Good morning and welcome to Acuity Brands' fiscal 2019 first quarter financial conference call. After today's presentation, there will be a formal question-and-answer session. [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.

Good morning. With me today to discuss our fiscal 2019 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 on our website at acuitybrands.com. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our most recent 10-K and 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 will answer your questions. Our results for the first quarter were solid, despite continuing inflationary cost pressures. We took several actions in the quarter to address these cost issues, including price increases and productivity improvements. Further, our topline growth this quarter continued our long trend of outperforming the overall growth rates of the markets we serve while diluted earnings per share grew 17% to $1.98, a first quarter record. I know many of you have 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 first quarter of 2019. Our net sales for the first quarter were a record $933 million, an increase of 11% compared with the year ago period. Reported operating profit was $116.4 million compared with $120.2 million in the year ago period. Reported diluted earnings per share was $1.98 compared with $1.70 in the year ago period. There were adjustments in both quarters for certain special items as well as certain other addbacks necessary for our results to be comparable between periods as Ricky will explain later in the call. In adding back these items, one can see adjusted operating profit for the first quarter of 2019 was $134.1 million compared with adjusted operating profit of $135.5 million in the year ago period, a slight decrease of 1%. Adjusted operating profit margin was 14.4%, a decrease of 170 basis points compared with the margin reported in the prior year. Adjusted diluted earnings per share was $2.32, a first quarter record, up 20% from the year ago period. Net cash provided by operating activities was a solid $132 million this…

Thank you Vern and good morning everyone. As Vern mentioned earlier, we had some adjustments to the GAAP results in the first quarter of fiscal 2019 and 2018, which we find useful to addback in order for the results to be comparable. In our earnings release and Form 10-Q, we provide a detailed reconciliation of non-GAAP measures for the first quarter of fiscal year 2019 and 2018. Adjusted results exclude the impact of acquisition related items, amortization expense for acquired intangible assets, share-based payment expense and special charges for streamlining activities. We believe adjusting for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations. We think you will find this transparency very helpful in your analysis of our performance. During the first quarter of fiscal 2019, we recognized a pretax special charge of $1 million, primarily related to moved cost associated with the previously announced transfer of activities from a planned facility closure. In the first quarter of the prior fiscal year, we recorded a pretax special charge of $200,000. We expect to continue to incur additional costs primarily attributed to early lease termination and moving costs in future periods associated with the closing of certain facilities related to the streamlining actions announced in fiscal year 2018. Fiscal 2019 first quarter results were impacted by the adoption of Accounting Standards Codification 606, Revenue From Contracts With Customers, which negatively impacted current period revenues by $2.4 million, gross profit by $1.1 million and operating profit by $1.2 million as compared with the prior-year period. Additionally, fiscal 2018 results were restated to reflect the impact of adopting a new accounting standard regarding retirement benefits which resulted in an increase in operating profit of $1.6 million, with an equal offsetting increase in other expenses…

Thank you Ricky. While current market conditions in the lighting industry continue to be challenging, we continue to be optimistic regarding our long-term future. We believe our many actions to improve our market reach, enhance our customer solutions and capabilities and to drive company wide productivity will help optimize our financial performance in the future while affording us the opportunity to continue to invest in areas we believe have high growth potential over the long-term. Our robust sales growth, significant cash flow and upper quartile return on invested capital are reflective of our strong operating performance despite some of these current industry headwinds. Our views on overall market demand for the lighting market and items influencing cost have not really changed over the last quarter. So let me reiterate some of those key items that could influence our performance for the balance of 2019. Many independent third-party forecast continue to suggest the overall construction market as measured in dollars will grow in the low to mid single-digit range. We still believe the lighting industry will lag the overall growth rate of construction market somewhat primarily due to continued product substitutions to lower priced alternatives for certain products sold through certain channels, though recent industry pricing actions should have a favorable impact on growth as measured in dollars. Additionally, we expect that labor shortages in certain markets could continue to negatively impact growth rates for both construction and lighting. While the U.S. government delayed the implementation of increased tariffs to 25% from the current 10% for certain imported Chinese-made finished goods until March 1, we believe the outcome of the entire tariff situation could have a dampening effect on overall demand due to higher component cost and finished good prices. Further, it is evident that the global trade issues have certainly created greater volatility in demand in our various end markets and we expect that to continue. As previously mentioned, we believe the announced price increases and other actions taken will, in time, offset the increases in costs for various items noted earlier. While increases in some input costs such as steel have leveled off for now, we expect other costs and expenses such as imported electrical components and finished goods, freight rate and wages will continue to rise. These potential costs increases -- [AUDIO GAP]

[Operator Instructions]. Matt McCall from Seaport Global Securities, you may go ahead.

Thanks. Good morning guys. So Vern, maybe start with the comment you made about expanding Contractor Select to profitably compete in that market. Can you talk about just the trends since the reinvigoration or reintroduction of that product, the trends in the profitability in recent quarters and then expectations, just trying to understand what you were referencing when you made that specific comment.

Sure. Well, just to further make a comment, I wasn't able to finish the prepared remarks. So there are probably some other important things that I will touch on as we get towards the end of the call. But Matt, let me begin to address your questions. Yes, Contractor Select was a relaunch of a product portfolio that was directed at, if you will, lesser featured or more value oriented products. And what we did is we had a number of products branded maybe under Lithonia, but we recreated, if you will, Contractor Select to have a more fulsome portfolio directed specifically at that market with new products that had better cost structures for us at better price points. Some of those products continue to be manufactured both in Asia as well as in our North American manufacturing footprint. So our margins in those have improved and we continue to see growth. Contractor Select is designed to serve both the home center channel as well as the electrical distribution channel, and then to a lesser degree showrooms and our digital retail capabilities. So we continue to see growth in that portfolio, and it has had some positive impact on our margins. As we said in the quarter, which was really exciting for us, price mix overall was very slightly favorable, let's just call it neutral, which is the first time we have experienced that, geez, Ricky, probably in the last two to three years. So part of that benefit has been due to actions taken like the introduction of Contractor Select.

Okay. Thank you. And maybe continuing on that thought, you mentioned some of the product comes from Asia, you are manufacturing part of it. I guess I am trying to understand the impact on your gross contribution margin. Do you still get the same leverage opportunities from that sourced product? And will that, I am really thinking about the substitution effect of just the product coming in out of Asia, do you sacrifice some maybe leverage opportunity, but you benefit from lower costs? I am assuming or I am sure, just help me understand the impact and how we should think about gross contribution margin from just pure volume, just given this shift in substitution or trends with substitution?

Sure. So as we stated in our 10-K, approximately 20% of our total sales are produced by others. About 15%, Ricky, is produced in Asia?

Correct, 15%.

I think that was the number. So that's up a little bit from, say, prior years. We obviously have a very strong supply chain in Asia. When you say we lose a little bit of leverage, sure. When you are not manufacturing in your own facilities, increases in volume, you are not able to really leverage that across your fixed cost base, but we like the margin profile of our portfolio in Contractor Select. And as we think about product substitution, again this quarter, it was essentially a wash, price mix was essentially a wash, which again first time in a long time. So the efforts that we are putting in to products like Contractor Select, not just Contractor Select, allowed us to again have price mix be a wash. I would tell you that product substitution, it will continue. And the way we are attacking that to offset product substitution and what that simply means is that we are moving from a product that has one price point to something that has a lower price point, it's entirely possible that the gross profit margin on the lower price point item is actually higher as a percentage of the sale than on the higher price one, so we continue to push our mix as a company into those areas that we realize both higher profit dollars as well as higher profit margin. A good example of that is in our controls business, our controls overall business, and it's impossible to call it a separate business because so much of our controls are embedded into our luminaires, but we are seeing great uplift as we continue to introduce new products and solutions such as nLight Air into the marketplace with great demand. So that benefit of that price mix was also because of the introduction of products like that.

Okay. Very helpful. Thank you Vern.

Thank you. And our next question comes from Jeffrey Sprague from Vertical Research Partners. You may go ahead, sir.

Thank you. Good morning everyone. Two from me, first on substitution. I wonder if you have a sense of how much is happening, kind of at the front end relative to the initial bid versus a response to price cost dynamics in the project later in the construction process and a need to get cost out given other inflationary pressures that may have risen during the project itself? Is there a discernible difference there?

Well, let me take a cut at it and then Ricky can take a cut. Product substitution is occurring in two key areas, and just it's interesting, it's trends of how people want to, if you will, use like the shift from certain 2x2, 2x4, 1x4 fixtures to flat panels, for example is a trend that has been in the marketplace for a while. So as Acuity ramps up its capabilities in the flat panel business, and I believe that today we are the largest seller of flat panels in the North American market, at least that's what our data would suggest and that is over the last, call it, less than 18 months that that's occurred. Well, that product is replacing certain other form factors and in those other form factors, we are simply at higher prices, and so that's an example. Another example is slim form wafers replacing certain types of downlighting. Again profitability off of those products for us, from a margin percentage, is favorable, but yet just pure dollars because the physical construct of that product is meaningfully different than something that it is substituting in certain applications. So it is both upfront but it's also in our stock business, it's also being sold through whether it's electrical distribution channel or whether it's being sold through the home center or the showroom or our digital retail capabilities for, what I will call, renovation projects. It's just people looking at different choices that they have in terms of how they want their space to look and how they want it to operate. And so that product substitution or that shift is having some change on topline, if you will, dollars. Units are obviously up higher, but dollars tend to be lower. And this is again why, to me, it's very exciting for us to show an almost 11% topline growth while all of this is going on.

And also just on Tier 3, Tier 4, you continue to seek good growth in units. Can you give us a little update there in terms of actually turning the capabilities on, what's happening there, service revenues associated with it, et cetera?

Yes. We are seeing nice growth but often an incredibly small base. And so what we have learned in this process is that people who deploy our Atrius-based luminaires are looking for some level of critical mass within their own facilities or number of facilities. So as they install, they are now beginning to experiment and use. We have certain customers that are much further along than others and they are now actually starting to use apps within their space. We are helping them do that. It obviously creates an increased, if you will, revenue stream for Acuity. But the Tier 4 SaaS revenues are still really small but growing, I mean they are doubling. So we are very, very excited about the prospects of what that SaaS revenue looks like, particularly as customers start to use the solutions or use the capabilities of the solutions that they purchase. And so as expected, it's now starting to ramp and you are seeing that multiplier effect occur, but again against the $3.8 billion Acuity Brands, it really does not move the needle just yet, but it will. It's moving the needle, by the way, in us selling IoT-enabled luminaires in a very significant way. I mean part of our growth is because of our enterprise solutions capability, which is selling virtually all IoT enabled luminaires and that piece of our business continues to grow nicely.

All right. Thanks.

Thank you. Our next question comes from John Walsh from Credit Suisse. You may go ahead, sir.

Hi. Good morning.

Good morning.

So I am going to apologize because I don't know if I fully understood the answer to Jeff's question, but maybe I can just ask it again in a little different way. As we think about the product substitution, is that when the project first starts, so when the initial bid happens? Or are you seeing the general contractors actually break the spec later in the construction process and then seeing the substitution happening there where you have to go and fight what the contractor is trying to do to the spec? Just trying to understand that dynamic a little bit better.

Yes. That's a great question. So generally speaking for projects, products like this are specced in, but the normal cycle just general contracting capabilities that they may spec something else and this has happened historically for years, for decades. You get down to now at the end of the project because lighting is some of the last stuff in, someone may say, listen, I need to alter the specification to a degree, because I am out of budget and I need to be in budget. So some of these products provide great alternatives but their features and benefits are not the same as what may have been specced in. So you can have a combination of both. But for Acuity, again, if you go back to more traditional lighting, Acuity never participated in the lamp ballast replacement business. Today, we have a product portfolio that is amply suited for replacement of existing luminaires. So when we sell these types of products through certain channels, very often they are for renovation projects, which we have said for a long time is a growth rich opportunity for Acuity or they may be part of smaller projects, where there is not a specification and the builder is saying, hey this product looks like it's a fantastic opportunity or the owner says this is something that I like. Flat panels as a form factor are becoming very popular. And so again that product substitution is because that product category is growing significantly because people like those form factors. It's simply displacing other types of product that may have had a higher price point and they are willing to any feature or benefit difference, should there be any. So it can be both, but generally speaking, someone is not using that flat panel to break a spec. They are using it as something that they have specified in and Acuity will be introducing a spec-grade product or flat panel family, which is a whole different opportunity. But no, I would say that it's part of the normal course of business and these features and benefits that these products have are attractive at those price points.

Okay. Thank you. And then, just thinking about this potential or the pre-buy impact ahead of the price increase is obviously very difficult to parse that out, but you did say you thought there could be some dampening impact in the next quarter. I mean, is that to think a couple of points? Is that kind of the order of magnitude that you have in your head when you use the word dampening? Or is there a more specific range that you would point us to?

Yes. I would say to the extent, because it's impossible for us to precisely quantify it. I would say that to the extent we assume there was some and we have seen some evidence but to quantify that and say okay, here is a number, we just didn't even try because it wouldn't have been worth that effort. But to the extent that there was some, it would have been, generally speaking, a pull primarily from Q2 into Q1. We can't estimate it. Ricky, any other thoughts on that?

No. We have looked at it in a lot of different ways. Some of the pull forward was within the same quarter. So it obviously has no impact on our quarterly result. So it's hard to put a breadbasket around it.

Okay. Appreciate it. Thank you.

Thank you.

Thank you. The next question comes from Tim Wojs from Baird. You may go ahead, sir.

Hi guys. Good morning.

Good morning.

I am just curious if you could give us a little bit of color on just what you are seeing around pricing traction in the marketplace? I know there is a lot of variabilities between price and mix. But if you just look at like-for-like pricing and based on some of the increases that you have put in the market, is there any sort of estimate you could give or what you are seeing in terms of how much of those price increases are starting to stick?

Ricky, you want to tackle that and then I will add.

Yes. In the quarter, as Vern said in his prepared remarks, very little impact in this first quarter. Most of the price increases were implemented mid-quarter and we protected certain channels as well as the delay due to projects, as Vern mentioned, that were in our backlog. But we are committed to the price increase and do see evidence that in most of the channels it is sticking. It is coming in at different timelines in different channels. But we are continuing to be pretty firm in our resolve with the increases because they were real cost increases, inflationary as well as the tariffs that we are needing to offset and we are holding firm. Most of the major competitors have announced similar if not identical price increases to us. So that is encouraging. But as we always see in price increases, it varies by geography. It will vary by channel somewhat as to how quickly they get implemented and to what extent. But we still are very committed to the announced increases we put out.

And Ricky, if I could just pile on a little bit. Two-thirds of our total business is bid business and that hasn't changed. We have experienced real cost increases. We will continue to aggressively look to recover those, both through price increases that we have pronounce as well as productivity improvements. We look at every project and decide whether that's something a piece of business that we are after. As Ricky pointed out, different channels have different contractual obligations. So we are implementing our price increases, because these cost increases are real to us and we are evaluating as we always do what our product portfolio looks like relative to how we serve and support our customer base relative to how we make money. And so we are aggressively focused on pushing through price. Generally speaking, the industry is pretty disciplined when cost increases come about putting those into the marketplace and to the extent that those things ebb and flow, again on the bid business we look to optimize our profitability by all measures. So we have seen our price increases we implemented into the marketplace and we are pleased with the progress that we have made so far.

Great. And then just thinking about seasonality and just trying to make sure we are all on the same page. The second quarter is typically your weakest revenue quarter. So while I think price would probably have a little bit of a sequential impact, you would also lose some leverage. So is it fair to assume that the gross margin sequentially are down from Q1 just in line with historical seasonality before seeing the more market improvement in the stronger months in your fiscal year?

Yes. I would say that the seasonality is normal. We have had this for forever. And you are absolute correct in assuming that the leverage of volume does have an impact. We are looking to recover some of the cost increases that we have increased our price. Again as said earlier, the timing of some of these things are depending on the channel, the contracts that you have with a customer but our expectation is that as we enter into Q2, it will not be materially different than other Q2s as it relates to the seasonality. While we are optimistic, we are seeing positive signs within the construction market. We continue to see some of the volatility in demand that is caused by people's concerns around tariffs and what's going to happen in trade negotiations. I wish I could tell you differently. We have a positive view of the overall market, but it's still tempered by what happens into a quarter from one quarter to next because someone says, hey, I am going to wait and see what happens with this trade policy. It's frustrating for us because we believe that there is momentum out there and there is a real need. I look at all of the demographics of rising employment, vacancy rates going down, rental rates going up, absorption of real estate. These are all favorable signs and longer-term bullish signs for nonresidential construction. So it's a bit of a Dr Jekyll and Hyde but overall we are net positive in what we see going forward.

Thanks for the comments. Good luck.

Thank you. Our next question comes from Ryan Merkel with William Blair. You may go ahead, sir.

Hi. Thanks. Just want to follow-up on the gross margin question. So do you think that you are going to recover the 170 basis points of price cost in the fiscal second quarter? Or it might take a little longer?

So, as Ricky and I said, the price increases that have been enacted, some of those take time to roll in because of contractual obligations, because of our backlog. I think we will make good progress in capturing those costs. We don't give guidance on that entirely. I don't want to comment completely on that. But our price increases and our resolve around capturing those price increases are important for us to recover our cost.

And then I would just comment, Ryan, that and Vern added in his prepared remarks, we are still seeing inflationary cost increases beyond what are in our first quarter results. So wage inflation is alive and well. Our merit increases went into effect mid or second, last third of our first quarter. So all of that impact will be in our second quarter. So we will continue to have some inflationary cost increases we need to offset, all the reason why these price increases were so necessary.

Got it. So it sounds like you are expect to make progress but we shouldn't expect you can recover the full amount in the fiscal second quarter?

We don't give guidance.

Okay. Fair enough. All right. And then back to the issue of pull forward, maybe just comment on the order rates in December? Potentially that could tell us a little bit about what's going on and what the pull forward could be.

Yes. We have not seen a meaningful change compared to the prior year in our order rates. Again, my concern is less around the pull forward and more around just how do people release projects, how are people feeling about their businesses. It is becoming more and more evident to us that labor shortages in large markets are having a dampening effect on construction in general and lighting to a lesser degree. So we are looking at the overall demand and why are people doing things. We continue to see strength in smaller and mid size projects, which may not be as impacted by labor shortages of larger projects. So we continue to see this dynamic going on. It gets exacerbated to a degree or the fluctuation/volatility to a degree into the Q2 weather related things. So we continue to see, what we would call, normal trends. So again, that's why it's impossible for us to say, oh gosh, it's this percent that will impact first quarter versus second quarter.

Got it.

I would just like to mention, related to a part of your question, another uncertainty out there is this potentially next round of tariff increases on finished goods coming from China. March 1 is the date the administration said those would become effective, which is obviously the end of our second quarter. Will those go forward? What impact may that have on demand but also on potential pull forward because we have indicated, as others, that we are going to have a price increase contemporaneous with that tariff increase. So that's another uncertainty we are looking at here in the second quarter that could have an impact on order rates depending on whether that tariff increase goes forward or not.

Very helpful guys. I will pass it on. Thanks.

Thank you. Our next question comes from Rich Kwas with Wells Fargo Securities.

Good morning. This is Deepa for Rich Kwas. Hope you are all well. Two quick questions from me. First one is, can you comment on the state of non-res cycle and what you are hearing from the field, especially commercial versus institutional? Large commercial softness, obviously continues. You mentioned that in your product commentary. But do you think that is cycle driven or is that more like a short-term impact from all the headline uncertainty of tariffs, etcetera that we see?

So on the non-res piece for small, medium projects, I think that again the portfolio of solutions that Acuity and to a degree, others have to offer, offer favorable energy savings. So good returns on investment. So I think that people continue to move those along typically to the extent that they have access to electricians in their local market. So I see that as being favorable. Larger projects, all of the big indicators, rental rates, rental vacancies, absorption of real estate, employment, all of those are usually leading indicators of construction, particularly around medium and larger projects. Without getting into the specific verticals of non-residential construction, we still have favorable, but our favorability or our optimism is somewhat tempered by again in some of these key markets the availability of electricians to do some of these projects. And by the way, what we are talking about here is growth, right. All of these folks have good backlogs. They have projects out there, whether they are the electrical distributor or the electrical contractor. It's just that if their workforce is the limiting factor to their ability to grow and again in the lighting space, we continue to experience a bit of deflation structure for the reasons we have articulated. I think that there should be legs there in terms of what's going to happen in non-residential construction. But we have to solve some of these labor issues.

Got it. Can you comment on your residential piece of business? What was your resi growth in the quarter? And have you seen any deceleration or stability in that piece of your business?

Yes. So we don't measure it exactly as residential because we sell products that has residential applications and/or light commercial applications through multiple channels. We would sell those products through the home center channel. We would sell it through the electrical distribution channel. We would sell them through the showroom channel. Those products or those channels, as Ricky pointed out earlier, are network sales for us that represents about 70% of our business, which would have some resi in there. It was up about 10% on the retail channel, Ricky, which would be also resi and light commercial. We saw favorability there. So we continue to see favorable movements. I know that residential construction has kind of moved sideways here a little bit, but I think that that is just temporary. I mean you look at the number of workers, the population continues to grow, rental rates continue to increase. I am still bullish over the long-term on residential construction capabilities. I think Acuity is well-positioned to play there.

Got it. Final one for me. So just given all the pre-buy due to the price increases, can you comment on the state of inventory in the channel? Should we be concerned at all? You alluded, you talked about some pull forward, but just curious on the inventory in the channel. Thank you.

Yes. I don't know that. I am saying that there is inventory in the channel. I think that the channel manages its inventory pretty well, both on residential and non-residential. From our perspective, our inventories are up a bit, because we have extended some of our supply chain to Asia. That's increased a little bit adding a little bit more inventory into the system. But we also continue to grow in certain markets. Take our enterprise solution market, where that business grows, we are required to maintain certain levels of inventory to support store renovation construction. So that's caused us to have to carry a little bit more inventory. But I think that the channel of electrical distribution, the channel of the home center and so on and so forth, all those inventory levels seem to be appropriate given the economic activity that's out there.

Thank you. And our final question comes from Christopher Glynn with Oppenheimer. You may go ahead, sir.

Thanks. Good morning guys. Vern, did I catch that someone out there may be thought you should tighten your prepared comments I guess.

Thank you Chris. I think that was you. And by the way, all the questions that folks asked, that was in my prepared remarks.

I am sure. So your volume outgrowth was pretty profound in the second half of last year. I am wondering how to think about those comparison run rates there? In the absence of guidance, how would you advise we consider that? And maybe part of the context is, if you could describe the trend with the building breadth of customers now creating critical Tier 3 mass for themselves pursuant to entering the Tier 4 base?

Yes. Our business continues to diversify both in terms of within channels. So if you were to look at the home center business, we continue to diversify our customer base there also looking to evaluate our portfolio in some of those things. So there is a little bit of a ebbing and flowing going on. I love what we are doing in our enterprise solutions capabilities. This is really where we are selling our IoT and Atrius-enabled luminaires into retail and other segments specifically how they are purchased. Well, the acceptance of those products are significant, but the problem and the opportunity is that that's very lumpy. When someone says, hey look, we don't want you in our retail stores from the beginning of November until the middle of January, you could appreciate. That's when they make most of their money in terms a lot of these retailers. So anyway, I expect our growth to continue to outpace the overall growth rate of the markets that we serve. We have had a good track record of doing that. Some of the influences that we have had here over the last couple of quarters, as we mentioned, we expanded our customer base in certain channels, which caused us to have a bit of, I call it, load-in of certain things. Some of those things will come back to normal volume and activity. So it may not be quite to the level because you don't have those load-ins happening every quarter that we experienced in fourth and first quarter. But again, I think that we have a long track record of outperforming the overall growth rate of the markets that we serve and I think that that's probably a pretty good indicator as you think about your models of how did we grow last year, how do you think the market is going to grow, where you thin Acuity is going to be. I think you can get yourself into a reasonable range around that.

That works. And then just the inventories on the magnitude of a quarter, year-over-year. Just wondered if you can comment on the strategic aspects of that inventory build versus whatever working capital execution factors and the free cash flow conversion outlook for the year?

Sure. So we continue to have good cash flow conversion. Our inventory levels, as we bring on whether it be through enterprise solutions or customers in certain other channels, we are working that into our business. But our expectations would be that we would improve our inventory turns as our business processes to support those growing aspects of our business come into both focus as well as we get our processes honed down. Said simply, we have too much inventory right now relative to the service levels. It's just getting those processes honed between ourselves and the customers, their POS, their store increases, some of the projects that we have worked on within our utility channel. Our utility business continues to grow significantly well. There are requirements for inventory until we get that pipeline really smoothed out. We have added inventory to support the service levels. So our expectation as a company is really critical to us to get our inventory turns back to where it should be with levels of service that are commensurate with customers' expectations. So I believe that by the end of year you will see our inventory turns and our inventory levels improve relative to the volume.

It's days on hand that's important and it's service that's important, not the dollars that are important. So we want to get those metrics back to where we think we ought to be out there.

Thanks. Have a good one.

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

So thank you so much. You asked some of my remarks were cut off of it a bit, but I think we answered some of the things I would have said during the Q&A. So again, I would like to thank you for your time this morning and again we strongly believe we are focusing on the right objectives, deploying the proper strategies and driving the organization to succeed in critical areas that have the potential over the longer term to deliver strong returns to our key stakeholders. Our future is bright. Thank you for your support.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.