Acuity Brands Inc (AYI) 2013 Q1 法說會逐字稿

Good morning.

Welcome to Acuity Brands' 2013 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.

Sir, you may begin.

Thank you, and good morning.

With me today to discuss our fiscal 2013 first-quarter results are Vern Nagel, our Chairman, President, and Chief Executive Officer and Ricky Reece, our Executive Vice President and Chief Financial Officer.

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

com.

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

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

Please refer to our most recent 10-K and 10-Q SEC filings 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 the call over to Vern.

Thank you, Dan.

Good morning, everyone.

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

Overall, our results for the first quarter of fiscal 2013 were influenced by what we believe was a lull in demand in the nonresidential construction market and higher spending primarily related to temporary inefficiencies associated with the closing of our Cochran, Georgia manufacturing facility.

Overall, we are pleased with our results for the first quarter, particularly given the challenging market conditions and the complexities associated with the Cochran closure.

With that said, we feel we delivered solid results while achieving success on numerous strategic priorities.

As independent market data is becoming available, it is confirming that the potential economic slowdown we discussed in our previous filings and calls became a reality during the quarter.

The result this quarter was inconsistent demand.

In spite of the slowdown, this was the 11th quarter in a row where we achieved volume growth.

I believe this is yet again positive 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 and productivity.

We would like to be very clear about our continued expectations for our performance in 2013.

For us, nothing has really changed.

We expect to continue to outperform the markets we serve and to deliver full-year results more consistent with our long-term financial goals as noted in our 10-K.

Remember, these goals represent upper quartile performance.

As we discussed on our fourth-quarter call, we anticipated inconsistency in demand this quarter, and we expect that to continue through our second quarter and potentially longer.

Nonetheless, we remain positive about our long-term opportunities to extend our market leadership position while delivering superior value for our customers and returns for our shareholders.

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

Net sales for the quarter were $481 million, an increase of 1.4% compared with the year-ago period.

This level of growth is meaningful given general economic and industry conditions as I noted above.

Reported operating profit was $48.2 million.

We took a special charge in the current quarter for previously announced streamlining actions and incurred temporary inefficiencies associated with these actions which, in total, reduced operating profit by $5.5 million.

The year-ago period also had streamlining charges for other activities.

Ricky will talk more about these special charges and these temporary inefficiencies associated with the Cochran closure later in the call.

We find it helpful to add back these items to both quarters' results to make them comparable.

Doing so, one can see adjusted operating profit was $53.7 million, consistent with the year-ago period, while adjusted operating profit margin was 11.2%, also consistent with the year-ago period.

Diluted earnings per share were $0.61.

Again, adding back the impact of the items noted above in both quarters, adjusted diluted EPS for the current quarter was $0.69 compared with $0.74 in the year-ago period.

As Ricky will explain later, fluctuations in foreign currency had no material impact on our diluted EPS this quarter while it benefited EPS in the year-ago period by $0.04.

You can do your own math to get a true apple-to-apples comparison between quarters from an EPS perspective when eliminating the impact of these currency fluctuations.

As you would expect, similar with operating profit, we were essentially flat with the year-ago period.

There are a number of key items to note regarding the results in the first quarter.

Net sales grew 1.4% compared with a year ago, however, unit volume grew almost 2% this quarter.

This growth was partially offset by a slight shift in the mix of products sold.

The impact of acquisitions and foreign currency on net sales was not significant.

The increase in net sales was impacted by tepid demand in the nonresidential construction market, reflecting what we believe was a wait-and-see approach by customers to the resolution of the fiscal cliff situation and government funding availability.

From a product perspective, the increase was reasonably broad-based along many product lines, partially offset by declines in certain channels.

These declines were caused by delays of projects in certain channels, including retail renovation and municipal expansion due to the factors I just mentioned.

Growth in our largest channel, commercial and industrial, was above this quarter's average due to the continued emphasis on selling higher value-added lighting solutions, especially LED-based luminaires, which again grew by more than 2.5 times compared with the year-ago period, as well as a continued focus on smaller and medium-sized projects of various types.

Additionally, we enjoyed growth in our residential products as demand for new housing and renovation of existing homes continued to rebound, helping to offset some of the softness in the nonresidential market.

We continue to experience growth in certain geographies and channels in North America as well as key markets internationally, all of which is 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 the negative impact on sales from price mix was primarily due to a slight shift in the mix of products sold principally among certain channels.

While there were puts and takes on both the product pricing and material and component cost fronts, we believe that both were fairly benign this quarter.

Looking at all of 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 relatively flat in the quarter compared with a year ago.

Further, we believe the overall lighting market was up slightly during the same period supported by modest growth in the residential market.

This is consistent with our unit volume growth in North America which was up more than 2%.

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 salesforce has allowed us to achieve volume growth this quarter in spite of these challenging market conditions.

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 and the temporary inefficiencies associated with the plant consolidation, adjusted operating profit margin for the first quarter was a solid 11.2%, consistent with the year-ago period.

This is particularly notable given that sales of LED-based luminaires now make up more than 13% of our net sales.

Further, as Ricky will discuss later in the call, adjusted gross profit margin was 40.4%, down about 40 basis points from the prior year.

We believe the decline was due primarily to slight shifts in the mix of products sold, along with continued spending for new products, partially offset by lower material and component costs, as well as modest productivity improvements associated with our ongoing streamlining activities.

In our view, much of the increased spending is primarily due to the acceleration of new product launches, which include start-up cost and inefficiencies we normally experience in the early phases of new product introductions.

While our gross profit margin is highly dependent on unit volume and the mix of products sold, we expect our gross profit margins to improve as volume grows and as we realize typical gains in manufacturing efficiencies as well as more cost-effective launches for new products.

The 40-basis point decline in gross profit margin was offset by a similar improvement in selling, distribution, and administrative expenses, which were 29.2% of net sales in the quarter.

Total SD&A expenses were essentially flat this quarter compared with the year-ago period.

Lower incentive compensation expense and 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 and investing in innovation and technology, primarily for solid-state luminaires and integrated intelligent lighting systems.

Investments in these key areas are starting to pay off as our new products and solutions gain traction in the marketplace, driving revenue growth.

As a point of reference, we have noted in previous earnings calls we expect SD&A expenses, excluding freight and commissions based on our current structure, to fluctuate a few million dollars or so around the midpoint of $88 million.

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

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

Today, LED-based products are now more than 13% of our sales.

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

More impressively as I noted earlier, our adjusted operating profit margin continued to remain solid while sales of LED-based solutions have become a larger portion of our overall business.

Acuity is the clear leader in digital lighting solutions.

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

Customers understand it takes more than just an LED chip, which is quickly becoming a commodity or 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 extending our leadership position.

As I have noted before, our organization 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 traditional energy-efficient luminaires and lighting controls.

And, we are delivering profitable growth and strong financial returns for our shareholders while making these investments.

Our customers continue to recognize the fulsomeness of our capabilities as we won a number of awards for Vendor of the Year.

Our success with customers is driven by excellent service, breadth of product portfolio, and the ability to incorporate the best technology to provide superior lighting solutions that best meet the needs for virtually any indoor or outdoor application.

These accomplishments have diversified and strengthened our foundation, and we believe 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.

I will talk more about our future growth strategies and our expectations 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 the balance of 2013.

Ricky?

Thank you, Vern.

Good morning, everyone.

I will highlight a few items regarding our income statement, including the special charge and production inefficiencies related to our streamlining activities.

I then will discuss our cash flow and financial condition before turning the call back to Vern.

Vern covered the primary drivers for our sales growth 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 first quarter results.

Let's first look at our streamlining activities.

In the first quarter of fiscal 2013, we recognized a pretax, special charge and temporary expenses related to the previously announced streamlining actions totaling $5.5 million, or $0.08 per diluted share.

The pretax special charge was $0.7 million, or $0.01 per diluted share, and related primarily to the cost associated with the transfer of production due to the closure of the Cochran, Georgia facility.

In addition to this special charge, we incurred $4.8 million of higher pretax cost, or $0.07 per diluted share, related to temporary manufacturing inefficiencies associated with the closing of this facility, consisting primarily of -- nonproductive operating cost at the Cochran facility which should cease when the plant is closed during our second quarter, expenses associated with the initial setup of production at various facilities that have accepted the production of products previously manufactured at the Cochran facility, and incremental cost associated with production-related activities temporarily performed by third parties that are now largely executed internally as our manufacturing capacity has recently been increased to accommodate the transfer of production.

As Vern said earlier, we find it useful to adjust our results for these items to make them more comparable, and we have included in our earnings release a full reconciliation of our GAAP amounts to these adjusted results.

The closure of the Cochran facility began in the third quarter of fiscal 2012, and as we mentioned previously in our 10-K and prior earning conference calls, the timing of completing the transfer and closing the facility was dependent on how quickly we could receive the necessary government permits and approvals.

Due primarily to delays in receiving the necessary government permits and approval, it has taken longer to complete and has cost more than we originally expected.

We now expect to be principally complete with the closure by the end of the second quarter of fiscal year 2013.

We expect to record an additional pretax special charge and temporary production inefficiencies of approximately $4 million associated with this closure, which will be recognized primarily during the second quarter of fiscal 2013.

If we have no further delays in receiving government permits and approvals or in ramping up production in the receiving facilities, we currently expect after the second quarter, the Cochran facility will totally cease production, and we will not incur any more special charges or manufacturing inefficiencies related to this streamlining effort.

Annualized pretax savings associated with this closure are still estimated to be approximately $8 million, but due to the delays in completing the transfer of production and closure of the facility, the full realization of the savings has been pushed out and are now expected to be fully realized by the beginning of our third fiscal quarter.

You may recall, in addition to the streamlining activities for the Cochran closing, we also had other streamlining efforts in fiscal year 2012 which are expected to yield annualized savings of roughly $6 million.

Therefore, we estimate that these streamlining actions, in total, will generate annualized pretax savings of approximately $14 million, or $3.5 million per quarter, of which, approximately $1 million was realized in each of our second and third quarters of fiscal 2012 and approximately $2 million in each of our fourth quarter of fiscal 2012 and first quarter of fiscal 2013.

We hope to be at the full quarterly savings rate of $3.5 million for all of these actions at the beginning of the third quarter of fiscal 2013.

As Vern mentioned earlier, our adjusted gross margin decreased 40 basis points to 40.4%, due largely to a slight shift in the mix of products sold and increased expenses associated with the large number of new product introductions and higher manufacturing costs related to other product mix changes.

These higher costs were partially offset by the favorable impact of increased net sales, lower material and component cost, and realized benefits from the previously mentioned streamlining actions.

Let's next turn our attention to some of our results below the operating earnings line.

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

In the first quarter of fiscal 2013, we had miscellaneous expense of $0.1 million, compared with miscellaneous income of $2.9 million, or $0.04 per diluted share in the prior-year period.

As Vern mentioned earlier, if you exclude this unfavorable comparison, our diluted EPS this quarter was essentially flat with the prior-year period.

The effective tax rate this quarter was 35.4%.

This is 70 basis points higher than the prior-year quarter.

This higher effective tax rate negatively impacted diluted EPS by $0.01 compared with the prior-year period.

The effective tax rate for the prior-year period was favorably impacted by various discrete items, including the research and development tax credit which did not occur in the first quarter of fiscal 2013.

Subsequent to our first quarter, the US government has reinstated the R&D tax credit effective back to January 1, 2012.

We will reflect the catch-up impact of this tax benefit in our second quarter of fiscal 2013.

And, we estimate the favorable impact to be approximately $0.6 million, or $0.01 per diluted share.

And, it will lower our estimated effective tax rate for fiscal 2013 to slightly below 35%.

Now, let's look at the cash flow for the quarter ended November 30, 2012.

Cash flow used for operations for the first quarter of fiscal year 2012(sic) was $14.5 million.

Our first quarter is usually our weakest cash flow quarter due to seasonality and payment of prior fiscal year's incentive compensation.

This year, we had higher payment of accounts payable related to inventory purchases made late in the fourth quarter of fiscal 2012 in order to maintain service levels during the production moves associated with our closure of the Cochran plant and certain strategic purchases of commodities and components.

We had expected to bring down these inventories during the first quarter of fiscal 2013.

But, primarily due to the previously mentioned delays in the Cochran production transfer, we did not reduce the inventories as quickly as originally planned.

In the first quarter of fiscal year 2013, we spent $11.2 million on capital expenditures compared with only $4.2 million in the prior-year period.

This increase in expenditures is largely related to the capital associated with adding capacity in the plants receiving the production transfer from Cochran and tooling associated with the large number of new products recently developed.

Including our first-quarter CapEx spend, we currently expect to spend approximately $40 million in capital expenditures for fiscal year 2013.

At November 30, 2012, we had a cash balance of $267.5 million and total debt of $353.5 million.

At the end of the first quarter of fiscal 2013, net debt to total capitalization was a mere 9%.

At November 30, 2012, we had additional borrowing capacity of $244.3 million under our credit facility that does not mature until January 2017, so we continue to maintain a significant amount of financial flexibility.

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

Thank you, Ricky.

As we look forward, we see significant long-term growth opportunities while short-term economic challenges are still the norm.

Although we don't give earnings guidance, I would like to add a few more observations to what I mentioned earlier regarding our expectations for the balance of 2013.

First, we expect the economic environment to continue to be challenging as businesses and consumers in the US begin to adjust their spending patterns based on the new tax laws just passed, as well as continuing to hone their plans to manage through the lingering uncertainties over US policy reforms to address the nation's budget deficits as well as other global economic concerns.

The consequence of these uncertainties in our view will continue to be volatility in demand.

Forecasts by independent organizations for industry growth continue to vary widely.

The consensus is that unit volume growth for key segments of the nonresidential construction market in the US will still be in the lower mid-single digits in 2013 while sales for lighting fixtures are expected to be modestly higher supported by a growing residential market.

This suggests that expected growth in the broad lighting market in North America will still be in the low- to mid-single-digit range for our fiscal 2013.

This is reasonably consistent with the outlook in our previous filings.

Additionally, there are other signs that give us optimism regarding the future growth of our business.

Leading indicators such as architectural building index, vacancy rates, office absorption, lending availability, and the rebound in the residential construction market are all favorable.

Therefore, our expectations for fiscal 2013 is that overall demand will be favorable.

However, while we are seeing favorable trends in our order rate so far in the second quarter, we still expect to see inconsistent conditions this quarter.

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

While we still see wide variability and demand amongst channels reflecting the tepid economic recovery in the US, we expect this inconsistency in demand to yield to more consistent and positive growth in the latter half of our fiscal year.

Second, the industry continues to experience volatility with respect to input costs.

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

As of now, we expect material input costs to be relatively flat except for certain LED components which should continue to decline.

Further, we expect employee-related costs will rise due to wage inflation and the negative impact of Obamacare on health care costs.

Of course, we will continue to be vigilant in our pricing posture and productivity efforts to help offset rising 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.

Lastly, we expect to outperform the markets we serve.

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 calls, our strategies to drive profitable growth remain intact.

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

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

Our products and solutions portfolios continue to expand rapidly, including the addition of five strategic acquisitions over the last few years, and we are adding more.

Yesterday, we announced the acquisition of Adura Technologies, a leading provider of wireless lighting controls and energy management systems.

The acquisition of Adura, while small today in terms of revenues, is a meaningful addition to our growing portfolio of wireless lighting solutions, an area of significant focus and growth potential for Acuity and its customers.

Our strategy is straightforward.

Expanded leverage of our industry-leading product portfolio 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.

Though these investments -- 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% over the next few years, 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.

In order to provide everyone the opportunity to ask questions, the Company asks that you limit your questions to two per caller.

If you have further questions, simply reinsert yourself back into the queue, and additional questions will be answered as time permits.

Jed Dorsheimer, Canaccord.

Vern, in your prepared remarks earlier, you mentioned that operating margins were held up as a function of higher LED sales.

One, I just wanted to confirm that.

And then, two, in the past you have said that LED is neutral from a gross margin.

Could you confirm that it is neutral to, I guess, accretive at this point to operating margin?

Jed, on your first point, what we were mentioning was that our margins remained consistent at 11.2% this period compared to the year-ago period, while our LED sales were up by more than 2.5 times.

For us, we believe that's an affirmation that as we continue to see the migration to more and more LED sales, that it does not have a dilutive effect as was concerned or a concern by many before.

So, I think it's very positive that we were able to maintain our operating profit margin at 11.2%, while seeing a meaningful increase in our overall LED sales.

My own view about the future of LED luminaire sales and their ability to be accretive to our earnings is that, as we continue to tie more and more lighting control around these LED luminaires, and we sell more holistic, integrated lighting systems, we are going to be able to sell more value per square foot.

One of our key product lines, very small today, is our nLIGHT system.

We are seeing it growing very dramatically as the industry -- as consumers find the use -- simple to use, fantastic energy savings, and great lighting control as an alternative to some of the traditional systems that are out there.

So, we continue to be optimistic that LED lighting and LED control systems will be accretive to our margins in the future.

And then, I was wondering, if we looked at C&I and further segmented into individual sectors within that group, if you will.

From a quoting activity or a level of interest, could you single out any particular sector, ie, hospitality or retail for example that you are seeing the most activity?

I guess, both -- maybe from a renovation, and then also from a new build perspective?

So, Jed, early on, I think that the industry, where LED has had the most, if you will, transformation or most penetration, you are seeing that in easy-to-use items -- outdoor, parking garages, certain difficult service-type environments on the indoor side.

You've really yet to see the full penetration in commercial indoor spaces.

We're way early in the game in terms of schools, commercial office buildings, healthcare facilities.

As these price points and as these integrated solutions become more and more to the forefront, interest is starting to really ramp up.

So, we are very excited because we've really yet to see the true opportunities of what LED and, again, integrated lighting systems can be on a go-forward basis.

So, to me --.

Vern, I actually -- sorry.

Thank you for the added color in the LED.

I just meant in the traditional business -- so, in your overall business, I know you have hundreds of thousands of SKUs.

Is there a particular segment of the market that you are seeing the most demand?

Could you further clarify sort of where demand is right now?

And where maybe quoting or interest is coming from?

Or is it just too broad based?

No, it's a good question.

I can answer that it's more on the small- and medium-size projects.

We know that there are certain areas of the municipal markets that are actually down.

Schools are still very difficult in this current environment, as municipalities look for funding.

Healthcare seems to be kind of ebbing and flowing here.

The commercial office space is still yet to take off.

So, our demand is relatively broad based but still reflective, in our view, of the tepid economic environment that is out there.

When we look forward and you look at some of the leading indicators -- there are many that are out there -- you can pick and choose the ones that you want.

But commercial office space -- as absorption continues to improve, as employment continues to improve, we're starting to see -- if you look at Dodge's Momentum Index, these things are finally starting to just turn positive.

And usually, there is a lag to that.

So, a lot of the quote activity that we have out there is around these future opportunities, particularly around the commercial office space, industrial space.

Even some of the outdoor opportunities where municipalities have delayed spending, there is a lot of quote activity that is out there that we expect will yield or turn into orders really in 2013, calendar-year 2013.

Thank you.

Thank you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

Good morning.

Vern, can you give us a little bit of color or clarity on the mix comment?

Sounds like that was the driver -- or offset volume in the quarter?

I'm just wondering, was that more of a channel -- a change in channel during the quarter?

Or was there more product there that caused that mix to be negative in the quarter?

So, Pete, it would really be a combination of both.

Let's first take the channel cut.

The fact of the matter is, is that on the good news side, C&I was a little bit more as a percentage of our total.

The bad news side, a little bit of that channel mix was more driven by stock and flow.

We tend to see a little bit higher margins on larger projects, so that mix had a little bit of an impact.

We improved margins in our retail and catalog business, but yet those overall were relatively flat.

Some of that was offset by large infrastructure-type projects, where, again, municipalities or those types of projects that are reliant on government funding were also taking a wait-and-see approach.

We saw some minor cancellations, but what we believe was more delays in these types of projects.

We also saw a little bit of mix shift into certain areas of our business where, again, our margins are just a little bit different, influencing our margins down slightly.

Okay.

All right, that's helpful.

The second question, if I could -- price being a relative neutral in the quarter, I'm just wondering if you could bifurcate that?

I know it's going to be difficult, but if you could bifurcate that between the LED product and the non-LED with really a focus on the non-LED?

I'm just wondering, with this migration to LED, if you are seeing any sort of -- I don't know if significance is the right word.

But just price pressure on non-LED products as you kind of move more toward LED?

So, Pete, again, overall we felt pricing was reasonably benign, but as you know, everything is local.

Everything is specific to the channel and the geography that they are in.

So, we gave you the overall feeling.

My own two cents is that in the non-LED side, probably in terms of some of the lower end -- in the good-better-best value propositions -- some of that lower end continues to be maybe a bit more price competitive.

But where we have the ability to differentiate features and benefits and value, typically you see more stable pricing there.

So, I don't know that there's any macro trend that we could provide to you that would be different than saying that overall pricing was benign for us in the quarter.

Okay.

All right.

I'll jump back in queue.

Thanks for your time.

Thank you.

Matt McCall, BB&T Capital Markets.

Thank you.

Good morning, everybody.

So, start with the gross margin.

I guess several items to adjust for.

Just trying to understand -- Ricky, you talked about hitting your run rate, I think, at the beginning of Q3, from a savings perspective.

Should we expect any incremental in Q2?

And then, anything we should keep in mind from a mix perspective, the incremental margin, price/cost?

Just trying to understand the puts and the takes there from the starting point of this 40.4% in Q1?

Sure, Matt.

First, on the streamlined savings, the additional, call it, $1.5 million a quarter out there opportunity, will mostly be at the gross margin line.

That is when we are able to get the savings from the shutdown of the Cochran facility, and the added volume absorption into the existing facilities.

And yes, I would expect to see some improvement in our second quarter relative to the first as we ramp up to hopefully begin the third quarter at that full $3.5 million a quarter rate.

So, we should see some benefit throughout the second quarter, again, depending on the timing of getting these governmental permits and approvals.

That's been a frustrator for us in trying to get these approvals, so that we can more quickly move certain aspects of the production into the facilities, and the inefficiencies that our incumbent when we don't have those facilities up to where we need them to be.

But assuming we get all that on tack, you should see some improvement throughout the second quarter.

And then, we would hope to be at that full rate in the beginning of the third quarter.

And Matt, this is Vern.

Our team has done an outstanding job in transitioning from the Cochran facility to other facilities.

These delays in permits are like taking a wrench and throwing it through a jet engine, and yet our team has done really an outstanding job of managing that process.

The hidden cost of that is that while you are focusing maniacally on trying to make sure that you can paint things, even though you don't have your paint permit, so you are now outsourcing that.

We have identified that as inefficiencies associated with Cochran, but it also takes away from our continuous improvement efforts.

I'd like everyone to understand -- we are maniacally focused as an organization on continually driving improvements in our business to reduce costs so we can continue to invest.

When you have challenges like the complexity of the Cochran close, which is a great thing for us to do, it tends to also have some leakage in other areas.

So, as Ricky points out, going forward, we would expect to continue to drive improvement.

The mix and its impact on our current quarter -- truthfully, it's impossible for us to manage, quarter to quarter, the mix.

And we don't try to; we try to serve our customers as best we can.

So, there's some noise in that, and there always will be.

As I said earlier, our gross profit margins are really contingent upon volume and the mix of products sold.

And our Company will always be focused on continuing to drive cost out of all of our processes, and it's -- while we put out a [votie] and a goal, it's impossible to, from one quarter to the next, completely predict that.

Okay.

Thank you, Vern.

And then, on the SG&A line, your commentary in the past -- I think you mentioned it again here, $88 million, plus or minus.

I think I've used a little more than 11% on the variable component for freight and commissions.

If I run those numbers -- or put those numbers into the Q1 SG&A -- or SD&A, it comes up a little higher.

I guess my question is -- you said that you are starting to see some payoff.

Can you maybe talk a little bit more about the payoff you are starting to see?

And was that it?

Or did you curb some spending or do something else to reduce that line item relative to what you were seeing on the top line?

So, Matt, I think if you use maybe more like an 11.3 %, 11.4%, what you will probably come up with is about $55 million, $54 million for freight and commissions, and probably roughly $86 million for SD&A.

And that is within, if you will, the tolerance of a few million dollars either side of the $88 million that we feel is a current run rate.

And again, the variability depends on things like product samples, product introductions, T&E, certain marketing expenses.

But obviously, there is salaries in there and things of that nature.

Again, a lot of our streamlining activities are to help us continue to offset wage inflation, health care costs, things of that nature.

So, again, I think that the SD&A was managed well during the quarter.

I think when you do your math, you'll probably come up with something like that.

I did that off the top of my head.

That is correct math.

I was just more referencing the starting-to-pay-off reference.

You said -- starting to pay off.

I am just trying to understand the leverage opportunity?

What kind of specific benefits have you seen from the spending that you have incurred over the past few quarters?

Great question.

When we look at our product vitality and the revenues that are ramping up on the new product introductions, these are having a favorable impact on top line.

When I look at our residential business this quarter, for example, a lot of the new products that were introduced -- LED-based products into that space -- really have benefited us as we have offset some of the tepid decline, or tepid demand, in the nonresidential space.

Our lighting systems business -- we're introducing and have introduced a number of lighting control systems to great fanfare.

Our nLIGHT software capability, or lighting control system -- without providing specific numbers, it more than doubled this quarter relative to its revenues in the year-ago period.

So, all these things are fantastic indicators that our strategy is right and the future opportunities where these things find themselves -- schools, office buildings, health care facilities, industrial spaces, our outdoor control capability.

All these are robust platforms for future growth for us.

Matt, I would also mention the $2 million or so of productivity improvements from the streamlining activities that we realized.

The majority of that is in the SD&A area.

And so, we are beginning -- unlike the Cochran that had been pushed out because of the permitting and other issues -- the $6 million of savings from the other streamlining activities, we are now at that full rate.

And most of those savings are in the SD&A line that are currently helping us a bit as well.

Okay, perfect.

Thank you.

Kathryn Thompson, Thompson Research Group.

Hi, thanks for taking my questions today.

Digging a little bit more into pricing.

I understand you spent a fair amount of time talking about mix and how that affected pricing.

But stripping that away, first question is, where in general do you see pricing trends regardless of mix?

In other words, when you look at the different -- your higher margin product to your lower margin product?

Where generally do you see pricing trends for 2013?

And second, along with -- along the lines of pricing, what's really pushing the greater pricing competition for that lower- to mid-tier product?

And has that changed relatively speaking over the past six to nine months?

Thank you.

Kathryn, thank you.

This is Vern.

First of all, I believe that the conventional lighting product portfolio -- middle- to upper-value lighting propositions -- I think that pricing is fairly stable.

The notion of selling value-add is still alive and well.

On some of the lower-end products, more of the -- I'll call value purchases, you see a number of competitors that are in the marketplace, I think, attempting to take share using price as a point of differentiation.

Mostly on stock and flow type things.

Certainly, not on projects.

And even there, I don't see pricing being punitive.

It's just that typically their business strategy -- I call them termites.

The termites tend to use price as their point of differentiation, and I don't know that that has meaningfully changed in the past 12 months.

Nor do we expect it to meaningfully change in the next 12 months.

I would say relative to the growing LED portfolio, if you look at simply the product of an LED luminaire, it's sure that pricing continues to come down, particularly as cost, chips in particular, become more commoditized.

And so, that trend has not changed, nor do we expect it to change.

Profitability -- you didn't ask this question on LED products.

I think costs are coming down in an appropriate fashion for a Company like Acuity to actually generate profits that are consistent with its other portfolio.

Again, there's puts and takes around all of that.

So, I see, from a simple product perspective, trends continuing as they are.

I do believe that lighting solutions, integrated lighting systems, where you are selling not just a discrete luminaire or a discrete control product, you're selling an integrated system into a campus that ties into building management.

There, I see the opportunity for price improvements, particularly as features and benefits around lighting control systems come to the forefront, and folks understand the value of those.

In other words, you are getting energy savings while you are using the space.

A luminaire can be dimmed down 30% because there is light coming through the window, so you are able to take advantage of daylight harvesting.

I see the opportunity to sell higher value in those kinds of things going forward.

So, I would expect, as we continue to hone our value proposition around integrated lighting systems, for us to actually sell more value per square foot, influencing our margins.

Along that line with value per square foot, have you been able to quantify -- this is something that we've talked about in the past.

Have you been able to quantify and put in relative perspective what the unit value per square foot on average is for Acuity today?

And how that has changed relative to the previous 12 to 24 months?

Kathryn, you have asked that question before.

It's a fantastic question.

I would defer the answer because I believe that we are still very much in our infancy around these things in terms of selling holistic lighting solutions.

We know, for example, when we sell our ROAM value proposition, which is an outdoor lighting control system, there is really no competition for it.

So, to say that I am selling a discrete component versus a holistic system -- it is a system.

And our margins there are favorable, but the investment to really expand that capability -- we are still incurring it.

Okay.

Sorry.

Finally, you may have mentioned this on the call, and I apologize if I missed it.

But did you quantify your volume growth excluding LED in the quarter?

We did not, and frankly, it's very difficult for us to do that because what LED is doing is it's replacing, for certain customers, a conventional light source luminaire that they would have purchased otherwise.

And depending on the luminaire, depending on the application, the price can be anywhere from slightly above parity to quite a bit above parity.

So -- and I will let Ricky respond more at length on this, but the fact of the matter is, we don't try to distinguish that difference.

Ricky?

We don't -- one, we don't track units.

It's very difficult for us to track units because of the different trends, different accessories, and all of that, that come in when you call it a full luminaire.

And then, you've got the controls and integrated stuff, so trying to get to a unit comparison is virtually impossible.

So, we look at volume more just in total revenue, and as Vern said, are we cannibalizing?

Or is this incremental?

It's impossible for us to really tell.

So, the short answer is we don't track, and therefore, not really able to give you a volume number separately or even specific to LED.

In general in the past, you've able to say -- like two-thirds of the revenue group is driven by volume.

In general, would you be able to give that for this quarter or --?

We said this quarter about 2% of the revenue growth was in volume, partially offset by price mix.

Okay, great.

Thank you for taking my questions today.

Thank you.

Glenn Wortman, Sidoti & Company.

Good morning, everyone.

On the residential business, do you see any direct benefit from new home construction?

Or most of your products just going in towards renovation?

And maybe the surrounding communities?

Can you just talk a little bit about that, please?

Glenn, we believe that roughly 10% of our revenues are directed towards the residential -- directly toward the residential market.

Obviously, we then have the secondary effect of building neighborhoods and things of that nature.

The product portfolio that we have directed at residential, driven through our electrical distributor partners, showed nice growth in the quarter, helping to ameliorate some of the, again, tepid demand in nonresidential construction.

We are excited about the residential market and what it means over the next handful of years.

We expect that market to show growth.

It's still operating at very, very low levels compared to historical standards, but growth is growth.

And we're excited to have it.

I would add, we continue to fill out more SKUs in the residential area where there still are existing channels or some of the others.

So, it is an area of opportunity for us as we continue to fill out that capability on the luminaire side, as well as on the solution and systems side.

Okay.

And then, second question on the gross margin.

I understand the mix shifts from quarter to quarter, but do you still have a target, or maybe an estimate of your full-year gross margin could be?

Glenn, we don't provide guidance on that.

But as I said earlier, our gross profit margin is very contingent upon volume and mix.

Our expectation is that, particularly in the second half of the year, markets will rebound.

I think we have been pretty diligent about bringing variable contribution to our bottom line.

And so, as you think about your own model, or you think about the future of Acuity, our expectation is to have volume growth and to outperform the markets.

We have a pretty good track record of bringing the variable contribution margin to the bottom line.

So, I think you can do your math from that.

Okay.

Thank you very much.

Thank you.

Brent Thielman, DA Davidson.

Hi, good morning.

Vernon, your commentary on your daily order rate as being favorable, should we take that to mean overall volumes are still growing through this current lull in demand?

Or is it just certain aspects of the business?

Well, we wanted to give you -- the market -- an indication of what we are currently experiencing.

We were very specific, really in our fourth-quarter call, to talk about this inconsistency in demand.

Our concern about the lull -- you read it in the newspapers everywhere.

We do believe that there is pent-up demand out there, and so we think it got pushed out a little bit.

So, to give some indication that what we are seeing, based on what we know today, was favorable compared to the year-ago period.

We still want to be very cautious in saying that we still expect volatility in demand.

You see it.

I mean, you see corporate America continuing to build up huge cash hordes.

Their cash balances are growing.

That means they're not investing.

There are positive signs out there -- again, absorption of office space, employment levels, architectural billing index.

All of these things are really positive leading indicators for a company like Acuity, and so we're giving you our best crystal ball -- and it's cloudy.

Understood.

I guess my second question, along those lines -- it sounds like the bulk of the new construction projects you are seeing are still sort of smaller- to maybe medium-sized.

Based on what you are seeing out there as far as leading indicators and maybe your own pipeline, is it your expectation some of the larger, maybe more complex projects could begin to show up as orders in the second half?

And maybe that provides some tailwind into fiscal '14?

Is that a reasonable way to think about it?

I think it is.

We look at a number of different indicators, as do you.

Employment, absorption are all, again, positive things as investors start to see -- real estate investors start to see this, and they see tightness in availability, rising commercial rents, which are all occurring.

They are more likely to invest in expanding the real estate footprint that is in that particular geography.

Another favorable trend is lending standards, and demand for loans are starting to increase again.

So, all of those suggest is that as we think about what the next 18, 24, 36 months looks like, those are all favorable indicators for us.

This recovery, by all measures, has been very, very slow.

And so, it's now starting to take hold, and that means employment, so on and so forth, start to improve.

And that benefits directly a company like Acuity's.

Again, I would just say -- I think we are uniquely positioned with the product portfolio that we have, including integrated lighting systems, to really leverage that growth cycle.

I would add another encouraging sign is the residential pickup, as Glenn was referring to earlier.

Typically, nonresidential has trailed that -- six, nine months, as residential picks up, you now have to build the schools and the branch banks and the quick foods and all the other things as these neighborhoods and condominiums and apartments and all start coming up.

So, that is another encouraging sign that we may see some pickup in the number of new projects as opposed to more of these smaller, tenant fit-up or renovation-type activity that has been a bigger portion of our business here recently.

Thank you.

Rich Kwas, Wells Fargo.

Good morning, everyone.

I had a follow-up.

Just to summarize, Vern, so if you look at LED, and you look at the price and you look at mix -- and if we look at FQ1 versus FQ4, I know there's some seasonal differences and business trends.

But it seems like most of the negative impact on the margin line came from mix.

Is that a fair summary based on everything I've heard so far?

Yes, and puts and takes around investments that we are making in our production facilities to significantly ramp up our new product introductions.

We've accelerated -- and I want to be clear on that word.

We've accelerated the ramp of new product introductions, and so that is having cost impacts within the facility that, as volumes ramp up, we will be able to leverage those, I think, quite well.

And the price issue seems to be pretty benign as an impact?

You mentioned that it's slight, but it doesn't seem all that meaningful.

We said that we believe that most of the gross margin impact for price mix was due to mix, not price.

So, to be clear, we felt that pricing in the quarter was benign.

Okay.

And then, just as a follow-up on the outlook.

The outlook -- the low- to mid-single digit growth, that applies to your fiscal '13, right?

Your outlook for the market?

Yes, correct.

Okay, and then, how do we interpret that in the scope of going forward?

So, you had talked about potential -- some potential weakness here in FQ1 last quarter.

Was this quarter -- the industry worse than you had expected going in?

About the same?

Or is it a function where this didn't seem like it would be better?

But how do we interpret the outlook for the remainder of the year?

It seems like maybe the rest of the year is not going to be as strong as what you had envisioned three or four months ago -- for the industry?

Thanks for the question.

The three of us that are sitting in here are not economists, and so we attempt to, as best we can, garner information.

Our Organization does a great job really garnering the best thinking, whether it is global insights or Dodge or government information.

So, we accumulate this.

We do our own checks with our customer base, and again, we're very fortunate we sell through 14 different channels here in North America.

So, we touch a lot of different people.

We try to make sure, or understand as best we can, what their views are, of what that future holds.

We were very concerned, I think, as was indicated in every newspaper starting in April or May of pending slowdown and the impact of these global uncertainties, including what was existing in the US and how that might impact business.

I think we talked ourselves into a pretty good slowdown here.

That's what we experience from the market.

I think we were able to eke out growth that was probably slightly better than the market.

I don't have precise data around that yet.

It's usually done in hindsight.

As we think about what's going forward, again, we're accumulating discussions again with our end market customers, as well as trying to understand what smarter people than us have found third-party forecasters say.

I personally believe that we're still going to have some of this choppiness that we've experienced in both the end of the fourth quarter and in our first quarter because of the fiscal cliff.

I think that that's going to continue to be front and center in the headlines, and people take a wait-and-see approach on some of these things when they are investing their money.

I believe there's pent-up demand out there.

I believe that we'll see that demand flow into orders, but do they deliver in Q2 or Q3?

Do they deliver in Q4?

We just don't know yet.

So, what we try to do is give some indication that we are seeing favorable daily order rates compared to our year-ago period but we believe that there will still be inconsistency in demand because of these uncertainties that still hover out there.

Okay.

That's helpful.

I just wanted to clarify that as it relates to what you said last quarter.

So, appreciate it.

And Rich, Ricky made a point that I want to make sure everyone understands.

This is what we believe the market will do.

It's our focus and goal to outperform the markets that we serve.

To grow faster than them, to continue to penetrate.

So, just know that.

Right.

Right.

Okay.

Thank you.

Thank you.

Christopher Glynn, Oppenheimer.

Thanks, good morning.

Vern, just wondering how much of a fix you are able to get on the scope of the project delays?

And you just mentioned pent-up demand.

Maybe this is the same field of conversation.

But could this project-delay thing really set up some surprise strength in the second half, do you think?

I don't know if surprise would be the right word.

I would say favorability it would contribute.

We look at the full year.

We try not to look at what one quarter means compared to another.

We try to execute around that.

Where we see opportunity, we are aggressive about going after it.

My hope -- and hope is not a strategy -- but my hope is we get some clarity around these uncertainties that are in the marketplace, enough so that people can get back to doing their business and investing.

I will give you an example -- southern California.

Because of the fiscal issues that California has, they've delayed a lot of the spending on schools, and yet their population is growing dramatically.

So, at some point in time, something is going to have to give.

These kids need schools, and they'll invest in them.

But how people manage their budgets have a direct impact on what they do in terms of their purchases for lighting.

So, that's just one example.

Larger municipal projects, depending on where the funding has come from, people have taken a wait-and-see approach.

I do believe that as people get clarity around what is going to happen, they will begin to invest.

We're starting to see some of that, particularly around absorption in commercial office space.

Okay, thanks.

Just the last one.

On residential, presumably a long way over a long time for that market to go.

Would you look at a larger deal in that space?

Well, deals, as you point out there -- it takes two to tango.

So, I don't know that there is anything that is available to us that is both desirable and doable.

So, for us, our access to market and the technology shift is allowing us to really demonstrate our scale and capability.

I would expect us to pick up share in that space relative to what our historical percentages have been.

So, Ricky is continually looking for opportunities to expand our portfolio through acquisition, and the Adura acquisition is an example of that.

Though that is not specifically for resi, we will continue to look to build our portfolio not only through aggressive product launches and introductions, but also complement it with acquisitions.

I would add is we certainly will continue to look, as Vern says, for opportunities not just in residential but otherwise.

But as our capability continues to improve, as the newer technologies, as these solutions -- although maybe mostly focused on commercial -- the comparability and the ability to leverage that into resi is becoming easier for us.

Our market access is okay in that area.

So, while acquisitions could be an opportunity, I still feel good about our ability to continue our participation there on an organic basis as well.

Okay, thanks.

Shawn Severson, JMP Securities.

Thanks.

Good morning, gentlemen.

I have a question on the LED side.

I'm just trying to get an idea of where some of the business and the growth is coming from there?

Are you able to tell if it's kind of retrofit and relight?

Or is it new construction?

I guess, secondarily, away from maybe the outdoor lighting, but what's going on in the commercial building?

Is it a tenant moving into an empty space?

Or is it an ROI-driven retrofit?

Just a little more color on what's driving the LED?

Without precise knowledge or information in front of me, I would say that it's more skewed towards renovation of existing spaces.

Particularly, obviously, on the indoor side.

But the outdoor side is also renovation.

Parking garages, for example, are a great opportunity for LED luminaires.

On the outdoor roadway-type lighting, I think that that has probably slowed down a tad relative to where it was -- pick 18 months ago, when a lot of shovel-ready monies were being directed towards those areas.

Still plenty of growth, plenty of potential out there.

I would say that the residential side, again, has been an opportunity for growth.

More, again, renovation than new.

We are getting a lot of inquiry -- to the question earlier, a lot of inquiry from commercial office spaces, educational facilities, healthcare facilities that are looking to add.

So, I would call it new construction, and therefore, it's easier to implement a more holistic, integrated lighting system into that space.

Easier may not be the best choice of words, but it's very simple to do.

When it comes to renovating a space, a lot of folks are typically looking at what is the payback around that, and we are seeing success there as well.

And to that point on the payback, I mean historically two-year type payback being targeted.

Has to be less than three generally to get people to move outside of the mush markets.

Is that still the case?

And is that what you are proposing with most of your LED retrofits at this point?

Is it two- or three-year --?

(multiple speakers)

A key element in that is where is that particular location of that building in terms of its cost per kilowatt hour for energy?

So, paybacks can be very significantly influenced on cost per kilowatt hour and/or rebates by utilities in those local markets.

So, where the cost is high -- energy costs are high, where rebates are high.

Those paybacks are attractive, and we are seeing success there.

But I have to say, in other markets where the costs are maybe more normal and the paybacks are pushed out, there are folks who are saying, you know what -- I want to have a more sustainable footprint.

I want to have an office building that is akin to LEED certification.

I want to attract my employees this way, so on and so forth.

So, we are seeing those more soft benefits or soft opportunities pushing demand as well.

I would add, where maintenance is high -- Vern had mentioned earlier where it is a very high ceiling in an atrium or roadway lighting there where they can factor in the maintenance savings along with the energy savings because of the longer lives that LED offer is a driver that is enabling certain applications to go there.

I would piggyback on this emotional, not just green and sustainability, but we are seeing for security reasons.

ATMs, for example, many of the banks and all are re-lighting the light at an ATM to go LED because it's less likely to burn out and for safety and all reasons are liking that kind of an alternative.

So, there are reasons besides just an ROI that are certainly factoring into the buying decision that would cause folks to go beyond that two- to three-year, although certainly that's the primary driver.

Great.

And then lastly, I know this is a very hard question for you to answer.

But in the lighting retrofits that you are seeing -- going back to the idea of the LEED certification and sort of a more comprehensive approach to energy efficiency.

Are you finding that lighting retrofits are part of larger projects?

In terms of efficiency in retrofits?

Or are you finding lighting is still kind of standing as an independent retrofit project for your customers?

Thanks.

Our observation is that lighting is the second largest consumer of energy in a space, and yet it's the easiest one to convert.

So, lighting is an integral part of any energy retrofit that goes on in the building.

And lighting also has a meaningful impact on the visual environment.

So, folks are very focused on how they drive lighting as part of their overall energy retrofit.

We would continue to see that as a significant driver of growth and opportunity going forward.

Thank you.

Due to time, there our no further questions.

I would like to turn the call back over to Mr. Vernon Nagel for closing remarks.

Thank you, everyone, for your time this morning.

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

Our future is bright.

Thank you for your support.

This concludes today's conference.

Thank you for participating.

You may disconnect at this time.