Acuity Brands, Inc. (AYI) Q4 2012 Earnings Report, Transcript and Summary

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

Thank you. Good morning, all. With me today to discuss our fiscal 2012 fourth quarter and full year results are Vern Nagel, our Chairman, President and Chief Executive Officer; and Ricky Reece, our Executive Vice President and Chief Financial Officer. We are webcasting today's conference call at 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 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 actual results to differ materially from those contained in our projections or forward-looking statements. Now let me turn this call over to Vern Nagel.

Thank you, Dan. Good morning, everyone. Ricky and I would like to make a few comments, and then we'll be happy to answer your questions. First, let me say we are very pleased with our results for the fourth quarter and for the full year 2012. We reported strong top and bottom line growth in spite of continued soft economic conditions. As we will explain, our reported results include the impact of our previously announced streamlining activities, which mask the significant improvement in performance of the company this quarter. This is the 10th quarter in a row where we achieved unit volume growth in an environment where spending for new nonresidential construction remains sluggish and inconsistent. I believe this is, yet again, strong evidence our strategy to diversify the end markets we serve and extend our leadership position in North America is succeeding. These strategies include the continued aggressive introduction of innovative, energy-efficient lighting solutions; expansion in key channels and geographies; and improvements in customer service. Our profitability and cash flow for the quarter and full year 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 economy in North America continues to be fragile, as consumer confidence lags and job growth remains anemic. 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 for items such as freight and lamps. Overall, we estimate our pricing initiatives have allowed us to recover these higher input costs. I mention these macro factors because it provides a backdrop against which you can again see the outstanding performance of our company. I know many of you have already seen our results, and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights. First, for the quarter. Net sales for the quarter were $514 million, an increase of almost 4% compared with the year-ago period. This level of growth is significant, given general economic and industry conditions. Reported operating profit was $61.2 million or 11.9% of sales. We took a special charge in the current quarter for previously announced streamlining actions and incurred expected inefficiencies associated with these actions, which in total reduced operating profit by $6.5 million in the quarter. Ricky will talk more about these special charges and these inefficiencies later in the call. I find it helpful to add back these items to the current quarter's results to make them comparable with the prior year. Doing so, one can see adjusted operating profit was $67.7 million, up 21% over the year-ago period, while adjusterated [ph] operating profit margins improved 200 basis points to a strong 13.2%. Diluted earnings per share were $0.78. Again, adding back the impact of these items noted above, adjusted diluted EPS for the current quarter was $0.88, up 11%. As Ricky will explain later, fluctuations in foreign currency reduced our diluted EPS by $0.04 in the quarter, while it benefited diluted EPS by $0.03 in the year-ago period. You can do your own math to get a true apple-to-apples comparison between quarters from an EPS perspective when eliminating the impact of these currency fluctuations. As you would expect, the growth is similar to the 21% growth we achieved in adjusted operating profit. Strong results indeed. For the full year, net sales at Acuity were more than $1.9 billion, up almost 8% from 2011. Adjusted consolidated operating profit margin was 11.7%, up 120 basis points compared with the year-ago period. Adjusted diluted EPS was $3 per share, up 24% from 2011. In addition, we generated over $172 million in net cash provided by operating activities. This is the 8th year out of the last 9 years where we have generated more free cash flow than our net income, a significant accomplishment. As Ricky will discuss later, we've meaningfully enhanced our already strong financial position in 2012 as net debt to total capitalization, net of cash, is now just over 7%. Lastly, I'm pleased to report that we, once again, earned much more than our cost of capital and our cash flow return on investment was a robust 24%, 300 basis points better than last year in spite of these challenging economic conditions. These results for the quarter and full year were significant improvements over the year-ago periods. We believe you will find these results even more impressive upon further analysis. So first, let's look at the quarter. On a consolidated basis, net sales grew almost 4% compared with a year ago. Approximately 2/3 of the 4 points of growth were due to greater product shipments, with the balance coming from the benefits of better price and product mix. The impact of acquisitions and foreign currency on net sales were not significant. The increase in net sales was reasonably broad-based along most product lines, partially offset by a decline in renovation due to the timing of projects for certain large corporate accounts in the year-ago period. Growth in our largest channel, commercial and industrial, was well above this quarter's average due to continued emphasis on selling higher value-added lighting solutions, especially LED-based luminaires, which again grew by more than 2.5x compared with the year-ago period, as well as a continued focus on smaller- and medium-sized projects of various types. We continue to enjoy solid growth in important geographies and channels in North America, as well as key markets internationally, all of which is very encouraging in spite of the variability in demand within the nonresidential construction market. 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 primarily due to the benefits from previously announced price increases to recover rising input costs. We estimate our pricing actions helped offset approximately $4 million in higher input costs compared with the year-ago period. Looking at all this a bit more closely, there are some interesting points to note. First, we believe spending in key segments of the 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 more than 3% and even more in the C&I channel. 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 outperform the markets we serve. Our solid growth in a challenging market is due in large part to our focused strategy to diversify our portfolio, to be less reliant on new building construction and more focused on growing portions of market, including renovation 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 and the strategic accomplishments in the quarter and the full year. Excluding the impact of the special charge and the expected inefficiencies with plant consolidation, adjusted operating profit margin for the fourth quarter was a strong 13.2%, again up 200 basis points from the year-ago period. In fact, we earned more adjusted operating profit this quarter than any quarter since 2008, and this was our highest operating profit margin in the last 4 years. Further, as Ricky will discuss later in the call, adjusted gross profit margin expanded 140 basis points to 41.8% due to higher shipment volume, a better mix of products sold and improved productivity. Next, selling, distribution and administrative expenses were 28.6% of net sales for the quarter, a decline of about 60 basis points from the year-ago period. Total SD&A was up only 1.7% on a sales increase of 3.6%. Productivity improvements helped to offset other increases in SD&A expenses, which were primarily related to activities focused on longer-term growth opportunities, including market diversification and investing in innovation and technology, primarily for solid-state luminaires and integrated intelligent lighting systems. Investments in these key areas are starting to pay off as our new products and solutions gain traction in the marketplace, driving revenue growth. As a point of reference, SD&A that is not directly variable with sales volume was slightly less than $90 million this quarter, in line with the expectations noted in our last quarter's earnings call. On the strategic front, we continued our rapid pace of introductions of new products, significantly expanding our industry-leading portfolio of innovative energy-efficient luminaires and lighting control solutions. The rapid introduction of innovative, more energy-efficient products and services have been key contributors to our improved performance over the last few years. This, contrary to the view of some, has allowed us to extend our market leadership position and is one of the cornerstones of our growth strategy going forward. As I mentioned earlier, our solid-state lighting portfolio is expanding rapidly, as are the sales of these luminaires. Today, LED-based products are now approximately 12% of our total sales. And we continue to fund the development of other light source technology, such as organic LEDs, where we continue to expand our award-winning portfolio of these innovative products. More impressively, our adjusted operating profit margins continued to expand this quarter, while sales of LED-based solutions have become a larger portion of our overall business. 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 a chip, which is quickly becoming a commodity, or a fluorescent lamp to be a true lighting company like Acuity Brands. At Acuity, we offer customers superior quality lighting and energy-efficient solutions for virtually every indoor and outdoor application regardless of the light source. This is again why we are extending our industry-leading position. As I've noted before, our organization has a long and distinguished history of leading and innovating during eras 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 traditional energy-efficient luminaires and lighting controls. And we are delivering profitable growth and strong financial returns for our stakeholders while making these important investments. For the full year, we performed exceedingly well in spite of another year of weak economic conditions. Just to note a few of the key highlights: Net sales grew almost 8% over $1.9 billion, while adjusted operating profit margins expanded 120 basis points compared with the year-ago period. Our solid growth in this challenging environment was due in large part to our focused strategy to diversify our portfolio, to be less reliant on new building construction cycle and to expand in underpenetrated channels and geographies. Innovation and the record pace of new product introductions continued to fuel our growth. Interestingly, we sold as much LED-based luminaires in the fourth quarter of 2012 as we did in all of 2011. Our formidable strength in innovation was on full display earlier in 2012, when, as I mentioned before, Acuity won a total of 11 industry awards at 2 key industry events for its indoor and outdoor LED lighting solutions. These awards included the prestigious "Best in Class" designation at the Next Generation Luminaires Solid State Lighting Design competition. No other competitor even came close to this level of success at these events. Again, we are a lighting company. We are extending our leadership position because customers understand it takes more than simply slapping a chip on a board and shining it on someone's eyes and then claiming to be a real lighting company. These accomplishments have diversified and strengthened our foundation and will further serve as a robust platform for our future growth that is less reliant on the 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 progress that they have made in 4 key areas of strategic focus: customer service; pricing and margin management; geographical channel and product portfolio expansion; and 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 like to now turn the call over to Ricky before I make a few comments regarding our focus for 2013 and beyond. Ricky?

Thank you, Vern, and good morning, everyone. I will highlight a few items regarding our income statement, including the special charge in production and efficiencies related to our streamlining activities. I then will discuss our cash flow and financial condition before turning the call back to Vern. Vern covered the primary drivers for our sales growth and our profitability, so I'll not repeat these items, but I would like to provide a bit more color on certain aspects of our fourth quarter and full year results. Let's first look at our streamlining activities. In the fourth quarter of fiscal 2012, we recognized a pretax special charge related to the previously announced closing of the Cochran, Georgia production facility of $2.1 million or $0.03 per diluted share, which related primarily to the cost associated with the transfer of production. In addition to this special charge, we incurred $3.2 million or $0.05 per diluted share of higher costs related to manufacturing and efficiencies directly associated with the closing of this facility, as well as $1.2 million of noncash expense or $0.02 per share related to the abandonment of usable inventory at the facility because we concluded that the cost to move and warehouse the inventory exceeded the benefit. We had pretax special charge and production inefficiencies this quarter totaling $6.5 million or $0.10 per diluted share. As Vern said earlier, we find it useful to adjust our results for these items to make them more comparable and we have included in our earnings release a full reconciliation of our GAAP amounts to these adjusted results. The closure of the Cochran facility began in the third quarter of fiscal 2012 and is expected to be principally completed by the end of the first quarter of fiscal year 2013. We expect to record an additional pretax special charge and production inefficiencies of approximately $5 million associated with this closure, which will be recognized primarily during the first quarter of fiscal 2013. Annualized pretax savings associated with this closure are currently estimated to be approximately $8 million and are expected to be fully realized following the completion of the transfer of production and closure of the facility, which we currently estimate will be by the end of our first quarter of 2013, assuming we can receive all necessary government permits and approvals timely. You may recall, in addition to the special charge for the Cochran closing, we also recognized a $2.7-million pretax charge in the first quarter of fiscal 2012 for other streamlining efforts, which are expected to yield annualized savings of roughly $5 million, and an additional $1.2-million pretax charge in the second quarter associated with a reduction in workforce, primarily in our operation in Spain, which we estimate will generate annualized pretax savings of approximately $1 million. Therefore, if you total all the streamlining actions for the full fiscal year 2012, we recognized a pretax special charge of $13.3 million or $0.21 per diluted share, plus pretax cost of $4.4 million or $0.07 per diluted share associated with the production inefficiencies and abandonment of inventory. We currently estimate we will record an additional pretax special charge of $2 million and incur additional pretax cost associated with the production inefficiencies of $3 million, primarily during the first quarter of fiscal year 2013. However, these amounts could vary depending on the timing of the production transfers. We estimate that these streamlining actions in total will generate annualized pretax savings of approximately $14 million, of which approximately $1 million was realized in each of our second and third quarter of fiscal year 2012 and approximately $2 million in the fourth quarter of fiscal 2012. We hope to be at the full annualized savings rate of $14 million for all these actions by the end of the first quarter of fiscal 2013. As Vern mentioned earlier, our adjusted gross profit margin expanded 140 basis points to 41.8%, largely due to the incremental profit on our higher shipments and favorable price mix. In addition, we are continuing to see profitability improvements due to productivity gains in our manufacturing facilities and early savings from the transfer of production from the Cochran facility to other manufacturing sites. Partially offsetting these improvements, as Vern previously mentioned, was increased input cost of approximately $4 million. While we are experiencing reductions in certain commodity costs, such as steel and solid-state components, these savings are being partially offset by increases in other areas, such as freights -- freight and lamps. Also, most of the recent reduction in commodity cost and solid-state components have not yet been reflected in our financial results because of our FIFO inventory cost and methodology and higher inventory levels. Rather, these recent favorable movements in cost are reflected in our year-end inventory costs in the balance sheet until these inventory items are consumed in production and sold. Let's next turn our attention to some of our results below the operating earnings line. Miscellaneous expense is due primarily to the impact of exchange rates on foreign currency items. In the fourth quarter of fiscal 2012, we had miscellaneous expense of $2.8 million compared with $1.7 million of miscellaneous income in the prior year period. The unfavorable impact of exchange rates on certain foreign currency items, primarily the Mexican-peso-denominated items, negatively impacted fourth quarter earnings by $0.04 per share compared with a $0.03 favorable impact in the prior year fourth quarter. For the full fiscal year, we actually experienced miscellaneous income of $1.7 million compared with expense in fiscal year 2011 of $1.2 million. The relative value of the U.S. dollar to the Mexican peso has fluctuated greatly during this year, impacting our foreign currency gains and losses on our Mexican entities' U.S.-denominated receivables and cash, resulting in these earnings swings. The effective tax rate this quarter was 34.4%. This is 270 basis points higher than the prior year quarter. This higher effective tax rate negatively impacted diluted EPS by $0.03 compared with the prior year period. The effective tax rate for the prior year period was favorably impacted by various discreet items, including federal and state tax credits, which did not occur in the fourth quarter of fiscal 2012. The full year tax rate was 35% compared with 33.1% last year. We currently expect fiscal year 2013's effective tax rate to be approximately 35%. Now let's look at the cash flow for the year ended August 31, 2012. Cash flow provided by operations for fiscal year 2012 was a strong $172.2 million, an increase of $11.1 million compared with the prior year. The higher level of cash provided by operations this fiscal year was due primarily to higher net income. Operating working capital, defined as receivables plus inventory minus accounts payable, was basically flat with the prior year, but improved 90 basis points to only 11.6% of sales, which we believe leads our industry by a wide margin. Inventory and accounts payable both increased by 7 days compared with last year. These offsetting increases of just under $30 million each compared with last year primarily reflects higher relative cost of raw material used in products based on newer technology such as solid-state lighting, temporary build of certain inventories in order to maintain service levels during the production moves associated with our closure of the Cochran plant, and certain strategic purchases of commodities and components. We would expect to be able to bring down our inventory by several days as we complete our production transfers in the coming quarter. In fiscal year 2012, we spent $31.4 million on capital expenditures and $3.8 million on the acquisition of businesses. We currently expect to spend approximately $40 million in capital expenditures in fiscal year 2013. We ended fiscal 2012 with a cash balance of $284.5 million and total debt of $353.5 million. At August 31, 2012, net debt to total capitalization, excluding cash, was 8% and debt-to-EBITDA was a mere 1.4x. On January 31, 2012, we executed a new 5-year $250-million revolving credit facility. At August 31, 2012, we had additional borrowing capacity of $244.3 million under the new facility that does not mature until January 2017. So we continue to maintain a significant amount of financial flexibility. Thank you. And I'll now turn the call back to you, Vern.

Thank you, Ricky. As we look forward, we see significant long-term growth opportunities while short-term economic challenges are now the norm. While we don't give earnings guidance, we would like to offer a few observations about what we see for 2013. First, we expect the business environment to continue to be challenging as business and consumer confidence wanes due to the macroeconomic and political uncertainties in the U.S. and globally. The consequence of these uncertainties is continued volatility in demand. Forecasts by independent organizations for industry growth vary widely. The consensus is that unit volume growth for key segments of the nonresidential construction market in the U.S. will be in the lower mid-single digits in 2013, while sales for lighting fixtures are expected to be modestly higher. This suggests that expected growth in the broad lighting market in North America to be in the mid-single-digit range for our fiscal 2013. This is reasonably consistent with the outlook in our previous filings. Therefore, our expectation, results of the U.S. election notwithstanding, is that overall demand in our fiscal 2013 will be choppy in the first half, yielding to more consistent and positive growth in the second half of the year. Our order rates, so far for the first quarter, seem to reflect these inconsistent yet modestly improving conditions. Again, we still 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 cost, particularly for rare earth elements, mostly used in lamps, and oil-based items. While some commodity costs have waned recently, others continue to rise. As of now, we expect material input cost to be relatively flat except for certain LED components, which should continue to decline. Further, we expect employee-related cost will rise due to wage inflation and the negative impact of Obamacare on healthcare costs. Of course, we will continue to be vigilant in our pricing posture and productivity efforts to help offset rising costs. Additionally, as I've 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 done 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 market, further expansion in underpenetrated geographies and channels, and growth from the introduction of new lighting solutions. As the industry leader in North America, we are uniquely positioned with key suppliers around the globe to bring greater and more differentiated value to our customers, incorporating advanced technologies, providing superior lighting quality and more sustainable energy solutions. Our product and solutions portfolios continue to expand at a record-setting pace for us, including the addition of 5 strategic acquisitions over the last few years 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. As I have said before, we believe the lighting and lighting-related industry will experience significant growth over the next decade, particularly as energy and environmental concerns come to the forefront. We continue to believe the 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 you have.

[Operator Instructions] Our first question comes from Rich Kwas from Wells Fargo.

I had a question on the incremental margin performance of 65% this quarter on a year-over-year basis, very impressive. Vern, I think last quarter, you thought -- you were pretty optimistic about incremental margin performance and this is the third quarter you've seen acceleration. Just broadly speaking, anything that was unique this quarter? And what do you think -- I would expect that's not sustainable, but if you could provide some color on what you think the direction of incremental margins are going forward, that would be great.

Sure. I think you saw this quarter the leverage power that Acuity has on incrementally higher volume. We continue to drive productivity throughout the business. We did have a more favorable price/mix option this quarter. And so I think all of that served well to help drive incrementally higher margins. Our fixed SD&A was slightly below the $90 million that we had talked about before. So I think the combination again of higher volumes, better mix, price/mix, if you will, and productivity improvements gave us the opportunity to do that. I think if you look at the full year, our adjusted variable contribution margins were roughly 27%. So we had good productivity improvement, reasonable mix, but we made investments in the business. If you look at our total fixed SD&A for 2012 compared to 2013, we were up about $11 million or about 3%. Total fixed SD&A was about $348 million, suggesting about an $87 million per quarter run rate. We feel more comfortable that, that number probably is 90 or so. So now, it's how do we continue to drive new product introductions? How do we continue to drive a better mix of products sold? And to look at one quarter does not necessarily give you the full picture, but I think to look at the full year, it shows you how we can continue to, we believe, drive future profitable growth as we grow our business. The other thing I would comment on, LED products sold this quarter represented almost 12% of our total revenues. And yet, we were still able to improve our operating profit margins. I think that may be in contrast to some others that are out in the industry more broadly. So we continue to focus very narrowly on, how can we drive profitable growth in our business? And I would expect that -- as we think about 2013, we hope to continue that trend. Obviously, not necessarily at the rate of the fourth quarter, but more broadly, building on what we did in all of 2012.

Okay, that's helpful. And then just a follow-up. Ricky, on the miscellaneous line item, should we think about a headwind going forward if current FX rates with the peso maintain? Or is there anything that -- any other color on that just from a modeling prospective?

Yes, you should. Currently, we are exposed because of the receivable balances and some cash that we have in our Mexican entities that get translated. So to the extent forecasts are showing the peso strengthening against the U.S. dollar, that would create some headwind for us. As you know, the peso tends to move fairly tightly with what oil prices move because of their large resources down in Mexico that drive their currency. We are looking at options of how we might minimize some of this variability, either through reducing some of these balances, if we can do that on a tax-efficient basis, or through some form of potential hedging that might make sense for us. Clearly, the volatility this last year of the peso, roughly seesaw in each quarter, up roughly 9%, 10% a quarter, down the next quarter, up and then down. We've seen that kind of fluctuation all year and it has made it difficult to try to predict our results below the operating earnings line. So right now, you're correct. The peso continues to strengthen to the dollar. We'll have that headwind but we are going to explore some alternatives if we can do it on a tax, as well as an otherwise efficient basis to maybe minimize some of this volatility.

Our next question comes from Ahmar Zaman from Piper Jaffray.

This is Shawn for Ahmar. I wanted to just talk a little bit or ask a little bit about your -- in terms of how you're looking at your LED sales for fiscal '13, you've obviously made some good progress in '12. Any sense of how we should look at that in terms of a percentage of your sales, of what your goals are for fiscal '13?

As you know, the -- and there are many forecasts out there of people calling for by 2015, a percentage of the total market being LED, I've seen numbers as high as 60% of the total market by 2015. I've seen numbers as low as 30%. We continue to robustly build out our portfolio. I believe that we have the industry-leading portfolio in terms of the ambient indoor market today. Our outdoor portfolio is similarly strong. And so now it's just leveraging our access to market to continue to drive both market share gains, as well as the overall market converting to LEB -- LED-based luminaires. And we don't have a specific target of what that number is going to look like for 2013, but we are focused on continuing to drive meaningful market share gains. So it's a one-two approach. We have fairly consistently, at least for the last 3 quarters, expanded our LED sales as a percentage of the total compared to the year-ago period by over 2x. So I think that, that trend should continue for a while, though one quarter does not necessarily make a trend. That's why I think when you look at what we've done in all of 2012 -- and please note that we're just really gaining traction right now as the portfolio has been out there, the specification cycle kicks in. And that again, is for both indoor and outdoor. I would expect us to continue to make meaningful progress, as we did in 2012, in 2013.

In terms of the outlook, sort of the choppy outlook for nonresidential construction, over the next few quarters, I mean, would you expect to see sort of flattish growth in LED? Or would you expect it to continue to grow meaningfully over the next few quarters?

Well, 2 comments. One, I think that the choppiness is due again to the uncertainties, both with the upcoming election here in the U.S, as well as global uncertainty. So the choppiness, I think, until we get clarity around several key points, what's Europe going to do, the fiscal cliff, the election, all those things, once those get past, I believe that you're going to again see more business as usual. So hence, the choppiness. I don't know that, that choppiness is going to have an impact one way or the other on how LED grows. I think it's more market -- overall market-driven that will impact, both the order rate, and then assuming orders, I think the LED conversion will continue.

I would also add, a lot of the LED sales we're seeing today are not as much dependent on new construction as they are on renovation, tenant fit-out, those type of opportunities, because of the value proposition that solid-state lighting and the varied output, the controls are offering. So while certainly, if we were able to ease some of this choppiness in a more consistent growth in new construction, that would be helpful. A lot of the activity we're seeing today is in that renovation part of the market.

I'd also like to be very clear, as a lighting company -- as a fulsome lighting company, we again are indifferent to the light source. We want to provide our customer base with the right types of lighting solutions that are best for them. I personally believe that by 2015, a meaningful percentage of market will be LED-based because there's great value proposition there. But be clear: it won't be 100%. And so our ability to continue to provide the kinds of solutions that customers are calling for is a growth opportunity for us. And we expect to fully leverage that.

Our next question comes from Peter Lisnic from Robert Baird.

Vern, I guess, first question. If you look at gross margin, appears to be the highest, I guess, since at least fiscal '04 according to my numbers. How should we think about that gross margin as we progress forward and LED becomes more of the mix?

Sure. First of all, the gross profit margin, again, is a -- gives you a view as to what volume can do over our fixed footprint. We continue to drive productivity into the business, so we're very pleased about how our supply chain not only leverages its cost structure, but also leverages its service capability. We continue to invest in that. Product mix obviously has an impact and it's difficult to predict each quarter what that product mix is going to look like. But I think if you look out over the full year, we would expect to continue to drive improvements. [Technical Difficulty]

This is Vernon Nagel. I apologize. We had some technical difficulties here. Obviously, we try and drive expense control and do our business, but maybe someone carried it a bit too far. Anyway, I apologize for that. So back to the questions.

Yes, Vern, I don't know if you could hear me. It's still Pete, but I don't know if we ever got the -- or if I ever got the gross margin answered. You got cut off in the middle. It sounded like, as we look to 2013, even with LED growing the way it is, that you would still expect some good gross margin improvement. Fair answer?

As Ricky pointed out, the fourth quarter for us is our seasonally high quarter. Volume, obviously, benefited the quarter's gross margin. Product mix benefited and productivity improvements. We would expect to see certainly productivity improvements. Mix is very difficult on a quarter-by-quarter basis. Obviously, it does have an impact. But we are driving to a higher gross profit margin. I think that the fourth quarter's gross margin gives you insight as to what it could be as volumes continue to build.

Okay, got it. And then for the follow-up question, it sounded as though C&I was a bit stronger in the quarter or maybe the order book looked stronger for C&I. Either way, just wondering where some of the perhaps offsetting volatility or weakness might be, if you could give us a little color there.

Sure, as I mentioned in my comments, some of the renovation for large corporate accounts, we had some particularly large orders in the year-ago quarter that didn't repeat themselves. And that business is -- it's a very solid business, but it tends to be volatile, if you will. So in the year-ago period, it was just the timing of some of those projects for very large corporate accounts, a couple. And our expectation is that, that business will continue to be robust. It just didn't manifest itself this quarter. So in the C&I channel, which is a primary channel for us, our growth rate there was quite nice in terms of what we saw and above what the company's average was for the quarter. We were approximately 4% top line growth. C&I was better than that.

Our next question comes from Christopher Glynn with Oppenheimer.

I had a question about the comment for mid-single-digit end markets growth plus outperformance, given that right now kind of coming off mid-single digits. You've kind of addressed it, Vern, talking about maybe first half lighter and second half bigger. So my question is, are we at the stage now where you see that larger project pipeline emerging now and then it's just a lag to the fiscal second half, where that's kicking in to give visibility?

Yes, I would say that in talking to our very diverse and broad customer base, people are cautiously optimistic about what the future holds. But in the nearer term, they are not as optimistic. People are really, I believe, taking more of a wait-and-see approach. We see that in our orders so far for the first quarter. Again, orders are favorable to the year-ago period and -- but they're choppy. And one day, your input rate is high and the next day, you say, "What happened?" And so I believe that, that will continue to be the norm until we get clarity around what is going to happen, both in November and what is going to happen with some of the policies around the fiscal cliff. I just think that, that void of leadership is creating a bit of a vacuum. And I think all of you read and see that or hear that in the marketplace. We are expecting growth given what we see right now. And I think that the opportunities for our fiscal 2013, while the forecasts do vary widely, we're of the belief that we will see growth in the lighting side in kind of that mid-upper single-digit range. And we believe that we have fairly consistently outperformed the growth rates of our markets and that has allowed us to gain share. So we're, based on what we see right now, expecting that growth rate in the kind of upper mid-single-digit range. And we would expect that we would outperform that.

Okay. And it was my understanding that for the large project cycle, you can get specified, in some cases, quarters in advance of actual orders. So I'm wondering if you see that ramp taking shape.

Well, again, as I said in our prepared remarks, we see more medium and smaller-type projects. As Ricky pointed out, tenant improvement, which is the churn in the employment. We're seeing favorability in absorption, but these aren't the huge projects that you may have seen in 2008. I don't see a meaningful change to your question in large projects relative to where we've been, say, 6 months ago to where we are today. We still see positive activity. So I want to be clear about that. And from our perspective, we continue to see the opportunity of selling lighting solutions into these projects, whether they be small, medium or large. And as Ricky pointed out earlier, it's a leverage point for us because of the value proposition that we can bring to the table.

Okay. And then lastly, the margin tailwind coming from the LIFO dynamic and component cost decreases. Can you address the -- is there any acceleration in your kind of keeping those decreases?

Let me just make a quick comment. First of all, we're on FIFO. And so our two cents is that, and then I'm going to turn it over to Ricky to respond as well, that input cost continue to vary widely as well. As I said earlier, we see some input cost decreasing but we see others increasing. And it may not be intuitively obvious why are some of these other items increasing. It could be capacity issues. It could be the individual components that we're using. But overall, I think, in 2013, what we see right now is a fairly benign cost environment in total. In other words, you'll have pluses and you'll have minuses. And so we're not seeing meaningful -- we're not expecting meaningful changes. But as you know, that's a crapshoot and when it happens, it happens quickly and we have to respond to it. We do see higher input costs from some wage inflation but we'll look to offset that with productivity. We do think health care costs will continue to meaningfully rise. So we're trying to balance all of that off, both with future price increases, the potential of those, as well as how do we drive productivity into our business, and we have a good track record of doing that, to help offset those costs. Ricky?

Just to comment a little bit, Chris, we did see, as most of you are aware, some decline sequentially in steel cost. Certainly LED components, solid-state components, we've seen some decline. As I mentioned in my prepared remarks, a lot of that's hung up in our balance sheet at the moment because of the FIFO inventory and the inventory build that we did for the reasons that I've previously described. So yes, we'll have some benefit as those lower sequential costs that we've seen recently convert through cost of goods sold here in the first quarter, but would want to be cautious. As Vern said, we are seeing some other input costs that are mitigating some of that benefit.

Our next question comes from Glenn Wortman from Sidoti.

Yes, could you just update us on your end market breakdown between non-res construction, tenant improvement and relight, and then residential?

So more broadly defined, we believe that we are probably 90%, roughly speaking, in the nonresidential side, but very broadly defined. That would include renovation, tenant fit-up. And then directly associated with about 10% resi. But we're also indirectly associated with resi when you imagine how neighborhoods are built. Street, roadway-type construction, schools, malls, those kinds of things are all reasonably dependent on residential construction. So it's very positive, in my view, that residential is now starting to rebound after a very low base, both for our direct sales and our indirect sales. When it comes to a further breakdown between renovation and tenant improvement, we really -- the way we kind of look at it is right now -- and it's hard to say, because we don't have real empirical data around the difference between a renovation project of a school because it looks to us like it's new construction. But I would say that, that number is probably 70% new and 30% some type of renovation or tenant improvement. But that's just a swag on our part.

Okay. And then just on the fixed SD&A of about $90 million. I mean, do you expect any major variation, up or down, as we move through fiscal '13 -- as we move through fiscal '13?

I don't. And that's why we wanted to continue to provide you with that information. Based on the structure of the organization as it is right now, we would expect to continue to leverage that number for a while. And believe me, it has ramped up. I mean, if you go back into 2011, at the first quarter, we were probably spending in the $82-million to $83-million range. And now we're roughly $90 million. It varies, again, by quarter because there's some variable in there. But I think that, that is a good number and a leverage-able number for us to continue to drive our business. And we can do that with the kind of product and new product introductions that are in place. So I feel pretty good about that number for a while.

Our next question comes from Noelle Dilts from Stifel, Nicholson (sic) [Stifel, Nicolaus].

Just expanding on some of the questions earlier about raw materials. Can you just give us an update on maybe -- I don't know if it's better to do it on a tons or a dollar basis or a percentage of sale -- I'm sorry, percentage of input cost. But can you remind us how much steel accounts for your cost of goods sold?

Yes, we believe that steel and aluminum, I believe it was posted in our last K, is roughly, what, 100,000 tons. Is that what we're saying? And that...

Roughly.

That's probably a reasonably good number. And, Ricky, on fuel cost?

Again, I'd have to refer you to the K. I'm not remembering off of the top of my head, but we do give you a sense, in our last K, of what gallons of diesel fuel that we would roughly consume, directly and indirectly. But I don't remember it off the top of my head.

Our next question comes from Jed Dorsheimer from Canaccord.

Just 2 clarifying. First, on the fixed cost of SG&A. Ricky, just curious how we should look at this on a go-forward with the streamlining activities. Do you see this figure trending down? Or do you see sort of wage increases keeping this at more of a neutral level? How should we look at this component?

Yes, I think, as Vern indicated, that fixed component of around $90 million, we think is a good number. Yes, we will have the benefit from additional streamlining. As I said, we had about $2 million this quarter and we'll be getting at an annual rate -- so that's an annual rate, obviously, of $8 million and we're going to escalate that to an annual rate of $14 million as we exit the first quarter. But you'll have that benefit, but then offsetting it, as Vern's comment said, we're going to have some wage inflation and higher healthcare costs. So we're working hard to keep that as a pretty fixed number. But the streamlining benefit will offset it. Now some of the streamlining is up in gross margin and we should see some of those benefit because the closure of Cochran, which is $8 million of those streamlining savings, and most of the incremental savings come from Cochran and most of that will be up in the gross margin line. So it's not as if we're having to offset all of that incremental in the SD&A cost. So it's productivity gains helping us to offset the wage inflation and all, and then the incremental benefits you're going to see from the streamlining should more come through in the gross margin line versus fixed SD&A, Jed.

That's helpful. And then, Vern, I was curious, as you move to more of a system solution that you're providing your customers versus historically providing products, I'm curious where you are in that evolution in -- from a margin perspective, in particular for the LED. Do you feel that the commoditization that's happened relatively faster than what a lot have anticipated in terms of the actual components -- do you feel that your neutral to accretive position in those products is based on largely a function of the component commoditization? Or do you feel that it's more towards the movement towards a system solution? And how should we think of that sort of 2 or 3 years out?

That's a great question. I believe that we and the industry are in our infancy around the types of solutions and integrated systems -- holistic integrated systems that we can offer. In the past, as you know, Jed, it's been take a series of components; put some control devices in the room; and if someone's in there, turn them on; if they're not, turn it off. I think as we continue to evolve, we'll see much more opportunity to make those luminaires, instead of being the dumb terminal in the ceiling, that sophisticated terminal that will allow for much more two-way communication, much more control, so that energy savings will be able to be achieved while you're using the space. So the notion of daylight harvesting and how we take advantage of that, all of those types of capabilities are really, I think, evolving. So I would say that we're early in that game. When you sell the holistic integrated systems -- so imagine a complete school or a health care complex or a commercial office building or an industrial warehouse space or outdoor, roadway -- the ability for us, for Acuity to take advantage on the indoor side with its nLight System, with its sophisticated control capability, and then on the outdoor side with ROAM, really provide us the opportunity to sell, to an end user, a full value proposition that gives them optimal lighting capability while deriving extra energy savings while they're using it. So I would say that we are early in that game and I see it as a unique opportunity because you're now selling a full value proposition, a full total cost of ownership and it gets you away from arguing about, what's that discrete component cost? And now it's about, how do you pay for it through the entire total cost of ownership? So...

Our next question comes from Shawn Severson from JMP Securities.

Just -- I was curious, as you're talking with customers these days and approaching from kind of the energy efficiency side, are you finding that you're being part of larger energy-efficient retrofits? Or are you finding that these are oftentimes your really lighting-specific projects associated with either a tenant moving or something like that? Just trying to get an understanding of where you're fitting into the bigger -- kind of the bigger picture here.

I would say that the answer to that is both. When you have energy management companies that are calling on clients, they're looking for the quickest hit to provide a total cost of ownership solution. And the greatest opportunity, typically, is in lighting. It's the one where you can get the biggest payback the fastest. So energy management companies are an opportunity for us and we sell to them as part of their overall system. I think that the bigger part of the market for us at this point in time is working with customers directly who actually own spaces, whether it's large retailers or it's an owner of an industrial space or commercial office building or a school, to work with various partners that have access to those channels, as do we, to bring a lighting solution to them that is more specifically lighting solution. But yet, many of these customers are very sophisticated in their knowledge about where they can get the benefit of energy savings. But virtually all of them care about what the lighting experience is about. They want to make sure that they're at least being neutral or enhancing it, so that really gives us a leg up over a number of competitors because we know how to sell quality of light while providing a significant payback on energy savings.

Are you still finding that kind of that 3-year mark is the hurdle for projects? And obviously, some of them in lighting can be a lot shorter than that. But is that still the cutoff that people are thinking of? And if so, how is LED fitting in that today from the pricing standpoint and efficiency standpoint?

So the answer is that it depends on the channel. It depends on the project type. For example, a parking garage, they would be looking at paybacks that would be less than 3 years. But if it's a corporate office building of a Fortune 500 company and they're located in an area where energy costs are fairly low, their objective is more around sustainability and quality of lighting. So the paybacks could be more than 3 years. So it really depends on channel projects and what you're attempting to do. LED solutions are really -- people want to discuss what type of solution would be best for their application. They want to know what good/better/best would look like, both in terms of performance as well as cost. And today, still a meaningful portion of renovation is being done with some type of fluorescent capability. And again, Acuity has the full product portfolio to offer that full good/better/best solution, irrespective of the light source. So it's interesting to us that as sophisticated buyers continue to weigh these decisions, today, they're still moving forward with fluorescent because it's a compelling value proposition. And my guess is that 2 or 3 years down the road, as LED in their particular area or application become cost effective and can provide a total cost of ownership and a payback that is less or attractive to them, they'll convert again. So...

Are they still -- are they asking you for LED solutions or at least a bid on the solutions? So when you're going in and you're comparing the traditional fluorescent with LEDs, are they at least saying, what would this be using LED technology versus the fluorescent? And then obviously, making a decision based on that? Or are they not asking that?

No, no, no. I want to be very clear about this. I believe that the marketplace, in general, is now very open to LED technology. The problem is that, as I said earlier, you have so many folks. All of us could run out to RadioShack, buy an a LED chip, slap it on a board and shine at each other, and call ourselves a lighting company. The problem in the marketplace is there's so much noise out there around LED because of these companies that really don't provide a quality lighting solution. So if there's any skepticism, it's more around, well, who is actually providing this to me? Because at the end of the day, this is a light source and how you put it into the space and create that lighting environment that you're after is critically important. So yes, people are asking and people are saying, what are my alternatives? And again, as the preeminent lighting company in North America, we are able to say, "Here are the various choices that you have for this particular application and we offer various light sources for those." And that's what gives us strength. And that's what's giving us the ability to gain share and significantly grow our LED business.

Our next question comes from Colin Rusch from ThinkEquity.

So you're at fairly low net debt levels here. Could you talk about the attractiveness of the acquisition environment? And if you could just talk about that in the context of a slightly changing competitive environment as you move into this area where you're really dealing more as a controls company and running into, I would imagine, some different folks in terms of the value proposition of the solution.

So from a strategic perspective -- and then I'll turn it over to Ricky for further comment, but from a strategic perspective, we are looking at acquisitions that will allow us to either enhance our product portfolio; extend our access to market; or bring technology that will allow us to offer more innovative lighting solutions, fully integrated lighting systems to our customer base. And we continue to look at attractive acquisitions. Sometimes, as you know, price and the desire to sell, and then all of that come into -- that's the art of the deal -- come into play. But we are continuing to look at and will look at acquisitions as an opportunity to expand our capability. Ricky?

Yes, we certainly are seeing quite a large number of potential candidates. Most of them are the relatively small. What we tend to see are $20-million to $50-million revenue companies, not dissimilar from the recent acquisitions you've been seeing, or a start-up kind of technology company that's very early in their revenue -- most of them are at least getting some revenues but some are almost pre-revenue stage -- that are of some interest to fill out some technology capability and so forth. Not seeing a lot of larger opportunities out there. There are a few, but not a lot. But I would say, it's not dissimilar from what we've been seeing over the last few years, other than a few more start-up type companies in the technology space that are now getting at the level that they realize they need to find an exit, either for monetizing their investment or they've gotten to just a stage without market access and so forth that they need to team up with a strategic. So busy out there but I would characterize at it as, as Vern said, more plug-in, tuck-in type acquisitions or some technology-related opportunities as opposed to larger type of acquisitions.

Great. And just changing gears a little bit. Regarding seasonality, when you're talking about the choppiness over the next several quarters, are you at all concerned about there being a more-than-seasonal dip in the November and February quarters?

Well, I mean, am I concerned? Absolutely. But everything that we see and hear and read suggests that these markets, in particular lighting market, will continue to evolve because the value proposition that we can sell has a payback associated with it. I think what people are seeing right now are folks standing a bit on the sidelines. I mean, look at the accumulation of cash by U.S.-based companies. They're taking a wait-and-see approach. We have a compelling value proposition for many of the -- many of these types of companies in terms of updating their lighting and having it paid for through energy savings. So how the election plays out, how we resolve some of these uncertainties to get our economy moving again, I think all of us have concern about how we do that. And I -- we are no different than that. The benefit that I think, again, Acuity has is that we do have a value proposition out there that for folks, we can enhance, again, their visual environment while giving them better operating costs because of lower energy. So we like the position that we're in, frankly.

Our last question comes from Andrew Abrams from Avian.

Just kind of 2 quick questions. On the LED side, the LED luminaires side, when do you think you will start to see the SSL chip-level improvements starting to kind of help your margins there? And in that same regard, when would you expect margins on the LED product side to begin to rise above, I guess, what would be your standard corporate average for non-LED products?

Yes, so for us, I believe that the notion of continuing to drive margin improvement in total was on full display in our fourth quarter and that was a combination, again, of productivity, product mix, as well as greater volume of products sold. So our expectation is for continued growth, so driving the volume, productivity. When it comes to the product mix side, as we -- we believe, as we sell more higher value-added integrating lighting systems into campuses overall, where folks really can derive even more energy savings while they're using the space, we think that, that will help us sell more value per square foot and therefore, higher margins. As I answered to Jed earlier, I believe that we are in our infancy in that. But yet, the early returns on that, if you will, are very, very compelling. And so it's how we can condition -- continually transform the market to look at, again, these integrated lighting systems as opposed to just discrete components, I think, will be accretive to our margins going forward. With regard to LED, I feel that as an individual product -- and again, we sell so many different LED products now. It's difficult to say that -- what's your margin on this compared to the fluorescent or some other lighting alternative? We feel that we're now in the range. And so for us, it's really -- we're indifferent to the light source. We are very focused on providing the best lighting solution for our customer. Personally, I believe that by the time we reach 2015, you'll see a market that is very compelling for LED luminaires. And it will be because the efficacy of the chip and the price of the chip and those components become more similar to what a fluorescent lamp/ballast combination costs today. And that will happen. It's happening.

Got it. And just lastly, would you expect -- if we're talking about the kind of trade-off between some costs rising and some costs decreasing for the balance of this year, would you expect there to be any price increase this year? Or would they balance out and probably not have to pass that along?

So where we stand today, we believe that our pricing is appropriate given both the cost structure. What we attempt to do is leverage, again, the mix side of things, selling higher value-added products that have greater value for the end customer as opposed to saying, "Here's an existing product and I'm going to increase my price by x." I think that where we stand today, we're pretty consistent. We feel our pricing is pretty consistent with the cost structure that we have. But as you know, I just want to be clear to everybody, it can change instantly, as we have seen over the last 3 years with the kind of volatility in commodities.

And I would just add that, many of the people on the call know this, we have a very robust process in looking at product lifecycle management, looking at pricing of individual products. Yes, we as an industry, and certainly Acuity often leads, will pass on changes in input costs. Certainly, if they rise, we've been able to pass those on and you'll see the across-the-board type announcements. But we continue to be pretty proactive in managing the price, and when we think we can because of the value proposition and the paybacks, look to expand that pricing or sometimes as you get to the end of the life of a product, you can raise the price. Many of the others have gotten out of the market and we can take advantage of that. Conversely, obviously, there are times that you need to recognize it's commoditized to a point or become to a value proposition or a value engineer to a level that you need to lower it. But I just want to make it clear: we are very proactive in managing our price despite just following whatever is happening in our cost structure.

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

Thank you for your time this morning. We strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that will, over the longer term, deliver on the expectations of our key stakeholders. I think our fourth quarter was very indicative of just how well our team is managing this company. Our future is bright. Thank you for your support.

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