Good morning and welcome to Acuity Brands Fiscal 2016 Fourth 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 and good morning. With me today to discuss our fiscal 2016 fourth quarter and full-year results are Vern Nagel, our Chairman, President and Chief Executive Officer and Ricky Reece, our Executive Vice President and Chief Financial Officer. We are webcasting today's conference call at www.acuitybrands.com. I would like to remind everyone that during this call we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks 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 the call over to Vern.

Thank you, Dan. Good morning, everyone. Ricky and I would like to make a few comments and then we will answer your questions. First let me say we are very pleased with our performance in 2016. We achieved record results for virtually all financial metrics including net sales, operating profit, diluted earnings per share and cash flow generation. For the full year in the fourth quarter net sales grew approximately 22%, while sales volume excluding acquisitions was more than double the estimated mid-single-digit growth rates of the key markets we serve. In fact this was the 14th quarter in a row where we achieved double-digit volume growth, a remarkable achievement that few companies can claim. We believe these results are yet again strong evidence of strategies to deliver superior returns to shareholders, provide customers with differentiated value-added solutions, and diversify the end markets we serve are succeeding allowing us to extend our leadership position. These strategies include the continued aggressive introduction of innovative energy-efficient lighting and building management solutions, expansion in key channels and geographies, improvements in customer service and companywide productivity. We achieved record profitability for the quarter and full-year even as we continue to invest in areas to support our strong sales growth, as well as opportunity for significant future growth potential including the expansion of our digital lighting and building management solutions portfolio which affords us a huge opportunity to be a critical part of the backbone for enabling the Internet of Things. I know many of you have already seen our results and Ricky will provide more details later in the call but I would like to make a few comments on the key highlights, first for the quarter. Net sales for the fourth quarter were a quarterly record of $926 million, an increase of 22%…

Thank you, Vern and good morning everyone. As Vern noted, we had a solid fourth quarter and full-year performance on virtually all metrics including sales and earnings growth, profitability, and cash flow. I will add insight to our financial performance and not repeat the information already provided by Vern. As Vern mentioned earlier we had some adjustments to the GAAP results in fiscal 2016 and 2015 which we find useful to add back in order for the results to be comparable. In our earnings release, we provide a detailed reconciliation of non-GAAP measures. Primarily, due to the impact of the four acquisitions completed in fiscal year 2016, we experienced noticeable increases in amortization of acquired intangible assets, share-based compensation expense since we used restricted stock as a tool to improve retention and to align the interests of key leaders of acquired businesses with those of the shareholders. Special charges as we streamlined and integrated recent acquisitions and an impairment of intangible assets as we rationalized acquired trade names. We believe adjusting for these items in providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations. We think you'll find this transparency very helpful in your analysis of our performance. In addition, many of our peer companies especially as we become more of a technology company make these same adjustments. So it will help as you compare our performance to other public companies in our industry. During the fourth quarter and full year of fiscal 2016, the company recorded a pretax special charge of $4.9 million and $15 million respectively for actions initiated to streamline the organization, including the integration of recent acquisitions. These streamlining activities included the consolidation of selected production activities and realignment of certain responsibilities primarily within various selling, distribution and administrative departments.…

Thank you, Ricky. As we look forward we continue to see significant long-term growth opportunities that are ever-changing and evolving in a positive direction for Acuity. Overall the economy in North America and certain markets we serve in Europe continue to move along at a measured but sometimes inconsistent pace. This year's Presidential election in the U.S. and event such as U.K. referendum thought to exit European Union continue to create uncertainty and volatility. This uncertainty and volatility always has the potential to affect consumer and business sentiment which in turn could negatively impact global economic activity. That notwithstanding, we remain bullish regarding the company's prospects for continued profitable growth. So while we don't give earnings guidance, I would like to provide a few observations for 2017. First we estimate the broad lighting market in North America which represents 97% of our total net sales will grow in the mid-to-upper single digit range for fiscal 2017 reflecting the benefits of both new construction and renovation and retrofit activity. Again the favorable trend in our September order rate seems to support this continued level of improvement. Further we continue to see signs that give us optimism regarding the future growth of the markets we serve in our business leading indicators for the North American market such as the architectural billing index, vacancy rates, office absorption, lending availability and the favorable employment trends continue to improve at varying paces while residential construction continues to grow nicely. Excluding the price of certain LED components which are expected to continue to decline and steel costs which we continue - which we expect to continue to rise, we do not anticipate significant changes in other material and component cost over the next 12 months. We expect to offset the impact of rising steel prices through…

[Operator Instructions] Our first question comes from Rich Kwas from Wells Fargo Securities. You line is now open.

Vernon, I just want to follow up on the installed base for the network fixtures. So on the quadrupling, do we - is it off the 200,000 base or is that imply that it's off a lower base and that by calendar yearend it will be higher than 200,000, but don't use that as the guide or the benchmark.

No. It's off of the 12 million square feet and 200,000 installed white enabled Beacons. The business and what we're experiencing there is just fantastic. There is interest in many different verticals and so we're in various stages of pilot programs to larger - much larger test programs all the way to installation. So it's happening and it's happening at a very interesting pace. We think that over the longer term, and please I don't mean next quarter to quarter after that, I am talking pick the next 1,000 days, I think you're going to see a meaningful change and a meaningful adoption of these Tier 3 solutions that Acuity is offering and then the opportunity for it to enable Tier 4 revenues for Acuity. We just introduced nLight ECLYPSE, which is truly in our view a game changing solution set. It doesn't exist in the industry today where it provides a unified system, not an integrated system, but a solution set that ties together HVAC, lighting, access, security and also provides a great capability to collect data and push that to the cloud and then push that back through the IoT type solutions set. So early, early, early stages of all this, but we're now seeing the growth and it's very exciting for us.

Okay. So substantially you've seen some benefit already but then it continues to build, a way to interpret that. So and then a quick question on incremental margin as we think about 2017, so the target always been mid to high 20s and you’ve got some investments going on and you’ve got restructuring. So, I guess how do we think about the cadence of improvement because the last couple quarters there has been some noise in the numbers as it relates to cost and what not and obviously you had some loss sales this quarter. So do we think about this rebounding to the mid to high 20s in a fairly quick manner or just more of a gradual recovery as the restructuring benefit to play out?

Well, I think there are variable contribution margins off of the - if you were the legacy business and were about the anniversary Juno here December 10, Ricky?

Yes.

So, those variable contribution margins should continue to roll, we still have some work to do. We took actions this quarter that obviously impacted this quarter but we did that because we really wanted to accelerate both our growth capacity, our capacity to service the growth that we are seeing and we’ll continue to see we believe. And number two to drive productivity so that we can continue to have the type of variable contribution margins that we expect and then what we expect as we said before is kind of that mid to upper 20s. It doesn’t mean that we won’t exceed it from time to time but this quarter is a great example in spite of the challenges that we had with some of the streamlining issues we still delivered, 26%, 27% variable contribution margin. For the full year 2016, we were about 30%. So our expectation is that even as we anniversary the acquisitions, we'll still be in the very high rate while continuing to invest. And just to be clear these numbers of pretty staggering, Acuity in its legacy business in the fourth quarter compared to the third quarter, we added a 100 people. We added 100 salaried people. We’re investing heavily because we see huge growth coming our way. Over the last literally year including acquisitions, we’ve added almost 700 salary heads to our capabilities. This is a enormous capability. In the last quarter we added almost 1,500 hourly people, now that number will come down a little bit as we streamline the operations that really was what caused us to experience both labor shortages and just on boarding issues as we ramp up the business because again we see very, very robust growth. All this means as we think about 2017, our expectation is to continue to deliver a very robust variable contribution margin that is in that mid to upper 20% range while investing in our business.

All right, thank you for the color. I’ll pass it on.

Our next question comes from Jeremie Capron from CLSA. Your line is now open.

Thanks. Good morning. I wanted to ask about what you are seeing in terms of the regulation landscape here. Any particular regulations you are keeping an eye on? And also in terms of incentives in various parts of the country, if you could shed some color on this, it would be appreciated.

Sure. Ricky do you want take that one?

Yes, we continue to see primarily from utility companies incentives been offered and as you might imagine it’s been more lucrative in the higher cost areas of those coast, east coast as well as west coast. Some of those have diminished a bit from the rights we’ve seen in previous years but continue to see pretty aggressive incentives been offered by the utility companies and then there are some tax accelerated benefits as well. On the regulatory front, continue to see most of the states implementing building coded that mandates certain levels of efficiencies much of it is around the level of control of lights or you need to put occupancy sensors and take advantage or turning lights off on a room and stay well or in a areas not been occupied but as in the case of Title 24 in California you are seeing many of them go beyond that and start mandating how much you're allowed to consume per square foot and the level of integration of the entire office power grid. So the regulatory front continues to move forward and we see it as another catalyst for growth.

Great, thanks. And going back to your commentary around incremental margins going forward, can you help us understand the difference in terms of profitability between your higher tiered solutions and the simpler LED solutions because, as you highlighted, the increase in your cost base has been pretty significant yet margins continue to grind up. I'm trying to understand the mix effect here as Tier 3 and over - it starts to move the needle.

Sure. Well you're seeing our margins continue to improve for a number of reasons one, incremental volume, number two the mix as we migrate more to migrate as the percentage of what Tier 3 and Tier 4 is de minimis right now but ultimately we expected to be a nice margin contributor because you have invested the cost, it's almost a software related, so the margins should come off that be very consistent with other companies providing those types of capabilities. So our expectation is that our gross profit margin will continue to improve over time and we will be able to continue to leverage as we hit sort of a plateauing probably sometime in late 2017, early 2018 of some of these investments and then the revenues that will be returning off those will make those the percentage of SDA become smaller relative to where it is today. We finished the year on an adjusted basis with SDA about 26.9%, let's call it 27% margins at the gross profit level were about 43.7%. Again our expectation is that our gross profit margins will continue to improve and our SDA we will continue to be able to leverage that. So the best way to think about our business is still in terms of variable contribution margin. We are still investing so the investing is slowing down it had because we have made significant investments in 2016. I would also say that when I look at our total cost for salaried associates, as well as our total cost for ROE associates as a percentage of our sales, those things continue to be flattish and so that's why you're again seeing margins improve over the 2015 time period whether it would be at operating profit or at the gross profit level. So we're getting the leverage, it is coming through the variable contribution margin, and yet we're still investing heavily in our business because again we see really tremendous growth opportunity over the next decade.

Thanks very much.

Our next question comes from Ryan Merkel from William Blair. Your line is now open.

Thanks. So first question I had is the sales issue from the supply chain fully behind you in September? And then secondly, could you comment on if the September order growth rate is still outperforming the industry?

I will take the last one first, the September order rate for Acuity is meaningfully outperforming the industry as we pointed out. Number two, your first question, the issue was we knew we were going to have to accelerate the consolidation of some of our manufacturing capabilities. We knew we were going to have to free up some capacity in key manufacturing facilities, so we decided during the quarter to make that investment to accelerate those efforts and so the sheer act of ramping up and attracting talent into the organization, I’m talking about hourly talent was a challenge particularly in a couple of areas because those areas are also experiencing growth from other companies moving into the market. We knew that was going to happen, we anticipate it but truthfully as we were ramping up the whole notion of the number of - sheer number of folks that we needed and then the training side of it resulted in us not wanting to ship products because we want to make sure that the quality was there and all of those issues. So we believe that we lost roughly $25 million. It's an estimate of lost orders and the lost shipments during the quarter and our guess is just a guess that it probably cost us 70 bps of operating profit margin in total. So you can understand the magnitude but we had to bite the bullet, we did it, we believe it's behind us, we think there maybe some just carry over lingering effect, there is orders ramp back up. Our order rates suggest that it's behind us. Our productive output is pretty close back to where it was in terms of our efficiencies and our effectiveness. So we're not expecting any of the lingering issues to have a material impact on our first quarter results.

Okay. That's helpful. And then, secondly, you are seeing very strong growth of Tier 3. It was 40% this year, I think you said. And based on some of the commentary, it sounds like this growth rate could accelerate in 2017. Am I reading that correctly?

Well, I think our mix of business continues to evolve. You know we are very focused on selling all tiers and selling value in all of those tiers. We do well in Tier 1 and 2 both from a sales perspective, as well as of margin perspective but the Tier 3 solutions particularly those that are enabled or capable of enabling the Internet of Things really are very exciting for us and we see more and more people wanting to bring those together. And truthfully this is why we introduced nLight ECLYPSE, it's a very, very powerful lighting building automation system that come together in a way that is unified. So there's no steps that others have to take, you don't have to worry about whether the mechanical folks or whether the electrical folks are going to work together, that's the beauty of this solution set and it can enable the Internet of Things and so we believe that more and more folks as the specification cycle starts it's normal routine, we believe that by midyear you're going to see orders ramping up for these things. So again this is what gives us confidence and optimism that we should be able to meaningfully outperform the growth rates of the markets that we generally serve.

Okay. Very good. I will pass it on. Thanks.

Our next question comes from John Quealy from Canaccord Genuity. Your line is now open.

Good morning, folks. First, I'm sorry if I missed this, but did you give an update on the Target stores deployment relationship? I think last quarter we were talking about 300 or 400 stores at least through that quarterly period, but could you give us an update there?

Sure, we are on track and things are moving along as expected and very excited about not only what Target is doing but what other folks not only other retailers in different sub verticals if you will, but with other verticals are doing we have just a lot of activity going on in lot of different places.

Okay. Thanks. And my follow-up, in terms of the acceleration of some of the footprint issues you did this quarter, the M&A integration at Distech as a standalone, can you talk about your bench strength in terms of being able to integrate more businesses? Does that limit your M&A appetite in 2017? If you could just talk a little bit more there. Thanks, folks.

Thank you for the question. No, our acquisition appetite is quite robust. Whenever you make acquisitions of companies that are add-ons like Juno for example, it just gives a company like Acuity which is has a robust supply chain, the opportunity to leverage its efficiencies and so sometimes you have to move things around to be able to do that, you hope that they always go perfectly, I think we get a good job, we just caught a little bit of a perfect storm. Some of our main facilities are in locations where the growth rate is robust because they're just great locations to be in and so as we are ramping up, the number of people I had mentioned earlier, just the whole notion of bringing people on board, training them and facilitating all that was a challenge but it was a temporary challenge. I think you companies have the skill and capability to do it as effectively and as efficiently as we've done. This was basically a 60 day, 90 day type issue where we've done some meaningful things that will have a huge impact on the profitability of our business going forward, as well as our ability to serve customers and to expand into new markets. The Distech acquisition and its integration is moving along exceptionally well because they continue to focus on their core businesses. Engineering departments are working together in a way to introduce solution sets like nLight ECLYPSE. That's never existed in the market before. We are meeting an unmet need. So it will take a while for those sales to ramp up as the specification cycle works its way through as we train people, as people become committed to it. But no our appetite for acquisitions continues and while I'm disappointed that we lost some revenues this quarter, I just been very pleased that how aggressively we attack these things because we do see robust growth now in lighting side, but the building management side we see growth in Juno product lines that they brought to us and we see growth in the combination of Acuity and Juno. So we're very bullish about what we see on a go-forward basis.

Our next question comes from Christopher Glynn from Oppenheimer. Your line is now open.

Good morning. With all the industry changes and the repositioning of the portfolio and the project groups to those dynamics to digital lighting controls, maybe some operational disruption was even a little overdue. Wondering if you could comment on that thought and just around the risk going forward? I know you already touched on it, but is there any kind of backdrop for legacy product obsolescence and challenges in managing that?

No Chris, that really is not the issue at all. We always go through product lifecycle management I don't see any of this current environment being any different because of how our supply chain works. We don't have legacy fixed assets because we don't make lamps, we don't make many things that require heavy investment. We are a designed and procurer and assembler of product to meet our specifications. So the investments that we have been making have really to - been to expand if you will our physical capacity in some areas because of the growth our electronics business is just on fire, it's doing exceptional work. But so I don't see any technical obsolescence. As we think about the moves that we took in the fourth quarter, it was really about training people and bringing people on board and then stabilizing that process. We added an enormous number of folks as I had mentioned earlier in the call. So I think we have managed it exceedingly well, I wish we had managed even better. Typically we do these things and view the shareholders don't really see a blip, this time it was pretty big. And so the consolidation of what we've done, we believe we will have huge benefits on a go forward basis. So again I don't really see much in the way of issues, it's training, it's development of our people, we are good at that, it just happened very, very quickly because we made the decision to accelerate, not go slow but go quickly because we believe that the growth particularly on the installed base renovation and retrofit activity is a huge opportunity for Acuity. We've introduced some new products and solutions sets that really go after that market even more aggressively. So we're ramping up our capacity and we made the decision to do that in a location where it would have its permanent home, not doing places where it would be temporary. So that's caused us to want to accelerate this activity because we see great future growth going forward.

Okay. And then just wanted to touch on the idea of using your eldoLED driver or some industry standard potential. Just wondering how that's rolling out and what the longer-term implications and role of your driver technology are for the portfolio.

Sure, that market like really all markets it's based on features and benefits and capabilities of your solution set and how you have used technology knowhow to create a difference. I believe that. We use other light engines as well from other folks. So the notion of creating industry-standard a little different in that we want to offer features and benefits where our eldoLED driver for many of our partners, our friends and we want to enable more. It really provides a capability that is unmatched in the industry. So it's a solution set that people would identify with and by virtue of its features and benefits we would hope that they would prefer that over others and then therefore it becomes the driver of choice for many applications. As we think about the Internet of Things and how we enable more folks to participate, we want people to use our driver so that it can be part of a holistic system and their capabilities, whoever they happen to be can participate in a set that an architect lighting designer or building owner would like to have including their luminaires. I wish I could tell you we make every luminaire, known to man. We don't and so our branding strategy is to get others that filling gaps and have opportunities to participate on the overall system to be part of that digital backbone and Acuity can then guarantee to the building owner that it's going to work and work the way they want and it will do everything that they want so, that’s really what we’re driving towards.

Thanks. And quick clarification. On the expectation for gross margin to expand over time, I assume that comment applies discreetly to fiscal 2017 as well?

Sure, we always are looking to continue to drive and improve our margins. We have a long history of doing that and our expectations are high for 2017.

Thanks Vern.

Our next question comes from Brian Lee from Goldman Sachs. Your line is now open.

Thanks for taking the questions. Maybe first off, Vern, you mentioned less reliance on non-res new construction during your prepared remarks. Was hoping you can maybe help quantify that to some degree. What's your mix today between the new construction and renovation and then how much do you think it could skew toward renovation in fiscal 2017 and then maybe over the longer term?

Sure. So Brian the way we look at the market as we say there is new construction and we all know well how to do that, there is an architect, lightening designer, engineer, building owner, electrical contractor, electrical distributor. Next portion of the market is plan renovation that's where someone again will hire architect, engineer, lightening designer and they’ll go after and they’ll say, I'm going to remodel a wing of my hospital, great. That looks like new construction to us. And then there is this world of what we call unplanned renovation. It’s what exist out there every day and you use your office every day and you don’t think about the lights that are above you, it's that world that we’re looking to attack in a much more aggressive and holistic way bringing to them solutions that will cause them to say, yup, I want to go from having analogue lighting to digital lighting, yup, I want to go from having an analogue, HVAC building management system to a digital building management system. Our view is that the installed base and I've given these statistics before DOE estimates that there is 100 billion square feet of building space in the U.S. A few years ago our guesstimate was that it was about $3 a square foot to convert, $2.50 a square foot for fixtures and another $0.50 square foot for controls. We believe today that with our solution sets, the unified nLight ECLYPSE system for example, the ability to enable Internet of Things to collect data off of this to provide many more features and benefits of data and what it can do in the space to help a building owner optimize what they're doing as a unique and compelling value proposition. So the conversion of that install…

All right. Thanks. That insight is super helpful. Maybe just a quick follow-up on mix. LEDs, you mentioned, is now approximately two-thirds of sales. I think you have said in the past it's in theory probably not likely that LED becomes the entire business mix. There's always a place for some amount of traditional lighting technologies. What do you think is the upper limit on LED mix for you because it does seem like you've grown a lot faster in that segment than expected. And so just wondering how close you might be getting to what you might consider an upper limit as you see it? Thank you.

Sure. So LEDs today represent almost two-thirds of our total revenues but I just want to emphasize that Acuity has revenues other than fixture products obviously Distech it's a simple example that we also sell emergency lighting, we will sell poles for outdoor lighting. So when we think about where our mix actually is for our lighting business, and we sell control systems too. It is a much higher percentage than what it means to the overall sales. So ultimately I see Acuity sales continuing to grow in multiple areas including selling more luminaires but I think LED as a percentage, I don’t know what the exact number will be that will hit a fixed percentage because we’ll have been converted virtually all to LED within our luminaire business. I still think that that is a few years away but I believe that will happen particularly as LEDs just become more efficacious and they are doing that. So I think that for our business, I don’t know what the exact percentage will be because we sell other things and we want to sell those other things, those other items we will continue to grow. I mean our building management systems which tie now where we have nLight ECLYPSE in a unified way with HVAC and other lighting and so and so forth. We expect that to grow fairly significantly. So it will continue as a percentage of the total and make LEDs. We will hold their percentage to our total and there will be other technologies that will come out there that won't be directly LED that will also continue to sell and there will be a small portion of our business as well.

Okay. Thanks guys.

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

Thank you, everyone. Thank you for your time this morning. We strongly believe we are focusing on the right objectives deploying the proper strategies and driving the organization to succeed in critical areas that will over the longer term continue to deliver strong returns to our key stakeholders. Our future is very bright. Thank you for your support.