Good morning and welcome to the Acuity Brands 2015 Third 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.

Thank you. Good morning. With me today to discuss our third 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 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 in 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. First off our results for the third quarter of 2015 were simply outstanding. Our net sales grew over 13%, while our adjusted earnings per share grew 37%. Net sales, gross profit margin and our adjusted results for operating profit, net income and earnings per share were all quarterly records for Acuity. In addition, this was the ninth quarter in a row where we achieved double-digit volume growth. We believe these results are yet again strong evidence of our strategies to provide customers with differentiated, value-added solutions and to diversify the end markets we serve are succeeding, allowing us to further extend our leadership position in North America. 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 company-wide productivity. Our adjusted profitability for the third quarter was a record for Acuity, even as we continue to invest in areas to support our strong sales growth as well as opportunities with significant future growth potential, including the expansion of our digital lighting solutions portfolio affording us a huge opportunity to be a critical component of the backbone for enabling the internet of things. 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 third quarter were $684 million, an increase of more than 13% compared with the year-ago period. On a GAAP basis, our diluted earnings per share was $1.48, up 47% from the year ago period. As Ricky will explain later in…

Thank you, Vern and good morning, everyone. Vern covered the primary drivers for our third quarter sales growth and our profitability, so I will not repeat these items. I will provide a bit more color on our quarter's results and financial position as well as our pending acquisition of Distech. I will begin my prepared comments by providing a brief update on our streamlining activities. We recorded a modest $0.4 million pretax special charge associated with our previously announced streamlining activities related to production transfer cost. We currently expect to incur addition production transfer expenses and other costs associated with these streamlining actions totaling approximately $1.3 million during the fourth quarter of fiscal 2015. This will result in a total special charge for fiscal year 2015 of approximately $11.2 million. We plan to reinvest a portion of these savings and additional growth initiatives, which will require Acuity adding new talent with different skill sets. However, during the first nine months of fiscal 2015, we've realized savings over and above these reinvestments that are approximately equal to the amount of this year's total streamlining cost. As Vern mentioned earlier, we had some adjustments to the GAPP results in both quarter of fiscal 2015 and 2014, which we find useful to add back in order for the quarterly results to be more comparable. In the third quarter of fiscal 2015, we added back pre tax $1.3 million or $0.03 per diluted EPS for acquisition related professional fees associated with the pending Distech acquisition, which is a non-tax deductible expense and pre-tax $0.4 million or $0.01 per diluted EPS for special charges related to our streamlining efforts, which I discussed previously. In addition, we adjusted our third quarter 2015 results by $10.5 million pre-tax or $0.15 per diluted EPS for the net gain…

Thank you, Ricky. As we look forward, we continue to see significant long-term profitable growth opportunities that are ever-changing and evolving, particularly for Acuity. Our growth expectations for the lighting industry primarily in North America has not really changed much over the last several quarters. We remain very positive. So while we don't give earnings guidance, I would like to provide you with some observations for the balance of 2015. First, most economists expect the economy in North America will continue to improve at a modest but increasing pace. While forecast for industry growth rates by independent organizations continue to vary widely, the consensus estimate for the broad lighting market in North American is expected to grow mid to upper single digit range for 2015, reflecting the benefits of both new construction and renovation activity. Further, we continue to see signs that give us optimism regarding the longer term future growth of the markets we serve in our business. Leading indicators for North American market such as the architectural billing index, vacancy rates, office absorption and lending availability and favorable employment trends continue to improve, while residential construction continues to grow nicely. As this becomes the norm over the last handful of years, we're always leery of the next round of uncertainty that might come out of Washington as well as fiscal and foreign policy issues. As you know, the manner in how these key issues are resolved can meaningfully influence business and consumer confidence. Nonetheless, we continue to expect that the overall demand in our end markets for our fourth quarter and into fiscal 2016 will continue to improve and be more broad-based and consistent than that experienced over the last few years. The continued favorable trend in our June order rate again seems to support this continuing level…

Thank you. [Operator Instructions] Thank you. Our first question comes from Jed Dorsheimer with Canaccord.

Hi, thanks and congratulations on the margin increase. Vern, I was wondering -- my first question is just on the tiered solution and specifically if you could look at -- if we could look at what we're seeing in California is indicative to the rest of our the country. If you've been able to discern your tiered approach with respect to Title 24 and how that business is going and would you be able to provide us with some updates in terms of where that is at and then overall as a percentage of sales?

Sure. Jed, it's really too early for us to provide great detail around the specific tiers. If you imagine Tier 1 as being just simple devices migrating to Tier 3 where there are now integrated holistic solutions. Some of our record keeping in the past we really didn't look at the market place that way. As we look at our portfolio today and structure our portfolio more and more around these Tiers, we are seeing growth that is meaningfully above even our strong growth rate that you see today and it is because customers are looking more and more for that smart and simple turnkey solution. This is why we're particularly excited by the pending acquisition of Distech because it allows us to really provide even more total end to end capabilities to customers. You had mentioned California. I think California is a harbinger of real positive things to come as energy and conservation comes to the forefront of people thinking. When we look at what we are doing in certain geographies in terms of year-over-year growth, it is favorable. We don't provide the absolute detail around that, but it is meaningfully higher than the overall growth rate. So our expectation is that as we look out over the next… …So our expectation is that as we look out over the next handful of years and beyond as more and more of both regulation as well as just great business practices come to the forefront, these are energy saving, cost saving opportunities and this is why we think we are uniquely positioned to help drive that with our tiered solution strategy. We will continue to provide more detail as we go forward as it becomes if you will more known. We still have issues around how we collect data and information around that to make it truly actionable. So, at this point in time, we're not going to provide really specifics around it because it's still a bit of an estimate.

Okay. Fair enough. Just with respect to mix and actually distribution in the segment of -- or the breakdown of your sales, when you refer to the benefit in terms of gross margin, is it just in the agent side of the business that you've seen a larger proportion of sizable contracts this quarter, or is there something -- was there another move within that mix that benefited the margins this quarter?

That’s a great question. The key elements benefiting our gross profit margin improvement were primarily increases in volume and you saw that very nice growth 14% volume growth, material cost opportunities and benefits there as well as continued productivity of our supply chain. Our supply chain team is just doing an outstanding job of improving their cost structure as well as providing superior service for our customers. When we look at verticals, we continue to see favorability really along all verticals. Healthcare grew nicely for us. Education grew nicely for us. Infrastructure, street and roadway grew nicely for us and we continue to see benefits through renovation. So I would say that what happened with the mix this quarter is not necessarily a lot more larger products but are projects, excuse me, but opportunities to serve these verticals in just a more favorable way. So still waiting for if you will the opportunities and the benefits of larger projects coming through. We believe that as we look out into our market place, we discuss opportunities with our channel partners whether it’s the specification community, our electrical contractor partners, our electrical distributors partners, we believe that there is a lot of favorability out there that will manifest itself over the next easily three years because we can see that, but the trends are very favorable even beyond. So we are optimistic about where our markets will go and really optimistic about how we've positioned ourselves to capitalizing on that. We are really in the early innings of all this.

Thank you.

Thank you. Next question is Tim Weiss with Baird. Your line is open.

Hey guys. Good morning. I guess just a follow-up on the price mix question from before. Just any color behind how you guys are seeing new construction and retrofit come through? Is there any benefit right now that's coming through price mix from an improvement in new construction and is that something that's in the early innings in your view?

In our view, it’s still very much in the early innings. As we look at again the difference between renovation and new construction if a specifier is involved in the renovation frankly it look like new construction to us, but it’s really a different segment. So we're trying to get better analytics around that to understand where our markets are going. When it goes through our electrical distributor partners often where there is not a specifier involved, its product type. So we have pretty good track record around that and frankly I believe that’s our internal capabilities that have helped influence mostly our gross profit margin improvement. We like what’s happening with the mix. We've actually kind of annualized some of this. We work hard to offset some of the channel mix. We have certain channels where pricing and the margin dynamics are a little different when you compare one to another channel. But overall, our cash flow return on investment off of those types of channels is usually quite favorable. In fact, when we look at our trailing 12 months cash flow return on investment as a company, we're now above 30%, which is just really a pretty extraordinary achievement.

No, that's great. I guess my follow-up question just a clarification on some of the prepared remarks around the market growth, it's been mid to high single digits from the last couple of quarters last few years here and I just wanted to clarify, it sounded like it could get better and maybe more broad-based as we look into fiscal '16. So I guess what are the drivers you think specifically that could drive that improvement and is it possible that you could see a lighting market and underlying lighting market that actually gets into double-digit growth territory?

That's not necessarily what the prognosticators say. We don't consider ourselves to be economists. So we use information from Dodge and global insights and NEMA and NAM and other places to really help us understand what they're forecasting and then we contrast that with our really voice of the market our sales people interfacing with the various people who we work with. And when you look at things like architectural billing index and you talk with architects lighting designers and engineers, they're busy and they're growing their business and usually is a leading indicator of what ultimately will happen in the larger market that even when working on renovation projects because lighting and energy management systems really do provide a very robust payback. And so most businesses seem to be flushed with cash and so they're looking for ways to optimize their returns. They're certainly not getting at by leaving in, in the bank and so lighting and building management systems provide companies with the opportunity to not only enhance their environment, but to get really good return off of it. So I am not going to go out on the limb and say I see a double-digit growth in sort of the non-residential construction market, but I think the prognosticators are telling you that it's getting very close to being in that upper single digit when you think about '16 and '17. Our opportunity we believe is to again outperform those types of growth rates as we have really for quite some time now.

You guys have done a great job. Thanks for the additional color.

Thank you.

Thank you. The next question is Brian Lee with Goldman Sachs.

Hey guys, thanks for taking the questions. I guess first one I had was just around some recent data points around the LED cycle that suggest and it's consistent with some of your commentary. Pricing on components is seeing faster than expected decline this year in recent times. I know historically, you passed on most of these declines, but wondering what impact you may be seeing or you might see here in the near term given not only the increased pricing pressure on the supply chain for those components, but also what I believe is a mix shift for you guys specifically to more suppliers and lower cost alternatives in Asia versus what you may have been sourcing in the past. So any color there will be helpful.

Sure. I don't know that LED component prices are declining any faster than the market anticipated. I think it's been a normal decline. Actually in some areas one could argue that the price decline is slowing a tad. Most all of our business if you will is a bid business. So our objective is to really create a value proposition around our solution set that is not really a cost plus, but is really what is the value of that, that total holistic solution and that's why we've really are starting to migrate towards a tiered solutions approach, so we can really differentiate the features and benefits of our products and solutions amongst those tiers. And that allows us from what we're seeing to extract a bit more margin as we sell more effectively. So I believe that LED component cost will continue to decline. The market generally is passing that back to the consumer. I don't see that trend materially changing, but from Acuity's perspective, we will continue to drive our tiered solution strategy where we're actually creating a difference for those holistic solutions because the energy savings and the other features and benefits that the building owner or building user would get, whether it's a better visual environment, whether it's the internet of things, it's more friendly user ability. All these things are hugely important in creating the difference, which we think over time will help us not only gain share, but improve our margin profile.

Okay. Thank you. That's very helpful. Second question was just around the sort of a higher level snapshot of what's happening in your competitive landscape if you look at the reshuffling at some of your traditional peers like Phillips and Osram. I wonder is that creating opportunities for you or has that been creating opportunities for you and may be the share gains you might be seeing from this? How do you view those in terms of the stickiness? Is that a permanent shift in share that you might be taking advantage of, any thoughts there? Thanks,

Sure. I believe that the competitive landscape, the two names that you mentioned I mean the bigger shift for them is exiting the lamp balance side of the business, not really the fixture. Osram is not a material player in the fixture side of the business here in North America. Certainly Phillips is and I don't see really a change in their approach to the market. They're an aggressive competitor. They sell traditionally on value. I think some of the other competitors that are out there that have attempted to enter the market using primarily price as their point of differentiation have -- that model has been repudiated to a degree. And so I don't see huge changes in the competitive dynamics from traditional players. We do see the opportunity and this is why we continue to look at alliances and opportunities to work with other technology based businesses because as we migrate from the analogue world to the digital world, now all of a sudden I mean frankly lighting as wherever people are and wherever there is lighting, there is power. So now you're able to do so much more with this digital world and Acuity truly understands how to help drive these things. So you've seen announcements around the acquisition of Brightlight for example. That acquisition was to really help us drive our visible light communication capability that is not just for key retailers, but ultimately will be in many, many buildings. So to sense around what's going to happen in the competitive landscape is our value proposition will proliferate and some of the traditional competitors won't really be playing there because it's now that how do you serve the building owner in terms of not only enhancing that visual environment, but enhancing the entire environment and using lighting as the backbone to collect information to help provide capability back so that they can optimize the management of the building. What that means to us is that we will see probably new competitors or different competitors than we have in the past. We're very excited about it because the value proposition for these building owners is really quite significant and it doesn’t matter whether it's retail or education or commercial office buildings or industrial, lighting is going to be a -- from Acuity anyway, a critical backbone in how the building is operated.

Thank you. The next question is Kathryn Thompson with Thompson Research Group

Hi, thanks for taking my questions today. Firstly -- we attended Light Fair this year. You had said that the most exciting thing about your business is the Internet of Things, which you've talked about on today's call. So in other words, connecting a variety of devices in an everyday environment over the Internet. Just as you over the past several quarters have been able to outline LED as a percentage of your total sales, could you -- over the next two or three years, are you able to either quantify or envision how much of your business, your total business, will be more tech versus device and what does this mean from a margin profile standpoint? Thank you.

Sure. Kathryn that goes back to Jed's question earlier. It's really our tiered solution strategy approach and as we get a better base of data and our ability to more effectively collect that information, particularly as we think about these holistic solutions and how they come together. Again building owners will care less and less about the pieces and parts. What they will care about is do all of these things work together. Are they smart and are they simple for me to use and can I use them in a way that helps me optimize with whatever I am doing. If it's a retailer, can I optimize my associate… …I am doing. If it’s a retailer, can I optimize my associate productivity or enhance the retail environment for consumers. If I am university, can I make my university safer and so on and so forth? I believe that we will be able to give better information around our tiered solutions strategy as we go forward. It’s just that we are in our infancy. We're trying to slice and dice the historical data so that we can have a base with which to compare. We're working hard to create the portfolios internally that will then allow us to sell those as holistic solutions and we will be able to record those. It’s rough right now. It’s really a guesstimate. But when we look at that, when we look at the data that we have, it tells a compelling story and when we think about the hit rate that we have when we tell folks who are interested in these holistic solution, their interest and what they're focusing on and the opportunity to look at it as a total cost of ownership is very robust. And our hypothesis is that we will see more improved margin profile from those kinds of thing. But it’s really early in the game favorable trends, but we will be able to do that probably down the road certainly not over the next couple of quarters though.

Okay. So it’s too early to quantify effectively.

Yes.

That's helpful. Second question, how much of your top-line growth do you think is more driven by the cycle versus secular drivers?

Ricky, I’ll turn that over to you. Our growth rate is above the market growth rates that we're experiencing. As you all know, lighting lags right. So while leading indicators are like such as architecture billing index they can see.

And we're also seeing in some of our survey work, for instance, fuel starts and aggregates, which are early indicators, are right now seeing volume growth of 8% to 9% in that non-res sector. But I guess the point is did you see growth above and beyond what you are seeing in the current quarter because it is a lag product?

Correct and we also have the added benefit of renovation activity. Again it’s a huge installed based that’s out there and its been converting very slow as Acuity becomes better and better, fishing in that pond, we think it allows us to -- any components that will allow us to outgrow the overall growth rate of the markets. I think that the mid to upper single digit range for lighting over the last quarter is probably closer to upper is probably a fair reflection of what the marketplace is and again we're collecting data Kathryn as you are from various sources to help us sort of triangulate but compute that and yet our growth rate continues to be above that.

I would add that Kathryn, if you look at our growth rate, clearly we're seeing the secular benefit of the moved LED. LEDs tend to sell at a higher price point per fixture than the traditional fixture So that’s helping the industry and us from a top line growth. That secular trend as Vern commented the renovation retrofit over the last several years just continues to accelerate. Obviously again the LED technology being a catalyst for that, but there is the desire to be green, desire to be sustainable, the energy savings regulations we've talked about California Title 24, other factors that are driving that. And then as you mentioned, the cyclical I would say the minority of our growth now would be the cyclical recovery while we're seeing a recovery in nonresidential construction and may be a bit more in residential construction, I would say that's a minority of our growth versus the secular trend of moving to LED and this renovation retrofit opportunity of converting this very large install base. We estimate the install base at over $300 billion indoor and then you add it all at the outdoor and all we have to do is drive around and look up and you recognize how few of the outdoor lights have converted to LED and similar when you look around in building. So huge, huge opportunity and we're beginning to see that conversion rate pick up and that secular trend I think is a bigger driver of our growth for the industry and certainly for us. But we're seeing the cyclical recovery and as we've talked about and it’s good to hear what you're seeing in other industries that will continue.

Great. Thanks so much for taking my questions.

Thank you. The next question is Sven Eenmaa with Stifel. Your line is open.

Great. Thanks for taking my question. Wanted to ask about when you think about around 6 to 12 months or so, how do you see a mix evolving versus new construction versus renovation activity and retrofit activity? And also how big of a part of their mix you expect to be coming from again the stock and flow and then discrete item sales?

Sure. I think over the last year maybe 18 months, our view was that our business was probably 50-50 in new construction and renovation. Our expectation is that as new construction comes back, that mix will shift a little bit towards new construction. But be clear we have become very skilled at fishing in that renovation pond. So we would expect to continue to see that grow as well. It's just that as Ricky pointed out some of the new construction activity may more, may shift that mix just a little bit. So does it become 60-40 that it wouldn't surprise me, but we're going after it all in that regard and then remind me the second question was…

In terms of whole -- in terms of discrete sales, discrete and then the stock and flow sales to distributors, how kind of the big part of the business mix you expect that to be going forward?

Sure. It may be different for Acuity than others because again of the renovation relation or the relationship that we have with our key electrical distributors around renovation. So that number is probably a two thirds, one third number. We're just kind of guessing here a little bit, 70-30 something like that new versus stock inflow or I should say a more specification project business versus stock inflow. That would be my guess and truly it's a guess.

Thank you.

Thank you.

Thank you. Next question is Ryan Merkel with William Blair.

Great. Thanks for fitting me in. The first question I had was on SG&A, there wasn’t a lot of leverage this quarter or even last quarter, but is it fair to expect some SG&A leverage in the fourth quarter and then also in 2016 and 2017?

Yes, I understand that SGA area we are a pay for performance environment and so the performance that the company is performing to today is really upper quartile performance and so the incentive compensation is upper quartile. This quarter compared to the year ago quarter, we probably booked close to three times the amount of accrual for incentive compensation. When I think about the fourth quarter last year, we had a very solid fourth quarter and so the accrual was higher than it had been in the typical or the previous quarters because the performance was more consistent with a lower accrual number. Anyway we earned the bonus last year accrued in the fourth quarter. My guess is that this year we'll see some of that leverage coming forward. In other words we won't be booking. We'll probably be booking a consistent number for incentive comp, but on a higher level of revenues. The other thing that I would point out is we continue to reinvest back in the business. As we've talked about the tiered solutions approach, the investments that we're making to really drive capability in Tier 3 and Tier 4, peak skill sets and resources that we haven't had in the past and so we're investing there. We took a streamlining action in the first quarter of this year and we've been adding back different skill sets to help us drive that. I think what's particularly important as the variable contribution margin that we earned this quarter, it was above what we would like to provide if you will sort of a directional capability variable contribution in the upper 20s is a number that we're comfortable with. But yet we continue to outperform that or have outperformed that and our objective is to always do that. So you will see leverage in the SDA are as we go forward. Certainly in the '16, '17 period, we would expect to see that, but be clear, we are investing in our business. We're a human capital intensive business. Primarily this year our CapEx is up a little bit more than what it has been by historical trends and that's primarily because we're running out of space and we've done some things to expand our technical capabilities from a physical plant perspective, but you'll continue to see us leverage the SDA as we go forward.

Okay. That was very helpful. I guess the follow-on question is I think last quarter you mentioned that incremental margins could be above 30% in 2016 and 2017 if the investments in the tier solutions paid off. So I am curious if it's outlook is still on track?

Well, the answer is we're aggressively each quarter looking to bring every nickel we can of incremental profitability to the bottom line, but we're doing that while appropriately balancing reinvestment back into the business. And so while we're very proud of the incremental margins that we've generated this year, we still expect to not only drive improvement there, but we do expect to invest back into the business. As we go forward, when we think about future years and the out years as we drive these tiered solutions approach more into Tier 3 into Tier 4, we would expect our variable contribution margins to improve because the overall margins in those tiers our expectation is that they will be higher. Early indications are suggesting that to be true, but again we're very early in this game.

Fair enough, Vern. Thank you.

Thank you.

Thank you. Next question is Jeff Osborne with Cowen & Company.

Great. Good morning and congratulations on the strong results. I was wondering if you could comment on the geographic diversification of revenue and now that the LED technology is becoming more known, are you starting to see the mid American states pick up or are we still heavily centered on the Coast in terms of revenue mix for you folks?

That's a great question. Our revenue mix and our growth was reasonably broad based. Some of the geographies where we may have not -- where we were below our average, I don't believe it was a difference between LED and non-LED. It was just that some of these markets from what we can tell were just a little bit slower. When you think about the two coasts, it's clear that the adoption of LED is moving forward nicely, but we have had great successes in mid America vis-à-vis LED. If you would have talked to various distributors in those markets, I think that they would tell you that their LED based luminaire business is growing and growing nicely. So I don't perceive it to be a huge difference. I do think that some of the energy savings codes that some states have promulgated facilitate a more rapid if you will renovation opportunity and typically if folks are looking at alternatives, they're going with LED.

Great. Thanks. And this may be in the 10-Q, but maybe Ricky can elaborate on it. Can you just touch on the $70 million in Canadian revenue for Distech? How much is exposed to the sanctions that you mentioned or that you was a rational for the delayed closing of that?

The amount is very de minimis. You will see in the 10-Q that the amount of shipments related to this is less than $300,000. So a very immaterial amount. So it should not have a material impact on the revenue growth going forward.

Great. Appreciate it. Thank you.

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

Thank you everyone for your time this morning. We strongly believe we're 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 returns to our key stakeholders. Our future is very bright. Thank you for your support.