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Acuity Brands (NYSE:AYI)

F1Q08 Earnings Call

January 8, 2008 10:00 am ET

Executives

Dan Smith - Treasurer

Vernon Nagel - CEO

Richard Reece - CFO

Analysts

Robert McCarthy - Banc of America

Peter Lisnic - Robert W. Baird

Christopher Glynn - CIBC World Markets

Matt Mccall - BB&T Capital Markets

David Woodyatt - Keeley Asset Management

Dennis Scofield - Delafield Asset Management

Presentation

Operator

Good morning and welcome to the acuity Brands 2008 first quarter financial conference call. After today’s presentation, there will be a formal question and answer session. To ask a question please press star one. 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 Vice President and Treasurer Acuity Brands. Sir you may begin.

Dan Smith

Thank you. Good morning.With me today to discuss our 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 atwww.acuitybrands.com. I would like to remind everyone that during this call, we may, make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially.

Please refer to our most recent 10-K and 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. Also, as mentioned in our press release earlier today we will file our first quarter 10-Q by the end of day tomorrow. Now let me turn this call over to Vern Nagel.

Vern Nagel

Thank you Dan. Good morning everyone. Ricky and I would like to make a few comments and then, we’ll be happy to answer your questions. On behalf of our 7000 associates worldwide, I’m again pleased to announce record quarterly results from net sales and earnings before a special charge for the first quarter of 2008. This is our 11th quarter in a row quarter over quarter record results. Most importantly our diluted earnings per share from continuing operations before the special charge were 93 cents up 37% from a year ago another first quarter record. In addition to our record operating performance, we brought strategic clarity to the company by completing the previously announced distribution of our specialty chemical business and a tax-free spinoff to our shareholders on October 31st of 2007. Today that company Zep, Inc. trades on the New York Stock Exchange under the ticker symbol ZEP.

The start of our broader plan to enhance shareholder value, which included the spinoff of ZEP, we recognized a special charge in the first quarter for expenses associated with the spinoff and actions taken to simplify and streamline the organization once the distribution was completed. The special charge reduced our consolidated operating profit by $14.6 million and diluted earnings per share from continuing operations by 21 cents. The simplification of our organization structure afforded by this spinoff will allow us to bea more effective and nimble company while reducing overhead costs by more than $14 million annually. Ricky will provide more detail on the charge and our expected savings as a result, of our more simplified organization structure later in the call. I know many of you have already seen our results but I would like to make a few comments on thekey highlights for the quarter. Our first with the lighting company as our only operating unit.As I noted earlier our diluted earnings per share from continuing operations before the special charge were 93 cents again up 37% from a year ago period.

Our continued actions to introduce new and more energy efficient products to improve productivity to provide customers with superior service and to maintain our disciplined approach to pricing were once again significant contributors to the top line growth and our robust expansion of our margins. Net sales for the quarter were $509 million up almost 7% compared with a year ago period. The solid growth in net sales reflects the benefits from the execution of our strategies to be the innovative leader in new energy efficient lighting fixture products expansion of our presence in key channels in new markets and continued improvements in our service and our disciplined approach to pricing. Our top line growth in the quarter was even more notable given the significant decline in construction activity in the residential housing market, which fell for the 21st consecutive month in November.

While it is impossible for us to know the precise impact that declining demand in the residential housing market had on our net sales we believe this weakness reduced our total net sales somewhere between one and 2% this quarter compared with a year ago period. Excluding the impact of the decline in residential housing market the acquisition of Mark Architectural Lighting, which added about $6 million in revenues in the quarter, and the favorable impact of foreign currency rates, we believe our net sales grew about 6% in the nonresidential sector. While it is again impossible to precisely calculate the impact of our pricing action product mix and unit volume growth we believe that this increase in net sales was split relatively equally among these three components.

In addition, we believe we are positioned to continue to enjoy market growth in key sectors of the lighting fixture market inNorth America where we believe the market grew in low single digits on an inflation-adjusted basis during the quarter. Our incoming order rates inthe first quarter as well as December were favorable as key sectors of the nonresidential construction market where we have particular strength enjoyed positive growth.As a consequence, our backlog at the end of November was up 7% over the year ago period. In addition to our positive top line performance, we were particularly pleased with our operating performance especially regarding productivity and customer service. For example, gross profit margin improved 210 basis points over the year ago period to 39.9%.

Consolidated operating profit margin before the impact of the special charge exceeded 13% for the first time ever reaching 13.7% an increase of 250 basis points. Once again, significantly exceeding our goal of adding 70 basis points or more to our margin on a period over period basis.Operating profit before the special charge was almost $70 million an, increase of 30% over the year ago period. This was terrific performance by our team. Looking at our results from another perspective, we generated $16 million of incremental operating profit before the special charge on an increase in net sales of $31.2 million. This represents a variable contribution margin of 51%. Profitability and margins in the quarter grew significantly in spite of rising costs for certain raw materials and component parts and employee related costs. and while continuing to make significant investments to further improve productivity and for projects to expand our presence inkey markets like New York City and lighting related adjacencies particularly in the lighting retrofit market where we see significant growth opportunities.

Also in the first quarter, we received a cash dividend of $62½ million from Zep as part of the spinoff. We used this cash as well as our net cash flow from operating activities to repurchase over two million shares in the quarter for $93 million. Over the last two years, we have repurchased approximately 3.6 million shares net of stocks issued under our incentive plans reducing total shares outstanding by 8% to 41.4 million shares as of November 30th 2007. Lastly, our cash balance was almost $202 million at the end of November giving us tremendous financial flexibility to continue to invest in opportunities to significantly enhance, shareholder value. These exceptional results are the byproduct of the commitment and focus we have as an organization to provide our customers with superior value our associates with great opportunity and our shareholders with upper quartile performance.

All in all ABI had a great first quarter I compliment the leadership team and all the associates at ABI for their dedication outstanding execution and intense focus in the pursuit of operational excellence.

I would like to now turn the call over to Ricky to make a few brief comments on our overall financial performance in the quarter. And then we will make some concluding remarks. Ricky.

Richard K. Reece

Thank you Vern and good morning everyone. Vern previously discussed our operating results for the quarter so I will not repeat this, information however I would like to discuss and provide more detail on our reported results. First, I’ll provide a little more color and some details on our first quarter operating results then I’ll discuss the special charge we took in this quarter including the anticipated timing of the savings we are expecting as a result of these actions. I will conclude my prepared remarks with some comments about our cash flow and financial position. So let’s look at our first quarter operating results. On a GAAP basis first quarter, 2008 reported diluted earnings per share which includes the special charge of $14.6 million and the results of discontinued operations was 72 cents versus 77 cents in the prior year. A special charge negatively impacted reported diluted EPS by 21 cents while discontinued operations effectively had no impact on diluted EPS, as it was essentially breakeven for the first quarter of 2008.

Income from discontinued operations included the net results of Zep Inc. For two months September and October prior to the distribution, date of October 31st 2007. And $5 ½ million of nontax deductible spinoff costs or 13 cents per diluted share.these spinoff costs were primarily for professional and legal fees. Sales for the quarter were, $508.9 million up 6 ½ % from prior year and gross profit was $203.2 million an, increase from prior year of $22.7 million or 12.6%. Gross profit margin reached 39.9% for the quarter reflecting a 210 basis point improvement compared with a year ago period.

Selling distribution and administrative costs were, $133.6 million in the quarter ended November 30th 2007 compared with 126.9 million in the prior year period. This increase of $6.7 million is primarily due to higher commission expense as a result of our increased sales and inflationary increases in certain costs. However, as a percent of sales these operating expenses declined 30 basis points to 26.3% compared with 26.6% a year ago. This improvement demonstrates our continued ability to leverage increased sales and to aggressively manage our indirect costs. During the first quarter, net interest expense declined approximately $1.1 million primarily as a result of interest income on higher cash balances. During the first quarter, our effective tax rate related to continuing operations was 35.9% versus 34.7% in the prior year. Last year’s tax rate benefitted from a discreet item, which did not repeat in the current quarter. Going forward we are estimating our full year tax rate to approximate 35.5%. Let’s now turn our attention to the special charge.

$14.6 million special charge taken inthe first quarter consists of $12.2 million of mostly cash charges for severance costs that were being occurred primarily during the remainder of calendar year 2008. In addition, the charge includes $2.4 million, which is an estimate of corporate office lease exit costs.

The current lease for the corporate office extends until November 2012. The ultimate lease exit costs for this space will of course depend on how quickly we can find a new tenant and the sublease rate we receive for this class a midtown Atlanta office space. We estimate we will achieve $14 million in annual savings from these actions to streamline and simplify our organization structure. While we have already begun to realize savings from certain of these actions, we believe it will be the first quarter of fiscal 2009 until we achieve the full $14 million annual run rate. My concluding comments will address our cash flow and financial position. During the quarter, we continued our long history of strong cash flow generation ending the quarter with nearly $202 million of cash. We generated cash flow from operations of approximately $26 million versus $43 million in the prior year. The decline versus prior year was largely attributable to a timing difference in collection of receivable as higher shipment volume earlier in last year’s first quarter allowed for collections of such sales. In the prior year, this acceleration of shipments earlier in the quarter was largely attributable to customer orders placed prior to implementation of last year’s price increase. A positive consequence of this timing difference is that we expect stronger cash flow generation in our second fiscal quarter of 2008 as compared with the previous year.

Overall our trade cycle days continue to improve including a five day reduction in our inventory levels compared with last year. We invested over $6 million in capital expenditures during the quarter, which is comparable to prior year’s first quarter. We continue to forecast full year capital expenditures between 35 and $40 million. As a result of the spinoff and our recent share repurchases our shareholder’s equity declined to $526 million at the end of the quarter while our total debt balance decreased modestly to $364 million.

We continue to maintain strong financial flexibility as reflected by our net debt to cap ratio, which was 24% at the end of the quarter. Since the end of the first quarter, we have repurchased an additional 390,000 shares at an average price of approximately $42 per share. There are currently approximately 1 ½ million shares remaining under our existing share buyback program. Thank you and I’ll now turn it back to Vern.

Vernon J. Nagel

Thank you Rick. Looking forward, while we have our challenges we continue to see significant opportunities. Let me just note a few of the challenges. First, we expect to continue to experience cost pressures for certain raw materials component parts fuel and employee related items such as healthcare. Second, as the markets continue to grapple with issues associated with the fallout of the sub prime lending market there appears to bea tightening of lending practices for commercial projects. This of course may have a disruptive influence on the broader economy which could dampen demand in both the nonresidential construction market as well as the residential market.

Third, we need to continue to find ways to offset costs associated with investments and programs to drive future profitable growth including those that enhance customer service improve productivity expand our access to market and develop innovative new products. While we continue to make investments to accelerate our product pipeline including led based products as well as fund our expansion in the lighting retrofit market where we see significant growth opportunities.

Fourth we expect the residential market to be soft for the foreseeable future somewhat impacting our shipments to the home improvement channel and for other infrastructure related projects that are tied to new construction for the residential housing market.

Lastly, there always exists the potential for irrational pricing tactics by undisciplined competitors. While we monitor these issues closely, we so far have demonstrated a strong capability to deal effectively with these challenges while delivering upper quartile results for our shareholders.

In addition, we continue to be very vigilant on our pricing and quotation posture and continue to drive programs throughout the company to enhance our competitive position. Overall, we continue to be positive about the growth prospects of the nonresidential lighting market where we still expect to see volume growth inthe low single digits in our fiscal 2008. While the risk of recession in the U.S. is real, some guess it to be a 40% chance we feel there are solid opportunities for us to continue to prosper particularly as we introduce new innovative products and further expand our access to new markets including retrofit.

Additionally, we continue to see a number of influences that we believe support positive volume growth. For example while recent nonresidential building awards and employment numbers have lagged or signaled a slowing of the economy other indicators such as architectural billing index office absorption rates and rising rents for commercial space suggest demand for lighting fixtures will continue to be positive in our fiscal 2008 and into 2009, though quarter-to-quarter order rates may be inconsistent.

While we believe these and other factors that influence nonresidential construction market continue to show positive signs including increased spending by governments on infrastructure projects like roads highways strong demographics for school aged children fueling a boom in school construction and a continued attractive longer term interest rate environment. We are also encouraged by our traction in the retrofit market as commercial retail and industrial customers take advantage of more energy efficient lighting fixtures to reduce energy consumption while creating a better lighting environment. We believe this market which some estimate to be in excess of $100 billion in size represents a significant growth opportunity for us.

Also we continue to position ABI proactively to leverage its market presence better through investments which enhance our go to market programs and strengthen our geographic footprint as well as expanding our product offering with new and innovative products that provide superior value to customers from an energy and lighting performance perspectives.

We have created one of the broadest most energy efficient and cost effective product lines available in the industry to allow our customers to benefit from the energy policy act. We believe this will continue to bean opportunity for growth in 2008 and beyond.

In addition, we continue to make investments in programs to train and develop our associates more robustly to enhance their ability to service customers and improve our productivity. We continue to demonstrate that by investing in these programs we can profitably grow our business and better serve our customers, and improve our margins while investing for future profitable growth. Given the current conditions of the markets we serve and our growth opportunities we expect to meet or exceed our long-term financial goals in 2008.

Lastly, we will continue to be relentless in our mission to excel in providing our customers with superior value our associates with great opportunities and our stockholders with consistent upper quartile performance.

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

Question-and-Answer Session

Operator

The first question comes from Robert Mccarthy, Banc of America.

Robert Mccarthy – Banc of America

Good morning everyone.

Vernon J. Nagel

Hi, Rob.

Robert Mccarthy – Banc of America

Congratulations on a good quarter it looks like you had double digit operating margins even including the special charge. Could we talk about the special charge and the benefits first? There’s, 14 million I think you're, seeing you expect the run rate to be kind of hit. For fiscal one q08 any kind of sense of the timing trajectory near-term of those kind of benefits and how does that relate to this already stated goal of about 70 basis points and kind of base cost take out over the next couple of years.

Vernon J. Nagel

Sure first of all Rob it was a great quarter not just a good quarter. We believe that the opportunity for the simplification of our organization really does [inaudible] as I said earlier allow us to be more nimble and quick. We believe that we will achieve the full run rate of $14 million savings and we get our fiscal year ’09. So you’ll, seea ramping in Ricky do you have some…

Richard K. Reece

Yeah Rob as you looked at it obviously here in the first quarter we got virtually no benefit from these actions. We’re, looking at probably a seven to $8 million of benefit for the remaining three quarters of this year and as Vern said that'll, ramp up from say around $2 million in the second quarter. And, up closer to three or 3 ½ million by the fourth quarter and then we’ll, be at that 3 ½ million or so run rate per quarter as we get into ’09 to achieve that 14 million.

Robert Mccarthy – Banc of America

And then, you'd, of course you’d and then of course you would anniversary that benefit then you would start to anniversary that benefit.

Richard K. Reece

Beginning the second quarter.

Robert Mccarthy – Banc of America

Yeah understood.

Vernon J. Nagel

We would expect that it would contribute to the 70 basis points or more of improvement and as you know Rob, we have been on a trajectory of doing much better than that goal.

Robert Mccarthy – Banc of America

Absolutely. So this is going to just basically, infuse your goal this is not a step function in addition to that goal.

Vernon J. Nagel

Right.

Robert Mccarthy – Banc of America

Fair enough. And then talking about the 2Q trajectory, you did issue some caution in the 2Q but frankly you always issue some caution in 2Q given the seasonal trends. How should we think about generally in terms of modeling purposes and what you're seeing in terms of order intake rates of December just in terms of should we think about the historical pattern or the past couple of years or how should we kind of look at it as you enter into the 2Q here.

Vernon J. Nagel

That’s a very good question. I believe that the seasonal pattern that we experience and have historically experienced will continue to play out Q2 is historically our weakest quarter simply because it’s December January and February and as you might imagine construction activity slows down during those time periods. So, we would expect that to happen again. I believe that the historical change that you see going from first quarter to second quarter will continue to play out however as we noted our back log is up about 7% on a year over year basis as we enter Q2. Orders continue to be favorable activity quote activity in the marketplace continues to be favorable.

our ability to leverage products that have been introduced over the last couple of years particularly those that are targeted at retrofit ten to fit up or have an energy story well they all have an energy story associated with them really continue to play well. So, while I expect us to always have, as you said these challenges I do think that Q2 will continue to be favorable. As you know, Q1 was our 11th quarter in a row of record quarter over quarter results and my expectation is that we’ll, continue to do that in Q2.

Robert Mccarthy – Banc of America

Into Q2 and then finally on just the longer term on the energy efficiency in retrofit opportunity is there any way I mean you’ve given us some sense of the overall aggregate market as kind of a tantalizer there. but is there any sense in terms of the 6% growth how much was continued by kind of the retrofit opportunity obviously all your products kind of by level of generality everything can begin to consider an energy efficient product. And, could be considered largely retrofit. But just could you talk about the pricing or mix or kind of volume characteristics in association with that just so we can get a sense longer term of how much of a secular trend we’re seeing for energy efficiency in conjunction with kind of the cyclical trend we’re seeing.

Vernon J. Nagel

Yeah at this precise point in time our ability to track where some of the products that are ending up we believe are ending up inthe true retrofit side we’re not as specific about being able to track some of that. We are focused, on getting that capability. We are expanding ourselves into that market. And so, more to come on that. Unfortunately at this point in time I don't think that me speculating as to how much of our products actually ended up in the retrofit side it would be just that and I don't think it’d be helpful to you. We will be providing more information as our systems and our focus around that get more particular. But yet, we see it as a significant again growth opportunity. On a go, forward basis.

Robert Mccarthy – Banc of America

Finally, any legislative highlights kind of coming up or can you review the recent legislation in respect to energy and what do you see kind of going ’08 to ’09 particularly with what we’re, seeing on the political environment. Any things we should keep our eyes on and what we should be watchful for or anything that’s, already been passed, that we should be mindful of.

Vernon J. Nagel

Ricky you can help me here I believe that they did not extend epact beyond December 31st of 2008 because there were other items that were contained in the bill that were unsavory apparently.

Richard K. Reece

That’s, correct.

Vernon J. Nagel

And yet there is great bipartisan support for the type for epact the epact policy if you will so our view is that there will continue to be opportunities to help drive that I can't predict for certainty whether congress will take another bite at that apple and extend epact 2005 beyond December 31st of 2008. But, my sense is, is that there’s, a lot of bipartisan support for that so it seems likely that there could be something there.

Richard K. Reece

Because that’s on the incentive front and you continue to see more local incentives both from the utility companies as well as municipalities on the regulatory kind of the stick front you continue to see obviously see in legislation to ban the incandescent bulb and go to compact fluorescents. I think now virtually all 50 states are requiring some levels of controls be applied on new construction when you put lights in public buildings so we’re, continuing to see a major focus.

both with the carrot in the way of incentives as well as the stick in the way of regulations that are encouraging and pushing people to address the huge opportunity out there to improve the efficiency of light as well as improve the quality of the light source. And then, I’d, just say from a non-regulatory standpoint just a lot more attention being given, to the green and the energy efficient movement that is I think all positive towards us starting as an industry to see a lot more activity in retrofitting the lighting fixtures out there.

Vernon J. Nagel

And Rob just again, to follow up on that with a question you had previously posed what we are seeing is a number of instances where we are calling on customers who have existing facilities. And, they are looking at the opportunity of redoing these facilities because of the benefits of better lighting in their facilities whether it’s, for their customers or the associates as well as the energy savings as well as really trying to be good corporate citizens in terms of reducing their carbon footprint. The question that we have is, is that retrofitter is that new in the way we look at it are a lot of our different sales forces have at this point in time difficulty in coding some of that. That’s, why for us to give you some of that information right now it’s still a work in progress for us but we will be providing that to you at some point in time.

Robert Mccarthy – Banc of America

Thanks for your time and I’ll pass the baton.

Operator

Your next question comes from Peter Lisnic with Robert W. Baird, your line is open.

Peter Lisnic – Robert W. Baird

Good morning gentleman and happy New Year.

Vernon J. Nagel

Hi Peter how are you.

Peter Lisnic – Robert W. Baird

Good I just want to ask another question on the retrofit opportunity if you kind of look at it from a different angle. And, ask yourself what kind of, drives retrofit or what I’m, really wondering is how much of retrofit is really driven, by energy efficiency versus more macro economic based fundamentals. What I'm trying to I guess get at is should we be worried about retrofit in the context of potentially slower or slowing employment growth and slower macro economic conditions here in the states.

Vernon J. Nagel

I actually think it would be the opposite of that because again not only do you in many instances have a better lighting experience so if you're a retailer it’s improving your sales productivity and that’s been factually proven but it’s also reducing your operating costs so where you potentially have a slow down in top line growth. You may be very interested in continuing to drive productivity improvements in your business. And, this is an example of being able to reduce those operating expenses so we actually seeit as almost being a buffer if you will in terms of how the cycles work. Actually, if you even go back a few years ago when the markets were turning down on the new construction side, our revenues actually expanded during that time period. and we believe that there was not only a mixed ship going on towards more tenant fit up and retrofit type opportunities we were certainly expanding our access to market going to new channels.

things of that nature on a go forward basis we see the retrofit and tenant fit up market as really an opportunity to augment our growth as we go forward so we continue to be very positive if you will about what the future holds particularly in this market.

Peter Lisnic

Okay that’s, an interesting point thanks for that. Then the other thing I guess this is the first chance we get to hear you speak publicly about what’s, happened in the industry from a structural standpoint with obviously the acquisition of Genlyte by Philips. I'm, just wondering kind of what your thoughts or public thoughts on that are does it change the game at all for you or your strategy going forward.

Vernon J. Nagel

I believe that Genlyte was a very good competitor as a stand-alone company Philips acquiring Genlyte I believe that they will continue to be a very good competitor. I don't, really see significant changes in the landscape. Certainly, this was an opportunity for Philips to get a toehold in this market in the fixture side of the world we acquire a great deal of product from Philips in terms of component parts. And, our expectation is that we will continue to do that many of those components are sourced are available by others it’s, a very competitive world. It’s, becoming a very worldwide, opportunity in terms of technology whether it’s, led based or whether it’s, even core technology traditional lamp balance technology. there’s still many, many buyers out there who are bringing new and creative technologies to the marketplace and we’re an integrator and we know how to do that very well we have relationships with them also I don't see a significant change in the landscape by virtue of Philips acquiring Genlyte.

Peter Lisnic

Okay fair enough and just to clarify one of Mr. McCarthy’s questions on the 14 million. Is that included in the 70 bips annual operating margin improvement or not?

Vernon J. Nagel

We think that it will contribute to our annual margin improvement but as I said. and I want to be clear on the point we have over the last couple of years now exceeded that 70 basis points by a wide margin so I'm thinking that my expectation is, is that we will do that again in 2008 and beyond. But, to be clear it is contributing to our 70 basis points of improvement or more.

Peter Lisnic

Okay thank you for the clarification and the time and congrats on a good quarter.

Vernon J. Nagel

Thank you.

Operator

Your next question comes from Christopher Glynn, CIBC World Markets. Your line is open.

Christopher Glynn – CIBC World Markets

Thank you good morning so you talked about the current order rates in the press release and in the comments and just kind of curious to get into the clarification of key areas of non-res construction obviously some parts of it would be a little more linked to the residential are you seeing more variability. Even in the second half of last year in the different subsectors of non-res.

Vernon J. Nagel

We are and I think that as you look at the different economic forecasters that are out there whether it’s, dodge or whether it’s, global insights they too get into these verticals. Dodge looks at something like 145 different verticals and it’s, clear that you see differences there our expectation is, is that the institutional markets will continue to be favorable. We currently see medium to larger type projects on the commercial side being favorable the notion of retrofit and renovation and tenant fit up continues to be favorable. Some of the soft spots as you might imagine are those that are more directly related, to resi you build a new neighborhood you need a strip mall you need a gas station. You need some of these things those markets and some of that flow business continues to be soft I think hotels are starting to slow down a tad.

so but we do see a normal cycling if you will within these verticals the good news for us is I think that where we continue to have strength those verticals are also continuing to show positive growth signs.

Christopher Glynn – CIBC World Markets

Okay and obviously, the cash position balance sheet very strong what are you seeing in the kind of acquisition landscape.

Vernon J. Nagel

We continue to be active in the marketplace so looking at acquisitions that will continue to build out our portfolio of businesses it’s difficult to precisely predict when but we feel confident that there are acquisition candidates out there that really make sense to be a part of us and so we will continue to pursue and examine those opportunities.

Christopher Glynn – CIBC World Markets

Are they almost exclusively inthe sort of 20 to $40 million sales range or are there reasonable number of larger properties out there?

Vernon J. Nagel

I believe that there are some larger properties that are out there whether those have highest opportunity for us I think would be somewhat [inaudible] I don't, know that they necessarily have the highest opportunity for us. Some of the smaller targets to me really fit better with the strategy that we have of building out the portfolio really from a product and an access to market perspective.

Operator

And, our next question comes from Matt Mccall - BB&T Capital Markets.

Matt Mccall - BB&T Capital Markets

Thanks good morning everybody.

Vernon J. Nagel

Good morning.

Matt Mccall - BB&T Capital Markets

Let’s, see first Vern you spoke about expectations of volume being up low single digits next or this year and I think inthe release you talked about a little bit about mix and pricing expectations. Can you remind us about the most recent pricing action what’s, the magnitude what the expectations are there and then also your expectations for the benefit of mix as we progress through ’08.

Vernon J. Nagel

As I said in my comments when you sort of, backed out if you will the addition of Mark Architectural Lighting you back out foreign currency. and, you also, adjust for what we believe was the impact on residential impacting, our sales it looked like our growth was something slightly north of 6% within that 6% our feeling was that it was relatively split or relatively equally split amongst volume mix and price in the July timeframe. I believe that we ranged in the somewhere in the two to 4% range I’m, trying to remember.

Matt Mccall - BB&T Capital Markets

It was three to five.

Vernon J. Nagel

Three to five but it wasn’t on all products and so we have been getting a fair bit of that price increase I'm not certain that that’s necessarily true in the marketplace overall our view on pricing going forward. As you know, we annually do a price review we’re, in that process as we speak a lot of it has to do with where to our products fit in their product lifecycle.

And so, we examine those on a very, focused basis mix and this is why it’s, very difficult for us to determine precisely price versus mix. the product mix continues to be very favorable products that we have developed and introduced over the last three years continue to provide growth in our business and what’s difficulty to determine is how much of it is cannibalizing our own say older products versus the opportunity to expand into new markets we believe that it’s a combination of both. but it’s difficulty to say precisely how I would expect that you will see us and hear us talk about product mix continuing to be a significant contributor to our top line growth and our margin improvements as we go forward we’re very focused on the development of new products and those tend to appeal to large markets. And, tend to have a high value proposition for customers and as a consequence, they typically have higher contribution margins for us.

Matt Mccall - BB&T Capital Markets

Okay thank you that’s helpful and so if I hear you I think if we look ignore that the year ago comps it sounds like expectations are for current trends to kind of, continue through ’08 roughly across all those different factors whether it be price mix or volume.

Vernon J. Nagel

Again, our view is that the marketplace at least the components that we participate in should give us low single digits of unit volume growth price it just it really depends on what we see out there, in terms of what’s happening with either costs. Or, what’s, happening with competitive situation but the product mix side I think will be continue to be a key driver in terms of the opportunities for us as we go forward. Again new products better service the opportunity to differentiate how we deliver that level of service has really been has been a driver of our top line growth and our profitability and we expect it to be on a go forward basis.

Matt Mccall - BB&T Capital Markets

Okay thank you Vern so you reported a 13.7% margin in Q1 and if I look historically yes, Q2 is seasonally weaker and as we move into the back half of the year it looks like Q3 and Q4 have historically been a little stronger than Q1. So I’m trying to get a picture of you discussed the expected cost savings from your from the moves you made in Q1.

We’re, also talking about some potential for some cost pressures on the raw materials and input side but help me understand from a seasonal perspective what the back half of the year should look like directionally versus Q1 from a margin standpoint.

Vernon J. Nagel

Well first off from the top line perceptive I believe that we are about a 52, 53% of our full year revenues are in the second half versus the first half. That volume has two benefits one it has the variable contribution coming off of, higher sales plus, it also helps us absorb our supply chain costs in a more effective way. So typically you'll, get that variable contribution flowing through I believe that last year in 2007 on an adjusted basis excluding if you will Zep our consolidated operating profit margin Ricky was about 11.3% it would be my expectation that we will continue to show favorable improvement over 2007 each quarter. And, as you saw from our first quarter results we were favorable by 250 basis points, a strong and pretty robust, performance I would say.

Matt Mccall - BB&T Capital Markets

All right well I don't know if I want to build in 250 or if I guess so the back half there’s nothing seasonally or there’s nothing that we should expect I think Q3 last year had a little bit lower profitability than Q1 on a slightly stronger top line. But, there’s, nothing that permanent in the business from a seasonal perspective that would cause that to recur on an ongoing basis.

Vernon J. Nagel

Yeah when I look at 2007 our third quarter profitability at the operating profit level was above Q1 and certainly, Q4 was above all of them giving us an average of 11.3%. I believe that in the second half of the year there is still if you will this concern out there about how will demand, continue to manifest itself in the second half of the year. Our feeling is, is that demand while in certain sectors is slowing down we still feel that from a unit value perspective we’ll, see low single digits. Two three percent would be a good guess in terms of unit volume growth contributing to our full year should be our product mix and some opportunities for us to extend into the retrofit market opportunities to continue to expand in New York City where we have recently made some significant investments. And now, have a presence in that marketplace so all of those things I believe will contribute to a positive second half.

Operator

Your next question comes from David Woodyatt - Keeley Asset Management.

David Woodyatt - Keeley Asset Management

Yes, I was wondering if you could elaborate just little bit more on the share repurchasing you’ve, helped us out by mentioning what you had done so far this quarter but clue me in shares bought in the first quarter seems like a high level. I what kind of a pace would you generally expect going forward and be another way of asking is how soon. Or, is there a point in time when you want to get the million and a half shares remaining completed.

Richard K. Reece

Looking at the first quarter therate of repurchase was ata higher level as we took advantage of the dividend we received on the distribution of Zep the $62½ million and felt that the best use for that cash flowin terms of enhancing shareholder value was to repurchase shares with that. So, we were pretty aggressive, in our first quarter while we’ve, been aggressive over the last couple of years. We were at a higher rate there in our first quarter taking advantage of the opportunity of reinvesting or using that dividend from the distribution of Zep on what we thought was the highest use for shareholder value creation we are looking to continue to repurchase. and it will a million and a half shares that we have we’ve got a 10b5 program in place now that we’re purchasing under and just based on various market factors. As well as other opportunities we may see to reinvest that, capital would cause us to continue to examine what’s, the highest and best use of that capital atthe moment. Though I think, you're, likely to continue to see us in the market repurchasing shares but probably not as aggressive, arate as you saw in our first quarter because we had the added boost of the dividend from Zep.

Vernon J. Nagel

And Ricky just to add more color to that since the beginning of 2006 through this first quarter we have repurchased or invested $330 million in terms of share repurchase or share repurchases over that time period our expectation is, is that our cash flow will continue to be very strong. we have a goal out there of having our free cash flow exceed our net income our expectation is, is that we’ll do that again in 2008 so we continue to generate very favorable cash flow as we continue to improve our asset management capabilities because of better processes. So, as Ricky said we would expect to continue to look for ways to deploy that capital in the most advantageous way for our shareholders that would include share buyback and investments in terms of back into our business in terms of market expansion new all at New York City as well as potential acquisitions that help our portfolio.

David Woodyatt - Keeley Asset Management

Also, could you just comment briefly on those stock options have you issued any yet since the spinoff of and do you have any immediate plans in that area?

Vernon J. Nagel

I can’t, comment on that, I don't, know the precise number but our long-term incentive plans are annual plans they are pay for performance plans. what that means is, is that we have to hit certain financial targets in order to fund a pool of long term incentive for the last four years we have generally used restricted shares as the only vehicle in terms of how we have funded those long term incentive plans through the first quarter post spin. We funded our long-term incentive plans and it was primarily again restricted shares but we did issue some options. And, Ricky the number was pretty small, right.

Richard K. Reece

I don’t, recall the exact number either but it wasn’t a significant amount. And to put it in broadly in perspective we look atthe total number of shares including options that have been issued and as I recall that number is about was about 1 ½ % of our total shares outstanding. So it was well below about 600,000 shares but that included both restricted shares and options and I’m, giving this to you off the top of my head sobe a little careful there. But, I think I’m, pretty close in terms of the number.

David Woodyatt - Keeley Asset Management

Okay just one last question given the fact that you're, say a new entity but changed entity do you have any near term plans for getting on the road to meet with investors.

Vernon J. Nagel

We yes we do that on a quarterly basis we present at different conferences that are sponsored by the folks that provide coverage on us and so it’d be our opportunity or it’d be our expectation to continue to do that. So and Dan I look to you I believe we have various road shows or trips that are planned we try and, do something once a quarter and.

Dan Smith

Yeah we’ll, probably have a northeast in the next month or so and then probably Midwest later on.

Vernon J. Nagel

Just one last comment on the stock options our overhang has dropped dramatically over the last three years I believe that total options outstanding in our most recent 10-K were about 2.1 million Ricky. So, we were down pretty dramatically, if you go back even just three years ago sothe overhang issue we have really addressed pretty aggressively favorably for shareholders I might add.

Operator

Your next question comes from Dennis Scofield with Delafield Asset Management.

Dennis Scofield – Delafield Asset Management

You had talked a lot about the energy policy act did that include anything about the retrofit for federal buildings.

Richard K. Reece

Yes, there is opportunity there if you're, a taxpayer there are accelerated tax deductions that you get if you own the building but there are also opportunities when it goes into a non-taxable entity for the contractor. And, the designer to participate in some of those incentives so there would still be an incentive through the epact, as I understand it for even entities that are not otherwise paying taxes.

Dennis Scofield – Delafield Asset Management

But, there was no requirement that the government retrofit their own buildings with energy efficient lighting.

Richard K. Reece

No to my certainly not as part of epact 2005 and at the federal level I'm not aware of any requirement you're beginning to see more activity at a local level but I'm not aware of a requirement at the federal level at this time.

Vernon J. Nagel

And, Dennis the local level is very exciting for us we continue to make inroads into those markets and feel that from a strategy perspective and from an organizational structure perspective. We are going to realign or better align some of our resources to target some of those types of markets in a more effective way because of the growth potential that’s, there.

Operator

Our next question comes from Robert McCarthy with Banc of America.

Robert McCarthy – Banc of America

Just a couple of follow-ups and I notice we’re getting late in the day here with respect to the New York market Vern obviously you’ve made abig splash there with your new design center things like that. Could you talk about and the fact is those commercial markets particularly inthe northeast and some of the major metropolitan remain fairly firm are you seeing any signs anecdotally. Or, incrementally of market share gains or growth there above kind of market expectations.

Vernon J. Nagel

Well in the city itself, we had very little presence so any real opportunity there is market share gain for us and we believe the way we have positioned the product portfolio it fits very well with the opportunities and the demands of the New York City market. the acquisition of Mark Architectural Lighting some of the structuring that we've done with our specialty products businesses under one of our better leaders really is just a very exciting growth opportunity for us. so we’re after that supply chain is focused on making sure that we have New York type product but we see this in other markets as well other large markets where there continues to be. And, we expect there to continue to be strength in demand so for us those aren’t, shared gains they're, geographical share gains if you will.

Robert McCarthy – Banc of America

So, there’s definitely an opportunity there. Finally on the acquisition front just following up on a previous commentary and questions with the fact that Genlyte is effectively focused on other things now being acquired is it is there any potential for any residential properties. and have you started to see multiples for some of those smaller residential properties kind of come down now as people kind of go through the Kübler-Ross stages of dying and realize that they're not going to get quite the multiples they thought.

Vernon J. Nagel

Yeah and we see opportunities in that market it may be a little too soon to put our toe into the acquisition side there having said that we continue to develop and enhance our own product portfolio through our internal engineering and design capabilities targeting at that market. Because again we believe that, there is an energy story there as well so, we see the resi market again as a very large market. and an opportunity for us in the future to participate in more aggressively where we do that through again continued development of products internally or through acquisition those are choices and opportunities that we’ll have to consider I think later not right at this point in time.

Operator

There are no further questions so I’ll now turn the call back over to Vernon Nagel.

Vernon J. Nagel

Thank you for your time this morning we believe we are focusing on the right objectives deploying the proper strategies and driving the organization to succeed in critical areas that deliver on the expectations of our key stakeholders I’d like to thank all the associates again of Acuity Brands terrific quarter and more to come our future is bright. Thank you for your support.

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Source: Acuity Brands F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

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