Acuity Brands Inc (AYI) 2017 Q1 法說會逐字稿

Good morning and welcome to Acuity Brands fiscal 2017 first-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.

Thank you and good morning.

With me today to discuss our fiscal 2017 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 our website at www.Acuitybrands.com.

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

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

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

Now, let me turn this call over to Vern Nagel.

Thank you, Dan.

Good morning, everyone.

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

First, let me say we are pleased with our results for the first quarter of 2017 given market conditions.

Net sales were up 16%, while diluted earnings per share grew almost 19%, both first-quarter records.

In fact, this was the 15th quarter in a row where we achieved double-digit volume growth, a remarkable achievement that few companies can claim.

We believe these results are yet again strong evidence our strategies to deliver superior returns to shareholders; provide customers with differentiated, value-added solutions; and diversify the end-markets we serve are succeeding, allowing us to extend our leadership position.

We achieved record profits for the first quarter, even as we continued to invest in areas to support our strong sales growth, as well as opportunities with significant future growth potential, including the aggressive introduction of innovative, energy efficient lighting and building management solutions portfolio, as well as the expansion of our Internet of Things software platform.

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 first quarter of 2017.

Net sales were a first-quarter record of $851 million, an increase of 16% compared with the year-ago period.

Reported operating profit was $126.6 million compared with $112.4 million in the year-ago period.

Reported diluted earnings per share was $1.86, a first-quarter record, compared with $1.57 in the year-ago period.

There were adjustments in both quarters for certain special items, as well as certain add-backs in order to make our results comparable between periods, as Ricky will explain later in the call.

In adding back these items, one can see adjusted operating profit for the first quarter of 2017 was $143.2 million compared with adjusted operating profit of $125.9 million in the year-ago period, an increase of 14%.

Adjusted operating profit margin was 16.8%, a decrease of 30 basis points compared with the prior year.

Adjusted diluted earnings per share was $2, up 13% from the year-ago period.

We closed the quarter with $451 million of cash on hand, leaving us with plenty of financial firepower to execute our growth strategies.

While our results for the quarter were solid improvements over the year-ago period, despite weak demand in the quarter.

We would like to provide you with more color on our results for the quarter.

While net sales grew 16% compared with the year-ago period, we estimate that sales volume from our legacy business grew by a strong 10%.

The addition of Juno increased net sales another 9 points while changes in price/mix and foreign-currency reduced net sales by approximately 2 points and 1 point, respectively.

While it is not possible to precisely determine the separate impact of price/mix changes on net sales, we believe the difference was primarily due to changes in the mix of products sold and, to a lesser degree, lower pricing on like-kind LED luminaires between periods, reflecting a decline in certain component costs for these products.

Next point is important.

While the increase in net sales was broadbased along most product lines and sales channels, we anticipated and planned for a greater growth in the quarter.

Demand softened in the back half of the quarter, particular for smaller projects, apparently due to what many of our customers are telling us, election jitters, and to a much lesser degree, delays in certain larger projects due to more pronounced labor shortages at contractors in certain areas.

To add a bit more color on this, while available market data does not line up perfectly with our quarters, we have recent information from organizations including the US Census Bureau and NEMA, which suggests construction put in place for September and October were very sluggish while shipments of lighting fixtures were actually flat to slightly down in the third calendar quarter.

Nonetheless, we were still able to grow our legacy business by 10%, far outpacing the growth of the overall lighting industry.

While we expect some of these market conditions to carry over into our second quarter, we also expect demand to improve as election concerns subside, particularly for smaller projects which generally have short lead times compared with larger projects.

I will comment on our expectations for the balance of 2017 later in the call.

Sales of LED products grew robustly this quarter and now account for two-thirds of our total net sales, which, as you know, includes the sales of non-fixture-related products and solutions as well.

Lastly, we believe our channel and product diversification, as well as our strategies to better serve customers with new, more innovative, and holistic lighting and building management solutions and the strength of our many salesforces have allowed us to yet again achieve meaningful sales growth this quarter.

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

Our profitability measures for the first quarter were solid, but somewhat disappointing for us.

Our adjusted first-quarter operating profit was $143.2 million, the third highest in our history, while adjusted operating profit margin for the quarter was 16.8%, down 30 basis points from the adjusted margin in the year-ago period.

Adjusted gross profit increased $41.2 million, or 13%, this quarter over the year-ago period primarily due to the increase in net sales, lower component costs, and productivity improvements primarily from previously announced streamlining actions.

This was partially offset by higher manufacturing costs primarily related to short-term production challenges mostly related to new product introductions and product transfers, a rise in quality cost, and expected increases in certain hourly employee wages and benefits.

Our adjusted gross profit margin for the quarter was 42.4%, down 100 basis points compared with the year-ago period and well below our potential.

The decline in our adjusted gross profit margin was primarily due to less-than-anticipated variable contribution margin caused by weaker-than-expected net sales volume this quarter and, to a lesser degree, the impact of the other items noted above.

Another way to say this is we carried a higher manufacturing cost structure into the quarter in anticipation of servicing a higher level of demand than actually occurred.

We are in the process of aligning our supply chain cost structure to meet current demand, as well as enhancing the execution of certain new product introductions.

Next, adjusted SDA expenses were up $23.9 million, or 12%.

The increase in SDA expense was primarily due to higher freight and commission costs to support the increase in net sales, the inclusion of acquisitions, and the continued investment in additional headcount to support and drive our tiered solution strategy.

This was partially offset by lower incentive compensation expense as our period-over-period improvement in our key metrics as part of our pay-for-performance culture resulted in a much lower potential payout than the year-ago period.

Adjusted SDA expenses as a percentage of net sales were 25.6% in the current quarter, a decrease of 80 basis points from the year-ago period.

Excluding the impact of acquisitions, our variable contribution margin as a percentage of net sales was approximately 20% below our current annual target of mid to upper 20%s, primarily due to the impact of less-than-anticipated net sales and, to a lesser degree, the continued investment in additional headcount to support our Tier 3 and Tier 4 solutions, partially offset by less variable incentive compensation expense.

All in all, we had a solid quarter given market conditions.

On the strategic front we continued to make great strides, setting the stage for what we believe will be strong growth and profitability in 2017 and beyond.

We continued our rapid pace of introducing new products and solutions, expanding our industry-leading portfolio of innovative, energy efficient luminaires and lighting controls, as well as our building management platform.

While the rapid rate of new product introductions is hugely positive for our long-term growth potential, it did put some strain and added costs on our supply chain, mostly around component sourcing and production startup issues for those products.

Much of this growth in our portfolio has been driven by the expansion of our digital lighting solutions portfolio, including controls that support building management systems and our IoT software platform as innovation continues to be at the forefront of our strategy.

Additionally, we continue to invest in and expand our capabilities to drive our integrated tiered solution strategies which consists of four tier levels.

As we have noted before, the purpose of this strategy is to leverage our incredibly diverse and growing portfolio by offering customers lighting, building management, and IoT solutions that best meet their needs.

These solutions are compelling and powerful value propositions for customers and a true competitive advantage for Acuity.

While sales data for our tiered solutions is still imprecise and expanding off a small base, we believe sales in our Tier 3 category, encompassing our holistic integrated solutions, were up 40% again this quarter and now represent more than 12% of our total sales.

Furthermore, our Tier 3 solutions can be enabled to collect data and to support connectivity to the Internet of Things, affording Acuity additional recurring revenue streams which we identify as Tier 4 solutions.

To fully execute our holistic tiered solution 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.

We have added enormous capabilities over the last year, including our recent acquisitions, as well as increased salaried headcount to support the growth as part of this overall tiered-solution strategy.

In fact, our salaried headcount, including acquisitions, is up almost 700 associates, or over 30%, from one year earlier.

Few of our competitors, if any, have been able to make this kind of investment while delivering upper-quartile financial performance like Acuity.

At Acuity we are not just talking Internet of Things; we are actually doing it.

As of the end of the quarter, we have converted almost 40 million square feet of space for customers, including leading global retailers and certain other customers, to a smart lighting solutions infrastructure.

This digital lighting infrastructure is connected to the Acuity IoT software platform, which allows our customers to deploy indoor positioning solutions including wayfinding, asset tracking, and geospatial analytics.

As part of their smart lighting platform, we have approximately 700,000 maintenance-free LED light-enabled beacons that are performing superbly, collecting data and enabling applications that provide users with superior lighting and energy performance, as well as useful, actionable information while providing Acuity with a recurring Tier 4 revenue stream.

Importantly, we expect the installed base of these smart lighting solutions to meaningfully expand by the end of calendar 2017.

We believe this level of capability and employment continues to be unmatched in our industry.

Further, we expect that our recent strategic acquisitions, coupled with our aggressive internal investments, will allow us to continue to deliver and strengthen our foundation and further serve as a robust platform for future growth that is less reliant on the new nonresidential construction cycle.

We have been able to produce these results because of the dedication and resolve of our now almost 12,000 associates who are maniacally focused on serving, solving, and supporting the needs of our customers.

We will talk more about our future growth strategies and our expectations for the construction markets 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 2017.

Ricky?

Thank you, Vern, and good morning, everyone.

As Vern noted, we had a solid first-quarter performance.

I will add insight into our financial performance and not repeat the information already provided by Vern.

As Vern mentioned earlier, we had some adjustments to the GAAP results in fiscal 2017 and 2016, which we find useful to add back in order for the results to be comparable.

In our earnings release we provide a detailed reconciliation of non-GAAP measures.

Primarily due to the impact of the four acquisitions completed in fiscal year 2016, we experienced noticeable increases in amortization of acquired intangible assets; share-based compensation expense since we used restricted stock as a tool to improve retention and to align the interest of key leaders of acquired businesses with those of the shareholders; acquisition-related costs, including profit and inventory and professional fees; special charges and manufacturing inefficiencies as we streamlined and integrated recent acquisitions; and gain on the sale of investment in an unconsolidated affiliate.

We believe adjustments for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations.

We think you will find this transparency very helpful in your analysis of our performance.

In addition, many of our peer companies, especially as we become more of a technology company, make these same adjustments, so it will help as you compare our performance to other public companies in our industry.

During the first quarter of fiscal 2017 the Company recorded a modest pretax special charge of $1.2 million as we complete the previously-announced actions initiated to streamline the organization, including the integration of recent acquisitions.

These streamlining activities included the consolidation of selected production activities and realignment of certain responsibilities, primarily within various selling, distribution, and administrative departments.

We realized net savings of approximately $5 million in the first quarter of fiscal year 2017 and expect to achieve annual savings of almost twice the amount of the cumulative special charge or approximately $25 million, and we believe we will be at this run rate by the end of the second quarter of fiscal-year 2017.

We are reinvesting these savings in additional headcount to support and drive our tiered-solution strategy.

We anticipate incurring additional cost associated with further integration activities of recent acquisitions later in fiscal year 2017, although the amount and exact timing has not yet been determined.

The effective tax rate for the first quarter was 35.3% compared with 35% in the first quarter of last year.

We expect the effective tax rate for fiscal year 2017 to once again be 35.5% before any discrete items and if the rates in our taxing jurisdictions remain generally consistent throughout the year.

Our operating working capital, defined as receivables plus inventory less payables, at November 30, 2016, increased to 45 days compared with 32 days in the prior year.

This increase was due primarily to more stocking of faster-moving items to improve delivery service and greater receivables due to timing of shipments.

In the first quarter of fiscal year 2017 we spent $19.5 million on capital expenditures, compared with $23.1 million in the prior year.

This decrease in capital expenditures is primarily due to reduced spending on facility enhancements as the prior year included expansions in our electronic and painting capacity and the buildout of our innovation and technology center and a new production facility.

We currently expect to spend approximately 2.5% of revenues in capital expenditures in fiscal year 2017.

At November 30, 2016, we had a cash and cash equivalent balance of $451.2 million, an increase of $38 million since August 31, 2016.

This increase was due primarily to greater net income, lower capital expenditures and proceeds from sale of assets and investments, partially offset by increases in working capital and payment of dividends.

Our total debt outstanding was $356 million at November 30, 2016.

We had more cash than debt at November 30, 2016.

We also had additional borrowing capacity of $243.9 million under our credit facility, which does not expire until August 2019.

We clearly enjoyed significant financial strength and flexibility and will continue to seek the best use of our strong cash generation to enhance shareholder value.

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

Thank you, Ricky.

As we look forward we continue to see significant long-term growth opportunities that are ever-changing and evolving in a positive direction for Acuity.

While we provided explanations for our first-quarter performance, we would like to be very clear on our key assumptions going forward.

While we do not give financial guidance, we hope the following will help you better understand our current assumptions.

It is reasonably clear that the end-markets we serve in North America and certain markets we serve in Europe this quarter moved along at a slower and more inconsistent pace than in previous quarters.

Many of our end customers inferred this year's presidential election in the US and certain political events in Europe created uncertainty and volatility over the last several months.

We believe this uncertainty and volatility negatively impacted demand, particularly for certain smaller projects which have short lead times and, to a lesser degree, residential construction.

Additionally, we were told that labor shortages in certain markets caused delays in larger projects.

How much all of this directly impacted our shipments this quarter is difficult to precisely quantify, but we clearly anticipated greater shipments in the quarter than actually occurred.

This notwithstanding, we remain bullish regarding the Company's prospects for continued profitable growth.

We believe the softness in demand over the last quarter or so was due to temporary circumstances, some of which could potentially linger into the second quarter.

However, it seems the long-term fundamental drivers of the markets we serve are still positive and intact.

Therefore, as we noted in our last 10-K, we still expect the broad end-markets that we serve in North America, which represents 97% of our total net sales, will grow in the mid to upper single-digit range in fiscal 2017.

We continue to see signs that give us optimism regarding the future growth of the markets we serve and our business.

Leading indicators for the North American market such as Architecture Billing Index, vacancy rates, office absorption, lending availability, and favorable employment trends continue to improve at varying paces.

Forecasts from independent third parties continue to project positive growth rates for the residential and nonresidential construction markets in our fiscal 2017.

So, key assumption number one is positive growth for the key markets we serve in our fiscal 2017.

Key assumption number two: excluding the price of certain LED components which are expected to continue to decline and steel costs which have risen recently, we do not anticipate significant changes in other material and component costs over the next 12 months.

We expect to offset the impact of rising steel prices through certain pricing initiatives and product cost reductions.

Further, we expect employee-related costs to continue to rise, primarily due to increases in associate headcount, wage inflation, and the negative impact of rising healthcare costs.

Also, we continue to be leery of foreign currency exchange rate fluctuations which are always unpredictable.

Key assumption number three: while our gross profit margin is influenced by a number of factors including sales volume, innovation, and price in product and sales channel mix, we expect our annual gross profit margin to improve over time as volume grows and as we realize typical gains in manufacturing efficiencies, including cost savings related to recent acquisitions and new product introductions.

We continue to target a current variable contribution margin on an incremental dollar of sales in the mid to upper 20% range over the course of fiscal 2017, knowing that it is not possible to predict with precision what the rate will be by quarter.

Key assumption number four: our adjusted SDA expense as a percentage of sales was 25.6% this quarter.

This is below our recent trend, primarily due to much lower incentive compensation expense due to lower year-over-year financial performance improvements.

Trust me, we are motivated to drive strong period-over-period growth, which is at the core of our pay-for-performance culture, which would result in much higher incentive compensation expense.

This means we expect our adjusted SDA expense as a percentage of net sales to be closer to our historical trend, assuming markets rebound and we continue to meaningfully outpace the growth rates of the markets we serve.

This further assumes we execute as we have in the past regarding our supply chain performance and are able to move gross margins toward our historical trend.

This would suggest that our variable contribution margin over the back half of the year will be higher than our target noted above.

So to be very clear, our key assumptions for additional top-line growth, driven primarily by stronger market dynamics and better internal execution within our supply chain.

Lastly and most importantly, to add to the point on the top-line growth above, we expect our overall growth rate to continue to meaningfully outperform those of 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 expansion of our Tier 3 and 4 holistic lighting, building management, and IoT platform solutions.

We continue to experience strong interest from many of our key customers for our holistic solutions with these capabilities and more.

We have meaningfully expanded the number of pilot tests with customers, as well as garnered strong interest in new prospects.

As we have noted in our last several conference calls, the implementation of our integrated tiered-solution strategy and our opportunities to meaningfully participate in the interconnected world is really a continuation in the advancement of our overall growth strategy which has been in place for some time.

This includes expected benefits from our acquisitions of eldoLED, Distech, Geometri, and DGLogik, which we believe will allow us to continue to meaningfully expand our addressable market and add significantly greater broad-based holistic solutions, allowing customers to optimize the performance of their facilities.

As we noted earlier, while we are very early in this game, we are seeing positive results in growth rates for our Tier 3 and Tier 4 categories, as well as the implementation of our IoT platform solutions.

One last point on current market dynamics.

The election process in the US has produced a great deal of rhetoric and debate regarding a wide range of policy options with respect to monetary, regulatory, tax, and trade, amongst others, that may be pursued by the new administration.

Any policy changes implemented could have a positive or negative consequence on our financial performance depending on how they influence many factors including business and consumer sentiment.

While we are proactively identifying and evaluating potential contingency options under various policy scenarios, we believe it is just too early to speculate which policy options will win the day and how they will be enacted.

We will monitor the situation closely and work with our many points of contact to make sure our government officials understand how certain policies could impact the stakeholders of our company and our industry.

As such, it is just too early for us to comment or speculate at this time on the potential ramification of these endless scenarios.

We will comment when it becomes clearer.

Our company-wide 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 resource.

We are investing to enhance and expand our core competencies to excel in our fast-changing industry because we see great future opportunity.

Through these investments we have significantly expanded our addressable market; our strong growth record supports this view.

As I have said before, we believe the lighting and lighting-related industry, as well as the building management systems market, will experience significant growth over the next decade because of continued opportunities for new construction and, more importantly, the conversion of the installed base which is enormous in size to more efficient and effective solutions.

We believe this is particularly compelling as energy and environmental concerns continue to 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 many markets we serve as part of the broader lighting and building management industries, some of which could grow by 50% or more over the next few years, will provide us with significant growth potential.

As the market leader in lighting solutions and a technology leader in building automation, we are positioned well to fully participate in these exciting and growing industries.

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

(Operator Instructions) Tim Wojs, Robert W. Baird.

Good morning.

I guess just maybe could you just add a little bit of color, Vern, just on maybe what you are seeing from a quoting perspective that gives you confidence that just some of the slower trends you have seen are more temporary?

Sure.

If we separate our business between larger-type projects and smaller-type projects, what we saw the fall off in, frankly, and that was precipitous, was in the smaller project side of the world.

Frankly, it just went flat.

And truthfully if you look at the new NEMA data around lighting, and we just received this data just a little a while ago, for the calendar year third quarter the shipment of light fixtures on NEMA participants was actually negative for the third calendar quarter.

We believe that this carried into our, if you will, fourth quarter and it was very, very interesting to us.

So our quote rate was fine until we got into the middle part of our fourth quarter and the quote rate for those smaller projects went just flat.

For larger projects the quote rate continues to be very favorable and you might imagine why, right?

Because those things have a long lead time.

Small projects can be influenced by sentiment very, very quickly.

And we heard from a number of different customer constituencies, whether it's electrical distributors or whether it is contractors, that the marketplace people were just jittery.

And why were they jittery?

It's very difficult for us to say.

I believe that we have seen this two years ago and we saw it four years ago, and we saw the markets rebound.

So, I will tell you that the things that we see, both in our quote rates, not necessarily rebounding yet for the smaller projects but the larger projects continue to be robust.

But all of the key, longer-term drivers that drive our business continue to flash positive signs.

While many of you did channel checks, it was just interesting to us; we saw something fairly different than that and actually experienced from customer visits something that was different than that.

So our view is is that while there may be some lingering impact coming into our Q2, because that is essentially December/January, our expectations are that the markets will continue to rebound as people get passed these things and move back to business.

The value propositions that we have that are available are compelling in terms of paybacks and so I think businesses are going to get back to business as usual.

I also believe that there is a favorable carryover from the election within the business community, where I think business leaders are going to be more favorable.

So our expectation is that we will see this rebound, particularly on the smaller-project side and as we continue to introduce new products.

Great.

That's helpful.

Then just on the incremental margins, should we think of maybe fiscal Q1 as being a low point and that variable contribution margin accelerating through the year as volumes come back?

The answer is yes.

Quite frankly, our first quarter, the variable contribution margins were impacted by two things.

First, in order of magnitude, just simply the lack of shipments.

Our expectations were and our supply chain was ready to deliver against much stronger growth.

We are very pleased with the fact that our legacy business grew 10% against the backdrop of what arguably was a flat environment.

Obviously we don't have NEMA data and won't have NEMA data on the fourth calendar quarter until probably late January would be my guess, but I'm quite certain we are going to see flattish environment.

So, our contribution margin was influenced by the lack of volume, sales volume coming through.

And then, to a lesser degree, just some issues that we had within the supply chain; different than the issues that we had in the fourth quarter.

More because of new product introductions and some product transfers that we just continued to struggle with, to absorb those into the facilities where they went.

I believe that those are temporary situations.

We will have to address them.

We are addressing them very aggressively and have been.

Our supply-chain capabilities have been a hallmark of what we are really good at, so I believe that those two are temporary, though they will still I think have some carryover to Q2.

So, in answer to your question, our expectation is that our variable contribution margin will get back to the annual target that we have for 2017.

And most likely, assuming as I pointed out, that the markets, particularly for smaller projects, come back and we continue to gain share as we have for a long time, we should enjoy the benefits of that volume and we should see more efficient production of that product.

Partially offset by an increase in incentive compensation expense as we improve our year-over-year performance and drive greater incentive compensation.

Thanks for the color.

Good luck.

Brian Lee, Goldman Sachs.

Thanks for taking the questions.

First off, Vern, wanted to ask if you could maybe give us a bit more quantification around some of the temporary disturbances you are talking about.

Last quarter you guys pointed to a $25 million pretty precise top-line impact due to the one-time issues.

Can you do something similar for this quarter, maybe even Q2?

How would you quantify the revenue you missed out on based on some of the election jitters and labor shortage issues you mentioned in your prepared remarks?

So, let me separate those and let me answer the second one first.

The labor issues in Q4 of last year, we believe that we resolved those.

We took a number of steps in terms of attracting folks.

We actually had to increase some benefits and some wages, not material.

We absorbed those this quarter; we anticipated that.

So the labor issues we think are behind us.

The issues that we experienced this quarter had more to do with that we carried that labor into the quarter with the anticipation of higher volumes.

You see that our finished-goods inventory ticked up.

That's primarily because we were producing at a steady rate in anticipation of.

We still believe that those orders will come back.

Precisely when?

Our expectation is that the second quarter we should start to see positive trends.

What are the indicators that we have?

It's longer-term indicators that I pointed to earlier: Architecture Billing Index, employment, interest rates.

Even interest rates ticking up a little bit, they are still historically very, very low.

All of those things continue to give both third-party forecasters, as well as customers that we serve -- architects, engineers, lighting designers -- confidence that things are there.

Our quoting activity on larger projects continues to be very, very positive though -- and that's a very positive trend about the overall health of the industry.

Projects that are short-term in nature, they can move with sentiment; that's why we comment on that type of thing.

And they did.

It appears that they moved fairly significantly.

We think that we moved beyond that because the indicators of broad business are favorable.

When we think about the temporary disruptions in the fourth quarter, they are very different than what we experienced here.

Our fourth quarter ended August 31.

Some of the NEMA data, which is just interesting to us, again for the calendar year quarter, went through September 30 showing that the markets were flat.

I believe, Ricky, that our volume growth in our Q4 was, what, 13 or 14 points?

Right.

14, I believe?

14.

And this quarter they were up 10.

Well, we are expecting bigger numbers than that, so where we were influenced is by the short-term stock-and-flow-type projects.

When I look at the US Census Bureau data around nonresidential and residential and I look at November on a year-over-year basis October/September, all these numbers were somewhat weak, though November is now starting to show a fairly strong rebound.

We are trying to put all of this together; we are talking to our customers.

The enthusiasm amongst our electrical contractors is still very positive, particularly for larger projects; though they do have some concern that labor shortages in certain markets will continue to influence just how much business they are able to take on.

We don't know right now what that exactly means.

Longer-term labor, electricians and people coming into the market, are a critical issue and may have some impact on the overall growth rate of the industry, but right now we are looking at these smaller-type projects and how do we get past that.

Again, our view is favorable though it may linger into Q2.

Okay, great.

Then question just maybe a bit more of a bigger picture one.

With LEDs now two-thirds of the mix, I am just curious how do you guys think about the impact the mix shift has on growth potential, particularly in retrofit as some of these products have much longer lifetimes and will push out the replacement cycle on sockets.

Then maybe just related to that whether the sustainability of the growth you are seeing in the LED side of the business, how much of that depends on earlier-gen LEDs being replaced with some of the newer Tier 3, 4 solution sets you are increasingly emphasizing?

Thank you.

Sure.

The last portion of your question first; I would say that the replacement of older LED is probably pretty nascent at this point in time, because people are quite pleased probably with what they have.

But when we think about the overall installed base, we still think that the marketplace is a $500 billion to $600 billion market, where outdoor is probably 10% or 11%; converted indoor is less than 5%.

So the solution sets that we are bringing to the marketplace, literally as we speak, whether it's nLight AIR, nLight ECLYPSE, whether it's our submetering capabilities, all of these things are new solutions that are directed towards primarily that huge installed base.

Where I see on some of the small projects, both new and renovation, we sense and we believe that people just took a break.

They were for whatever reason; why this happens, I don't know.

We think we saw it two years ago.

We think we saw it four years ago during this political election process, where people just they stop.

Larger projects, you can't do that because you put it in place a while ago.

Our expectation is that because of the size of the installed base, because of the solution set, because of the energy savings which are significant, the paybacks are significant, and now that you add our IoT software platform on top of that, very compelling value propositions in its totality.

So we expect over the longer term marketplace to really continue to embrace and absorb these types of solution sets.

And others will have competing solution sets and we want that.

We want more and more people to be evangelizing proper solution sets.

Unfortunately, right now there are too many people out there that are saying they are going to do things and they really haven't, so it creates a little bit of noise out there.

But in and of itself that is not a problem over the longer term.

I just want to comment -- this is Ricky, Brian -- that we have never really participated in the replacement of lamps and ballasts in the past.

So the fact that LEDs last a lot longer -- the fixtures in the past, whether they were florescent or HID or other forms of incandescent, the fixtures lasted a long time as well, so the conversion to LED doesn't have as much of an impact to us on that replacement cycle.

The opportunity, as Vern said, is converting that installed base to the more energy efficient and better quality of light that LED value proposition brings.

That's a great point, Ricky.

And the other thing I would say is that, while LED luminaires make up two-thirds, maybe a little bit more of our revenues today, understand that we sell a lot of other product and those products are growing rapidly as well.

The percentage of what our LED is to what our fixture portion of our business would be probably is significantly higher than the two-thirds.

And the other pieces of the business continue to grow nicely, lighting controls as well as building management controls, and now our IoT software platform.

Okay.

Thanks, guys.

Appreciate the color.

Christopher Glynn, Oppenheimer.

Thanks, good morning.

I'm interested in the significant headcount expansion last year and I believe that to be a reflection on how you see the breadth of the Tier 3 projects moving from germination stages into real momentum during fiscal 2017.

Can you update on that overall process and conviction that those investments drive the acceleration in Tier 3 and the visibility there?

Sure.

First off, as we pointed out in our comments, our Tier 3 solution set again grew 40% this quarter over the year-ago period, so that is very, very robust.

And it now represents about 12% of our total business.

Obviously these solution sets are being received very favorably by the market and so we continue to see opportunities to invest there.

Our software technology group and our IoT platform group now consists of north of 140 people.

That's where most of our investment has been going.

These are engineering folks of various types.

So when we look at our salaried headcount on a year-over-year basis, like I said we are up about 700 folks, the bulk of that is through acquisitions, the acquisition of Juno as well as DGLogik, Geometri, for example.

If I look at what we have been doing over the last quarter or two, we've added at a slower pace.

If I go back to, say, the May quarter we've added probably in the neighborhood of 30 folks on the salaried side.

But if we look at -- just picking last May -- if we go back to last May, we've added probably close to 15% on the hourly side.

Again, that add was primarily due to expected continued growth.

We did get growth; we got 10% growth on our core legacy business.

That was very, very favorable given market conditions, but it was clear that we had anticipated and planned for more.

You didn't ask about the hourly headcount, but I wanted to provide that color.

The Tier 3 solution set we are very optimistic and we are rolling out, again starting last quarter where we introduced nLight AIR, nLight ECLYPSE, those products are now being specified into the marketplace.

We are very excited about those.

We are introducing some new products this quarter that will target the commercial office market in terms of renovation, which is really an untapped market at this point in time.

As Ricky pointed out earlier, most of that was being serviced by people changing out lamps, which we think are a very inefficient solution given all of the other opportunities going forward.

So we are managing our headcount growth to be very specific.

We are honing it, as Ricky mentioned earlier.

We've taken some streamlining actions where we have de-invested in areas so we can continue to invest in these higher-growth, higher-margin opportunities.

We are very excited about what we've been able to accomplish in the quarter on putting in Tier 3/Tier 4 solution sets.

As I noted, we are almost up to 40 million square feet of these IoT-oriented solution sets, which is really, really robust, and the enthusiasm around that continues to be very, very strong.

And I would also say that don't take it lightly that someone has been able to now implement near 40 million square feet of these IoT-enabled solutions.

The learning curve and the ability to do that is really hard and we are really good at it and getting better at it every day.

This is what gives us optimism about 2017 and the customers that we are engaging; the breadth of customers that we are engaging is increasing at a very, very rapid pace.

We are very optimistic about Tier 3 and Tier 4 as we go forward.

Thank you, that's helpful.

Then could you just give the current estimates on LED energy savings or the payback time period?

And then also an update on the status of the share repurchase authorization?

Chris, you were only supposed to get two questions.

I think you just slid in two more, but anyway -- Ricky, why don't you go ahead and talk about share authorization?

On the share authorization, we have a 2 million share authorization that the Board has had out for quite a while.

We've only repurchased a minimal amount, as you saw in this quarter, under that, so we've got plenty of firepower -- firepower, that's not the right word -- but the potential to buy back shares.

Chris, I would say on the paybacks, again, as prices of LED luminaires -- many of you focus on that.

That's not really the big issue.

It's as we continue to proliferate different capabilities of LED luminaires -- in other words a good, better, best solution scenario -- as those prices become more interesting to customers, we think that that increases the opportunity for payback.

And it depends on cost of energy.

As you might imagine, some areas where the cost of energy is $0.20 a kWh the paybacks are very short.

Those areas are also expensive labor areas to actually do the install, but they also have incentives to do that.

So I think that paybacks are continuing to improve and, as a result, I think that customers -- again, this is where small projects, as well as medium-size projects, are very important -- customers are listening to these types of solution sets.

We just think that they took a hiatus last quarter because of the jitters that we spoke to.

We see paybacks continuing to improve.

We see solution sets that are not just based on energy paybacks but now have IoT capabilities that are providing even more, if you will, payback opportunities because of value in addition to energy.

Thanks.

I will behave next quarter.

John Walsh, Vertical Research.

Good morning.

So, had a question -- know we won't get into numbers around some of the potential policy changes, but just wanted to know if there is additional capacity in any of your US manufacturing facilities or the ability to add capacity.

And then maybe just the idea of what it actually cost to set up a factory if certain policy does go into effect.

Let me just take a brief stab and then I'm going to turn it over to Ricky.

We have a very strong US manufacturing capability, and the difficulty in all of these scenarios is who knows which one.

But what we are thinking through is how we, under different scenarios, would leverage our US capabilities.

We are looking -- as Ricky pointed out, we are targeting about 2.5% of sales CapEx investment this year.

Some of that investment may find its way into different locations.

It was probably going to anyway.

We like to do a lot of our own painting of our materials.

As we have moved product around we have actually had to incur both expediting of component cost, outside processing for painting, just as an example.

These are some of the inefficiencies that flowed through this quarter.

So as we think about our future investments and our future supply-chain capabilities, we may actually adjust some of the locations and just how we may make some of those investments.

So instead of putting in a large paint system, as we did in Guadalupe, Mexico, to support our growth, we actually have been thinking about more micro-paint systems in different areas really provide much more speed to the market and much more flexibility.

So these are the kinds of things that we would consider to help facilitate whatever changes may occur so that we can really serve our customers in a much more efficient way.

While we may have to do certain things, we are optimistic overall about what the positive business trends could be.

I'm not as nervous about that; we are thinking through those.

But, Ricky, maybe you might want to comment on the rest?

On the facilities, we do have excess capacity, as you might appreciate, with the acquisitions we made that gives us opportunity to consolidate and integrate.

Even though we have done some of that already, we do have excess capacity.

We also have ability in distribution centers where we do do light assembly and in some cases do more heavy manufacturing that we can expand it there.

And then there is opportunity within our supply base to source more of that domestically, depending on how all of the regulations; as Vern said, it's just too many options to speculate.

Rest assured, we are looking at almost all of those and planning our contingencies around them.

And when it becomes clearer we can provide better clarity.

Great, thank you.

Then just a quick one here.

Can you provide what kind of volume growth you were actually expecting in the quarter?

Well, I believe that some of the consensus forecasts for top line were not outside of our realm of expectation.

I think for folks who -- this is a hint to look at our growth in finished goods probably as a reflection of what we were expecting and now that is at cost level.

And so you can then do your own math from there.

I believe that the lack of demand probably was a 100 basis point hit on our gross profit margin -- and that's just a guess -- and some of the inefficiencies that we had probably added another 50 basis points, 60 basis points.

But that's all speculation at this point in time.

We know what our actual results were.

We know what we were anticipating and so we are now aligning our supply chain structure against current demand.

Here is the point that I would make to everybody: current demand is both what the market is plus what we believe we can grow beyond the market.

We have had a long track record of outperforming the market.

This quarter was no different.

We guessed the market was flattish and yet we were able to grow our core business 10%.

That is a pretty robust performance relative to the market.

As you know, we have experienced larger organic growth, volume growth in previous quarters and so we were probably more attuned to that than what we actually experienced.

Great.

Thank you for the color.

(inaudible), Deutsche Bank.

Thanks for taking my question.

In the retrofit market you guys have introduced some spec-cycle products recently.

Can you talk about the feedback you are getting from your customers on those products?

And also have you -- can you talk about what Tier 3, Tier 4 segment will look like as a percentage of mix exiting 2017?

Thank you.

So, first off, the bonds from customers; can understand that many of these products are spec-oriented products so they go into larger projects so the introduction of those products have been to architects, engineers, lighting designers.

And the solution sets, the way they have examined and the way they feel about what the features and benefits can be has been very, very positive.

It's a spec cycle.

These things have to get spec-ed in and that's how they will probably ramp up over the next 120 to 180 days kind of thing.

Some of the products that we've introduced are also now directed towards what we will call the more stock and flow, that renovation project that's very quick.

We were seeing very positive response to that, but yet those things need to translate into orders that then flow through the system.

So our second quarter we are expecting that we will see the ramp-up of those products and though solution sets more getting after untapped market as opposed to necessarily displacing other products within our portfolio.

We are optimistic about what those products will mean for our growth.

We've had good demand and good interest so far.

We have not specifically provided a target for Tier 3 and Tier 4 solutions sets, other than to say we expect outsized performance and growth in those things.

And we are seeing that.

We are trying to really get our base established and then to continue to provide you with insight as to the growth in those two segments.

Tier 4 revenues improved nicely, but it's off a very, very small base.

And relative to our total revenues it's still very small, but yet it's part of a broader package of solutions that we are bringing to customers.

So we are seeing larger, more significant pilot programs roll out.

We are seeing a broader base of customers expressing deep interest and we are expanding that customer base in terms of our dialogue.

Again, we are very optimistic about what Tier 3 and Tier 4 look like over the next, say, 1,000 days for Acuity.

Thank you.

Cindy Motz, Williams Capital.

Thanks for taking my questions.

I just wanted to clarify; the second quarter you had said in the press release that it was still a seasonally slow quarter, but just based on some of the new products and what you are mentioning in the ramp, do you think that you are still going to see mid to upper single-digit growth in revenues there?

Then just specific with the uncertainty surrounding some of the smaller projects, with Trump and everything, were they worried about anything specific or do you think it was just sort of the overall reaction that I guess a lot of us had -- uncertainty and then now it has sort of calmed down?

Thanks.

Cindy, the last question first, because that is one I can answer.

You know, it's just interesting to us.

We are citizens, too, and we watch all of this, as well as being business people.

We saw this two years ago and we saw it four years ago.

Why?

It makes no sense to us as business people, but yet we believe that that slow down was real and we heard it in many geographies, in many different customer sets.

Folks are sometimes looking for reasons why that they are going to just delay.

I believe that they are going to realize the sky didn't fall and they are going to get back to business as usual and they are look back to, hey, this is a great investment.

It's a payback that is very short.

It provides operating benefits; it provides commercial benefits.

It's a bit of a wait and see.

Large projects continue to move along; the quote rates are positive.

We are seeing positive activity in the precursor of those larger projects -- architects, engineers, lighting designers -- being busy.

The smaller folks are really -- the smaller contractors, as they go back to their electrical distributor partners and pick up product and take it to jobs and then those electrical distributors replenish, that's when we are going to know the cycle is moving back.

Our expectation is that that happens.

We are waiting to see that that happens.

Obviously, we are way early in January so we will wait to see on that.

When it comes to giving a forecast, I just am reluctant to go there.

I will give you, by way of anecdotal information, we always see a -- lesser revenues in Q2 relative to Q1, but in Q1 we always see lesser revenues than Q3.

And yet Q3 and Q1 revenues, Q3 from last year and Q1 revenues this year, were the same.

What's interesting about that is, for us, is that typically they would be a little less in Q1, but more importantly, the difference in mix between Q3 and Q1 was a significant drop in the C&I world, which is where these small projects are.

So we are actually seeing support around that.

We continue to believe that we will see solid growth in Q2, but also remember that in Q2 we will essentially have anniversaried all of our acquisitions.

So we will be back to a real year-over-year growth in terms of real volume, not just acquisition activity as well.

Thanks.

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

Thank you.

Everyone, thank you for your time this morning.

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

Our future is very bright.

Thank you for your support.

That concludes today's call.

Thank you for your participation.

All participants may disconnect at this time.