern, I was wondering if you could elaborate on first I guess the agent side of the business in terms of what the costs are to add an agent and how you compare to some of your peers -- Cooper, Hubbell.

Because it looks as if the agenting side is sort of a key differentiator, particularly for some of the newcomers coming into the industry, too.

So if you could elaborate on that and then I have a follow-up.

First of all, the agency model, for us, is fully developed, if you will.

In other words, the footprint and the agents that we have in place throughout North America are very strong.

We are blessed in having partners with our agents -- they are obviously independent businesses.

They are usually the number one agent in their marketplace, and so we leverage our relationship by providing them with great products and great service and support to help them win in their marketplaces.

I think they and we continue to work together to differentiate our value propositions against others.

I won't really comment on my competitors and their positions in the market.

I will just simply say that we value the agency relationship very robustly and we invest heavily to support them and us in the local markets that we have.

And, yes, we consider that to be a point of many, if you will, for differentiation in the marketplace.

Thanks.

Then on the LED side of the business, could you -- you said it was nearing 10%.

Could you just note what it was in the quarter?

And then from a controls perspective, what percentage -- is controls being spread across all of the products?

Is it really concentrated in sort of daylighting and LEDs, or how should we look at the controls aspect on a go-forward basis?

Thanks.

So with regard to LED, what we have provided is that we are nearing 10%.

We don't provide specific revenue numbers behind that and similarly with controls.

We are very focused as a single-line business on the broad lighting industry.

We see a real convergence occurring at how lighting control and luminaires are coming together to make them really a lighting solution.

It's becoming very, very difficult to distinguish between the two.

Yes, we know when we sell a sensing device as a single one-off item, but really it's more and more about how we are able to provide fulsome lighting solutions into a space to provide superior quality of lighting while optimizing energy.

So, to me, how lighting control comes into the fulsomeness of the market -- when you look out three years I think that again it will be indistinguishable between whether it's a luminaire or a lighting control, because so much control will be into the entire space in how it's being controlled.

Again, to optimize the visual environment while providing superior energy solutions.

So we see software as being a big part of how all of this plays out.

We think that lighting controls is really an additive value to the end customer and so, therefore, as we think about what a lighting solution is we are able to really provide an uptick in value.

And then, depending on their energy consumption, really get a very strong payback story.

So this is why it's very difficult to, if you will, break out individually one item versus -- one component versus another, frankly.

Jed, I would add on your comment is the controllers more for LED or daylighting, we sell controls for all the different light sources.

Embedding controls in the industrial bay fluorescent fixtures, nLight system, certainly works with all types of -- sources of light and so forth.

So our control offering for both energy efficiency as well as for architectural purposes spans all the different light sources and different types of luminaires that we sell, as well as the daylight fixtures that we offer.

Thanks, guys.

Christopher Glynn, Oppenheimer.

Thanks.

Lot of color on the market so far; I was just wondering about the cash that is starting to build pretty nicely.

Barring some significant near-term acquisition activity, would you expect to continue to build cash?

Yes, certainly we expect to continue to generate a significant amount of cash and build that cash.

As you know, we have $228 million at the end of this year.

We do intend, and Vern commented, would expect to make some more acquisitions.

That is a primary use of our cash historically and we will continue to do that.

We also, Chris, have 2 million shares authorized by the Board to repurchase in the open market as appropriate and would see opportunities to use the excess cash for share repurchase.

Of course, you know we do pay a dividend and periodically look at the level of dividend that we pay as well as another potential use of cash.

Right now we don't really have any maturity of debt coming up, so deleveraging is not an alternative to us.

So acquisitions, potential share repurchases, and then we continue to examine the dividend.

Chris, this is Vern.

If you look at our net debt to total capitalization, we are now roughly 13%.

So it is clear that we are well below what would be considered normal leverage.

We do see opportunities in the market place as Ricky pointed out, so we will continue to -- our terms and at our pace -- look to acquire, to fill out our portfolio whether it is technology, whether it is access to market design capability, potentially even geographical expansion.

The other thing that, as we pointed out to our board, I think this is very true with the pending tax cuts still very uncertain as to what next steps are, it is difficult for companies who are in a fortunate position like Acuity group, we are generating strong cash and we expect to continue to do that, to fully understand what is the best opportunities for our shareholders vis-a-vis stock buyback versus dividend increases.

So we will be looking at that as we get closer and have a better understanding as to what folks in Washington do, in terms of providing clarity on that kind of issue.

I am sure they will do the right thing.

Just on the types of deals, you mentioned the technology access type things.

I am wondering if there is much you see out there in terms of really high-end spec type product that still remain kind of attractive additives to the portfolio.

If we go back before the controls acquisitions, I think that was more characteristic of what you would typically do.

Yes, I would also point out the acquisitions that we have made -- Pathway, Horizon, Winona, Renaissance, Mark Architectural Lighting -- these are very important acquisitions for us and they all bring something unique to our portfolio.

And as we think about where we are driving our business on a go-forward basis, take Winona for example, they have tremendous manufacturing capability in terms of providing unique products.

As we delve more and more into the world of color changing, there is a great example of an investment that we made, not directly into how we would increase that portion of our portfolio, but yet with their great design and quick turnaround capability it is a perfect place for us to nestle and create product that is being developed in other parts of our business.

We have technology and innovation centers in a couple of parts of the country.

These are just fantastic folks who are creating design and solutions, but then are being manufactured much closer to the market.

So all of those types of investments we will look to enhance our capability.

So it may not be that we are looking for that one big home run hit; it is probably not out there, frankly.

But it will be to continue to piece together broad capability based on our strategic direction going forward.

Great.

Great color.

Thank you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

Vern, I guess you mentioned productivity a bit earlier and if I look at the SD&A number on the fixed side and I calculate the implied variable piece it looks like it's a little bit lower than kind of what you have been telling us it would be.

So I was just wondering what you are doing on the productivity front and what sorts of benefits we might expect to see as we go forward on that variable cost side of the equation as well.

It's a good point, Pete.

It is slightly lower.

We have gotten some benefit because of lower fuel costs, so some of our freight was down a little bit compared to prior periods.

We also continue to push our regional manufacturing capability to be much closer to the market.

We have a great capability there.

So a lot of freight back and forth in terms of one facility to another is down.

We will continue to leverage that; we will continue to leverage that capability.

My own feeling is that as we continue to introduce more and more holistic lighting solutions you will see our commission rate probably trend up a little bit.

So all that that, the puts and the takes around that, probably were still in that 11.2%, 11.3%, 11.4% for freight and commissions.

And that's probably a fairly consistent number.

We will look to leverage, if you will, that fixed SD&A side.

Again, there is some variability in that number on a go-forward basis.

In the manufacturing facilities our teams continue to do a great job driving productivity throughout our facilities, if you will.

Obviously the streamlining action and the shuttering of Cochran will continue to add to that.

I think on the SD&A side within our organization we continue to invest in new product development, and that is expensive, but we are looking at other things to help offset, if you will, that.

So we deem that productivity; Ricky and Mark Black are doing a great job driving productivity on the fixed SD&A side of their business.

So I think you will continue to see us do that.

As you know, Pete, we have said that we strive to add 70 basis points of productivity -- 70 basis points of margin from productivity type initiatives.

Again, the streamlining of our manufacturing footprint is a good example of us continuing to do that.

My hope is that soon here we will start to see a lift from the marketplace and so our productivity will be coming more from leveraging the fixed investments that we have to really support a much higher level of sales growth.

All right, that is perfect.

Thanks on that.

Then if I could just flip back to the controls comments you made a bit earlier, can you give us a feel for the competitive landscape and how well you fit in there?

Obviously been some strategic actions by competitors over the past few months, specifically on the control side.

Just wondering how well you are positioned there, any holes, and how you kind of think about that piece of the business right now.

I believe that some of those moves by our competitors are really a complete validation of our strategy and our view of the market going forward.

We believe that holistic, integrated lighting systems will become a bigger and growing part of the market, particularly as buildings or campuses.

Whether it's a school system or a healthcare facility or an industrial space or a commercial office building, people are going to want to have capability that allows them, for that entire campus, to make sure that they are delivering quality of light in the space.

We need light to see and to optimize the use of the space, but they also want the energy savings in terms of what lighting control can mean.

And so we think that we are uniquely positioned to fully leverage the fulsomeness of what we have in our portfolio today and to continue to expand, not only on the device side but on the software side.

Our nLight system is second-to-none in the industry and we think that is a very robust platform for us to continue to grow as the, if you will, the brains within that overall integrated lighting system.

All right.

Thank you very much for the time and the color.

Thank you.

Glenn Wortman, Sidoti & Company.

Actually, my question I think was basically just answered, but just to follow-up on that point with the convergence of the lighting fixtures and in the controls over the next several years.

It does sound like if you are offering the full holistic solution you would expect to increase your market share in that environment.

Can you just maybe kind of expand on that a little bit please?

Yes.

We believe that we have been expanding our market share in this environment, the industry, and we believe the industry will pay up for good quality technology that allows them, again, to optimize the visual environment while really taking advantage of energy savings.

The energy savings comes into play and can be further enhanced by really taking advantage of daylighting so that you are driving more energy savings even while you are using the space.

Our belief is that as the market continues to migrate and is more accepting and more knowledgeable of what these types of systems can do, particularly the way Acuity will bring ease of use -- and we demonstrated a lot of that at Lightfair met with great fanfare, hence, awards and really a keen focus by the industry on Acuity's capabilities in this area.

We think it's a leverage point for us to gain share as the market continues to grow these things will be higher value-add, but they will be paid for, again, by energy savings.

So we think it's a key driver over the next handful of years in terms of what the market will see and why.

Then just second on that fixed SD&A of $89 million, on the last conference call it sounded like you were going to ramp up for a couple of quarters and then that would abate somewhat.

Do you no longer think that is the case?

I think you mentioned earlier that you think this $89 million is a good run rate to use going forward.

In truth, given the -- we are introducing product both conventional but mostly LED-based solutions, controls, daylighting, all sorts of different capabilities into the marketplace, we see our product portfolio growth and proliferation continuing at this pace.

We continue to get more and more excited about the opportunities that we see in the market over the next handful of years, and so I would expect us to continue to invest at this pace.

Again, there is some variability in that fixed number; marketing expenses.

So when we are developing and procuring new materials, when we are introducing new products where we have samples and all of that, it's period expense for us and so I would expect us to continue to invest in those kinds of areas.

This pace, this range of where we are in terms of the fixed SD&A feels right to me.

I think it could go up, I also think it could also ebb down depending on just the timing of how things are done.

But at the end of the day we will continue this level of investment in technology and innovation and sales and marketing support to drive our future growth.

Okay, thank you.

Thank you.

Jesse Pichel, Jefferies.

Ricky, you talked about higher rare Earth inputs, but when will lower-priced LED components and lower-priced steel start to act as a tailwind to input costs?

Jeff, we are seeing that.

We are seeing some come down.

As you mentioned, we have seen sequentially some reduction in steel.

Vern commented on fuel; that has been the benefit on the reverse side.

We have seen increases in the example given of lamps on the rare Earth side.

As far as LED, we are seeing significant declines in the cost of the chip or the package.

Much of that is being passed on in the end price, although we have been able to, as Vern commented, to now have our LED margins in the range generally of our traditional fixtures.

So as we look at the puts and takes of commodity cost and input cost we see some up and some down.

Don't see a significant benefit or a challenge in the near-term horizon, but regardless we are very vigilant if we do see increases to pass that through in price.

So can you help us understand Acuity's exposure to new construction versus new tenants versus renovation this quarter?

I think that that is very difficult.

We do not have precise data around the actual sale.

We are at near $500 million of revenues and the average order size is probably 25,000 or 30,000 orders that have come through.

And it's impossible for us to precisely know was it new construction or was it tenant improvement.

Truthfully, for us it's really -- we are almost indifferent to it.

I'm sitting here looking out at an empty building where they are renovating the inside of it, the tenet has moved out, and so when someone else moves in there it will probably -- they will probably hire some type of specifier, lighting designer, architect, engineer.

And to us that will look exactly like new construction, even though the shell of the building is probably 30 years old.

We will not code it as tenant fit up.

We will code it as a job, so it has been very difficult for us to precisely quantify whether it's new construction.

My own personal belief, and the belief of our folks, is that in this environment right now it is mostly about tenant fit up and different types of renovation.

Many of the buildings that have been built -- again, we are in midtown Atlanta here -- there is a number of see-through buildings.

So as employment comes back and as people move into these spaces that have not been built out at all, for us that is new construction.

So I would tell you it has been difficult to precisely quantify that.

I feel very strongly that our skill set to be able to support both renovation and tenant improvement is very robust, as well as our ability to support and serve new construction.

75% or more of our capability in that channel is shipping to a different address than we are billing it to.

So as new construction comes back, as employment improves, as people find their way into these either commercial, industrial, healthcare facilities, office buildings, we feel that we are uniquely positioned to leverage our skill and our strength that we have always had in those spaces.

Thank you very much.

Brent Thielman, Davidson.

Just had a couple of housekeeping questions.

Was the top-line headwind from Spain less than 1 point or more than that?

It was less than 1 point.

Okay, great.

And then could you provide a backlog figure for the end of the quarter?

We have been mentioning, Brent, for a while now that that is less of a meaningful indicator for us just given the shortness of our shipping cycle as we do a lot more quick shipping and so forth.

It's now down to four or five weeks of sales, but it was generally consistent with where we were a year ago if you look at it on a comparable basis.

But we are, as we have been saying, implying that it's probably less of an indicator, a forward indicator, than many other things.

One of the things that we have done with how we use our backlog to manage our business it's what we see very clearly.

In the past, we have potentially added some items into the backlog -- and, Ricky, help me here a little bit -- it's a whole type of thing where in fact the number, the apple-to-apple number, again as Ricky pointed out, is roughly flat.

But it's much more because we are shipping -- it's what is actual to us close in versus taking orders that are further out because they are not actual to us immediately.

And in a very lean environment, the way we operate, we want to use our backlog as a tool to help us really drive and provide superior customer service.

So what you are seeing at Acuity is our input, our order rates are more important, and our ability to deliver on-time complete every time without error or defect in the product is a much higher priority.

And so we are selling that differentiation and that capability.

This is why backlog for us the way you might look at it or one might look at it is very different today than it was just even a few short years ago.

That is great color, thank you.

Ahmar Zaman, Piper Jaffray.

Good morning.

This is [Sean] on for Ahmar.

I wondered if we could talk a little bit more about your confidence you guys have in terms of being able to outperform the market.

In the face of sort of tough economic conditions the Company has performed very well, but we look at things like -- and I am just going to pull this one up -- the Architecture Billings Index which shows the -- which has been pulling back the last couple of months.

Can you guys talk a little bit more about what is giving you sort of the confidence that you are going to be able to kind of fly against any sort of headwinds and continue to grow at a steady rate with the company?

Sean, this is Vern.

Unfortunately that variability in demand has been in the marketplace now for at least three years, and so -- and we expect it to be that way for a while longer.

Our ability to really understand our end-markets -- we have 14 different channels that we serve in North America.

They all ebb and flow, and so they are all going through their own little mini cycles, if you will.

We continue to stay very close to customers in each of those channels.

We are very focused on the types of products and lighting solutions that we are bringing to them.

So we believe that we have the right strategies in these various channels to support growth where it either is from share again or it's because the market is growing in that particular segment and we have the right capability to both participate and take share.

The commercial markets, which have been really down for the last three years, are actually showing signs of life.

I think that McGraw Hill and others are showing an uptick there.

You take other channels or other market segments, whether it's the government support programs -- I think for folks who relied heavily on government spending they are going to find it a bit of a challenge over the next period of time as the government wrestles with its almost uncontrollable debt.

Fortunately for Acuity, we didn't really participate in the stimulus side of it so I don't think we are going to be directly impacted by it.

So I feel that the products that we are coming out with, that we have come out with, our intense focus on understanding the customers in these various channels, and the strength of our sales forces combined with that portfolio should allow us to continue to outperform the markets as we have for the last several quarters.

Great, thank you.

If we could talk a little bit -- you have a very good quarter in terms of just your gross margin, up around 41%, over 41%.

Is this the kind of level that we should expect going forward, or is it reasonable to think that with the variability of the business it could kind of tick back?

Maybe not dramatically, but I know that last quarter you were talking about maybe 40% to 41% gross margins for the year.

Is it reasonable now to think that you guys could be trending toward the higher end of that, or is it reasonable to think about the variability of the business there could be a tick back in the margins?

Thank you.

So last quarter I was being pushed on the gross margin because it was our second quarter.

Typically our lightest in terms of volume, mostly due to the just seasonal nature of construction, and so the question was around gross margins for the full year.

I believe that based on the current mix and what we produced and shipped this quarter, it is reflective of what our capabilities are.

That doesn't mean that it's always going to be precisely this number.

We do have ebbing and flowing depending on the mix that is shipped that particular quarter.

A little bit of the construction cycle influencing it.

The leverage of volume; typically our third and fourth quarters are higher volume so we are able to leverage our fixed cost base.

I think it gives investors a good sense of the leverage capability of what volume can do for Acuity.

We are very vigilant and diligent around how we manage our cost structure and drive productivity, so this is a good indicator, I think, of what we are capable of doing.

The other thing that was interesting to me this quarter, again, if you look at the growth in revenues on a year-over-year basis and compare that to the pull-through on our operating profit, it was a robust variable contribution of 30%.

So that meant productivity improvements, that meant opportunities for a favorable mix, and I think the Company just performed very, very well.

We push ourselves and we will continue to do that to have that level of performance while investing in the business.

Great, thank you very much.

Kathryn Thompson, Thompson Research Group.

Two-fold question for you.

First, you achieved about 5% unit growth.

Could you clarify how much of that is core market growth versus market share gains or new product categories for you which also gives you market share gains?

Then, second, if you look back, if you can really quantify, at least put some parameters around the content per square foot and how that has changed today versus three to five years ago.

It certainly has been improving, but could you put some quantifiable metrics around that shift?

Thank you.

Kathryn, thank you.

I don't know if I can answer either of these questions to be honest with you.

To quantify the content per square foot we, too, believe it's improving, but it's such macro gross numbers that it's very difficult to precisely say that this is happening.

When we look at jobs, individual jobs, and we see what we are selling into those.

We try to understand in that particular job what was happening, what would it have done a few years ago.

It's still -- while directionally we believe that we are selling more value per square foot, paid for it through energy savings.

People are now mandated that they have occupancy sensors in certain places.

People are acquiring more sophisticated luminaires that have much more capability, whether it's high-end florescent or LED.

So people are paying up to get quality of light but then typically they are justifying it by the payback of energy savings.

At least on a dollar per unit, at least you would be able to see that internally the dollar per unit is higher today versus three to five years ago.

Have you done that analysis before?

Again, the problem is that as we have converged more and more of technology into the luminaire -- so there is now embedded controls, there is embedded capability.

You can look at a space and say, yes, it's improving.

It's very difficult to say is it because of the luminaire or is it because of the control device because they are now a system.

So I have the ability to take raw numbers and divide it into my revenues and come up with something, but that is not precisely meaningful for us.

Then your question around the differentiation between just normal market and market share gain.

Unfortunately, a lot of the information that we use to determine market share gain is on a lag basis.

We are a fiscal quarter company versus most everyone else being a calendar company, and a lot of the data that we get, whether it's from Dodge or [NEMA] or other places to compare our share, it's on a lag.

So we're typically looking at that -- almost a quarter lag, frankly.

So we see share gain.

To say exactly what is the absolute percentage of that I wouldn't want to guess right now.

I know what it is for the last quarter, but that is not for this quarter, and we don't provide that information.

Okay, great.

Thanks so much.

Thank you all.

Due to time constraints, we will now turn the call back over to Mr. Nagel for closing remarks.

Thank you for your time this morning.

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

Our future is bright.

Thank you for your support.

Thank you for participating in today's conference.

You may disconnect at this time.