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Operator
Good morning and welcome to the Acuity Brands 2015 fourth-quarter financial conference call.
(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.
Dan Smith - SVP, Treasurer & Secretary
Thank you, good morning.
With me today to discuss our fiscal 2015 fourth-quarter and full-year 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 AcuityBrands.com.
I would like to remind everyone that during this call we may make projections or forward-looking statements regarding future events or future financial performance of the Company.
Such statements involve risks and uncertainties such that actual results may differ materially.
Please refer to our most recent 10-K and 10-Q SEC filings in today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.
Now let me turn this call over to Vern Nagel.
Vern Nagel - Chairman, President & CEO
Thank you, Dan.
Good morning, everyone.
Ricky and I would like to make a few comments and then we'll answer your questions.
First, let me say we are extremely pleased with our performance in 2015.
We achieved record results for virtually all financial metrics including net sales, adjusted operating profit margin, adjusted diluted earnings per share and cash flow generation for both the fourth quarter and the full year.
For the full year and the fourth quarter, net sales grew more than 13%, which were both meaningfully higher than the estimated mid-single-digit growth rates of the key markets we serve.
In fact, this was the 10th quarter in a row where we achieved double-digit volume growth, a meaningful accomplishment in this environment.
We believe these results are yet again strong evidence of our strategies to provide shareholders with superior returns, customers with differentiated value-added solutions, and diversify the end markets we serve are succeeding, allowing us to extend our leadership position in North America.
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 companywide productivity.
Our profitability and cash flow for the quarter and full-year were records for Acuity, even as we continue to invest in areas to support our strong sales growth as well as opportunities with significant future growth potential, including the expansion of our digital lighting solutions portfolio, which affords us a huge opportunity to be a critical part of the backbone for enabling the Internet of Things.
I know many of you have already seen our results and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights, first for the quarter.
Net sales for the fourth quarter were a quarterly record of $760 million, an increase of almost 14% compared with the year ago period.
Adjusted operating profit was $115.6 million compared with $90.7 million in the year ago period.
Adjusted operating profit margin was a quarterly record of 15.2%, up 160 basis points from the year ago period.
Adjusted diluted earnings per share were a quarterly record of $1.63, up almost 30% from the year ago period.
Strong quarterly results indeed.
For the full year, net sales at Acuity were a record $2.7 billion, up a little more than 13% from 2014.
Our adjusted operating profit was $392 million, up almost 34%.
Adjusted operating profit margin for the full year was a record 14.5%, up 230 basis points compared with the prior year.
Our adjusted EPS was a record $5.39, up 36% from 2014.
In addition, we generated a record $289 million in net cash provided by operating activities this year.
As Ricky will discuss later, we meaningfully enhanced our already-strong financial position in 2015, ending the year with more than $750 million of cash and cash equivalents, far exceeding our debt of slightly more than $350 million.
As you know, we deployed about $250 million of cash to acquire Distech Controls on September 1. We are very excited to have the Distech team now as part of the Acuity family.
Lastly, I am pleased to report that we once again earned much more than our cost of capital.
Our cash flow return on investment for 2015 was a Company record of 34%, which we believe is far in excess of most others in the electrical industry.
For those who follow EVA, we generated over $146 million in positive EVA this year, an outstanding achievement.
To put this performance in perspective, I would like to remind folks of two points.
First, the nonresidential construction market, a key market for us, is still off about 20% on an inflation-adjusted basis from its peak in 2008 and yet our net sales are up 34% since then.
Second, we sold virtually no LED-based fixtures in 2008 and today those solutions make up more than 50% of our net sales.
We have invested significantly to make Acuity the leader in digital lighting world over that period of time while at the same time delivering industry leading financial performance for our shareholders.
These results for the quarter and the full year were significant improvements over our results in the year ago periods.
We would like to provide you with more color on our results for the quarter and the year.
While net sales for the fourth quarter grew almost 14% compared with the year ago period, we estimate our sales volume was up 17%.
The increase in sales volume was broad-based along most product lines, channels, geographies, and verticals.
We estimate the change in price mix contributed approximately 2 points of the difference between our sales volume and net sales growth, while the impact of foreign currency, primarily the Canadian dollar, contributed 1 point of the difference.
While it is not possible to precisely determine the separate impact of price and mix changes, we believe the price mix difference was primarily due to a shift in the mix of products sold between channels, particularly in the home-improvement channel, where we continue to experience strong growth and lower pricing on like-kind LED luminaires between periods, reflecting the decline in certain LED component costs.
Sales of LED products grew by almost 50% this quarter compared with the year ago period, an extraordinary achievement when one considers that sales of LED-based luminaires at Acuity now account for more than half of our total net sales, which, as you know, also includes non-fixture-related lighting products as well.
We believe our rate of growth for LED luminaires continues to far outpace the growth rates of our largest competitors for these types of products and solutions, demonstrating our market-leading prowess.
Excluding LED luminaires, we believe the puts and takes for product pricing as well as material and component costs were again fairly benign this quarter.
Lastly, we believe our channel, product, and vertical 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 again achieve meaningful sales growth this quarter.
Before I turn the call over to Ricky, I would like to comment on our profitability and strategic accomplishments.
As we noted earlier, our fourth-quarter operating profit was $115.6 million, and operating profit margin was 15.2%, both quarterly records.
Our gross profit margin for the quarter was 42.3%, exactly the same as for the full year, and essentially the same as the year ago period.
Gross profit margin was consistent with the prior year as benefits from higher net sales and productivity improvements were offset by changes in sales channel mix primarily due to the accelerated growth in the home-improvement channel and unfavorable changes in foreign currency exchange rates.
Next, adjusted total selling distribution administrative expenses were up only $12.9 million or a 7% increase on a net sales increase of almost 14%.
SD&A expenses as a percentage of net sales were 27.1% in the quarter, a decrease of 170 basis points from the year ago period.
The increase in our SD&A expenses was primarily due to higher variable costs for freight and selling commissions to support the record growth in net sales, as well as higher employee-related costs, principally salaries, as we attract new associates to expand our capabilities in order to drive our tiered solution strategy.
These higher costs were partially offset by streamlining efforts and productivity gains.
Another way to view just how robust our fourth-quarter results were us to examine our variable contribution margin for adjusted operating profit on the increase in net sales.
In doing so, one can see our adjusted variable contribution margin was almost 28%, again strong results.
The story is much the same for the full year's record results in 2015.
Net sales grew more than 13% this year, over 2 times the estimated growth rate of our addressable market.
Gross profit margin was 42.3%, up 140 basis points compared with the prior year's gross profit margin.
Adjusted operating profit margin of 14.5% improved 230 basis points over 2014.
Our adjusted variable contribution margin for the full year was almost 32% even while we invested aggressively in areas which represent exciting growth opportunities.
All in all we had another great year.
On the strategic front we again accomplished a great deal in 2015, setting the stage for what we believe will be a strong growth in profitability in 2016 and beyond.
Just a few of our key highlights.
Internally we continue to accelerate the deployment of our lean business processes, driving greater productivity and enhanced customer service.
From a product and lighting solutions development perspective, we continued our rapid pace of new introductions, expanding our industry leading portfolio of innovative energy-efficient luminaires and lighting control solutions by introducing almost 100 new product solution sets.
We have noted in the past we offer customers more than 1.7 million SKUs to choose from, more than three times as many as we had in 2008.
To our knowledge, no other lighting company provides customers with more choices and solutions than Acuity Brands.
Much of this growth in our portfolio has been driven by the expansion of our digital lighting solutions portfolio, including controls.
We continue to invest in and expand our capabilities to drive our integrated tiered solution strategy, which consists of four tier levels.
The purpose of this strategy is to leverage our incredibly diverse portfolio by offering customers solutions that best meet their needs, whether it be a single device, which we identify as Tier 1, or a complete holistic integrated lighting solution, which we identify as Tier 3, for their indoor and outdoor needs and everything in between, all with the promise and security from Acuity that these solutions are smart and simple both to install and to use.
This is a compelling and powerful value proposition for customers.
While sales information for our tiered solutions is still imprecise and expanding off a small base, we believe our sales in our Tier 3 category encompassing our holistic integrated solutions offering were up more than 40% over the year ago period.
Tier 3 solutions can be enabled to provide data collection and to support connectivity through the Internet of Things, affording Acuity additional revenue streams which we identify as Tier 4.
To fully execute this strategy, we have continued to hone our organization structure to be more customer-centric, leveraging our industry-leading access to market and to better allocate resources among each of our tiers, creating the best solutions for our customers' applications.
Additionally, now that LED is widely accepted, the attention of customers is focused on how they can best control and utilize this light source to optimize their visual environment while realizing additional benefits including energy savings and the opportunity to have a smart, connected platform to enable the Internet of Things.
Because Acuity fully understands how best to fully utilize these unique capabilities of digital lighting through our smart and simple solutions for virtually any application, we believe we are uniquely positioned to grow much faster than the markets we serve.
As I have noted before, our organization has a long and distinguished history of leading and innovating during eras of technology disruption and that is even more true today.
As part of our tiered solution strategy, Acuity Brands is a leader in the evolution to smart buildings and smart cities.
We are leveraging our deep customer knowledge, our unmatched access to market, and our broad and deep portfolio of indoor and outdoor solid-state and traditional energy efficient luminaires and lighting controls to bring truly differentiated value to customers.
And we're delivering profitable growth and strong financial returns for our shareholders while making important investments including acquisitions and strategic alliances to broaden our capabilities to serve customers.
We are very pleased that Distech Controls officially joined the Acuity family on September 1. Distech Controls, as well as our other strategic partnerships, will help drive our tiered solutions strategy, particularly as it relates to our holistic approach towards the advancement of smart buildings and smart cities.
We expect the combination of Acuity with our broad industry-leading solid-state lighting portfolio, innovative control techniques, and integrated digital solutions and Distech to contribute to our tiered solution strategy of offering true end-to-end optimization of all aspects of the building, including enhanced occupant experience, quality visual environment, seamless operational energy efficiencies and cost reductions, as well as increased digital functionality due to a unique capability to collect vast amounts of data to better enable the Internet of Things for building owners.
We expect strategic opportunities such as these coupled with our internal efforts to allow us to continue to diversify and strengthen our foundation and further serve as a robust platform for future growth that is less reliant on the new commercial construction cycle.
We have been able to produce these results because the dedication and resolve of our almost 8,000 associates who are maniacally focused on serving, solving, and supporting the needs of our customers.
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 2016.
Ricky Reece - EVP & CFO
Thank you, Vern, and good morning, everyone.
Vern covered the primary drivers for our fourth-quarter sales growth and our profitability, so I will not repeat these items.
I will provide a bit more color on our quarter's results and financial position as well as our acquisition of Distech Controls.
I will begin my prepared comments by providing a brief update on our streamlining activities.
We recorded a $2.6 million pretax special charge associated with our streamlining activities related to certain headcount reductions and production transfer costs.
This results in a total pretax special charge for fiscal year 2015 of $12.4 million.
We are reinvesting a portion of the streamlining savings in additional growth initiatives including adding new talent with different skill sets and expanding and renovating some of our facilities.
However, during fiscal 2015 we have realized savings over and above the expense of these reinvestments that are approximately equal to the amount of this year's total streamlining cost.
As Vern mentioned earlier, we had some adjustments to the GAAP results in the fourth quarter of fiscal 2015, which we find useful to add back in order for the quarterly results to be more comparable.
In the fourth quarter of fiscal 2015 we added back pretax $2.6 million or $0.04 per diluted EPS for special charges related to our streamlining efforts which I just discussed previously.
Pretax $1.2 million or $0.03 per diluted EPS for acquisition-related professional fees associated with the Distech Controls acquisition, which is a non-tax-deductible expense.
And a $13.1 million or $0.18 per diluted EPS net loss associated with financial instruments to hedge the foreign currency exposure related to the acquisition of Distech Controls.
In our earnings release we provide a detailed reconciliation of non-GAAP measures.
The effective tax rate for the fourth quarter was 34.9% compared with 33.2% in the fourth quarter of last year.
The prior year effective tax rate benefited from favorable adjustments to certain income tax discrete items which did not recur in the current year.
We expect the effective tax rate for fiscal year 2016 to be 35.5% before any discrete items and if the rates in our taxing jurisdictions remain generally consistent throughout the year.
Cash flow generated from operations for fiscal year 2015 was an impressive $288.9 million, which is a $55.8 million and 24% increase over the prior year.
We did a good job of managing our operating working capital defined as receivables plus inventories less payables this fiscal year as our operating working capital days decreased by one day to 32 days, which we believe is industry-leading.
For the fiscal year August 31, 2015, we spent $56.5 million for capital expenditures compared with $35.3 million in the prior year.
This uptick in capital expenditures compared with recent prior years is primarily due to investments necessary to support our growth including tooling for new products, the expansion in our electronics capacity, and the buildout of our innovation and technology center in metro Atlanta, as well as expenditures related to certain projects that were delayed from the prior fiscal year.
We currently expect to spend approximately 2.5% of revenues in capital expenditures in fiscal year 2016.
At August 31, 2015 we had a cash and cash equivalent balance of $756.8 million, an increase of $204.3 million since August 31, 2014.
Our total debt was $352 million net of discounts and deferred amortization costs.
Consequently our cash exceeded debt at the end of the fiscal year.
At August 31, 2015 we had additional borrowing capacity of $243.9 million under our credit facility.
We clearly have significant financial strength and flexibility and will continue to seek the best use of our strong cash generation to enhance shareholder value.
I will conclude with some additional comments on the Distech Controls acquisition.
On September 1, 2015, just after our fiscal year end, we completed the acquisition of all of the outstanding capital stock of Distech Controls for approximately CAD318 million net of cash acquired or approximately $244 million, which we used cash on hand.
Because of significant volatility in the US and Canadian dollar exchange rate over the last year or so, we thought it prudent to enter into foreign currency contracts in an effort to mitigate nearly all of the foreign currency exposure associated with the Canadian dollar purchase price.
Because US GAAP does not allow a hedge of a commitment to acquire a business to receive hedge accounting treatment, a net pretax loss on these contracts totaling $2.6 million or $0.03 per diluted share was recognized in net miscellaneous income for fiscal year 2015.
The hedges achieved their stated purpose of protecting us against currency fluctuation in the Canadian dollar purchase price resulting in the actual purchase price after hedging transactions in US dollars being slightly less than the US dollar purchase price we assumed in our valuation of Distech Controls.
Distech Controls generated net sales in excess of CAD80 million during the fiscal year ended August 31, 2015 and enjoyed a five-year annual growth rate of over 25%.
Almost half of Distech Controls' sales are in the US, about a third in Europe, less than 10% in Canada, and the remainder spread probably around the rest of the world.
The operating profit margin of Distech Controls a similar to Acuity.
We expect Distech Controls will be modestly accretive to our fiscal 26 consolidated financial results.
Thank you and I will now turn the call back to Vern.
Vern Nagel - Chairman, President & CEO
Thank you, Ricky.
As we look forward, we continue to see significant long-term growth opportunities that are ever changing and evolving, particularly for Acuity.
Our expectation for growth of the leading industry, primarily in North America, has not changed much over the last few quarters in spite of some noise to the contrary.
We remain very positive.
So while we don't give earnings guidance, I would like to provide you with some observations we have for fiscal 2016.
First, most economists expect the economy of North America will continue to improve at a modest but increasing pace.
While forecasts for industry growth rates vary -- by independent organizations continue to vary widely, the consensus estimate for the broad lighting market in North America is still expected to grow in the mid- to upper-single-digit range for our fiscal 2016.
The continued favorable trend in our September order rate again seems to support this continuing level of improvement.
Further, we continue to see signs that give us optimism regarding the longer-term future growth of the markets we serve in our business.
Leading indicators for the North American market, such as architectural billing index, vacancy rates, office absorption, and lending availability and favorable employment trends continue to improve, though never in an absolute straight line, while residential construction continues to grow nicely.
Excluding the price of certain LED components, which are expected to continue to decline, we do not anticipate significant changes in input costs for our fiscal 2016 as we expect some commodity costs to wane while others could rise.
Further, we expect employee-related costs to continue to increase as we invest in people skills necessary to execute our tiered solution strategy, wage inflation, and the negative impact of rising healthcare costs.
To help offset these potentially higher costs we will continue to be vigilant in our pricing posture as well as furthering our efforts to drive productivity improvements to help deliver continued favorable contribution margin on incrementally higher sales.
Next, we continue to be leery of foreign currency exchange rate fluctuations, which are impossible to predict.
Another observation -- while our gross profit margin is influenced by a number of factors including sales volume, price, product, and sales channel mix, as well as innovation, we expect our annual gross profit margin to improve over time as volumes grow, particularly for larger new construction projects, which should also benefit our mix especially as we execute our tiered solution sales strategy and as we continue to realize typical gains in manufacturing efficiencies.
Our gross profit margin improvement in 2015 was a good example of our potential as we prefer to look at our margin improvement over 12-month periods to discern proper trends by removing quarterly anomalies.
You should do the same.
As you saw in 2015 it is a positive picture.
Additionally, while we continue to experience some isolated pricing pressures in certain markets and sales channels, we will continue to be vigilant on pricing.
As we 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 and most importantly, we expect to continue to meaningfully outperform the markets we serve.
Looking more specifically at our Company, we are very excited by the many opportunities to enhance our already strong platform including the introduction of our Tier 3 and 4 holistic lighting solution that, for example, connects smart lighting to smartphones for retailers, as well as our growing electronic component capabilities.
As we have noted in our last several conference calls, while our strategies to drive profitable growth rate essentially the same, the implementation of our integrated tiered solution strategy and our opportunities to meaningfully participate in the interconnected world is really the next logical step in the evolution of our overall growth strategy.
This includes expected benefits from the acquisition of Distech, which we believe will meaningfully expand our addressable market as well as add much greater opportunities to offer customers even more broad-based holistic solutions to optimize the performance of their facilities.
Our companywide 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 that will provide our customers with unmatched value and our shareholders with superior returns.
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.
Our record growth supports this view.
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 along with emerging opportunities for digital lighting to play a key role in the Internet of Things.
We continue to believe the many markets we serve as part of our broader lighting industry could grow by more than 50% over the next few years, providing us with significant growth potential.
As the North American market leader, we are positioned well to fully participate in this exciting industry.
Thank you and with that we will entertain any questions you have.
Operator
(Operator Instructions).
Mike Ritzenthaler, Piper Jaffray.
Mike Ritzenthaler - Analyst
Good morning.
I just wanted to kick it off here by asking about the 17% volume growth.
I realize it's kind of difficult to parse into different end markets.
But I'm wondering if there's any way to tell what the contribution was for new construction versus retrofitting activities in terms of how you view the end markets.
Vern Nagel - Chairman, President & CEO
Again, a very difficult question for us to answer.
We still believe that the mix of our business is roughly 50% new construction, 50% renovation, which contrasted by seeing some data around, Dodge trying to collect information around what is the difference between new versus renovation and that number is probably more like an 80-20 or a 75-25.
So Acuity continues to do an excellent job of diversifying its access to market and the types of projects that it works on.
In looking at our overall sales volume growth of 17%, it was very diversified in many, many channels.
We continue to experience again solid growth in our home improvement business, our international business, our utility business.
The C&I project business was excellent.
Again renovation, we continue to see good successes there.
So, overall I feel that our top line was really quite exceptional in terms of the overall volume growth.
Our gas, we don't know because we are a little bit off -- we lag a little bit, if you will, the data that comes out.
But my guess is that our fourth quarter the overall growth rate of the lighting market will probably be in that mid- to upper-single-digit range.
So showing us at 17%, again, more than 2 times the overall growth rate of the market is pretty significant.
Mike Ritzenthaler - Analyst
Okay, that helps.
On the recent collaborations with Sensity and then I guess just the other day with Solar Springs, will there be anything in the results or any commentary that you will be able to provide in the upcoming kind of 12-month period to be able to tell if those partnerships are bearing fruit?
I realize today you gave a little bit more color on the Tier 3 solutions.
Is that something that we should be looking for a little bit more granularity around whether those collaborations are (multiple speakers)?
Vern Nagel - Chairman, President & CEO
Good question.
We will be providing more and more information around our tiered solutions approach.
And again, it's coming off a small base.
We know that in the past we've sold individual discrete components, and so that's easy to measure.
But as we continue to offer more and more solutions that are holistic and integrated, particularly when we now bring Distech into the fold, this will be broad-based Acuity solutions.
And the partnerships that we have or the relationships that we have with others, such as Sensity and Silver Springs, those types of things will help to drive both a Tier 3 and Tier 4 revenue solution.
And we'll try to provide more cover, but we really have to get our definitions right.
We have to get the data collection process right.
We need to get people coding things rates that we are able to provide more precise information there.
And we will do that but it will take a bit of time before we can really provide you with I think great clarity around that.
And it is important that we do that because we believe very strongly that this tiered solutions approach, which we think Acuity is uniquely positioned to provide, will add greater margin capability and greater sales growth capability, particularly as we drive these technologies and these capabilities to our end vertical customers.
Mike Ritzenthaler - Analyst
All right.
Thanks for the help, Vern, and congrats on the good results.
Operator
Ryan Merkel, William Blair.
Ryan Merkel - Analyst
Thanks.
Good morning and very nice quarter.
So, the first question was one of your larger peers mentioned that lighting trends had slowed a bit in July and that non-res construction might be softening a bit.
Did you see any of this as you went through the quarter?
And is there any large project delays to speak of?
Vern Nagel - Chairman, President & CEO
We suspected that it would take one or two questions before we got this question.
So it's interesting to us.
We are a pure play lighting Company, but we are broadening very aggressively our capabilities to provide more content, more capability for building owners, smart cities as well as smart buildings.
The Distech acquisition will be very accretive to us offering more solution sets.
So when we look at the broad industry and we look at that nonresidential world, we see both new construction, we see renovation.
We see pockets in various channels, various geographies.
And I have to tell you that over the last decade -- I think I've been doing this that long and maybe even a little longer -- we're always experiencing pockets that seem to ebb and flow.
But overall the direction that we see and the context we get back from our channel partners, our customers is still a very favorable picture.
And that picture is primarily -- it is driven by both the opportunity for new construction activities and it depends on the vertical.
So if you are a person that is in a geography that is robustly connected to schools for example, you are probably seeing outsized growth relative to someone who may be in a manufacturing environment where things could potentially be a little slower in that geography due to dollar strength, due to other things.
So we look at the whole picture and our view is still very favorable around the opportunities that are before us in the marketplace.
So I can't really comment on what others have seen or are seeing, but from our perspective I think our fourth quarter is a good example of the opportunity to grow outside the growth rates of the markets we serve because of the channel diversification and also because of the opportunities that digital lighting energy efficiency brings to the marketplace.
You actually can sell paybacks to businesses and to communities that are looking to improve the quality of their light, improve the quality of their energy efficiency.
And now with Distech the opportunity really to enhance their physical environment as well.
We just see solid growth there.
Ryan Merkel - Analyst
Okay, I appreciate that.
And then the second question on gross margin.
Is it fair to conclude that the reason the gross margin was a little bit lower this quarter versus the prior quarter is because price mix was neutral last quarter but it was down 2 points this quarter?
Is that the conclusion?
Vern Nagel - Chairman, President & CEO
For us the gross profit margin was strong this quarter.
It was very strong, if you will, in the third quarter.
We continue to do excellent work in expanding in markets that -- for example, the home-improvement channel and I'll just use that as an example.
That channel, which is a fantastic channel for Acuity, has showed continued growth.
Well, that's a situation where we are selling limited SKUs, generally high-volume.
That's the nature of that business.
So the cost to serve that business is different than the cost to say serve a large project that is a huge building for example.
And so, the margin dynamics at gross profit and our SD&A expenses are just different in serving these various channels and that's true of all of our channels.
Our international business this quarter continued to show a revival of its vitality.
Well, the margin dynamics are a little bit different.
So I think what you saw in this fourth quarter was very, very outstanding sales volume growth and the mix of that business was a little bit different than, say, the third quarter, which resulted in just a little bit different what I will call gross profit profile, but I want to bring you all back down to our operating profit.
Our operating profit in the quarter was 15.2%, which was a record, and our variable contribution off of this fourth quarter was almost 28%.
And that's well within the range of what we like to talk about.
The overall year our variable competition was 32% and again that's fantastic.
But we continue to invest in our business.
Our fourth quarter saw a ramp-up in some of our people costs because we have added people to help us drive our tiered solution strategy.
So I think all of that came into play, but I'm very proud of how the organization drove its 15.2% operating profit margin.
Ryan Merkel - Analyst
Thank you.
Operator
Christopher Glynn, Oppenheimer.
Christopher Glynn - Analyst
Thanks, good morning.
Congratulations on a good fiscal year.
Some of the variation, Vern, maybe this is just an extension of what you have been answering, but the price mix going to minus 2 from flat and then minus a point in the first half -- is this headed anywhere on a normalized trend or still just for the foreseeable couple years any given quarter could come in anywhere within a range really?
Vern Nagel - Chairman, President & CEO
Chris, this is again why in our comments we like to look at the full year, not any one quarter.
We're always susceptible to sort of quarterly fluctuations.
But I think that when we look at not only the fourth quarter but the full year, the trend is very favorable.
We improved our gross profit margins for the full year on a robust basis.
And if you look at where we're going with our tiered solutions strategy, the ability to now bring on Distech, we have optimism that over time we will continue to improve our gross profit.
We will continue to leverage our SDA and as a result you will continue to see improvement in our overall operating profit margins.
Christopher Glynn - Analyst
Okay, and in that vein, you referenced either symbolically or literally the home retail channel can be strong at times.
Was there any shelf space fill in the quarter or was the top-line trend kind of a piece with what's ongoing?
Vern Nagel - Chairman, President & CEO
Well, the home-improvement channel -- and as you know we are strategic aligned with one particular customer that we have a great partnership and we're driving growth both for them and for us, so we see them taking share.
We see them continuing to invest aggressively in the lighting solutions side of their business.
They're putting in products that continue to have both higher average selling prices as well as ones that continue to be very competitively priced.
And with the Acuity, in this case, Lithonia brand behind it, it really provides the opportunity for them to differentiate in both their light construction as well as remodel and residential side.
So we're seeing good growth.
We're also seeing the opportunity to gain share as we provide to them new solution sets where they prefer ours versus others and so we're experiencing that growth as well.
But the home-improvement channel we think represents a great opportunity on a go-forward basis because of the customer base that they touch and the way they touch them.
And that model is just a little different than, say, the C&I model.
It's a little different than the utility model.
So that's the beauty of what Acuity has done over the last decade or so.
We've really worked hard to diversify the sales channels that we sell through, the verticals that we touch and the geographies that we are doing so that we are less tied to the new construction cycle.
And I think that's why you are continuing to see Acuity -- or a reason why you are continuing to see Acuity outperform the growth rates of the market, the lighting market overall.
Christopher Glynn - Analyst
All right, thanks for entertaining the similar question in a different way.
And then I've been getting asked more about international strategy, what you guys may or may not contemplate.
So I'm just wondering if you could update kind of when, if, how, why overseas opportunity might be compelling for you.
Vern Nagel - Chairman, President & CEO
Sure, we touch the globe.
We touch the globe through exports.
We have a nice little base in Europe both in Spain as well as in the UK that touches the industrial and the outdoor market.
Our approach internationally has been, and I believe it will continue to be, a vertical approach.
And when we say international I just would like to be clear, we say outside of North America, we are extremely excited by the success that our folks are having in Mexico.
We have a great team there.
We see great growth there.
The Canadian folks are doing very well.
So that we call North America and when we say international it's outside of that.
We continue to push our vertical approach there and we continue to follow customers around the globe.
Take for example large retailers.
When you look at Acuity's capabilities from an LED perspective, I'll call it a more holistic digital lighting experience and then you couple that with our ability to have in-store positioning, retailers that are around the globe continue to be prime customers and opportunities for Acuity.
That's just an example.
And outdoor roadway, smart cities around the globe continue to be an opportunity for Acuity.
And then we are very strong in the industrial space around the globe with our Holophane brand.
So we will continue to push those on a vertical and geographical and customer strategy.
Ricky Reece - EVP & CFO
And I would add with the Distech acquisition, they have a presence in Lyon, France that we can also leverage along with the other businesses we have in Europe and provide that broad holistic solution outside North America as well as within North America.
Vern Nagel - Chairman, President & CEO
Excellent point.
Christopher Glynn - Analyst
Sounds great, thanks.
Operator
Matt McCall, BB&T Capital Markets.
Matt McCall - Analyst
Thanks.
Good morning, guys.
So Vern, you talked a lot about the investment in people and I'm curious -- you did a good job on SG&A really this quarter, but the whole year.
Has there been -- when you are talking about the tiering approach and the tiering strategy, has there been a big sales force training element to it that maybe the SG&A line could have been even better this year if it weren't for the investments you have had to make up front introducing the strategy?
Vern Nagel - Chairman, President & CEO
Certainly training is a critical element in enhancing the selling forces that we have.
Acuity is blessed that it sells through many, many different channels and in virtually every one of those channels we are associated with the number one selling force, whether it's our rep agency or whether it's the utility side, you pick it.
The Hall of Fame sales team, they are the best in the business.
So our ability to leverage our access to market is critical.
What is going to be important is that we continue to bring solution sets, whether, again talking about the tiered solutions strategy, but these solution sets particularly in Tier 3 and 4 for holistic capabilities, so that would include Distech.
That also includes the Internet of Things.
So making sure that those things work are important.
But our Tier 1 and Tier 2 strategies are critically important as a foundational element because that's where a lot of projects will continue to evolve.
And whether it's new construction or renovation they'll want those types of solutions.
So we are investing in people to be able to, again, it's software.
It's controls.
It's additional lighting capacity.
It's the guts of how fixtures, digital fixtures work.
It's app writers.
It's all sorts of things that bring value that are different than in the analog days of, say, 2008 where it was a fluorescent fixture and it was fairly simple to make and there wasn't a lot of technology change.
So we are investing in people to really get after a number of these solution sets that are just so interesting because of how we're evolving in this digital world.
Matt McCall - Analyst
Okay, maybe if I take it a step further, the contribution margin this year really solid, I think the full year at 30%.
A couple of the quarters on a year-over-year basis looks like it was driven by gross margin.
The other couple quarters it was driven by SG&A leverage.
When you look out into next year I'm trying to kind of put all these factors, product mix, project mix, growth of tiers 3 and 4, more people costs, productivity.
When you think about the fact that you are facing a 30% incremental margin comp, how do you want us to think about incremental margin for the full year of 2016?
Vern Nagel - Chairman, President & CEO
So Matt, what we had suggested in past calls is that we are comfortable targeting a variable contribution rate of mid to upper 20s.
Obviously our objective is to make that variable contribution number as high as we possibly can.
But we see investment opportunities right now that are just so important to make today because in making these investments we believe we'll be able to drive even higher variable contribution margins in the future, particularly as we leverage our capabilities in Tier 3 and Tier 4, particularly as we create holistic solutions with Distech that are going to be real value add capabilities to customers that don't exist today.
So these investments -- I believe that the Acuity team feels that our variable contribution margin over a 12-month period is probably in that mid to upper 20% range.
But you are going to see quarters where we are north of that number.
The full year 2015 was excellent at 32% and our goal is to outperform what we comment on.
And our hope and our expectation is to execute our strategies and deliver on a favorable number to what we are suggesting here.
But we are very comfortable in that kind of mid to upper 20% variable contribution range.
And as we see out over the more midterm future, we see that variable contribution number improving nicely and it will come in both leveraging -- or excuse me, both in our gross profit margin as we discussed earlier, as well as leveraging our SDA area.
I would like to point out that that 34% cash flow return on investment, that's a pretty robust number.
So we've done a pretty good job of managing our business.
It's kind of interesting; if you go back 12 months our salary headcount relative to where we are today is essentially flat.
But yet, as you know, we took a number of streamlining actions earlier in the year.
So we have added capability and capacity back into the business but in a very different way.
We are truly restructuring the business as we go forward.
Matt McCall - Analyst
Very helpful.
Thank you, Vern.
Operator
Rich Kwas, Wells Fargo Securities.
Rich Kwas - Analyst
Good morning, everyone.
Just a question, first question on variable SD&A.
Any changes to the run rate here versus the $105 million or so that has been realized over the last couple quarters?
Vern Nagel - Chairman, President & CEO
Well, I believe we prefer to look at our variable contribution rate because our expectation is that we will meaningfully outperform the markets, the growth rates of the markets we serve.
So, we will continue to add capability to help support that, but I think we have done a very good job of driving productivity in our business.
We know how to do these kind of things.
So, you will continue to see leveraging of our SDA costs, but I think you should expect -- take it to [an illogical] stream, when we double our business we're going to be doubling that fixed SDA.
The question is at what rate?
And Ricky and I and the other folks here at Acuity are comfortable with the variable contribution rate kind of in that mid to upper 20s.
And so then therefore you can see how not really fixed, but how that portion of the SDA would grow in your business model.
Rich Kwas - Analyst
Okay, so it's tracking -- the fixed piece is tracking a bit more than $115 million and $120 million is in a reasonable way to think about it per quarter?
Vern Nagel - Chairman, President & CEO
Again, I'm not trying to be difficult, but I think it depends on what your timeframe is.
We will continue to add capability to our organization, human capability where those salaries will come into that bucket that you are talking about.
So I would expect that those numbers will continue to improve, but it's improving off of a very large sales growth rate because of the opportunities that we see.
Acuity I think has done a good job of making sure that it's driving sales growth so that it can reinvest in its business as opposed to trying to invest in its business under the hope of having sales.
That's a delicate balance and not one that is easily done, but yet we've been able to accomplish that feat.
Ricky, do you have any (multiple speakers)?
Ricky Reece - EVP & CFO
Yes, the only other comment, Rich, just to make sure -- obviously now with Distech we'll start consolidating them here in the first quarter of 2016 and they have some SG&A costs as well that will come into that base number in addition to the investments that we will be growing.
So you'll need to factor that into your thinking as well.
Rich Kwas - Analyst
Okay, of course.
And then just on Distech, do we think of this over the next year or so as -- from a go-to-market strategy as separate?
Or are you going to be able to integrate where the channels are going to be able to provide a -- offer a holistic offering and there's synergies on that front?
How long, Vern, do you think it takes for the growth to be accelerated if you will?
Vern Nagel - Chairman, President & CEO
Excellent question.
We see these two channels and opportunities, Distech's channel selling through system integrators primarily, us having 14 different channels.
But the opportunity for these folks to continue to drive their business.
But where we see the ability to be collectively accretive is bringing together a holistic combination of a solution set that not only involves lighting but it involves security, involves HVAC, access -- all of this information -- energy to provide it back to a building owner in a very simple and holistic way.
We think that's a real value proposition.
And so, what we'll look to do is to work in those local markets with those local customers and those local reps to bring even more capability.
We still have some work to do to figure out exactly how that's going to work in a local market, but the customer will dictate for us how they want to be served.
And we are very excited about what that means in terms of how building owners will be able to drive their business and their capabilities.
So I think that over this next 12 months or so we'll figure those types of things out very specifically.
We have working hypotheses around these.
The teams are working together exceedingly well.
We are getting different types of folks to come together to talk about how -- not only do we have, if you will, these two channels or this new channel, but the opportunity to actually create even more capability for the customer and how we get to that customer with that solution set still -- we're still working that.
And there are many other folks out there that are in the channel that Acuity didn't have access to before.
And now with Distech as part of the family we have access to those folks to really pitch them on the benefit of the combined Acuity Distech.
Rich Kwas - Analyst
Okay, understood.
Just a quick one before I give it off.
Commodity benefit, I know you talked about for fiscal 2016 kind of neutral, but I would think that you would get some benefit as you look at diesel costs and other metals costs, resin costs, etc., that go into your product.
So are you just assuming that there's other overhead costs that offset that or what's the rationale behind (multiple speakers) 2016?
Vern Nagel - Chairman, President & CEO
So our expectation is that those costs -- they have the potential to continue to decline, but they also have the potential to go up.
So our feeling was that we sort of see a net neutral.
To the extent that it turns out to be more favorable, fantastic.
Most of our business is a big business.
Sometimes that finds its way.
Sometimes we are able to bring a portion of that to the bottom line.
But the other thing that I would say is our expectations are that there are other costs that are not directly related to commodity costs such as healthcare costs, just to pick one.
Wage inflation.
Forget about just adding new people, wage inflation we think is alive and well and so how you manage those types of things.
So to the extent that we are able to drive productivity, to the extent that we're able to take cost out of our business, to the extent that we are able to get benefits from lower commodity cost, our own two cents is that it probably has the potential just to be kind of a net neutral at this point in time.
We will know more as we get into the year.
Ricky, do you have any other --?
Ricky Reece - EVP & CFO
No, I think that's -- I think the accommodation of other cost, as Vern highlighted, that will offset some of that particularly related around compensation and benefit cost given the dynamics there.
And then that [defines] its way in the market.
It's pretty public what steel, aluminum and all is selling at and it does find its way into the market.
Both directions, we try to keep as much, we as an industry and we as a company, as we can.
But the reality is a lot of that does find its way back into the market.
Vern Nagel - Chairman, President & CEO
And all of you know this.
The regulatory environment continues to grow unabated.
So we can see different parts of our business where we enhance, we have to change, alter, invest in compliance to meet some of these new requirements and things.
So those are added costs that come into our business for which no one will pay you a price increase on.
So that's why our view is that at this point in time the puts and takes are probably pretty even right now.
Rich Kwas - Analyst
Okay, understood.
I will pass it on.
Thanks for the color.
Operator
Kathryn Thompson, Thompson Research Group.
Kathryn Thompson - Analyst
Thanks for the question.
First question is more focus on the top line.
A trend we are seeing in later cycle building product categories, including the office furniture industry, is in increasing orders from small- and medium-sized businesses which has largely been absent in the cycle.
And this is interesting because generally these small- and medium-sized businesses typically lead a cycle, which hasn't been the case in current cycles.
Are you seeing changes in orders from different sides to that small and medium-sized business in recent months?
Is there a margin profile difference for these types of projects?
Thank you.
Vern Nagel - Chairman, President & CEO
Kathy, it's interesting to us.
We are not economists.
We look at broad data.
It's interesting to hear some of the pundits who are smart in this space.
[Barry Sternlich] was on a show the other day.
He was talking about hotels, how lodging rates are improving in apartment buildings, monthly rental rates are improving.
In office buildings you are seeing rising rents around the country.
You are seeing the whole notion of vacancy rates declining, office demand improving.
All of these things I believe are driving not just later stage, but the opportunity for Acuity in our industry to continue to show growth.
The employment figure, which employment is modestly improving, that unemployment is down, all of those bode really well for our business.
Nothing goes up in a straight line, you all know that.
And so, overall we think the trends are favorable.
And yes, I would say that our business has been built more around -- at least in the trailing 12 months around more small/medium kinds of things.
Renovation as well than big, large massive project.
We have done those as well and they're out there.
But what is interesting to us as we travel around and visit with customers and visit with our own associates, there's cranes everywhere and it's impressive to see.
And that is a normal part of the cycle.
This isn't like you're going to decide to go buy a pair of tennis shoes one day because you got a raise.
You were building these huge buildings and you are doing different things and you're making these long-term investments.
They take time.
So we believe that we're still in the early part of this uptick in the cycle.
And then you add on top of that the whole notion of I'm going to use the word renovation but it's more than that.
It's selling value propositions that in the past someone would've said, oh, my light fixtures are perfectly fine.
Now you are selling energy.
Now you are selling the collected world.
Now you are selling Distech environmental, if you will, energy control solutions.
You are selling Internet of Things.
So your value proposition has changed dramatically.
And a lot of the big players that would move on that, they are evaluating these types of things.
So we believe we're in the really early stages of this rather large move.
And from a profit profile it really depends.
Every job is different.
Depends on who and why and what value add you have had in there.
I don't think that it is precise to say that because it's a large project you make more money, because it's a small project you make less money from a margin perspective.
It just really depends.
And fortunately for Acuity we're good at all size projects.
That has been our strength for a long time.
Kathryn Thompson - Analyst
Vern, having just moved into a new office and having to get new lighting solutions, including some of your own, so I can agree to that.
And as we look out our window we have about five cranes so we're (multiple speakers) seeing that at TRG headquarters.
A follow-up question on margins, and this is really just a little bit longer-term focused.
As you focus on more technology-focused acquisitions and partnerships, as you grow your tiered solutions, how does this change your margin profile over the next two to four years?
Theoretically it should see, at least on the gross margin side, a bump up.
But maybe help us think about more mid- to long-term what tiered solutions do to your margin profile.
Thank you.
Vern Nagel - Chairman, President & CEO
Thank you, it's a great question.
Our expectation is that as we are able to bring, again, more holistic integrated solutions, and this includes Distech into a building -- and think about how someone who's managing a building, their opportunity to make their life smart through technology but simple to use we believe is a unique capability that Acuity and Distech will have.
And so, as a consequence of change in that type of what we'll call Tier 3 integrated holistic solution where it's more elegant, it's more efficient, it's more simple even though it's very, very sophisticated, we think that will resonate with folks and so therefore we would expect a higher margin profile.
When we think about Tier 4, which Tier 4 for us are alternate revenue streams.
The notion of how providing users whoever -- it doesn't matter who that user is, but users with the ability to have data because between Distech and its capabilities and where digital lighting is in Acuity and our capabilities, we think we'll have the ability to capture probably 85% of the data that is being generated in a building.
And you can also take this to smart cities and outdoor as well.
Well, the opportunity to do that we think is a unique revenue stream.
And we can take all the verticals.
We can see that there are value propositions there.
And so, Acuity -- 12 months ago if someone said do you have app writers on board, we would've said no.
Today we have 12.
The opportunity to create these solution sets, because of what our transformation has done and where we are in our Tier 3 solution, these app writers are creating solution sets that will allow us to generate revenues that should have very nice margins in that section.
So we -- over a longer-term period, we would expect to see our gross profit margin profile improve.
We would expect us to leverage our SDA, and we would expect that our operating profit margins would reflect that as well.
At some point in time here we're going to come back and say no, we don't think that our variable contribution margin of the high 20s is the right number anymore.
We think it should be in a high 30s but they are not there today.
That's the kind of transformation that we expect to see over the next handful of years.
Kathryn Thompson - Analyst
Perfect, that's exactly what I was looking for.
Thank you.
Operator
And now I'd like to turn the call back over to Mr. Vern Nagel for closing remarks.
Vern Nagel - Chairman, President & CEO
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 continue to deliver strong returns to our key stakeholders.
Our future is very bright.
Thank you for your support.
Operator
That concludes today's call.
Thank you for participating.
You may now disconnect.