Koninklijke Philips NV (PHG) 2006 Q1 法說會逐字稿

Good day and welcome to the Genlyte Group first-quarter 2006 earnings conference call. Also, welcome to those of you listening on our webcast. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded with an audio archived copy becoming available approximately three hours after the conference on Genlyte Group's website at www.Genlyte.com.

This conference will begin with an overview of the 2006 first-quarter results by Mr. Larry Powers, Chairman, President and CEO of Genlyte, and Mr. Bill Ferko, Vice President and CFO of Genlyte, followed by a question-and-answer session. (OPERATOR INSTRUCTIONS).

Before we begin, let me remind you that today's discussion may include forward-looking statements. These statements are based on our view of the world today and therefore are subject to risks and uncertainties which are discussed in more detail in the Company's most recent Form 10-Q. Obviously actual future results may vary. We will shortly hand you over to Mr. Powers.

Good morning, everyone, and welcome to our first-quarter conference call. As I already indicated in our press release that we put out early this morning, I was quite pleased with the results of our first quarter. There's no question that our overall business climate for our products, both on the commercial, residential and industrial side, have improved during the first quarter. We came off a relatively flat fourth quarter of last year, although December -- we did start seeing some improvement in December last year, but the momentum continued on into the first quarter this year and we're very pleased with the overall results that we were able to attain.

One of these things that has helped us this last year really in improving our margins and that is that we were able to obtain some price from the price increases that we had -- the last couple of price increases significantly helped us improve our margins. Last week I was at the NAED which is the National Association of Electrical Distributors, annual conference and the distributors and most everyone in our business today is pretty euphoric about the current market conditions, a business climate that is just extremely healthy right at the present time.

I have some concerns like many other people in our industry about these accelerating costs of raw materials in aluminum, copper, steel, zinc -- all of us know about the prices of gas. These things are all going up at unbelievably high rates. Most all of these commodities have reached new all-time highs and nobody's sees any slowdown in these price increases for these commodity materials in the near-term. China is putting a lot of demand on these commodity prices and they just continue to go up.

My concern is that if they continue to go up at some point it's almost got to have some impact on the commercial construction business and residential too for that matter. We also know about the increases we've had in the past year that in interest rates it appears that the Fed is now content to say that they may leave it stable for a while. If interest rates are to continue to go up that certainly will have some negative impact on our business also going forward. But all in all the first quarter was very good.

Now, we have just announced, as we stated in our release, another price increase to help offset some of the costs of these raw materials. We announced a price increase that will range somewhere between 5% and 10% that will be effective June 1st on all business that we ship after those dates. So we're hoping that that price increase will be well accepted -- and I think it will be. All of our major competitors have also announced a similar type price increase. Everyone recognizes the increasing cost of materials and so therefore I think the whole industry recognizes that we need a price increase.

In my discussing this price increase with many of our distributors at our meeting last week in Orlando, Florida, they all recognize that we're going to have price increases and I think they're going to be pretty well accepted. So I'm optimistic that they will certainly help to offset these costs of increased raw materials that we're seeing. I'm hoping that we can go forward and continue to keep our margins at a reasonably healthy rate.

A couple things on the downside. As most of you know, we have opened a new operation last fall in San Marcos, Texas. We keep being optimistic that we're going to get that operation back on track and they've definitely made some improvements down there, but we're still very, very inefficient. We're still way behind and very late in many of our orders and that operation is going to continue to struggle well into the second quarter. I'm hoping by the end of this quarter -- by the end of June I'm hoping that we'll have that thing up and running at at least a reasonably efficient manner.

Right now they're still struggling with getting new employees and getting people trained and getting inventories and there's just kind of the typical startup. It seems to me like we've struggled more than we should have, but for whatever the reason we haven't done as good a job there. We definitely lost some income and even some sales in the first quarter out of that operation due to these inefficiencies and our inability to ship like we should. So we're hoping to get that back on track in the near future.

Other than that the business climate is I think relatively good. We feel reasonably optimistic going into the second quarter. I'd sure like to see these material cost increases subside and slowdown, hopefully even stop for a while because I do think in the long-term they're going to start having some negative impact on our market if they continue to go up. Fuel is a significant problem for us and if gas continues to go up -- diesel we'll take a decent price hit, but if we get hit with these surcharges and it's significant cost increases to us with these materials and if gas continues to go up and it looks like it may do so.

So I think with that I'll turn it over to Bill Ferko and let him give you some details of the financials of the first quarter, and then we'll be happy to answer any questions that you might have. So with that, Bill?

Thank you, Larry. Good morning. As you saw in our release, our first-quarter sales of $329.2 million are $27.8 million higher or 9.2% over the first quarter of 2005. The Canadian dollar had some impact converting our first-quarter Canadian sales at the stronger Canadian dollar rate increased our sales by approximately $3.2 million. In addition to sales being strong orders were strong. Our orders in the first quarter were 15.1% higher than last year and our backlog going into the second quarter is 29.6 higher than it was at the end of the first quarter of 2005.

As Larry indicated, sales are higher due to the price increase that was effective in 2004 and was not repeated in 2005 which we believe probably resulted in some prebuying during the fourth quarter of 2004 and this didn't happen this last year in the fourth quarter, so we had more of a normal fourth-quarter to first-quarter sales trends.

And as I think all of you are aware, we had a very warm January in many parts of the United States. Larry talked about the price increase that was effective in June of last year which continues to provide some benefit. And we are starting to see construction or reconstruction activity accelerating in the New Orleans and Southeast Texas area where they were impacted by the hurricanes.

In the operating profit area our first-quarter operating profit of $43.6 million is 36.9% higher than 2005. Our operating profit margin improved to 13.2% of sales from 10.6% in the first quarter of 2005. We're very pleased that our gross margin has continued at approximately 200 basis points higher or 38.3% from 36.3% in the first quarter of 2005 due partially to product mix and higher value added products as well as the benefit of price increases.

However, as Larry indicated, cost increases are starting to be more of a year-over-year negative impact where some purchase agreements that we had in place earlier last year with vendors are starting to roll off and we're faced with higher costs for aluminum, steel, copper, ballast is a big issue for us, zinc coatings, etc., as well as energy costs that are used for our drying operations and fuel surcharges.

In the area of fuel, an area Larry just talked about, freight costs are rising and not all of the impact is actually in the first quarter. Freight costs have increase significantly just during the month of April. However, for the first quarter as a percentage of sales freight costs alone are 20 basis points higher than they were -- as a percentage of sales than they were in the first quarter of 2005. And so as a result of all these cost increases that we're faced with, we have announced another price increase of between 5 and 10% which will be effective for orders released after June 1st.

During the first quarter a currency gain was recognized due to translating our working capital transactions to U.S. dollars. It was $135,000 versus $329,000 in 2005. In addition, converting our Canadian division's operating profit at the higher exchange rate resulted in a benefit of $444,000 over 2005. However, during the second quarter last year we recognized a $408,000 gain from the working capital translation.

And during the month of April alone the Canadian dollar has appreciated by 4.5% which will result in a loss of approximately $1 million that will -- assuming the Canadian dollar stays the same it will result in an approximately $1 million loss just during the second quarter. So that's about a $1.4 million swing versus the gain that we recognized last year. However, this will be partially offset by the earnings of our Canadian operations translating it at the higher stronger Canadian dollar rate.

Another issue in the first quarter, as Larry indicated, our San Marcos operation continues to deal with the startup and the relocation from our facility which was the shut down during the fourth quarter of last year. Most of the moving costs are behind us. We only recognized about $186,000 of operating expenses related to the relocation and severance. However, the startup inefficiencies were fairly significant -- came in at just around $1.7 million in the first quarter. And we expect that during the second-quarter inefficiencies, we had announced a 2 to 3 million total for the year, we're sticking with that. At this point it still looks like an additional $300,000 to $1.3 million that will be recognized during the second quarter and probably in the middle somewhere closer to the middle of that range.

In the area of net income, net income, as you saw, was $48.6 million, increased 170% from the $18 million that we reported in the first quarter of 2005. Of course the first quarter includes this onetime tax benefit of $24.7 million which was due to a corporate tax restructuring. Without this benefit net income would have been $23.9 million or 32.8% higher. Additionally we had an increased tax expense of $2 million for a combination of a $10 million foreign dividend of subsidiary earnings repatriation plus a $25 million return of capital. Without these items net income would have been -- without all of these tax items net income would have been $25.9 million or 43.8% higher.

This tax benefit was really just a onetime type thing. It was related to the change in our corporate tax structure of Genlyte Thomas Group LLC from a partnership status to a corporate status for tax purposes. A portion of the deferred taxes that have been accumulated on Genlyte's outside basis of Genlyte Thomas Group were reported -- or they were required to be recognized in the income for tax accounting during the quarter. There's no change in the legal status or operational status of Genlyte or Genlyte Thomas Group as a result of this tax status change.

So after adjusting for all of these above items, the 2006 effective tax rate actually did increase a little bit to 39% Ron 38.9% in the first quarter of 2005. Earnings per share then in the first quarter were $1.70 compared to $0.64 in the first quarter of 2005 after adjusting for the stock split that occurred in April of last year. And of course that's a 165.6% increase. The $24.7 million tax benefit improved or had an impact of improving earnings per share by $0.86 per share and the $2 million additional tax on the foreign earnings repatriation had an impact of approximately $0.07 per share.

In the area of cash generation, we're very pleased that cash flow from operations net of capital expenditures was only a $20.5 million use of cash compared to a $23.4 million use in the first quarter of 2005. During the first quarter we typically have significant payments for rebates and there's a ramp up of the business. There's bonuses, etc. that are paid. So we're pretty pleased that negative cash flow -- outflow in the first quarter was actually less than last year despite a fairly healthy business.

And in the working capital area, our first-quarter working capital less cash, cash equivalents, short-term investments and debt, decreased $100,000 or 0.1% to $197.3 million from $197.4 million in March of 2005. Working capital as a percentage of annualized sales decreased from 16.4% to 15% this year, so we're very pleased with that. Inventory actually decreased $5.4 million to $153.3 million versus $158.7 million in the first quarter of 2005. And as a percentage of sales it decreased to 11.6% from 13% in the first quarter of 2005. We're extremely pleased with the improvements that we've had in the inventory area.

Capital expenditures of $5 million are $5.4 million lower than last year. They were $10.4 million total last year. In the area of debt, our net debt or that less cash and short-term investments position was $83.8 million compared to $190.2 million in the first quarter of 2005 and $70.7 million at the end of 2005. Total debt has decreased $112.2 million to $146.3 million from $258.5 million in the first quarter of 2005.

I thought I might give you a few comments about the impact of FAS 123R, the impact of stock option awards. Genlyte's Board of Directors did grant 169,250 stock options on April 20, 2006, which was equivalent to about 0.6% of our average shares outstanding. This compares to 503,600 stock options split adjusted that were granted in April of 2005. So significantly less options were granted this year than last year and that's our normal annual type award that we do.

The expected operating expense in the second quarter of this FAS 123 expensing of options is expected to be $274,000. The after-tax expense is expected to be $180,000 or the impact during the second quarter will be approximately $0.01 per share. The 2006 operating expense per quarter then after the second quarter will be approximately $346,000 and the after-tax expense will be $228,000 or $0.01 per share. So the total 2006 expected operating expense will be $966,000 pretax, $637,000 after-tax or approximately $0.02 per share.

And then 2007, which will be the first full year that we'll have the expensing of these options, the expected operating expense will be $1.4 million pretax, $912,000 after-tax and then the $0.03 per share just for the shares that were granted this past April. Now both members will basically layer on as the stock options are amortized over the vesting period which is approximately three years. So on a pro forma basis assuming the patterns have continued then you would just layer on those costs every year for the next three years.

So hopefully that helps those of you who try to do modeling and the impact of stock options. That's the end of my formally prepared comments and with that I will open the line up for questions.

+++ q-and-a: (OPERATOR INSTRUCTIONS). Craig Kennison, Robert W. Baird.

Good morning and congratulations. First question regarding the price increase, who among your peers have also announced a price increase? At what point does it become difficult to increase price without affecting your share or end demand?

Well, we know for sure that all of our three of our major competitors -- Acuity, Hubbell and Cooper -- have all announced a similar price increase effective about the same time. As long as all of us -- as long as commodities continue to go up and all of our major competitors continue to go up, we don't think it will have any impact or any change at all in our world market share.

As you probably know, in the past we've been a company that's concentrated on higher margin products and we choose many times not to participate in some of the high-volume commodity pricing that's out there particularly through some of (technical difficulty) retailers and some of the more commodity type jobs. We concentrate our energies and efforts on our specification work, working with major developers and architects and engineers and these types of people that specify and sell our higher margin products.

And that's why in some cases you'll see that our sales growth is slightly less in many cases than some of our major competitors, but if you start comparing the margins and our operating profit, you'll see that in many cases we do better. That's somewhat of a philosophy we have. We're going to be competitive; we're going to compete wherever we have to compete. And I don't think that these price increases will in any way have a negative impact on our (technical difficulty) to gain or lose market share really.

If all of the major competitors and the little guys now -- I mean the most of them are going to have to (technical difficulty) and even if they don't they don't have that much impact on the overall markets. So they're not a factor anyway. And as long as the three major or four major companies go up in pricing and recognize generally market share will stay relatively stable.

Thank you. And then of the 9% revenue growth in the quarter, can you give us a sense for the impact of price, volume and mix?

Bill, you might have some feeling. I don't know if we have that broken out exactly.

The price increase in June of last year has (technical difficulty) substantially worked its way through. And so we've probably got about 4% -- 4 to 5% of the revenue growth is in the price area and the rest of it --. And when I say that, it's difficult to separate mix. It's our strategy to target higher value added products versus price alone. And then the remainder (technical difficulty) roughly 4 to 5% of our growth would be in units.

And can you remind me what kind of realization you got on the June '05 price increase? In other words, what percentage of the (technical difficulty) were you able to achieve?

I would say roughly half of that. I think we'll do better this time just because of the rapidly escalating cost of raw materials. But I'd say the last couple of price increases we had we realize about -- in fact, a little over half, probably a little over half of the announced price increase.

Okay, thank you. And then finally, just with respect to the Energy Act. Could you comment on whether (technical difficulty) incremental demand or order flow related to that? Thank you.

Well, so far we can't say that we've seen any great demand. But it's still kind of in its infancy and it's taking some time to get all of the groundwork set for this. As an example, the government still hasn't come out and stated exactly how you're going to get credit for these tax rebates and that that you're supposed to get. That otherwise, when you go in and say you do a new building and you meet all the new energy codes and someone has got to come in and certify that you have now completed (technical difficulty) the exact details of all this haven't been worked out which is slowing it up a little bit.

But there is a lot of discussion and I think a lot of anticipation that a lot of people are starting already to move forward and more people will move forward as they gain more knowledge. I know we're out promoting and most of our competitors are doing the same thing and we've all got programs in place to go out and highly promote this new tax benefit. And as of yet I can't say that we've seen any great benefit, but I think we will.

There's a lot of momentum starting to build and I think towards the last half, last quarter of this year one of the things that we're working very hard to do -- I'm on the NEMA, National Electrical Manufacturer's Association Board of Governors. We're working very hard to try to get the length of time expanded. As you know, this is only a two-year program and my concern is -- or our concern is in total that we're just going to get this thing up and get the momentum rolling and it's going to expire.

So it really needs to be extended and we're working hard to do that. But I don't know whether we're going to be successful at that yet, but I am optimistic once they recognize that they've been very slow to get it up and running that we're going to need more time. So I'm hoping that over the next -- really I'd like to see a five-year program -- and I think we could have a tremendous benefit up to the (indiscernible) commercial, particularly commercial office space to have a tremendous (technical difficulty)

Thank you.

Robert McCarthy, CIBC World Markets.

Good morning, everyone. Congratulations on a great quarter. I just wanted to get some comments on commercial construction. It sounds like obviously demand seems to be very positive there and there really is no change to the margin over the past couple quarters. One of your competitors alluded to the fact that they have seen a lot of strength on the light commercial construction. How they define light commercial is any kind of commercial construction without cranes. But they haven't really seen any side of significant pickup in heavy construction, those involving cranes or high-rises in more industrial centers. Is there any way you can comment on the complexion of the demand for commercial construction?

I think we are starting to see some more demand for, and I'll try to characterize it the same way they did, for major commercial construction. A lot of the major areas -- Dallas, Texas; Louisville, Kentucky (technical difficulty) -- there hasn't been a new office building go up for quite some time. But right in back of us now they're building a complete new -- it looks like it's a replica of the building that we're in, new office building and as you are traveling around and you're talking to people, I'm talking to people and our distributors -- they are seeing more I think what we would characterize as major commercial construction.

And I do agree that light commercial has been very good. That's what's been active the last couple years. The smaller strip malls, branch banks, hotels, restaurants -- that kind of thing has remained relatively healthy. The thing that we didn't see last year; haven't seen the last couple years is any real cranes in the sky in major. I can't say that it's on fire right now, but I definitely think that there's an improvement in commercial construction -- in what we call major commercial construction. And assuming that these field costs don't continue to escalate and interest rates don't go crazy and scare people, I think that we will continue to see that improve over this year, certainly well into 2007.

Great. And then switching gears, can you give us some complexion on the fact that the dynamics of the Katrina (technical difficulty) push out given the fact that people had already recovered from Katrina? Did you quantify how strong the volume you saw? Do you think it's going to be sustainable? How long will it be?

Well, I think it's going to be for many years. Now how strong it's going to be -- I know in New Orleans, as a company we can't say that we were a major -- that was a major market for us. We are doing very well in that marketplace right now and, again, coming off a relatively small base for us. So I think anything that we get is going to be on the plus side, but I think it's going to last for a lot of years. In other words, it's not something that you're going to see a big surge and then it's going to go away. It's not going to be a huge surge.

It's taking a fair amount of time to get that mess cleaned up and to start construction, but we've already seen it in some -- (indiscernible) what we've seen so far is some remodeling and that of some hotels and restaurants and things that got hit pretty bad and they jumped on those very quickly because they wanted to get their businesses (technical difficulty). I think there will be a demand for new hotels, new restaurants.

Certainly the residential market down there, assuming that they get some of the details worked out and people start coming back, will be fairly strong I think for several years to come. But for us it's not going to be -- it's not huge dollars because, again, it's not what we would call a major market for us.

Right. And then switching gears again to the residential market, it looks like things continue to be strong there. Any expectation for the back half of the year? I guess flat is your guidance at the outset of the year, are you going to bring at guidance up or do you think it will be negative? What's your complexion on how residential will play out for the back half of the year?

I think it will definitely be down slightly. I continue to be surprised at the strength of the residential market. I've been doing this for a long time and it just continues to amaze me -- at the resiliency that that market (technical difficulty). My son-in-law works for the largest homebuilder in this country. And even though they've seen some softening but it's still at a very high level and then it appears (technical difficulty) start reading the areas like Miami, Phoenix, Las Vegas and these areas, there's no question that the (technical difficulty) and the amount of new construction has slowed, but it's still a relatively high rate though and I don't see any huge fall off the (indiscernible) of this year. I just think the second half will be a little (technical difficulty) than the first half, but again, still at a pretty high level.

More like sequentially than year-over-year then?

That's correct.

Okay. And then just in terms of just talking about the price increases. How should we think amount kind of the volume activity? Would you expect a significant prebuy ahead of the price increases? How should we think about it for modeling purposes?

No, I don't think you're going to see a big prebuy. First of all, a significant amount of our business today comes -- it's bid business, it's drop ship to job sites and distributors. You might see a few projects and that get accelerated, somebody will buy a little early or something to protect the prices on a few projects. Our distributors aren't buying very much ahead in any large volumes. We've probably got 60 to 65, 70% of our volume is not true distributor stock. It's directly -- it's all job-related anyway. So I don't think there will be a big prebuy. There will always be some, but I don't think it will be a significant amount of our volume.

Thank you for your time.

Cliff Walsh, Sidoti & Co.

Can you comment on the mix of the backlog? Are we going to continue to see the energy efficient type products grow in size?

I think so. We're coming out with a lot of new products. One thing I probably should have mentioned in my overall remarks is that we're continuing to be very aggressive and introduce some new products. Got lots of new energy efficient products coming out. Later this year we'll be introducing several new LED type products and we're just seeing a good demand for energy efficient new state-of-the-art products.

I think everybody is getting more tuned in now than ever before because of the continuing increases in energy costs and I think people now realize and believe that it's here to stay so maybe they ought to get serious about it. In this country so far we've never gotten serious at all about energy efficiency in residential construction, but I'm hoping that at some point we've start seeing a switch to incandescent down lighting and an incandescent track hedge to the PL and a lot more halogen and a lot more energy efficient type sources.

I think that (technical difficulty). Unfortunately in this country the construction business, because of the multiple layers from a specifier, architects, engineers, distributors, contractors -- nothing moves very fast in this country, but I think you'll see a continual improvement in energy efficiency -- and again, a continual demand for more efficient, better quality energy efficient type products as we these costs continue to go (technical difficulty).

In terms of any geographic strength or weakness been around the country?

The thing that I was pleased with -- all of our product lines, both indoor and outdoor, all pretty much, except for our problems that we're having in Texas with our new start-up operation, all of our companies had similar across the board increases. And I like to see that because it's not one market is real strong and something else is real weak. So we have a (technical difficulty) and that usually means that everybody in most parts of the country, because we have let some of our companies that are much stronger in certain geographic areas than others, but overall I think it's pretty uniform.

Great, thanks very much, guys.

(OPERATOR INSTRUCTIONS). Alex Rygiel, Friedman Billings Ramsey.

A couple quick questions. First Bill, as it relates to fuel and freight costs, is there any way you can give us a simple rule of thumb as to how we can think about future fuel increases at the pump and parallel it back to your business over the next six months or so?

Yes, there is. In fact, we have a chart that we use here and there are some rules of thumb. And you know, I don't have it handy here, of every $0.10 increase in diesel fuel has ex thousands of dollars increase --.

As I recall, Bill, it's about a half -- the rough estimate was about half $1 million. For every $0.10 diesel fuel goes up it (technical difficulty) $0.5 million additional freight costs.

Again, we have these price increases which hopefully will substantially offset that. So the net impact may be different than the gross impact of the cost increase. And then we have -- surprisingly our freight costs would be a lot higher if we had not had some fairly good improvements from teams of employees and the operations in the warehouses and in the logistics area working together (technical difficulty) to find ways to improve utilization in the trucks, to optimize routings of trucks, to minimize the number of orders or shipments per order, LTLs, etc. So we've got some very good logistics people in our company that have done a tremendous job of helping to avoid what otherwise would be a lot more cost increase.

The other thing we did, we increased our freight minimum is what (indiscernible) and distributors have to place larger orders, freight (technical difficulty) orders these days (technical difficulty) in order for us to prepay the freight.

Okay. Bill, when you look out into next year, '07, maybe even into '08, do you see on the horizon another San Marcos that in a short-term period of time might cost you some money, but over the long-term might provide you additional benefits?

If you look back over the last six or eight years, we have consolidated or closed a lot of facilities as a result of the merger between Genlyte and Thomas that took place in August of '98. And there were a lot of projects and synergies that were identified as a result of that combination. Now we've closed one or two (technical difficulty) every year for the past few years or merged facilities I should say.

The (technical difficulty) opportunities are becoming more difficult to do without of a lot of disruption to the operations. It's possible that there could be another one or two but there's nothing on the immediate horizon. Over the next three years (technical difficulty) you're going to 2008. It's very possible that we could find some opportunities to improve some efficiencies and put some things together. But at this point we're just focused on optimizing the one in San Marcos that was already started. And that will probably take a few more months to get there.

And lastly, with regard to acquisitions. Based upon what you just stated, would be safe to assume that any acquisitions you'd be looking at would most likely come with fairly significant internal cost savings synergistic opportunities?

Whenever we look at an acquisition there's a lot of factors that we look at. We look at revenue synergies, we look at cost synergies. One of the more challenging things for us to look at is making sure we don't cause disruption with our reps and with our customers in being able to service the business properly. And then secondary to that is the synergies that we can take a longer period of time to realize those. So the purchasing synergies come usually pretty fast in getting able to buy at a better price for the target company similar to costs that we're able to buy at.

The consolidation synergies take a lot of time and they have to make sense. We still have some fairly small focused factories out there that we believe are more efficient because they're focused then if we were to just have them swallowed up by a larger company. So we go through several series of analyses to determine if it makes sense and if it does and we're able to continue to provide (technical difficulty) service to our customers, we do attempt to harvest those synergies. Right now our challenge is to find those opportunities.

Great, nice quarter. Thank you very much.

Justin Maurer, Lord Abbett.

Larry, in the past you've talked -- I guess the last couple of quarters about the more commodity end of the spectrum, that it was getting tough to compare and you guys felt like you were leaving some business on the table as folks were leading that path down. It sounds like from your comments today about the industry participating that that may no longer be the case that people are getting religion in a sense, is that fair?

I think that's true, but there's always a certain amount of business (technical difficulty) the big box retailers and people like that. We just choose not to participate in that business. And I'd give you one prime example. For years and years and years we used to do a majority of all Wal-Mart stores in new construction, but that business just got to the point where it was no longer profitable business and so we made a conscious decision to say look, we can spend our time and energy and resources (technical difficulty) trying to introduce more innovative new products to people that appreciate our higher margin or our higher performance type products and therefore let's not participate in that.

And the last Wal-Mart (technical difficulty) probably in maybe -- I don't know -- maybe 15, 20 years that we as a company will not be participating in any of the Wal-Mart business because it's just we believe that it's at a level that just does not make any sense for us whatsoever. And that's the type of business we're talking about. In the day-in/day-out construction business, whether there may be some low-end margin products on that business, but as long as the overall mix of products and we can get some of our products specified whether it be controls, whether it be a downlighting, track, emergency whenever outdoor and we have a decent mix of products we will take those jobs.

But as far as just going out and selling into the commodity -- what we call the commodity end of the business, we just don't have any desire to do that in there are times when that business is kind of up and doing very well and therefore our growth may not be quite as high as some of our competitors. But again, if you look at our margins and that I think you'll see that we're doing significantly better than most of that.

This is Bill. Just to emphasize, we're certainly not shying away from the retail segment. Lighting has proven to be an important factor in influencing customer behavior (technical difficulty) in retail stores, but it's higher quality and point source lighting. And studies have been done that show that better lighting actually makes the buying experience more comfortable and retailers (technical difficulty) do a better job with better, higher quality lighting which is exactly Genlyte's sweet spot in helping the retailers to improve the ambiance in their stores and the customer experiences.

So we're certainly not abandoning, in fact it's a core area of our emphasis in the retail. It's just the low-end of the retail is the area that -- I can only spend so much time with the retailers and do we do it at the higher end where they can see the benefits of the lighting or you do it at the low and where they're just putting a bunch of light fixtures in.

Okay. Well, I'm sure the Wal-Mart purchasing people aren't communicating with the higher ups there because they've been talking about wanting to improve the selling experience and obviously it isn't happening on your end of the business.

Well, we've provided them over the years with a lot of innovative products, which is an interesting story, but they have chosen -- they just have gotten very aggressive in driving and they pound people that are willing to sell them product at very low prices. They want you to lock in very long periods of time and they won't allow price increases and you get to a point where they become -- it becomes unprofitable business.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS). Alex Mitchell, [Scoper] Asset Management.

Good morning. A couple questions. One is do you give an estimate as to how much raw material (indiscernible) you've had to absorb in the last year?

That's a tough question. It really is all over the place. We've had some fairly significant unfavorable cost variances particularly recently. Last year we --.

Well, let's say just the last quarter.

The last quarter -- it's probably on average 4 to 5% of our cost. And one of the issues is not just what we've absorbed because we had these purchasing agreements in place, like a one-year purchasing agreement or a six-month purchasing agreement, which has helped to buffer some of the cost increases that we're looking at right now. So the challenge is to look at the next three to six months where these supply agreements are running off and the cost increases that we'll be facing going forward.

Okay. And I guess your beginning of June price increase, does that get you caught up pretty much or --?

That's pretty much our objective, to get caught up. I think in the first quarter just to go back, Bill and I unfortunately are not in the same area today. I'm Out West, I'm not in a different location. But I think in the first quarter we didn't get hit as much with those price increases -- we didn't feel the impact of them so much because of what Bill said. We had purchase agreements in place. We just recently received a 10% increase in ballast and we haven't felt that yet. We will feel that by June.

That's why it was so critical for us to get this price increase out because we're going to feel some negative benefits of the price increases (technical difficulty) products in the second quarter and we've got to get out with this price increase and we've got to be sure this price increase holds or it's definitely going to have negative impact certainly going into the latter part of the second quarter and early into the third quarter. But I'm confident now because of the price increases going out, but we will be able to offset I'm hoping all -- at least most if not all of those cost increases. That is our objective and what we'll try very hard to do.

And are there any building code changes either -- you talked a little bit about energy savings and any fire code changes that may affect the business?

No, not anything significant. There's always little tweaks in various states. California's got some code changes. In fact, we're introducing some new products to able to meet a lot of these new codes and that kind of thing. But there's not anything that we're aware of. We stay very much involved with the [coat] body people and to my knowledge there's not anything that's going to have any -- there's some dark sky stuff coming down that's going to affect some outdoor businesses. That what we're doing in the meantime is developing new products. We have a group of our people that stay very much in tune with these code changes and that and then we try to react very quickly and stay abreast of that and stay ahead of that game so that it doesn't impact any of our businesses negatively.

Could it impact it positively (indiscernible)?

Yes, it can. Like this energy thing we think can have a big impact from a positive standpoint. There are a lot of the codes that can definitely have positive impacts on our business because we are a company that does really stay abreast of technology. We're very quick to jump on product innovation and new energy efficient products and new changes. The LED thing could have -- over time I think LED is going to have a major impact on the lighting industry in total and we're right on top of that working with many of the major LED producers and well, we've already introduced several products, we'll have several more products introduced this year and we're following that technology very closely.

Thank you.

This concludes the question-and-answer session. (technical difficulty) hand over to Mr. Powers for closing remarks.

Thank you, everyone, today for participating in our conference call and I'm cautiously optimistic that we can keep our momentum going as long as the favorable cost increases and interest rates don't stymie our economy I think we'll continue to perform at a reasonably healthy state. I am as I mentioned earlier, concern about the material cost increases. Hopefully we can offset them with price increases (technical difficulty). Again, thank all of you for participating in the conference call today.

As a reminder, this conference has been recorded with an audio archive copy becoming available in approximately three hours on Genlyte Group's website at www.genlyte.com.