Acuity Brands, Inc. (AYI) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Acuity Brands' 2013 First Quarter Financial Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to introduce Mr. Dan Smith, Senior Vice President, Treasurer and Secretary. Sir, you may begin.

Thank you, and good morning. With me today to discuss our fiscal 2013 first quarter results are Vern Nagel, our Chairman, President and Chief Executive Officer; and Ricky Reece, our Executive Vice President and Chief Financial Officer. We are webcasting today's conference call at 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 the call over to Vern.

Thank you, Dan. Good morning, everyone. Ricky and I would like to make a few comments, and then we'd be happy to answer your questions. Overall, our results for the first quarter of fiscal 2013 were influenced by what we believe was a lull in demand in the nonresidential construction market and higher spending primarily related to temporary inefficiencies associated with the closing of our Cochran, Georgia manufacturing facility. Overall, we are pleased with our results for the first quarter, particularly given the challenging market conditions and the complexities associated with the Cochran closure. With that said, we feel we delivered solid results while achieving success on numerous strategic priorities. As independent market data is becoming available, it is confirming that the potential economic slowdown we discussed in our previous filings and calls became a reality during the quarter. The result this quarter was inconsistent demand. In spite of the slowdown, this was the 11th quarter in a row where we achieved volume growth. I believe this is, yet again, positive 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 and productivity. We would like to be very clear about our continued expectations for our performance in 2013. For us, nothing has really changed. We expect to continue to outperform the markets we serve and to deliver full year results more consistent with our long-term financial goals as noted in our 10-K. Remember, these goals represent upper quartile performance. As we discussed on our fourth quarter call, we anticipated inconsistency in demand this quarter, and we expect that to continue through our second quarter and potentially longer. Nonetheless, we remain positive about our long-term opportunities to extend our market leadership position, while delivering superior value for our customers and returns for our shareholders. I know many of you have already seen our results, and Ricky will provide more detail later in the call, but I would like to make a few comments on the key highlights for the quarter. Net sales for the quarter were $481 million, an increase of 1.4% compared with the year-ago period. This level of growth is meaningful given general economic and industry conditions, as I noted above. Reported operating profit was $48.2 million. We took a special charge in the current quarter for previously announced streamlining actions and incurred temporary inefficiencies associated with these actions, which, in total, reduced operating profit by $5.5 million. The year-ago period also had streamlining charges for other activities. Ricky will talk more about these special charges and these temporary inefficiencies associated with the Cochran closure later in the call. We find it helpful to add back these items to both quarters' results to make them comparable. Doing so, one can see adjusted operating profit was $53.7 million, consistent with the year-ago period, while adjusted operating profit margin was 11.2%, also consistent with the year-ago period. Diluted earnings per share were $0.61. Again, adding back the impact of the items noted above in both quarters, adjusted diluted EPS for the current quarter was $0.69 compared with $0.74 in the year-ago period. As Ricky will explain later, fluctuations in foreign currency had no material impact on our diluted EPS this quarter, while it benefited EPS in the year-ago period by $0.04. You can do your own math to get a true apples-to-apples comparison between quarters from an EPS perspective when eliminating the impact of these currency fluctuations. As you would expect, similar with the operating profit, we were essentially flat with the year-ago period. There are number of key items to note regarding the results in the first quarter. Net sales grew 1.4% compared with the year ago. However, unit volume grew almost 2% this quarter. This growth was partially offset by a slight shift in the mix of products sold. The impact of acquisitions and foreign currency on net sales was not significant. The increase in net sales was impacted by tepid demand in the nonresidential construction market, reflecting what we believe was a wait-and-see approach by customers to the resolution of the fiscal cliff situation and government funding availability. From a product perspective, the increase was reasonably broad-based along many product lines, partially offset by declines in certain channels. These declines were caused by delays of projects in certain channels, including retail renovation and municipal expansion due to the factors I just mentioned. Growth in our largest channel, commercial and industrial, was above this quarter's average due to the 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 the continued focus on smaller and medium-sized projects of various types. Additionally, we enjoyed growth in our residential products, as demand for new housing and renovation of existing homes continued to rebound, helping to offset some of the softness in the nonresidential market. We continue to experience growth in certain geographies and channels in North America, as well as key markets internationally, all of which is encouraging. As we have noted before, it is impossible to precisely determine the separate impact that price and product mix changes have in our net sales. Having said that, we estimate the negative impact on sales from price mix was primarily due to a slight shift in the mix of products sold principally among certain channels. While there were puts and takes on both the product pricing and material and component cost fronts, we believe that both were fairly benign this quarter. 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 relatively flat in the quarter compared with a year ago. Further, we believe the overall lighting market was up slightly during the same period, supported by modest growth in the residential market. This is consistent with our unit volume growth in North America, which was up more than 2%. 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 force has allowed us to achieve volume growth this quarter in spite of these challenging market conditions. Before I turn the call over to Ricky, I would like to comment on our profitability and strategic accomplishments in the quarter. Excluding the impact of the special charge and the temporary inefficiencies associated with the plant consolidation, adjusted operating profit margin for the fourth -- for the first quarter was a solid 11.2%, consistent with the year-ago period. This is particularly notable given that sales of LED-based luminaires now make up more than 13% of our net sales. Further, as Ricky will discuss later in the call, adjusted gross profit margin was 40.4%, down about 40 basis points from the prior year. We believe the decline was due primarily to the slight shifts in the mix of products sold, along with continued spending for new products, partially offset by lower material and component cost, as well as modest productivity improvements associated with our ongoing streamlining activities. In our view, much of the increased spending is primarily due to the acceleration of new product launches, which include startup costs and inefficiencies we normally experience in the early phases of new product introductions. While our gross profit margin is highly dependent on unit volume and the mix of products sold, we expect our gross profit margins to improve, as volume grows and as we realize typical gains in manufacturing efficiencies, as well as more cost-effective launches for new products. The 40 basis point decline in gross profit margin was offset by a similar improvement in selling, distribution, administrative expenses, which were 29.2% of net sales in the quarter. Total SD&A expenses were essentially flat this quarter compared with the year-ago period. Lower incentive compensation expense and 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, we have noted in previous earnings calls, we expect SD&A expenses, excluding freight and commissions, based on our current structure to fluctuate a few million dollars or so around the mid-point of $88 million. On a 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. 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 more than 13% of our sales, and we continue to fund the development of other light source technologies, such as organic LEDs, where we continue to expand our award-winning portfolio of these innovative products. More impressively, as I noted earlier, our adjusted operating profit margin continued to remain solid, 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 lighting and 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 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 leadership position. As I have 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 shareholders while making these investments. Our customers continue to recognize the fulsomeness of our capabilities as we won a number of awards for Vendor of the Year. Our success with customers is driven by excellent service, breadth of product portfolio and the ability to incorporate the best technology to provide superior lighting solutions that best meet the needs for virtually any indoor or outdoor application. These accomplishments have diversified and strengthened our foundation and we believe will further service 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. 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 the balance of 2013. Ricky?

Thank you, Vern, and good morning, everyone. I will highlight a few items regarding our income statement, including the special charge and production inefficiencies 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 will not repeat these items, but I would like to provide a bit more color on certain aspects of our first quarter results. Let's first look at our streamlining activities. In the first quarter of fiscal 2013, we recognized a pretax special charge and temporary expenses related to the previously announced streamlining actions totaling $5.5 million or $0.08 per diluted share. The pretax special charge was $0.7 million or $0.01 per diluted share, and related primarily to the costs associated with the transfer of production due to the closure of the Cochran, Georgia facility. In addition to this special charge, we incurred $4.8 million of higher pretax cost or $0.07 per diluted share related to temporary manufacturing inefficiencies associated with the closing of this facility, consisting primarily of nonproductive operating cost at the Cochran facility, which should cease when the plant is closed during our second quarter, expenses associated with the initial setup of production at various facilities that have accepted the production of products previously manufactured at the Cochran facility, and incremental costs associated with production-related activities temporarily performed by third parties that are now largely executed internally as our manufacturing capacity has recently been increased to accommodate the transfer of production. 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 as we mentioned previously in our 10-K and prior earnings conference calls, the timing of completing the transfer and closing the facility was dependent on how quickly we could receive the necessary government permits and approvals. Due primarily to delays in receiving the necessary government permits and approval, it has taken longer to complete and has cost more than we originally expected. We now expect to be principally completed with the closure by the end of the second quarter of fiscal year 2013. We expect to record an additional pretax special charge and temporary production inefficiencies of approximately $4 million associated with this closure, which will be recognized primarily during the second quarter of fiscal 2013. If we have no further delays in receiving government permits and approvals or in ramping up production in the receiving facilities, we currently expect, after the second quarter, the Cochran facility will totally cease production and we will not incur any more special charges or manufacturing inefficiencies related to this streamlining effort. Annualized pretax savings associated with this closure are still estimated to be approximately $8 million. But due to the delays in completing the transfer of production and closure of the facility, the full realization of the savings has been pushed out and are now expected to be fully realized by the beginning of our third fiscal quarter. You may recall, in addition to the streamlining activities for the Cochran closing, we also had other streamlining efforts in fiscal year 2012, which are expected to yield annualized savings of roughly $6 million. Therefore, we estimate that these streamlining actions, in total, will generate annualized pretax savings of approximately $14 million or $3.5 million per quarter, of which approximately $1 million was realized in each of our second and third quarters of fiscal 2012 and approximately $2 million in each of our fourth quarter of fiscal 2012 and first quarter of fiscal 2013. We hope to be at the full quarterly savings rate of $3.5 million for all of these actions at the beginning of the third quarter of fiscal 2013. As Vern mentioned earlier, our adjusted gross margin decreased 40 basis points to 40.4% due largely to a slight shift in the mix of products sold and increased expenses associated with the large number of new product introductions and higher manufacturing costs related to other product mix changes. These higher costs were partially offset by the favorable impact of increased net sales, lower material and component cost and realized benefits from the previously mentioned streamlining actions. 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, primarily Mexico peso-denominated items. In the first quarter of fiscal 2013, we had miscellaneous expense of $0.1 million compared with miscellaneous income of $2.9 million or $0.04 per diluted share in the prior year period. As Vern mentioned earlier, if you exclude this unfavorable comparison, our diluted EPS this quarter was essentially flat with the prior year period. The effective tax rate this quarter was 35.4%. This is 70 basis points higher than the prior year quarter. This higher effective tax rate negatively impacted diluted EPS by $0.01 compared with the prior year period. The effective tax rate for the prior year period was favorably impacted by various discrete items, including the research and development tax credit, which did not occur in the first quarter of fiscal 2013. Subsequent to our first quarter, the U.S. government has reinstated the R&D tax credit effective back to January 1, 2012. We will reflect the catch-up impact of this tax benefit in our second quarter of fiscal 2013, and we estimate the favorable impact to be approximately $0.6 million or $0.01 per diluted share, and it will lower our estimated effective tax rate for fiscal 2013 to slightly below 35%. Now let's look at the cash flow for the quarter ended November 30, 2012. Cash flow used for operations for the first quarter of fiscal year 2012 was $14.5 million. Our first quarter is usually our weakest cash flow quarter due to seasonality and payment of prior fiscal year's incentive compensation. This year, we had higher payment of accounts payable related to inventory purchases made late in the fourth quarter of fiscal 2012 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 had expected to bring down these inventories during the first quarter of fiscal 2013. But primarily due to the previously mentioned delays in the Cochran production transfer, we did not reduce the inventories as quickly as originally planned. In the first quarter of fiscal year 2013, we spent $11.2 million on capital expenditures compared with only $4.2 million in the prior year period. This increase in expenditures is largely related to the capital associated with adding capacity in the plants, receiving the production transfer from Cochran and tooling associated with the large number of new products recently developed. Including our first quarter CapEx spend, we currently expect to spend approximately $40 million in capital expenditures for fiscal year 2013. At November 30, 2012, we had a cash balance of $267.5 million and total debt of $353.5 million. At the end of the first quarter of fiscal 2013, net debt to total capitalization was a mere 9%. At November 30, 2012, we had additional borrowing capacity of $244.3 million under our credit 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 Vern.

Thank you, Ricky. As we look forward, we see significant long-term growth opportunities, while short-term economic challenges are still the norm. While we don't give earnings guidance, I would like to add a few more observations to what I mentioned earlier regarding our expectations for the balance of 2013. First, we expect the economic environment to continue to be challenging, as businesses and consumers in the U.S. begin to adjust their spending patterns based on the new tax laws just passed, as well as continuing to hone their plans to manage through the lingering uncertainties over U.S. policy reforms to address the nation's budget deficits, as well as other global economic concerns. The consequence of these uncertainties, in our view, will continue to be volatility in demand. Forecasts by independent organizations for industry growth continue to vary widely. The consensus is that unit volume growth for key segments of the nonresidential construction market in the U.S. will still be in the lower mid-single digits in 2013, while sales for lighting fixtures are expected to be modestly higher supported by a growing residential market. This suggests that expected growth in the broad lighting market in North America will still be in the low- to mid-single-digit range for our fiscal 2013. This is reasonably consistent with the outlook in our previous filings. Additionally, there are other signs that give us optimism regarding the future growth of our business. Leading indicators such as Architecture Billings Index, vacancy rates, office absorption, lending availability and the rebound in the residential construction market are all favorable. Therefore, our expectations for fiscal 2013 is that over demand -- overall demand will be favorable. However, while we are seeing favorable trends in our order rate so far in the second quarter, we still expect to see inconsistent conditions this quarter. Additionally, we expect European economies to remain weak, particularly Spain, for the foreseeable future. While we still see wide variability in demand amongst channels, reflecting the tepid economic recovery in the U.S., we expect this inconsistency in demand to yield to more consistent and positive growth in the latter half of our fiscal year. Second, the industry continues to experience volatility with respect to input costs. 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 health care cost. Of course, we will continue to be vigilant in our pricing posture and productivity efforts to help offset rising cost. 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. Lastly, we expect to outperform the markets we serve. 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 calls, our strategies to drive profitable growth remain intact. We continue to see opportunities in this environment, including benefits from growing portions of 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 believe we are uniquely positioned with key suppliers around the globe to bring greater value 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 rapidly, including the addition of 5 strategic acquisitions over the last few years, and we're adding more. Yesterday, we announced the acquisition of Adura Technologies, the leading provider of wireless lighting controls and energy management systems. The acquisition of Adura, while small today in terms of revenues, is a meaningful addition to our growing portfolio of wireless lighting solutions, an area of significant focus and growth potential for Acuity and its customers. Our strategy is straightforward. Expand and leverage our industry-leading product portfolio 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. Though these investments -- 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% over the next few years, 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 Jed Dorsheimer from Canaccord.

Vern, in your prepared remarks earlier, you mentioned that operating margins were held up as a function of higher LED sales. One, I just wanted to confirm that. And then two, in the past, you've said that LED is neutral from a gross margin. Could you confirm that it's neutral to, I guess, accretive at this point, to operating margin?

Jed, on your first point, what we were mentioning was that our margins remained consistent at 11.2% this period compared to the year-ago period, while our LED sales were up by more than 2.5x. For us, we believe that's an affirmation that as we continue to see the migration to more and more LED sales, that it does not have a dilutive effect, as was concern or a concern by many before. So I think it's very positive that we were able to maintain our operating profit margin at 11.2%, while seeing a meaningful increase in our overall LED sales. My own view about the future of LED luminaire sales and their ability to be accretive to our earnings is that as we continue to tie more and more lighting control around these LED luminaires and we sell more holistic integrated lighting systems, we're going to be able to sell more value per square foot. One of our key product lines, very small today, is our nLight System. We're seeing it growing very dramatically as the industry, as consumers find the use, simple to use, fantastic energy savings and great lighting control as an alternative to some of the traditional systems that are out there. So we continue to be optimistic that LED lighting and LED control systems will be accretive to our margins in the future.

And then I was wondering if we looked at C&I and sort of further segment it into individual sectors within that group, if you will, from a quoting activity or a level of interest, could you single out any particular sector, i.e. hospitality or retail, for example, that you're seeing the most activity, I guess, both maybe from a renovation and then also from a new build perspective?

Sure. So Jed, early on, I think that the industry, where LED has had the most, if you will, transformation or most penetration, you're seeing that in easy-to-use items, outdoor, parking garages, certain difficult service-type environments on the indoor side. You've really yet to see the full penetration in commercial indoor spaces. We are way early in the game in terms of schools, commercial office buildings, health care facilities. As these price points and as these integrated solutions become more and more at the forefront, interest is starting to really ramp up. So we're very excited because we've really yet to see the true opportunities of what LED and again, integrated lighting systems can be on a go-forward basis. So to me...

Vern, I actually -- sorry, I just meant in the traditional business, so in your overall business, I know you have hundreds of thousands of SKUs. Is there a particular segment of the market that you're seeing the most demand? Could you further clarify sort of where demand is right now and where maybe quoting or interest is coming from, or is it just too broad-based?

No, it's a good question. I can answer that. It's more on the small and medium-sized projects. We know that there are certain areas of the municipal markets that are actually down. Schools are still very difficult in this current environment, as municipalities look for funding. Health care seems to be kind of ebbing and flowing here. The commercial office space is still yet to take off. So our demand is relatively broad-based, but still reflective, in our view, of the tepid economic environment that's out there. When we look forward and you look at some of the leading indicators, and there are many that are out there, you can pick and choose the ones that you want, but commercial office space, as absorption continues to improve, as employment continues to improve, we're starting to see -- if you look at the Dodge's Momentum Index, these things are finally starting to just turn positive and usually, there's a lag to that. So a lot of the quote activity that we have out there is around these future opportunities, particularly around the commercial office space, industrial space, even some of the outdoor opportunities where municipalities have delayed spending, there's a lot quote activity that's out there that we expect will yield or turn into orders really in 2013, calendar year 2013.

Our next question comes from Peter Lisnic from Robert W. Baird. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Vern, I guess, can you give us a little bit of color or clarity on the mix comment? It sounds like that was the driver or offset volume in the quarter. I'm just wondering, was that more of a channel, a change in channel during the quarter? Or was there more product there that caused that mix to be negative in the quarter?

And so, Pete, it would really be a combination of both. Let's first take the channel cut. The fact of the matter is, is that on the good news side, C&I was a little bit more as a percentage of our total. On the bad news side, a little bit of that channel mix was more driven by stock and flow. We tend to see a little bit higher margins on larger projects. So that mix had a little bit of an impact. We improved margins in our retail and catalog business. But yet, those, overall, were relatively flat. Some of that was offset by large infrastructure-type projects where, again, municipalities -- or those types of projects that are reliant on government funding were also taking a wait-and-see approach. We saw some minor cancellations, but what we believe was more delays in these types of projects. We also saw a little bit of mix shift into certain areas of our business, where again, our margins are just a little bit different, influencing our margins down slightly. Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. That's helpful. The second question, if I could, is if price being a relative neutral in the quarter, I'm just wondering if you could bifurcate that -- and I know it's going to be difficult, but if you could bifurcate that between the LED product and the non-LED, with really a focus on the non-LED. I'm just wondering what this migration to LED, if you're seeing any sort of -- I don't know if significant is that right word, but just price pressure on non-LED products as you kind of move toward LED?

So Pete, again, overall, we felt pricing was reasonably benign. But as you know, everything is local, everything is specific to the channel and the geography that they're in. So we gave you the overall feeling. My own $0.02 is, is that in the non-LED side, probably in terms of some of the lower end and the good/better/best value proposition, some of that lower end continues to be maybe a bit more price competitive. But where we have the ability to differentiate features and benefits and value, typically, you see more stable pricing there. So I don't know if there's any macro trend that we could provide to you that would be different than saying that overall pricing was benign for us in the quarter.

Our next question comes from Matt McCall from BB&T Capital Markets. Matthew Schon McCall - BB&T Capital Markets, Research Division: So the -- let's start with the gross margin. So, I guess, several items to adjust for. I'm just trying to understand, Ricky, you talked about hitting your run rate, I think, at the beginning of your Q3 from a savings perspective. Should we expect any incremental in Q2? And then, anything we should keep in mind from a mix perspective, the incremental margin, price cost? Just trying to understand the puts and the takes there from the starting point of this 40.4% in Q1.

Sure, Matt. First, on the streamline savings. The additional, call it, $1.5 million a quarter out there opportunity will mostly be at the gross margin line. That's when we are able to get the savings from the shutdown of the Cochran facility and the added volume absorption into the existing facilities. And yes, I would expect to see some improvement in our second quarter relative to the first as we ramp up to hopefully begin the third quarter at that full $3.5 million a quarter rate. So we should see some benefit throughout the second quarter. Again, dependent on the timing of getting these governmental permits and approvals, that's been a frustrater for us, and then trying to get these approvals so that we can more quickly move certain aspects of the production into the facilities and the inefficiencies that are incumbent when we don't have those facilities up to where we need them to be. But assuming we get all that on tack, you should see some improvement throughout the second quarter, and then we would hope to be at that full rate in the beginning of the third quarter.

And Matt, this is Vern. Our team has done an outstanding job in transitioning from the Cochran facility to other facilities. The delays and permits are like taking a wrench and throwing it through a jet engine. And yet, our team has done really an outstanding job of managing that process. The hidden cost of that is that while you are focusing maniacally on trying to make sure that you can paint things, even though you don't have your paint permits, so you're now outsourcing that, we have identified that as inefficiencies associated with Cochran, but it also takes away from our continuous improvement efforts. I'd like everyone to understand, we are maniacally focused as an organization on continually driving improvements in our business to reduce cost so we can continue to invest. When you have challenges like the complexity of the Cochran close, which is a great thing for us to do, it tends to also have some leakage in other areas. So as Ricky points out, going forward, we would expect to continue to drive improvement. The mix and its impact on our current quarter, I mean, truthfully, it's impossible for us to manage quarter-to-quarter the mix. And we don't try to. We try to serve our customers as best we can. So there's some noise in that, and there always will be. I mean, as I said earlier, our gross profit margins are really contingent upon volume and the mix of products sold. And our company will always be focused on continuing to drive cost out of all of our processes and it's -- while we put out a bogey[ph] in the goal, it's impossible to, from one quarter to the next, completely predict that. Matthew Schon McCall - BB&T Capital Markets, Research Division: And then, on the SG&A line, your commentary in the past, I'm thinking you mentioned it again here, $88 million, plus or minus, and I think I've used a little more than 11% on the variable component for freight and commissions. But if I run those numbers -- or put those numbers into the Q1 SG&A or SD&A, it comes up a little higher. And I guess my question, you said that you're starting to see some payoff was -- maybe can you talk a little bit more about the payoff you're starting to see? And was that it? Or did you curve some spending or do something else to reduce that line item relative to what you're seeing on the top line?

So Matt, I think if you use maybe more like an 11.3%, 11.4%, what you'll probably come up with is about $55 million, $54 million for freight and commissions and probably roughly $86 million for SD&A. And that is within, if you will, the tolerance of a few million dollars either side of the $88 million that we feel is a current run rate. And again, the variability depends on things like product samples, product introductions, T&E, certain marketing expenses. But obviously, there are salaries in there and things of that nature. Again, a lot of our streamlining activities are to help us continue to offset wage inflation, health care cost, things of that nature. So again, I think that the SD&A was managed well during the quarter. And I think when you do your math, you'll probably come up with something like that. I did that off the top of my head. Matthew Schon McCall - BB&T Capital Markets, Research Division: No, that is correct math. I was just more referencing to starting to pay off reference. You said starting to pay off. I'm just trying to understand the leverage opportunity. What kind of specific benefits have you seen from the spending that you've incurred over the past few quarters?

Great question. When we look at our product vitality and the revenues that we're ramping up on, the new product introductions, these are having a favorable impact on top line. When I look at our residential business this quarter, for example, a lot of the new products that were introduced, LED-based products, into that space really have benefited us, as we have offset some of the tepid decline or tepid demand in the nonresidential space. Our lighting systems business we're introducing and have introduced a number of lighting control systems to great fanfare. Our nLight software capability or lighting control system, without providing specific numbers, it more than doubled this quarter relative to its revenues in the year-ago period. So all of these things are fantastic indicators of -- that our strategy is right and the future opportunities where these things find themselves, schools, office buildings, health care facilities, industrial spaces, outdoor -- our outdoor control capability, all these are robust platforms for future growth for us.

And Matt, I would also mention $2 million-or-so of productivity improvements from the streamlining activities that we realized, majority of that is in the SD&A area. And so we are beginning, unlike the Cochran that had been pushed out because of the permitting and other issues, the $6 million of savings from the other streamlining activities, we're now at that full rate. And most of those savings are in the SD&A line that are currently helping us a bit as well.

Our next question comes from Kathryn Thompson from Thompson Research Group.

Digging a little bit more into pricing, I understand you spent a fair amount of time talking about the mix and how that affects the pricing. But stripping that away, first question is, where in general do you see pricing trends regardless of mix? In other words, when you look at the different, your high-margin projects to your lower-margin products, where generally do you see pricing trends for 2013? And second, along with -- along the lines of pricing, what -- what's really pushing the greater pricing competition toward that lower to mid-tier product? And has that changed, relatively speaking, over the past 6 to 9 months?

Kathryn, thank you, this is Vern. First of all, I believe that the conventional lighting product portfolio, middle to upper value lighting propositions, I think that pricing is fairly stable. The notion of selling value-add is still alive and well at some of the lower-end products, more of the, I'll call, value purchases. You see a number of competitors that are in the marketplace, I think, attempting to take share using price as a point of differentiation mostly on stock and flow type things, certainly, not on projects. And even there, I don't see pricing being punitive. It's just that, typically, their business strategy, I call, the termites, the termites tend to use price as their point of differentiation. And I don't know that, that has meaningfully changed in the past 12 months, nor do we expect it to meaningfully change in the next 12 months. I would say relative to the growing LED portfolio, if you look at simply the product of an LED luminaire, it's sure that pricing continues to come down, particularly as cost, chips in particular, become more commoditized. And so that trend has not changed nor do we expect it to change. Profitability, you didn't ask this question, on LED products, I think costs are coming down in an appropriate fashion for a company like Acuity to actually generate profits that are consistent with its other portfolio. And again, there's puts and takes around all of that. So I see, from a simple product perspective, trends continuing as they are. I do believe that lighting solutions, integrated lighting systems, where you're selling not just a discrete luminaire or a discrete control product, you're selling an integrated system into a campus that ties into building management. There, I see the opportunity for price improvements, particularly as features and benefits around lighting control systems come to the forefront and folks understand the value of those. In other words, you're getting energy savings while you're using the space. The luminaire can be dimmed down 30% because there's light coming through the window, so you're able to take advantage of daylight harvesting. I see the opportunity to sell higher value in those kinds of things going forward. So I would expect, as we continue to hone our value proposition around integrated lighting systems for us to actually sell more value per square foot influencing our margins.

Along that line, with value per square foot, have you been able to quantify -- and this is something that we've talked about in the past, have you been able to quantify and put to relative perspective what the unit value per square foot on average is for Acuity today, and how that has changed well into previous 12 to 24 months?

Kathryn, you have asked that question before. It's a fantastic question. I would defer the answer because I believe that we are still very much in our infancy around these things in terms of selling ballistic lighting solutions. We know, for example, when we sell our ROAM value proposition, which is an outdoor lighting control system, there's really no competition for it. So to say that I'm selling a discrete component versus a holistic system, it is a system. And our margins there are favorable. But the investment to really expand that capability, I mean, we're still incurring it. We still have [indiscernible]. I'm sorry?

Just finally, I -- you may have mentioned this in the call, and I apologize if I missed it. But did you quantify your volume growth, excluding LED in the quarter?

We did not. And frankly, it's very difficult for us to do that because what LED is doing is it's replacing, for certain customers, a conventional light source luminaire that they would have purchased otherwise. And depending on the luminaire, depending on the application, the price can be anywhere from slightly above parity to quite a bit above parity. So -- and I'll let Ricky respond more at length on this. But the fact of the matter is we don't try to distinguish that difference. Ricky?

Yes, we don't -- one, we don't track units. It's very difficult for us to track units because of the different trends, different accessories and all of that, that come in when you call it a full luminaire. And then you've got the controls and integrated stuff. So trying to get to a unit comparison is virtually impossible. So we look at volume more just as total revenue. And as Vern said, are we cannibalizing, or is this incremental? It's impossible for us to really tell. So the short answer is we don't track, and therefore, not really able to give you a volume number separately or even specific to tell you...

But generally, in the past, you've been able to say like 2/3 of the revenue growth was driven by volume. In general, would you be able to give that in this quarter or...

We said in this quarter about 2% of the revenue growth was in volume, partially offset by price mix.

Our next question comes from Glenn Wortman from Sidoti & Company. Glenn Wortman - Sidoti & Company, LLC: Just on the residential business, do you guys see any direct benefit from new home construction or most of your products just going in towards renovation and maybe the surrounding communities? Can you just talk a little bit about that, please?

Glenn, we believe that roughly 10% of our revenues are directed towards the residential -- directly towards the residential market. Obviously, we then have the secondary effect of building neighborhoods and things of that nature. The product portfolio that we have directed at residential, driven through our electrical distributor partners, showed nice growth in the quarter and helping to ameliorate some of the, again, tepid demand in nonresidential construction. We're excited about the residential market and what it means over the next handful of years. We expect that market to show growth. It's still operating at very, very low levels compared to historical standards, but growth is growth and we're excited to have it.

And I would add, we continue to fill out more SKUs in the residential area, whether it's through our existing channels or some of the others. So it is an area of opportunity for us as we continue to fill out that capability on the luminaire side, as well as on the solution and system side. Glenn Wortman - Sidoti & Company, LLC: Okay. And then second question on the gross margin. I understand the mix shifts from quarter-to-quarter. But do you still have a target or maybe an estimate of what your full year gross margin could be or...

Look, Glenn, we don't provide guidance on that. But as I said earlier, our gross profit margin is very contingent upon volume and mix. Our expectation is, is that, particularly in the second half of the year, markets will rebound. And I think we have been pretty diligent about bringing variable contribution to our bottom line. And so as you think about your own model or you think about the future of Acuity, our expectation is to have volume growth and to outperform the markets. We have a pretty good track record of bringing the variable contribution margin to the bottom line. So I think you can do your math from that.

Our next question comes from Brent Thielman from D.A. Davidson. Brent Thielman - D.A. Davidson & Co., Research Division: Vern, your commentary on your daily order rate is being favorable. Should we take that to mean overall volumes are still growing through this current lull in demand, or is it just certain aspects of the business?

Well, we wanted to give you, the market, an indication of what we are currently experiencing. We were very specific, really, in our fourth quarter call to talk about the same consistency in demand, our concern about the lull -- you read it in the newspapers everywhere. We do believe that there is pent-up demand out there, and so we think it got pushed out a little bit. And so to give some indication that what we're seeing, based on what we know today, was favorable compared to the year-ago period, we still want to be very cautious in saying that we still expect volatility in demand. You see it. I mean, you see corporate America continuing to build up a huge cash flow. I mean, their cash balances are growing. That means they're not investing. There are positive signs out there. Again, absorption of office space, employment levels, Architecture Billings Index, all of these things are really positive leading indicators for a company like Acuity. And so we're giving you our best crystal ball, and it's cloudy. Brent Thielman - D.A. Davidson & Co., Research Division: Understood. And I guess, my second question along those lines. It sounds like the bulk of the new construction projects you're seeing are still sort of smaller than to maybe medium-sized. Based on what you're seeing out there, as far as leading indicators and maybe your own pipeline, is it your expectations, some of the larger, maybe more complex projects, could begin to show up as orders in the second half, and maybe that provides some tailwind in the fiscal '14? Is that a reasonable way to think about it?

I think it is. We look at a number of different indicators as do you. Employment, absorption are all, again, positive things. As investors start to see, real estate investors start to see this, and they see tightness in availability, rising commercial rents, which all are occurring, they're more likely to invest in expanding the real estate footprint that's in that particular geography. Another favorable trend is lending standards and demand for loans are starting to increase again. So all of those suggest that as we think about what the next 18, 24, 36 months looks like, those are all favorable indicators for us. This recovery, by all measures, has been very, very slow. And so it's now starting to take hold, and that means employment, so on and so forth start to improve, and that benefits directly a company like Acuity's. And again, I would just say, I think we are uniquely positioned with the product portfolio that we have, including integrated lighting systems, to really leverage that growth cycle.

And I would add another encouraging sign is the residential pickup, as Glenn was referring to earlier. Typically, nonresidential has trailed that 6, 9 months. As residential picks up, you now have to build the schools and the branch banks and the quick foods and all of the other things as these neighborhoods and condominiums and apartments and all start coming up. So that is another encouraging sign that we may see some pickup in the number of new projects as opposed to more of this smaller tenant fit-up or renovation type activity that's been a bigger portion of our business here recently.

Our next question comes from Rich Kwas from Wells Fargo.

I had a follow-up. Just to summarize, Vern, so if you look at LED and you look at the -- and price and then you look at mix, and if we look at FQ1 versus FQ4, I know there's some seasonal differences in business trends. But it seems like most of the negative impact on the margin line came from mix. Is that a fair summary based on everything I've heard so far?

Yes, and puts and takes around investments that we are making in our production facilities to significantly ramp up our new product introductions. We've accelerated -- and I want to be clear on that, we're -- we've accelerated the ramp of new product introductions. And so that is having cost impacts within the facility that as volumes ramp up, we'll be able to leverage those, I think, quite well.

Okay. And the price issue seems to be pretty benign then, as an impact. I mean, you mentioned that it's slight but it doesn't seem all that meaningful.

We said that we believe that most of the gross margin impact or price mix was due to mix, not price. So to be clear, we felt that pricing in the quarter was benign.

Okay. And then, and just as a follow-up on the outlook. The outlook, the low to mid-single-digit growth, that applies to your fiscal '13, right, your outlook for the market?

Yes, that's correct.

Okay. And then, so how do we interpret that in the scope of going forward? So you had talked about potential -- some prudential weakness here in FQ1 last quarter. Was this quarter the industry worse than you had expected going in, about the same, or is it a function where this was -- it didn't seem like it would be better? But how do we interpret the outlook for the remainder of the year? It seems like maybe the rest of the year is not going to be as strong as what you had envisioned 3 or 4 months ago for the industry?

Thanks for the question. The few of us that are sitting in here are not economists. And so we attempt to, as best we can, garner information. Our organization does a great job really garnering the best thinking, whether it's global insights or Dodge or government information. So we accumulate this. We do our own checks with our customer base. And again, we're very fortunate. We sell through 14 different channels here in North America, so we touch a lot of different people. And we try to make sure or understand as best we can what their views are, of what that future holds. We were very concerned, I think, as was indicated in every newspaper, starting in April or May, of pending slowdown and the impact of these global uncertainties, including what was existing in the U.S. and how that might impact business. And I think we talked ourselves into a pretty good slowdown here, and that's what we experienced from the market. I think, we were able to eke out growth that was probably slightly better than the market. I don't have precise data around that yet. It's usually done in hindsight. As we think about what's going forward, again, we're accumulating discussions again with our end-market customers, as well as trying to understand what smarter people than us around third-party forecasters say. And I personally believe that we're still going to have some of this choppiness that we've experienced in both the end of the fourth quarter and in our first quarter because of the fiscal cliff. I think that that's going to continue to be front and center in the headlines, and people take a wait-and-see approach on some of these things when they're investing their money. I believe there's pent-up demand out there. I believe that we'll see that demand flow into orders. But do they deliver in Q2 or Q3? Do they deliver in Q4? We just don't know yet. So what we try to do is give some indication that we're seeing favorable daily order rates compared to our year-ago period, but we believe that there will still be inconsistency in demand because of these uncertainties that still hover out there.

Okay, that's helpful. I just want to clarify that on -- as it relates to what you said last quarter. So appreciate it.

And Rich, Ricky made a point that I want to make sure everyone understands. This is what we believe the market will do. It's our focus and goal to outperform the markets that we serve, to grow faster than them, to continue to penetrate. So just know that.

Our next question comes from Christopher Glynn from Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Vern, just wondering how much of a fix you're able to get on the scope of the project delays. And you just mentioned pent-up demand, maybe this is the same field of conversation. But could this project delay thing really set up some surprise strength in the second half, do you think?

I don't know if surprise would be the right word. I would say favorability to contribute. We look at the full year. We try not to look at what one quarter means compared to another. We try to execute around that. Where we see opportunity, we're aggressive about going after it. My hope, and hope is not a strategy, but my hope is we get some clarity around these uncertainties that are in the marketplace, enough so that people can get back to doing their business and investing. I'll give you an example, southern California. Because of the fiscal issues that California has, they've delayed in a lot of spending on schools, and yet their population is growing dramatically. So at some point in time, something is going to have to give. These kids need schools, and they'll invest in them. But how people manage their budgets have a direct impact on what they do in terms of their purchases for lighting. So that's just one example, larger municipal projects depending on where the funding has come from. People have taken a wait-and-see approach. I do believe that as people get clarity around what is going to happen, they will begin to invest. And we're starting to see some of that, particularly around absorption in commercial office space. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And just the last one. On residential, presumably a long way over a long time for that market to go. Would you look at a larger deal in that space?

Well, deals, as you point out, they're -- it takes 2 to tango. So I don't know that there's anything that is available to us that is both desirable and doable. So for us, our access to market and the technology shift is allowing us to really demonstrate our scaling capability. And I would expect us to pick up share in that space relative to what our historical percentages have been. So Ricky is continually looking for opportunities to expand our portfolio through acquisition. And the Adura acquisition is an example of that, though that's not specifically for resi. We will continue to look to build our portfolio, not only through aggressive product launches and introductions, but also complemented with acquisitions.

All I would add is certainly, we'll continue to look, as Vern says, for opportunities not just in residential but otherwise. But as our capability continues to improve as the newer technologies as these solutions, although maybe mostly focused on commercial, the comparability and the ability to leverage that into resi is becoming easier for us. Our market access is okay in that area. So while acquisitions could be an opportunity, I still feel good about our ability to continue our participation there on an organic basis as well.

Shawn Severson from JMP Securities.

So I have a question on the LED side. I'm just trying to get an idea of where some of the business and the growth is coming from? Are you able to tell if it's kind of retrofit and relight, or is it new construction? And I guess that that's out secondarily, away from maybe the outdoor lighting, but what's going on in the commercial building? Is it a tenant moving into an empty space, or is it an ROI-driven retrofit? Just one more color on what's driving the LED.

Without precise knowledge or information in front of me, I would say that it's more skewed towards renovation of existing spaces, particularly obviously on the indoor side. But the outdoor side is also renovation. Parking garages, for example, are a great opportunity for LED luminaires. The outdoor roadway type lighting. I think that, that has probably slowed down a tad relative to where it was, picked [ph] 18 months ago, when a lot of shovel-ready moneys were being directed towards those areas. Still plenty of growth, plenty of potential out there. I would say that the residential side, again, has been an opportunity for growth, more again, renovation than new. We're getting a lot of inquiry -- to the question earlier, a lot of inquiry from commercial office spaces, educational facilities, health care facilities that are looking to add, so I would call it, new construction. And therefore, it's easier to implement a more holistic integrated lighting system into that space. Easier may not be the best choice of words, but it's very simple to do. When it comes to renovating a space, a lot of folks are typically looking at what is the payback around that, and we're seeing success there as well.

And to that point, on the payback, I mean, historically, 2-year type payback being targeted has to be less than 3 generally to get people to move outside of kind of the mosh [ph] markets. But is that still the case? And is that what you are proposing with most of your LED retrofits at this point? Is it a 2- or 3-year kind of [indiscernible]?

So Shawn, a key element in that is where is that particular location of that building in terms of its cost per kilowatt hour for energy. So paybacks can be very significantly influenced on cost per kilowatt hour and/or rebates by utilities in those local markets. So where the cost is high, energy costs are high, where rebates are high, those paybacks are attractive, and we are seeing success there. But I have to say, in other markets where the costs are maybe more normal and the paybacks are pushed out, there are folks who are saying, "You know what, I want to have a more sustainable footprint. I want to have an office building that is akin to LEED certification. I want to attract my employees this way so on and so forth." So we are seeing those more soft benefits or soft opportunities pushing demand as well.

And I would add though, where maintenance is high, Vern had mentioned earlier, where it's very high ceiling in an atrium or a roadway lighting there, where they can factor in the maintenance savings along with the energy savings because of the longer lives that LED offer is a driver that's enabling certain applications to go there. And then I would piggyback on this emotional, not just green and sustainability, but we're seeing for security reasons. ATMs, for example, many of the banks and all are relighting the light at an ATM to go LED, again, because it's less likely to burn out, and for safety and all reasons, our light in that kind of an alternative. So there are reasons besides just an ROI that are certainly factoring into the buying decision that would cause some folks to go beyond that to 2- to 3-year, although certainly that's the primary driver.

And then last, I know this is very hard question for you guys kind of to answer. But in the lighting retrofits that you're seeing, going back to the idea the LEED certification and sort of more comprehensive approach energy efficiency, are you finding that lighting retrofits are part of larger projects in terms of efficiency and retrofits? Or are you finding lighting is still kind of standing as an independent retrofit project for your customers?

Our observation is, is that lighting is the second largest consumer of energy in a space, and yet it's the easiest one to convert. So lighting is an integral part of any energy retrofit that goes on in the building. And lighting also has a meaningful impact on the visual environment. So folks are very focused on how they drive lighting as part of their overall energy retrofit, and we would continue to see that as a significant driver of growth and opportunity going forward.

Due to time, there are no further questions. I would like to turn the call back over to Mr. Vernon Nagel for closing marks.

Thank you, everyone, 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 strong results and returns to our key stakeholders. Our future is bright. Thank you for your support.

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