Acuity Brands, Inc. (AYI) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Acuity Brands' 2012 Second Quarter Financial Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to introduce Mr. Dan Smith, Senior Vice President, Treasurer and Secretary. Sir, you may begin.

Thank you, and good morning. With me today to discuss our second quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer; and Ricky Reece, our Executive Vice President and Chief Financial Officer. We are webcasting today's conference call at www.acuitybrands.com. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve the risk and uncertainties such that actual results may differ materially. Please refer to our most recent 10-K and 10-Q SEC filings and today's press release, which identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. Now I'd like to turn the call over to Vern Nagel.

Thank you, Dan. Good morning, everyone. Ricky and I would like to make a few comments, and then we will be happy to answer your questions. First, let me say we are very pleased with our results for the second quarter of 2012. We reported strong top line and bottom line growth in spite of continued soft market conditions. This is the eighth quarter in a row where we achieved unit volume growth in an environment where spending in key segments of non-residential construction is just now starting to show signs of life. I believe this is strong evidence our strategies to diversify the end markets we serve and extend our leadership position in North America are succeeding. These strategies include the aggressive introduction of new energy-efficient lighting products and solutions, expansion in key channels and geographies, and improvements in customer service. Our profitability and cash flow for the quarter were again strong, even while we continue to fund areas with significant future growth potential, including the expansion of our solid-state luminaire and Lighting Controls portfolio. As you well know, the economic recovery in North America continues to be tepid as job growth remains anemic and lending practices for construction continue to be restrictive. Having said this, we believe the many channels and markets we serve are, for the most part, on the road to recovery. Also in the quarter, we continued to encounter rising costs, particularly for inputs based on oil and various metal types, including rare earth. Overall, we estimate our pricing initiatives allowed us to recover all of these higher input costs in the quarter. I mention these macro factors because it provides a backdrop against which you can see the outstanding performance of our company. I know many of you have already seen our results for the quarter, and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights. Net sales for the quarter were $458 million, an increase of 10% compared with the year-ago period. This level of growth is significant, given industry conditions and the variability that is typical of a second quarter for us. It is also our fourth quarter in a row of double-digit growth. Operating profit was $39 million or 8.5% of sales. We took a special charge in the current quarter for streamlining actions, which reduced operating profit by $6.6 million. Ricky will talk more about the special charge later in the call. I find it helpful to add back the special charge to the current quarter's results to make them comparable with the prior year. Doing so, one can see adjusted operating profit was $45.6 million, up 23% from the year-ago period, while adjusted operating profit margins improved 110 basis points to a strong 10%. Diluted earnings per share were $0.46. Again, adding back the impact of the special charge, adjusted diluted EPS for the current quarter was $0.57, up 27%. These results for the quarter were significant improvements over the year-ago period. We believe you will find these results even more impressive upon further analysis. On a consolidated basis, net sales grew by $41.6 million or 10% compared with a year ago. More than half of the increase was due to unit volume growth, while benefits from better price mix were more than 3 points of the increase. Acquisitions made up the balance of the increase in net sales. The increase in net sales due to unit volume growth in North America was partially offset by a decline in Spain, which reduced overall volume growth by 60 basis points. The growth in North America was broad based, with gains occurring in virtually all channels. Growth in our largest channel, commercial and industrial, was due to continued emphasis on selling higher value-added lighting solutions, especially LED-based luminaires, which almost tripled in sales over the year-ago period, as well as a strong focus on smaller and medium-sized projects of various types sold through distributor stock and flow. We also enjoyed solid growth in other important channels, including Home Improvement and infrastructure, all of which is very encouraging, in spite of the variability in demand within non-residential construction. As we have noted before, it is impossible to precisely determine the separate impact that price and product mix changes have on our net sales. Having said that, we estimate the positive impact on sales from price mix was due to benefits from previously announced price increases to recover rising input costs, partially offset by a somewhat less favorable mix of products sold through certain channels. We estimate our pricing actions helped offset all of the approximate $11 million in higher input cost for materials and components compared with the prior year. Looking at all this a bit more closely, there are some interesting points to note. We believe spending in key segments of the U.S. nonresidential construction market was up modestly in the quarter compared with a year ago, as was the lighting market. This is in contrast with our unit volume growth in North America, which was up approximately 6%. We believe our channel and product diversification as well as our strategies to better serve customers with new, more innovative lighting solutions and the strength of our many sales forces have allowed us to, yet again, gain overall market share in North America. Our solid growth in a challenging market is due in large part to the focus strategy to diversify our portfolio to be less reliant on new building construction and more focused on growing portions of the renovation market and lighting control solutions that enhance the visual environment while optimizing energy usage. Before I turn the call over to Ricky, I would like to comment on our profitability in the quarter and our strategic accomplishments. Excluding the impact of the special charge, adjusted operating profit margin was a strong 10%, up 110 basis points from a year-ago period. There are a couple of key points to note. First, as I mentioned earlier, we believe our price increases covered all of the higher costs for materials and components. However, as you know, this dilutes our margin percentage. Additionally, we had an adjusted operating loss excluding the special charge in our Spanish operation of $1.3 million in the quarter. The loss was due to a 50% decline in net sales in the quarter of $2.6 million caused by the precarious condition of the Spanish economy. The dilutive effect of both the price increase and the performance of our Spanish operations reduced operating profit margin by about 50 basis points in the quarter, certainly not insignificant. The adjusted operating loss in Spain excluding the special charge was not tax affected, resulting in a loss of almost $0.03 per share in the quarter. While we are taking significant steps to properly size our Spanish operation given the dire prospects of the local economy, we expect them to record a modest operating loss in the third quarter. Next, as we have explained in our previous investors calls, we have increased spending to fund initiatives for future growth such as technology and innovation as well as strategic acquisitions for the development of new products and lighting solutions. As a consequence, our operating profit margins continue to be impacted somewhat by these investments, I'd like to explain. Selling, distribution and administrative expenses increased $9.7 million in the quarter or more than 7% on an increase in net sales of approximately 10%. The increase in SD&A this quarter was due to incremental variable cost to support the growth in net sales, additional operating expenses from acquisitions, which are now starting to contribute nicely to our overall profitability, and higher compensation expense. Productivity improvements help to offset other increases in SD&A expenses, which were primarily related to activities focused on longer-term growth opportunities, including market diversification, expanding our fast-growing Lighting Controls business and investing in innovation and technology, primarily for solid-state luminaire and intelligent lighting solutions. We expect to continue funding these important and strategic activities, which are mostly an expense in our P&L today because they represent huge future growth potential over the next decade. While revenues are ramping up in these areas, they are nowhere near anticipated peak sales. We expect they will pay significant dividends in the future. As a point of reference, SD&A that is not directly variable with sales volume was slightly less than $84 million this quarter. Given the significant investment programs I just mentioned, including our aggressive product rollouts slated for the third and fourth quarters, we expect these SD&A expenses to be higher by about 5% in those periods. On the strategic front this quarter, we continued our rapid pace of introductions of new products, significantly expanding our industry-leading portfolio of energy-efficient luminaires and Lighting Control solutions. Rapid introduction of new, more energy-efficient products and services has been a key contributor to our improved performance over the last few years and is one of the cornerstones of our strategy going forward. As I mentioned earlier, our LED-based portfolio is expanding rapidly, as are the sales of these luminaires. Today, LED-based products make up approximately 7% of our net sales with margins generally consistent with profitability of other fixtures with conventional light sources. And we continue to fund the development of other light source technologies, such as organic LEDs. Acuity is a clear leader in digital lighting solutions. It is because we understand the sophisticated needs of our expansive customer base and are able to offer each tailored solutions from our industry-leading portfolio. Customers understand it takes more than just an LED chip, which is quickly becoming a commodity, or a fluorescent lamp to be a true lighting company, especially one that offers superior quality lighting and energy solutions for virtually every applications like Acuity Brands. Our organization has a long and distinguished history of leading and innovating during the areas of technology disruption. Today is clearly no different. Acuity Brands is leading the evolution to intelligent lighting solutions with its broad and deep portfolio of indoor and outdoor solid-state and conventional energy-efficient luminaires and Lighting Controls. And we are delivering profitable growth while making these important investments. These accomplishments have diversified and strengthened our foundation and will further serve as a robust platform for future growth that is less reliant on new commercial construction cycle. We have been able to produce these results because of the dedication and resolve of our 6,000 associates and the key progress they have made in, again, 4 key areas of strategic focus: customer service; pricing and margin management; geographical channel and product portfolio expansion, including significant additions to our industry-leading staple of sustainable and energy-efficient lighting products; and finally, company-wide productivity. I will talk more about our future growth strategies and our expectations for the construction market later in the call. I would now like to turn the call over to Ricky before I make a few comments regarding our focus for 2012 and beyond. Ricky?

Thank you, Vern, and good morning, everyone. I will highlight a few items regarding our income statement. I then will discuss our cash flow and financial condition as well as a summary of the special charge before turning the call back to Vern. Vern covered the primary drivers for our sales growth in the second quarter and our profitability, so I will not repeat these items. But I would like to provide a bit more color on certain aspects of our second quarter results. Miscellaneous expense is due primarily to the impact of exchange rates on foreign currency items. In the second quarter of fiscal 2012, we had expense of $1.1 million, compared with $700,000 of expense in the prior year period. This incremental expense of $400,000 is primarily associated with the Mexican peso appreciation against the U.S. dollar. The effective tax rate this quarter was 35.4%. This is a full 4 percentage points higher than the prior year quarter. This change in the tax rate negatively impacted adjusted net income by $1.3 million and adjusted diluted EPS by $0.03. The increased rate is due to the higher year-to-date pre-tax earnings, which causes a lower rate impact on favorable permanent tax items and lower anticipated research and development tax credit due to the failure of Congress to extend this credit at calendar year-end. In addition, last year's second quarter tax rate benefited from a catch-up in the R&D tax credit when Congress retroactively extended it for calendar year 2011. We still expect the effective tax rate for the year to be approximately 34%. As Vern mentioned earlier, our backlog at February 29, 2012, was down approximately 12% compared with last year. This decline was primarily due to a higher-than-normal backlog last year, due to significant pull-forward of orders placed ahead of announced price increases that became effective at the end of the prior year's second quarter. The backlog at February 29, 2012 of almost $138 million is up modestly from prior quarter end. I'd like to add that we decreased delivery cycle times, increased our sales mix in certain channels, like Home Improvement that has virtually no backlog, and enhanced our original manufacturing quick-ship capability. So therefore, the significance of our backlog decreases. Backlog now represents only 4 or 5 weeks of sales, so the timing of receipt or shipment of a single order can skew the backlog at any point in time up or down. So while we continue to report our backlog at quarter ends, I'd like to caution you to not read too much into this single data point. Now let's look at the cash flow for the 6 months ended February 29, 2012. Cash flow provided by operations for the 6-month period was $37.6 million, an increase of $8.9 million compared with the prior-year period. A higher level of cash provided by operations in the first half of our fiscal year was due primarily to higher net income and improvement in inventory levels. Inventory days decreased by 10 days compared with the last year, as we continue to improve our inventory turns and because strategic purchases of certain commodities and components, primarily ballast, that were made last year were not repeated this year due to stabilization of supply. In the first half of the fiscal year, we spent $9.4 million on capital expenditures and $3.8 million on the acquisition of businesses. We still plan to spend up to $40 million this full fiscal year on capital expenditures, as we expect the second half of the year to have more tooling and equipment purchases related to the large number of new product introductions and geographic expansion of production capabilities. Additionally, in the first 6 months of fiscal year 2012, we spent $9.2 million repurchasing 252,000 shares of our common stock at an average price of $36.31 and paid dividends of $11 million. We ended the second quarter of fiscal 2012 with a cash balance of $180.6 million and total debt of $353.4 million. Net debt to total capitalization at February 29, 2012, was under 18%. On January 31, 2012, we executed a new 5-year $250 million revolving credit facility. This new facility replaced our prior $250 million facility, which was scheduled to mature on October of this calendar year. At February 29, 2012, we had additional borrowing capacity of over $250 million under the new facility that does not mature until January 2017. So we continue to maintain a significant amount of financial flexibility. I will conclude my prepared remarks discussing the special charge. We recognized 2 separate special charges during the second quarter of fiscal year 2012. The first was a $1.2 million pre-tax charge associated with a reduction in workforce, primarily at our operations in Spain. As Vern mentioned earlier, the market conditions in Spain are extremely weak. We have seen our sales cut in half this year, and we do not expect them to rebound materially in the near future due to the austerity plans currently being discussed by the Spanish government. The charge consists primarily of severance and other employee-related costs as we attempt to right-size this business. We estimate annualized savings of approximately $1.2 million associated with this reduction in workforce. The second was a pre-tax special charge of $5.4 million related to the planned closing of our Cochran, Georgia production facility. We expect to incur additional cost of approximately $10 million associated with this facility closing, which we forecast to be recognized primarily during the second half of fiscal 2012. The total estimated pre-tax charge of $15 million consists of cash cost, primarily for severance and employee-related cost and product transfer expense, of approximately $12 million and noncash asset impairments of approximately $3 million. We estimate annualized savings of approximately $8 million beginning in fiscal year 2013 following completion of the transfer of production in closure of the facility, which is targeted to be essentially complete by the end of the current fiscal year. We expect to realize these savings while still having sufficient manufacturing floor space capacity to support the aggressive market growth expectations over the next handful of years. You may recall we recognized a $2.7 million pre-tax charge in the first quarter as we continued our streamlining efforts, which are expected to yield annualized savings of roughly $5 million. So if you add up the special charges taken in fiscal year 2012, we estimate total annualized savings of $14.2 million, of which $3 million is expected to be realized in the second half of the current fiscal year, and we hope to be at the full annualized saving rate early in the first quarter of fiscal 2013. Thank you. And I'll now turn the call back to Vern.

Thank you, Ricky. As we look forward, we see huge long-term growth opportunities, while short-term economic challenges have become the norm. While we don't give earnings guidance, I would like to offer a few observations about what we see for the balance of 2012. First, we expect the macroeconomic environment for the balance of 2012 to be influenced by continued volatility in customer demand and input costs. Forecasts by independent organizations have not really changed much over the last few quarters and continue to suggest unit volume, where key segments of construction put in place in the U.S. will grow slightly during the remainder of our fiscal 2012. Further, sales for lighting fixtures in North America are still expected to be up in the low- to mid-single-digits in 2012, mostly due to renovation in smaller-sized projects. This is consistent with our -- with the outlook in our previous filings. While it seems the significant headwinds that have prevailed in our markets over the last 2 years or so have begun to abate, the recovery continues to be slow and inconsistent in North America. An example of this inconsistency can be seen in the market for performance-based contracts for energy retrofits. It seems financing availability for these types of projects have become more restrictive, thus reducing current demand in this portion of the renovation market. Why is this occurring? I do not know. But this is an example of the ebb and flow within the current overall nonresidential construction market. Additionally, we expect Europe to continue to be impacted by sovereign debt concerns, creating the very real possibility of economic downturns in certain markets there, particularly Spain. On the good news front, we sense a level of cautious optimism about future business prospects in North America from our broad and diverse customer base, which is encouraging. Though many believe, as do we, that continued fluctuations in demand will be the norm for the foreseeable future. While our backlog is down about 12% from the year ago period, primarily due to the timing of the price increase implemented in the year ago period, our order rates so far for the third quarter reflect these improving conditions. Again, we see wide variability in demand amongst channels, reflecting the tepid economic recovery in the U.S. Second, the industry continues to experience volatility with respect to input costs, particularly for items based on steel and oil and rare earth metals, mostly used in lamps. We increased prices on those products most affected by these rising input costs a year ago, and then again in September. Our current estimate is that the price increases announced in September will be sufficient to recover higher input costs currently in effect. Looking ahead, we will continue to be vigilant in our pricing posture. If component material costs should continue to rise, as many forecasters expect, we will again increase our selling prices to recover these inflationary costs. Additionally, as I have said before, we will defend our market position vigorously from competitors should they attempt to use price as their only point of differentiation. Third, we expect to outperform the markets we serve, just like we have over the last several quarters. Looking more specifically at our company, we are excited by the many opportunities to enhance our already strong platform. As I noted in our last several conference calls, our strategies to drive profitable growth remain intact. We continue to see opportunities in this environment, including benefits from growing portions of the renovation market and tenant improvement projects, further expansion in under-penetrated geographies and channels and growth from the introduction of new products and lighting solutions. As the industry leader in North America, we continue to work diligently to expand our relationships with key suppliers around the globe to bring greater and more unique value to our customers, which incorporate advanced technologies, providing superior lighting quality and more sustainable energy solutions. Our product and solutions portfolios are expanding at a record-setting pace for us, including the addition of 5 strategic acquisitions in the last year and a half, and we expect to make more. Our strategy is straightforward: expand and leverage our industry-leading product and solutions portfolio coupled with our extensive market presence and our considerable financial strength to capitalize on market growth opportunities. This all takes focus and resources. We are funding these activities today because we see great future opportunity. Through these investments, we have significantly expanded our addressable market. We believe the lighting and lighting-related industry will experience significant growth over the next decade, particularly as energy and environmental concerns come to the forefront. We continue to believe that many markets we serve as part of the broader lighting industry could grow by more than 50% by the year 2015, providing us with significant growth potential. As the market leader, we are positioned well to fully participate in this exciting industry. Thank you. And with that, we will entertain any questions that you have.

[Operator Instructions] Our first question comes from Glenn Wortman of Sidoti & Company.

Just looking at the gross margin on a sequential basis, declined 110 basis points. I understand that in February is the weakest seasonal quarter, but it does seem -- the gross margin seems to contract more than one would think. Can you just maybe help us better understand what's going on there? And do you expect a snapback in the gross margin in the third quarter relative to the second quarter, as is done historically?

Sure. Just a couple of points to reference. One, when you do the math on what the actual price increase to cover the rising raw material cost of about $11 million, it was about a 90 basis point impact. So that would take the gross margins from 39.8% to kind of the net, 40.7%, 40.8%, which is a pretty robust gross profit margin, particularly for our second quarter, where we have, historically, variability between sales going through various channels. This particular quarter, just a little bit more revenues going through the Home Improvement channel, which typically has slightly less gross profit margins than our overall average, if you will. So I think that our gross profit margin this quarter was really quite robust. We had great productivity improvements in our factories. So I look, as we get this price kind of cost relationship in balance, I look for our margins to continue to be in the -- that 40% to 41% range, maybe even higher.

Okay. On a full year basis, you're saying. The 40% to 41% on a full year basis?

Yes.

And then the second question, I just want to make sure I heard it right. Your base SD&A spending, it was $84 million in the quarter. Did you say that's going to increase by 5% over the next couple of quarters? And if so, can you just provide some more details on where that investment is going? And did those costs persist into fiscal '13?

Sure. It's difficult to precisely predict the timing of product rollouts. Most of this investment, we believe, will be related to our very aggressive rollout strategies. We have a significant slate of new products that we'll be introducing both in the third and fourth quarter. Those require product samples, marketing collateral, so on and so forth, and those are typically one-time costs. It's really because of the increase in the significant amount of products that we're rolling out over those 2 quarters that we're just trying to give some indication of slightly higher SD&A costs that are not directly associated with a variable revenue base. Our expectation is, is that probably, that cost will occur in the third and fourth quarter and then abate somewhat as we get into future quarters. And again, we're trying to estimate the timing of these things because it's really almost, Ricky, a cash-base-type accounting in terms of what happens. But those investments are strictly for a much more aggressive product rollout strategy.

Our next question comes from Peter Lisnic from Robert W. Baird.

Vern, I just want to understand the -- that $84 million to $86 million on SD&A fixed. So what you're saying is the second half, we expect to see it up, call it, $4 million. And then can you give us a sense as to what fiscal '13 -- you said it abates. But I'm just wondering if we should think about that $88 million as just sort of the run rate number for fiscal '13 on the SD&A line. Or I'm sorry, on the fixed piece of the SD&A line.

Yes, we really haven't forecasted out. But what we're trying to indicate is that for the next couple of quarters, anyway, again, given the very extensive product rollout roadmap that we have, which is very heavy relative to what we would consider a more normal amount of products introduced in the period, that's going to kick that cost up, or that expense up slightly. And so we're trying to give a sense of range. Our hope, obviously, is, is that we'll be able to manage it less than the 5%, but it really, again, is dependent upon the timing. I would hope that as we get into 2013 that a number of the actions that we have taken to further streamline our business to drive productivity -- we have had great productivity. Our people are doing an outstanding job, whether it's in the shop floor or it's even in the office, productivity improvements continue to help us, if you will, offset some of these investments during this heavy investment period, if you will, to continue to deliver very, very strong operating profit margins. So without giving a precise number, I would expect that portion of our SD&A to be up slightly from, if you will, the $84 million that we have on a go-forward basis. But we're going to continue to drive productivity throughout our organization to help offset some of those investments. And again, to be clear, many of those investments are not just the sales and marketing side. It's the support effort that is required to help, again, drive that new product development. So while we will experience some of our sample cost and things that we have to take as period expense is coming down, we continue to invest in the type of talent that we need to help support and drive that. So all of that being said, we would expect a slight increase in that portion of the SD&A. But we believe that we will more than offset that by the expected growth of these products.

Okay, perfect on that. And then second question, the LED gross margin being in line with corporate I thought was an incremental positive, maybe sooner than what we have been expecting. So can you give us a sense as to how fast those component costs are coming down? And then what the margin profile that business might look like as you look forward the next few quarters? And whether or not your competitive positioning there is strengthening as some of this cost curve comes down on the LED side as well?

We expect, and I'll be very clear on this point, we expect that we will be the market leader, as we are in conventional light sources, in LED. And the growth in our portfolio as well as the growth in our sales, I think, is reflective of our ability to produce the types of quality product that the marketplace wants at a pace that is consistent with what we believe growth -- that growth will occur. Costs, many costs of those types of products continue to come down, as we expected, as I think the industry expects. As you know, LED chips are, generally speaking, becoming more commoditized. The efficacy and the performance amongst chips are becoming more consistent amongst suppliers. So those that have the best cost position, I think, will enjoy the greatest amount of volume. With regard to our profitability, it varies, if you will, by LED type of product. And so we continue to work. And that's -- we continue to work the cost side of all of our LED portfolio. But that's not inconsistent with what we do in all of our products. I would say that our LED margins are now in the range. And some were higher and some were lower, as you might expect, again, throughout the portfolio. The growth rate that we're experiencing is consistent with the growth rate that we would have expected based on the rollout of products in this portion of the market. And our access to market allows us to really see virtually all of the opportunities that are out there.

Our next question comes from Christopher Glynn of Oppenheimer.

I had a question about how you tease out the price mix. I know it's a little bit of art as well as science there. But the comment on the mix negative, with LED up nearly 3x year-over-year in a higher price point, is that mix shift excluded from the negative mix calculation?

So, Chris, what we said was that our price mix was primarily price offset slightly by what we call a channel mix. So the question you're asking is really referring to product mix. And with regard to product mix, we said that LEDs are now within the relevant range of other products. So we feel that comments that we may have made in the past around looking to catch up, if you will, vis-à-vis, LED products becoming more consistent with our overall margins, we feel that we're kind of there. So our comment around mix this time really referred to more channel mix. We shipped more as a percentage of our revenues into the Home Improvement channel than what we typically do if you look at the average for the entire year. And again, that's the variability that is prevalent, if you will, in our second quarter. It just has to do with the timing. Our second quarter is December, January and February. So it's really quite a guess as various distributors try and balance inventory, weather conditions, so on and so forth. I wouldn't make a lot out of, if you will, the channel mix issue in Q2. It's not really reflective of, necessarily, trends, if that makes sense.

Okay, yes, no. That's exactly the clarification I was looking for. So it's specifically just channel. Sorry if I missed that. And then on the gross margin, I know you gave a full year guidance range. But it was up year-over-year in the second quarter after a couple prior quarters where it was down on a year-over-year basis. Do you expect some of that modest expansion to stick now or continue to move around a little bit on a year-over-year basis?

Well, again, as we look at this quarter and we try and make sure that we get a clear reflection of what the math looks like, that's why we backed out the $11 million of increase in revenues that offset the $11 million of expense. So when you do that math, obviously, gross profit stays the same. You're dividing it by lesser sales. So when we looked at that gross profit margin at approximately 40.7%, revenues of $457 million, we were pretty pleased with that, frankly. Our teams did a great job in our supply chain and our factories. We continued to drive productivity there. So we're pretty pleased with that, because second quarter is always a little bit of a gas because, again, of that variability that's just inherent in Q2.

Okay. And then a note in the liquidity and the balance sheet. Just a comment on the acquisition pipeline mix of technology deals versus larger projects. And how would you define a sizable deal and anything like that out there in the field?

Ricky?

Yes. First of all, as you know, Chris, very fragmented in the luminaire as well as, arguably, portions of the control side of the markets. So the typical size deals, which are consistent with what you've been seeing us do, are relatively small, well under $100 million. In fact, most of them are well under $50 million in revenue, the $20 million to $50 million type range. And that hasn't changed. There's a lot of new startup companies that are out there. We hear about many of those, particularly in the newer technologies, whether it's LED, whether it's wireless controls, wherever it may be. Some of whom have been financed by private equity or venture capitalists and are looking for a liquidation event. So there's certainly a fair amount of opportunity out there, a pretty rich pipeline, but they're more in that smaller area. And frankly, a lot of them don't really add much for what we would be looking at to be that much attention. Larger ones, there's not a lot of larger transactions here in North America. There's a few in the "few hundred million dollar" range. But absent major consolidation among the majors, not a lot of large here in North America, which is our primary focus. We do look internationally occasionally, and opportunistically, if the right opportunity came, we would certainly look at it and particularly -- and potentially act on it, but our primary focus is here in North America.

Chris, the other thing I would say, it's particularly important. We are maniacally focused on reducing our product development lead times. Our organization is doing a great job. This is one of the reasons why you're seeing in the third and fourth quarter such a tremendous slate of new products that are coming out. Our teams are getting much better at that. So when it comes to acquisitions, we're looking for folks that would bring some type of skill or capability that either we don't have, Winona, Mark Architectural Lighting, Healthcare Lighting or technology, whether it's some of the smaller businesses that we've acquired, these are folks that have tremendous talents. And they are about what we're going to be delivering in terms of Lighting Solutions on a go-forward basis. So our acquisition strategy is really how do we enhance the portfolio that we have? And it's not necessarily looking just to find size. It's really looking to make sure that we are acquiring capability that allows us to really leverage our access to market in our existing portfolio.

Our next question comes from Colin Rusch with ThinkEquity.

Can you talk a little bit more specifically about the $11 million of cost increase? How much is coming from rare earth? How much is coming from steel, and then the balance?

Unfortunately, I don't have that right in front of me. Steel, items that are based on oil, inbound freight for materials coming from different parts of the globe, have been very expensive. Oil as it inputs into acrylics and things that we use have been expensive for us, rare earths, as they have impacted the cost of lamps. All of this has -- and there are other items, but all of this has rolled through our P&L. And again, we estimated that number to be about $11 million this quarter. Ricky, I don't recall last quarter, but I think it was not terribly dissimilar.

Yes. It was actually the same number, $11 million in the last quarter.

And it's entirely possible that we'll have the same delta cost difference in the third quarter. But again, as I commented, we believe that our pricing actions were sufficient to offset that cost. It just has, unfortunately, because of the math, a dilutive effect on the gross profit margin calculations.

Perfect. And just changing gears a little bit on the technology platform and the initiatives you're working there. Can you talk a little bit about your roadmap on which areas within the control functionality of the communications that you're really focused on? And then, if you -- within that, if you could comment on how you're dealing with latency on the columns [ph] platform and how much bandwidth do you really think you can get within the embedded controls that you've got in the roadmap. And then also, how much that might impact the cycle time on the product development as you get that platform to a more mature state.

Sure. It's not terribly dissimilar from the iPhones that we all have, where, again, today, it's about the application. It's about ease of use. It's about how do we get value out of that device. Lighting systems, in our view, will be no different. It's how do we take advantage of technology to provide light in the space, quality of light, where it's easy to use. Too often, and I'm certain many of you out there, when you go into your own conference rooms, they have control devices, and no one uses them because they don't know how to use them. Our view is, as a lighting company, that we can bring lighting systems to bear in schools, healthcare facilities, office buildings, industrial warehouses, indoor, outdoor, where people have functionality, where they can get quality of light in the space, and they can have energy savings at the same time. In our conference room that we're sitting in right now, we dim these luminaires down by about 30% because we have ample light coming in today to provide proper lighting in the space. This is, again, why we acquired Sunoptics to really aggressively include daylighting as part of our lighting system. So you're seeing already these types of capabilities roll out into the market. We think we're just scratching the surface on this type of thing. If you look out between now and, say, 2015, our view is, is that people will pay up for these types of incremental lighting control solutions because they can get energy savings while they're using the space. It's no longer, if you're in the space, turn the lights on 100%, if you're not, turn them off. So the value that we see going out into 2015 adds considerable market opportunity for us. I don't think that it's going to slow down or accelerate our development pace. That's really dependent upon us. We've changed internally our focus over the last 12 months in terms of how we focus on verticals to provide those types of lighting solutions. So our teams are very well aligned to the end market and then bringing that through our product development capability. The acquisitions that we've made in a number of areas help support us developing the lighting systems for these types of vertical applications. And again, we've just scratched the surface. Third and fourth quarter are going to be part of the rollout of some of these types of lighting systems. But it's 2015 and beyond where we really see, in our view, the huge benefit from our market leadership position in these kinds of activities.

Our next question comes from Jesse Pichel with Jefferies.

Could you give us some additional color on the increased LED growth? You said that LED sales increased, I guess, 200% year-on-year in the quarter, up from 150% last quarter. So where is that strength most pronounced? Is it indoor lighting? Or some of your new outdoor security lighting products? And then I have a follow-up question.

Sure. We are seeing very balanced growth now. Again, I wouldn't read too much into the balance between indoor and outdoor at this moment in time, because the products that we are introducing are, obviously, targeted at both sides of that. Given our market leadership, particularly in indoor, but we're under one player in outdoor as well, our ability to leverage our access to market and the portfolio that we have, we expect great growth in both indoor and outdoor. So while today, our revenues from LED products are now about 7% of our total, it's continuing to grow at a very rapid pace. I mean, we almost tripled where we were in the year-ago period in Q2. Again, trying not to read too much into that, because Q2s have again, a great deal of variability. But if you look at the sequential improvement, I mean, I didn't do the math, but it's probably another 30% on sequential of this Q2 compared to our Q1. So our expectation is to have great growth. And we will lead the LED transformation as we get out over the next 12 months or so.

Well, that's great to hear. And for my second question, post the Georgia plant closure, what is your overall plant utilization today worldwide? And would you anticipate any further actions to increase utilization?

It's always difficult when you make a decision that impacts people's lives. But as -- and we have really worked very diligently to make sure that we can help facilitate a transition for those people. But if you look back over the last handful of years and what we've been doing at Acuity, we have been very aggressively transforming our manufacturing footprint to both be very local in the markets that we serve and to be very efficient. As we apply our manufacturing processes, we've been able to take out square footage while meeting, if you will, growing unit volume going forward. Utilization for us is not a terribly important figure. It's really what can our supply base supply to us in terms of components? We work diligently with our key suppliers to make sure that we can respond to market demands in a much more effective way. Our assembly capacity, our paint capacity, our stamping capacity, all of those types of things, we feel we have ample physical space as well as the ability to ramp up to meet the type of growth that we are expecting over the next handful of years, as Ricky pointed out.

Jesse, I would add that virtually none of our operations are running 24 hours and certainly not even 7 days. So we have quite a bit of capacity, certainly floor space, even with the closure of Cochran, is not an issue in any of our mid-, even longer-term-type planning. There's always little bottlenecks here and there or some fabrication equipment and all, but those are not expensive-type costs to add. And again, we could go to multi-shift and longer weeks as necessary. So capacity, as Vern commented, is not really a big constrain on us.

Another important point to make you all aware of is that, look, today, the price of oil is roughly, call it $100 a barrel. I mean, just imagine if oil goes to $150 or $160 a barrel the impact on most people's supply chain. Just pure logistics gets to be very, very expensive. What we're doing with our footprint is allowing us to be very local so that in the event of some type of rather significant increase in oil, our supply chain should be able to put us in a competitive advantage because of our capabilities very locally.

That's very interesting. Do you think I can fit in one technology question? We've seen the unit volumes of the OLED displays in phones rise dramatically. And I'm wondering if that has manifested itself as lower unit costs for you in OLEDs? And what kind of cost-downs are you seeing in this technology? And do think it could be a viable lighting source?

We are investing, have been investing very heavily in OLEDs. And the answer is, is that we do believe that OLEDs will have a significant future. Today, the performance of OLEDs relative to either conventional lighting sources or LED have particularly, based on its performance and cost, it's really very high-end, very specific applications today. But I -- we see OLED as a unique opportunity. Last year, at LIGHTFAIR, we won the award for Product of the Year because of our OLED luminaires. We will again at this LIGHTFAIR introduce even more LED -- excuse me, OLED-based luminaires, because we believe they, again, have a very significant opportunity on a go-forward basis. Today, they're still very expensive for most applications.

Our next question comes from Carter Shoop of KeyBanc.

First question is on the backlog. I know it's not a great indicator for you, given how much of your business is book and ship. But could you help us try to better understand what that year-over-year trend would have been if you exclude the impact from the price increases and any pre-buying last year?

It gets a little difficult to do that. What I did indicate in my prepared comments was that sequentially, we were up a few percentage points. If we go back and look over the last 6 or so quarters, you will see that our backlog of approximately $138 million was pretty healthy but for the couple of periods where we have announced price increases, and people will place orders ahead of that. I want to stress these were orders placed ahead of it. Not a lot of pre-shipping, but orders. So it did spike up last February to that $156 million range and then came back down again, and by August, had it back down to $130 million. Then was $136 million last quarter, as I mentioned. So it's hard to say exactly how much of that $156 million was pre-buying. But if you look at the trend, and, again, as you highlighted, it's becoming less meaningful, in my opinion. But it's more the spike that happened back in February, May, but I don't know precisely how to say how much of that would be due to any pre-ordering that went on.

Okay. And then when you think of the rollout strategy that you mentioned earlier in the call and the number of SKU that are being rolled out or significantly above prior years. Is there any way to quantify that, maybe quantify the number of SKU that you're rolling out? And how that compares to maybe the prior couple of years in the second half of the fiscal year?

The way you would quantify it by, say, a product rollout versus -- not all products are the same. Some have their application into the marketplace, and the size of the market that they're serving are dramatically different than another product, which may be a niche product into a small vertical. So if you look at our product rollout where, last year and the year before, we introduced more than 100 new product families. The type of family, the type of product family that it is will dictate the amount of investment and the amount of marketing effort that you put behind it. So if of those 100, I'll just pick a number, 25 of them, so 25% are really significant, that's where you put your shoulder behind those. I would say that we are up fairly significantly relative to what we've done in the past in terms of those more important product families that are being rolled out. So difficult for me to give you a precise number that would be meaningful or actionable for you.

Okay. Last question is on the LED side. Hoping to get a clarification on a couple of numbers there. Did you say that LEDs were 7% of sales?

This quarter, yes.

And so that's about $30 million in revenue?

More than that. They were more than that.

Right. Slightly more than that, yes.

Yes. Because I think last quarter, you guys said the LED sales are up $30 million year-over-year, and then you said 30% increase off of that this quarter. And I'm not sure if there's like different ways to calculate LEDs or what the right way to think about that number is. Is that, I mean -- so maybe pull it above that 7% number for the most recent quarter?

Yes, I'm trying to recall. I think we may have used percentages, because when I look at Q1's number to Q1 of a year ago, the number is up, again, almost 2.5x or a little more than that this quarter compared to the year-ago quarter. So the amount of sequential -- the amount of year-over-year growth continues to be at a very robust pace in this first half compared to the first half of last year. And then, sequentially, we continue to grow at a fairly robust pace as well.

Okay. Do you think that year-over-year growth rate is sustainable in the second half of the year for LEDs?

Well...

Broadly speaking?

I don't know if it is or it isn't. But what I do know is that the product portfolios and the acceptance of LEDs and the specifications, like -- I mean, I understand the specification cycle for an office building or a school or whatever, it takes time. The amount of quotes that we are quoting today or the percentage of our quotes that are LED-based are -- would suggest a very significant difference between a 7% of our revenues today and what they might look like 12 months from now. Our hit rates are very high on our LED quotations. So I would expect these numbers to be, again, significant, if you will, in terms of growth. But the exact number, I don't know that it would be helpful, at least to you relative to me. We expect to continue to grow our business. We expect to gain share in these areas because of the quality and the type of products and the systems that we have. So this is what's fueling our growth relative to the overall market being, say, more stagnant than the unit volume growth that we enjoy.

Our next question comes from Jed Dorsheimer with Canaccord.

I guess, 2 questions. Vern, first on the diversification efforts as it relates to growth. If we look at these efforts, what would you expect this to add to the overall growth rate of the company?

Yes. So if you go back to 2008 and you look at our kind of high-water mark, that's when we did couple billion of revenue, and the marketplace was roughly an $11 billion addressable market for us. If you fast-forward and look at that same market, say, by 2015, we see that, that market being about the same size, but the opportunity to add a little bit more value into that market, vis-à-vis lighting systems, where people will pay up for that, the notion of renovation being a larger portion or contributing incrementally to the market. And then certainly, the Lighting Controls market by itself we expect to be north of a couple of billion dollars. Well, in 2008, we weren't in Controls at all, virtually not at all. So when we look at 2015, we see a marketplace for us that's addressable that's almost $18 billion. And I would submit to you that the difference, because of the investments that we've made in LED controls, lighting systems, daylighting really have allowed us to add probably another 60% of addressable market by the time you get to 2015, which is huge.

Great. So maybe just, if I look at that a little bit differently. If you're growing at sort of a 5% in the core business, does that mean that with the 60% increase, it would add another 3 percentage points, basically? So the overall business grows at sort of the 8% range?

Jed, you are much more skilled at doing math on your feet than I. I'd have to think about that. I come at it a little bit differently. I say that if the marketplace is a size by 2015, I know that we have the ability because of our portfolio, our access to market and the focus that we have to gain share. And if I look at what share we have today, roughly speaking, both in the traditional markets -- and by the way, I consider LED to be part of the traditional market. Today, it's accretive, but soon, it will begin, and maybe it is already, cannibalizing other conventional sources. But when I look at that market out in 2015 and where we continue to position the portfolio, I'm looking to have gained share in those key channels and verticals. So when you do that math and you look at $17 billion or $18 billion market and you apply some share number to it, you now can see the size difference or the growth potential. If we're tracking kind of around a $2 billion number for 2012, you can see what that difference is going to be by 2015. We continue to perform well. We continue to gain share on the LED side, which, again, the market is going to continue to transform to. Our portfolio and our ability to drive share gains there, I think, is formidable.

Fair enough. Maybe just -- that's a good segue to my second question on the LED. You made the comment that you expect to position the company as the market leader in LEDs. And I'm just wondering if there's a timeframe around that? And specifically, as I look at the business, sort of a run rate right now of $120 million, there are others that are sort of closer to that $400 million mark, so -- in North America. So I'm curious when do you expect to achieve that market leadership? Is that sort of a year out? Or is that again, sort of by that 2015 type of timeframe?

No. I would expect us in the channels as well as the vertical markets that we serve, that we will exert our leadership position here in all of those where we -- virtually all of those where we have leadership positions today in conventional sources to see that leadership position over the next 12 to 18 months. And in a number of areas, we have the leadership position. It's just that the market, except -- excuse me, the market availability for those products is still out there. It's still part of the longer-term specification cycle.

And that's neutral to overall margins, Vern. So you would expect that to sort of be, based on the cost-downs that you're seeing at the component level, to be accretive at that time, too?

Jed, I believe that as we continue to offer better lighting systems, a solution into a space, a solution for a building, a solution for an outdoor application, more and more, the value proposition is going to be based on how that system works and why you're able to get better energy savings while experiencing quality of life. I actually expect that we will continue to see as we get a little bit further out, certainly not next quarter, the quarter after that, but as we get further out, I would hope that we'll see better variable contribution margins off those types of systems compared with just a discrete luminaire or a discrete component.

Our last question comes from Andrew Abrams with Avian Securities.

Just one quick question, if I could, on price increases. Historically, I know these are pass-throughs for you guys and probably for your -- for the channel also. But is there a point at which price increases start to really affect the end user in terms of visibility just to keep up with those price increases? Is there a point at which, when they occur every 6 months or 9 months, that you start to see an impact to a slower revenue rate? Is that a historical issue or just a normal pass-through?

It's a great question. I would say that historically, because of the pace of change, the industry typically has been able to pass through those cost increases. And the impact of the broader economy is what influences whether someone can, if you will -- whether they need the luminaire or whether they can afford it is dependent upon, again, what they see out there. Our growth and the growth of the industry, I think, is very contingent upon a number of key factors. General economic health, employment, generally speaking, credit availability. It's those types of things that are more important determinants of whether someone is going to go forward with the project, less about the immediate costs. And typically, lighting is part of the last stuff in. You've already built your building. You've already gone forward with the renovation, and now you're putting in those last few components. Typically, if someone realizes a budget issue, they may look to value-engineer and put in lesser-value products. But they typically won't stop the project because of increases in cost.

And the only area I might add where you could see a bigger impact, but I don't think we're there today, necessarily, but in some of the renovation activity where it is an ROI type of a calculation and they're looking at the energy savings versus the investment and have their hurdles for ROI or paybacks, certainly, at some point is the cost of the luminaires and the controls extend that payback that could have some impact on demand. So -- but right now, we're seeing energy costs continue to decline in many areas that is counterbalancing that.

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

Thank you. I just wanted to make one last quick comment on the question around price versus cost relationship and the impact. I think it's important for everyone to note that the $11 million of incremental cost compared with the incremental revenues associated with that, if one were to back that out as well as understand that the issue in Spain was due to the dramatic and almost catastrophic change in the Spanish government and the austerity programs that they're attempting to push through, if you were to back out that $1.3 million operating loss, what you'd find is that our revenues increased about $30 million or 7%, pretty robustly directed at unit volume growth. You would have found that our gross profit margins would have improved about 130 basis points. But more importantly, our operating profit margins would have improved about 160 basis points over the year-ago period. So on an apple-to-apples basis, that's robust improvement. The variable contribution on that level of revenue is about a 32% variable contribution, which is very robust, given the level of investment. So I want folks to understand just how strong our results were for the quarter, particularly for our second quarter. So we strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that will, over the longer term, deliver on the expectations of key stakeholders. You all know our future is bright. Thank you for your support.

This concludes today's conference. Thank you for participating. You may disconnect at this time.