Dan Smith - Investor Relations Vern Nagel - Chairman of the Board, President, Chief Executive Officer Ricky Reece - Chief Financial Officer, Executive Vice President.

Matt McCall - BB&T Christopher Glynn - Oppenheimer Jeff Osborne - Cowen & Company Mike Ritzenthaler - Piper Jaffray Ryan Merkel - William Blair Tim Weiss - Baird Jed Dorsheimer - Canaccord Genuity Rich Kwas - Wells Fargo Securities Sven Eenmaa - Stifel.

Good morning and welcome to the Acuity Brands 2015 Second 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. I would now 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 second 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 be happy to answer your questions. First off our results for the second quarter of 2015 were simply outstanding. Our net sales grew almost 13%, while our adjusted earnings per share grew 44%.

Net sales and our adjusted results for operating profit, operating profit margin, net income and earnings per share were all second quarter records for Acuity. In addition, this was the eighth 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 second quarter was a record for Acuity, even as we continue to invest in our strong sales growth and in areas with significant future growth potential, including the expansion of our solid-state luminaire and lighting controls portfolio as well as our pursuit 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 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 second quarter were $616 million, an increase of almost 13% compared with the year-ago period.

Adjusted operating profit for the second quarter of 2015 was $78.7 million compared with adjusted operating profit of $58.2 million in the year ago period. There were minor adjustments in both periods. I find it helpful to add back these small adjustments to both quarters' results to make them comparable.

Adjusted operating profit margin for this quarter was a robust 12.8%, up 210 basis points from the adjusted margin reported in the year ago period. Adjusted diluted earnings per share were second quarter record of a $1.8 compared with adjusted diluted earnings per share $0.75 in the year ago period, up 44%. Strong quarterly results indeed.

Lastly as Ricky will discuss later, we meaningfully enhanced our already strong financial position this quarter as we now have more than $600 million of cash and cash equivalents on hand, far exceeding our debt of slightly more than $350 million. These results for the quarter were significant improvements over the year ago period.

We believe you will find our results for the quarter even more impressive upon further analysis. While net sales for the second quarter grew almost 13% compared with the year ago period. We estimate our sales volume grew more than 15%. This growth was partially offset almost equally by lower price mix and the impact of foreign currency.

While it is not possible to precisely determine the separate impact of price and mix changes, we believe that difference was primarily due to lower pricing on like-kind LED luminaires between periods, reflecting the decline in certain LED component cost.

Additionally, our sales volume was impacted by harsh weather conditions in certain parts of the U.S. as well as later issues at certain ports of the West Coast.

While it is impossible to precisely quantify the impact of these events on our results, we guess that the combined impact these items negatively impacted our shipments in the quarter by one to two percentage points.

Increase in net sales was broad-based along most product lines, including sales of certain specialty fixtures as well as certain control solutions more closely associated with new construction as this important market continues to expand.

From a channel perspective, we continue to experience strong growth in commercial, industrial, infrastructure as well as gains in home improvement.

Our sales growth this quarter was primarily due to our continued focus on projects for new construction and renovation in both non-residential and residential markets as well as continued emphasis on selling higher value-added lighting solutions especially LED luminaires, where sales of our LED products grew by 60% this quarter compared with the year ago period.

An extraordinary achievement when one considers that sales of LED-based luminaires at Acuity now account for 42% of our total sales. We believe our rate of growth for LED luminaires continues to far outpace the growth rates of our largest competitors for these types of products, demonstrating our market-leading prowess.

Excluding LED luminaires and components, we believe the puts and takes for product pricing were again fairly benign this quarter, while overall material and component costs were slightly positive. Looking at market conditions for the second quarter, we believe the North American lighting market was up mid-single digits during the quarter.

This is in contrast with the growth rate of our net sales in North America, which was up more than 15%.

Lastly, we believe our channel and product diversification as well as our strategies to better serve customers with new, more innovative lighting solutions and the strength of our many sales forces have allowed us to again achieve meaningful sales growth this quarter.

Before I turn the call over to Ricky, I would like to comment on our profitability and strategic accomplishments for the quarter. As we noted earlier, our adjusted second-quarter operating profit was $78.7 million, a robust 12.8% of net sales, up 210 basis points from the adjusted margin reported in the year ago period.

Our gross profit margin for the quarter was 41.5%, up 210 basis points compared with the year ago quarter. The expansion of our gross profit margin was primarily due to the benefits of higher net sales, productivity improvements and lower material cost, partially offset by price mix and unfavorable changes in foreign currency exchange rates.

Next, adjusted total selling, distribution and administrative expenses were up $20 million or almost 13% similar to the increase in net sales. Adjusted SDA expenses as a percentage of net sales this quarter were flat compared with the prior year at 28.7%.

The increase in adjusted SDA expense was primarily due to higher commission cost to support the increase in net sales and higher employee related costs, including incentive compensation partially offset by productivity gains. This point is very important.

Another way to view just how robust our second quarter results were is to examine our variable contribution margin for adjusted operating profit and increase in net sales. In doing so, one can see our variable contribution on the incremental sales of $70 million was almost 30%. All-in-all, we had another great quarter.

On the strategic front, we continue to make great strides setting the stage for what we believe will be a strong growth and profitability for the balance of 2015 and beyond.

From a product line solutions development perspective, we continued our rapid pace of new introductions, expanding our industry-leading portfolio of innovative energy-efficient luminaires and lighting control solutions.

As we had noted in the past, we offer customers more than $1.7 million SKUs to choose from, more than three times as many as we had 2008. To our knowledge, no other lighting company provides customers with more choices and solutions than Acuity Brands.

Much of this growth in our portfolio has been driven by the expansion of our lighting controls and solid-state product offering. For the second quarter, our LED sales grew 60% compared with year ago period.

This is an extraordinary achievement when you consider that if one were to measure the sales of our LED products as a standalone company, we believe it would be the fourth largest lighting luminaire company in North America. We continued to invest and expand our capabilities to drive our integrated tiered solutions strategy.

The purpose of the strategy is to leverage our incredibly diverse portfolio by offering customer solutions that best meet their needs whether it would be a single device or a complete holistic integrated lighting solution for the indoor and outdoor needs and everything in between, all with the promise and security from Acuity that you are in good hands and we have your back.

This is a compelling and powerful value proposition for our customers. Sales information for our tiered solutions is still in precise and expanding off a small base, we believe our sales growth over 50% year-over-year in these categories.

To fully execute this strategy, we have continued to hone our organization structure to be more customer-centric, leveraging our industry-leading access to market and to better allocate resources along each of our tiers, creating the best solutions for our customers' applications.

More impressively, our adjusted operating profit margin continued to expand this quarter compared with the year ago period, while sales of LED-based solutions have become an even larger portion of our overall business.

Acuity is a clear leader in providing customers with superior lighting solutions, incorporating either conventional or solid-state light sources. The market has come to understand that LED as a light source is no longer a new technology.

Now widely accepted, the attention of customers is focused on how they can best control and utilize this light source to optimize their visual environment while realizing additional benefits including its energy-saving characteristics and the opportunity to have a smart connected platform for the Internet of things.

Because Acuity truly understands how best to fully utilize the unique capabilities of LED through our smart and simple solutions for virtually any application. We believe we are growing significantly faster than the markets we serve.

As I have noted before, our organization has a long and distinguished history of leading and innovating during eras of technology disruption and that is even more true today. As part of our tiered solutions strategy, Acuity Brands is a leader in the evolution to smart buildings and smart cities.

We are leveraging our deep customer knowledge, our unmatched access to market in a broad and deep portfolio of indoor and outdoor solid-state and traditional energy-efficient luminaires and lighting controls to bring truly differentiated value to customers, and we are delivering profitable growth and strong financial returns for our shareholders while making these important investments, including acquisitions and strategic alliances to broaden our capabilities to serve customers.

As such, we are pleased to announce this quarter, the potential acquisition of Distech Controls as well as a strategic partnership with Sensity Systems, both of which have helped drive our tiered solutions strategy, particularly as it relates to our holistic approach towards the advancements of smart buildings and smart cities.

Just a quick comment in both opportunities, Distech based outside Montréal, Canada, is a leading provider of building automation and energy management solutions that allow for the seamless integration of lighting, HVAC, access control, closed-circuit television and related systems.

Combination of Distech and Acuity with our broad industry-leading solid-state lighting portfolio, innovative control technologies and integrated digital solutions should contribute to our tiered solutions strategy, offer true end-to-end optimization of all aspects of the building for enhanced occupant experience, quality visual environment, seamless operational energy efficiency, operational cost reductions and increased digital functionality.

Distech, while relatively small today with annual sales of approximately CA$70 million, would enhance our tiered solution strategy going forward as we enable smart buildings. We hope this transaction which is subject to Distech shareholders' approval as well as other customary closing conditions, will close before the end of our fiscal year.

We will have more to say about this once the transaction is complete.

Our strategic partnership with Sensity, a pioneer in light sensory networks will allow us to deliver smart lighting solutions to cities, commercial and retail facilities, airports and universities, focused on improving energy conservation, public services, safety and security and a wide variety of other applications.

Additionally, our joint solutions will further transform energy-efficient LED lighting into smart connected platforms for the industrial Internet of things.

Strategic opportunities such as these coupled with our internal effort should allow us to continue to diversify and strengthen our foundation and further serve as a robust platform for our future growth that is less reliant on the new commercial construction cycle.

We have been able to produce these results because of the dedication resolve over more than 7,000 associate by maniacally focused on serving, solving and supporting the needs of our customers. I will talk more about our future growth strategies and our expectations for construction market later in the call.

I would like to now turn the call over to Ricky before I make a few final comments regarding our focus for the balance of 2015.

Ricky?.

Thank you, Vern. Good morning, everyone. Vern recovered the primary drivers for our second 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 recently announced potential acquisition of Distech.

I will begin my prepared comments by providing a brief update on streamlining activities. We recorded a modest $0.6 million favorable adjustment to the special charge due to the lower than anticipated employee related severance costs.

We currently expect to incur production transfer expenses and additional costs associated with the streamlining actions totaling approximately $1.4 million during the second half of fiscal 2015. This will result in a total charge for the fiscal year of approximately $11 million.

We still expect to achieve annual savings in excess of the total estimated charge cost, but as we mentioned last quarter, we plan to reinvest a portion of these savings in additional growth initiatives which will require adding a new talent with different skill sets.

Accordingly, in fiscal year 2015, we expect to realize savings net of reinvestments approximately equal to the amount of the total streamlining cost. The effective tax rate for the second quarter was 34.4% compared with 35% in the second quarter of last year.

As we indicated last quarter, we received a slight benefit in the second quarter, due primarily to the retroactive application of the U.S. research and development tax credit, which became law during the second quarter with the passage of the tax extenders.

We still expect the effective tax rate for fiscal year 2015 to be 35.5% before any discrete items and if the rates in our taxing jurisdictions remain generally consistent throughout the year.

As Vern mentioned earlier, cash flow generated from operations for the first half of fiscal year 2015 was an impressive $75.5 million, which is an $18.1 million increase over the prior year.

Our operating working capital defined as accounts receivable plus inventory, less accounts payable decreased five days year-over-year to an industry-leading 41 days and represents only about 12% of annualized revenue.

Much of this year-over-year improvement was in our management of inventory where we continue to improve our inventory turns while also improving our service levels. In the first half of fiscal year 2015, we spent $27 million on capital expenditures compared with $16.5 million in the prior year.

We currently expect to spend approximately 2% of revenues in capital expenditures in fiscal year 2015.

This expected uptick in capital expenditures compared with recent prior years is primarily due to projects that we delay from fiscal year 2014 and investments necessary to support our growth, including the build-out of our innovation and technology center here in metro Atlanta.

At February 28, 2015, we had cash and cash equivalents balance of $601.1 million, an increase of $48.6 million since August 31, 2014. Our total debt was $354 million. Consequently, our cash exceeded debt at the end of the fiscal quarter. At February 28, 2015, we had additional borrowing capacity of $243.9 million under our credit facility.

We clearly have significant financial strength and flexibility and we will continue to seek the best use of our strong cast generation to enhance shareholder value. I will conclude with some additional comments on the proposed Distech acquisition.

As Vern mentioned earlier, on March 9th, we announced that we had entered into an agreement to acquire all of the outstanding capital stock of Distech. The terms of the agreement reflect a cash purchase price totaling CA$318 million or approximately U.S. $250 million, which we intend to fund using cash on hand.

The closing of this proposed transaction is subject to approval by certain Distech shareholders and other closing conditions. If we are able to successfully conclude these remaining conditions, we would expect to close in the next several months. Because of significant volatility in the U.S.

and Canadian dollar exchange rate over the last year or so, we thought it prudent to enter into a foreign currency forward contract in an effort to mitigate nearly all of the foreign currency exposure associated with the Canadian dollar purchase price, because U.S.

GAAP does not allow a hedge of a commitment to acquire our business to receive hedge accounting treatment, any gain or loss incurred on the ultimate settlement of the forward contract, which is based on market exchange rates at the settlement date of the forward contract will be recognized in the income statement.

Distech generated net sales in excess of CA$70 million during calendar year 2014 and enjoyed a five-year annual growth rate of over 25%. Almost half of Distech sales are in the U.S., about a third in Europe, less than 10% in Canada, and the remaining spread broadly around the rest of the world.

The operating profit margin of Distech is similar to Acuity. We will provide additional details following the completion of the transaction. Thank you and I will now turn the call back to Vern..

Thank you, Ricky. As we look forward, we continue to see significant long-term 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 do not 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. Our forecast for industry growth rates by independent organizations continue to vary widely.

The consensus estimate for the broad lighting market in North America is expected to grow in the mid to upper single-digit range throughout fiscal 2015, reflecting the benefits of both new construction and renovation activity. Further, we continue to see signs that give us optimism regarding the future growth of the markets we serve and our business.

Leading indicators for the North American market such as 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 has become the norm over the last handful of years, we are always leery of the next round of uncertainty that might come out of Washington as well as physical and foreign policy issues. As you know, the manner in how these key issues are handled can meaningfully business and consumer confidence.

Nonetheless, we continue to expect that the overall demand in our end markets for 2015 continue to improve and be more broad-based and consistent than that experienced in either 2013 or 2014. The continued favorable trends in our March order rate, again seems to support continuing level of improvement.

Second, excluding the price of certain LED components, which are expected to continue to decline, we do not anticipate significant changes in input cost for the balance of 2015 as some commodity costs have waned while others continue to rise.

Further, we expected employee related cost to continue to rise primarily due to wage inflation, higher incentive compensation and the negative impact of rising healthcare cost. Next, we continue to be leery of foreign currency exchange rate fluctuations, which are impossible to predict.

Of course, we will continue to be vigilant in our pricing posture as well as furthering our efforts to drive productivity improvements.

Another observation, while our gross profit margin is influenced by a number of factors, including sales value priced product and sales channel mix and innovation, we expect our annual gross profit margin to improve over time as volume grows, particularly for larger new construction projects which should also benefit our mix, particularly as we execute our tiered solution sales strategy and as we continue to realize gains in manufacturing efficiencies.

Our gross profit margin improvement in the second quarter was a good example of our potential, but we prefer to look at our margin improvement over a 12-month period to remove quarterly anomalies, like the impact of harsh weather conditions or the seasonality of the second quarter in general.

To discern proper trends, you should do the same as a positive picture. Additionally, while we continue to experience some isolated pricing pressures in certain markets and sales channels, we will continue to be vigilant on pricing.

As we have said before, we will defend our market position vigorously from competitors should they attempt to use price as their only point of differentiation. Lastly and most importantly, we expect to continue to meaningfully outperform the markets we serve.

Looking more specifically at our company, we are very excited by the many opportunities to enhance our already strong platform, including the introduction holistic lighting solutions that for example connect smart lighting to smartphones for retailers as well as our growing electronic component capabilities.

As we have noted in our last several conference calls, while our strategy is to drive profitable growth remain essentially the same, the implementation of our integrated tiered solution strategy is really next step in the advancement of our overall growth strategy.

Additionally, we continue to see opportunities in this environment, including benefits from growing portions of the market, further expansion in underpenetrated geographies and channels and growth from the introduction of new lighting solutions. Our positive results reflect the solid execution of these strategies by our associates.

Our companywide strategy is straightforward, expand and leverage our industry-leading product and solutions portfolio, coupled with our extensive market presence in our considerable financial strength and capitalize on market growth opportunities that will provide our customers with unmatched value and our shareholders with superior returns.

Sunoptics [ph] focus and resources, we are realigning our resources and continuing to make additional investments in certain areas today, because we see great future opportunity. Through these investments, we have significantly expanded our addressable market. Our record growth supports this view.

As I have said before, we believe the lighting and lighting related industry along with the broader electrical industry will experience significant growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of things.

We continue to believe the many markets we serve as part of broader lighting and electrical industry could grow by more than 50% over the next few years providing us with significant growth potential. As the North American market leader, we are positioned well to fully participate in this exciting industry. Thank you.

With that, we will entertain any questions that you have..

[Operator Instructions] The first question is from Matt McCall from BB&T..

Thanks, good morning, guys..

Good morning..

Vern, in the past, you have been helpful in giving us an idea of what the addressable market looks like over the next three to five years.

Can you talk about how Distech and the exposure to that, I guess, what amounts to be a new tier in your tiered solution strategy? What it does to that addressable market and how it changes your outlook over that three-year to five-year period?.

Sure. Matt that is a great question.

First of all, Distech participates in the building energy management system market that is roughly, what, a $6 billion market, Ricky, growing at probably second half or 8% per annum, so they themselves are participating in a very interesting, if you will portion of the broader electrical market and showing exceptional growth as Ricky reported.

We see the opportunity to not only participate, if you will, in that broader electrical market, but to see the convergence of our key customers sets to bring unique capabilities that as we said can provide sort of end-to-end type energy management occupant comfort, visual environment, so we see the opportunity to actually be accretive to the overall market growth by bringing these two businesses together and again it's a global business.

They have a global shareholder platform, so just working through the mechanics of closing the transaction.

Again, our guess is that completed sometime before the end of our fiscal year, so we are not really giving, if you will, additional earnings guidance for 2015 until the transaction is complete, but we are very bullish about the combination of the two business..

Okay. Perfect. Thank you. Then I guess my second question, another strong contribution margin this quarter. The comps seemed to get a lot easier if I look at my model correctly in the back of last year, especially in Q3.

Is there anything we need to keep in mind that would make us not assume that the incremental is thus stronger than what you have been running in the back half of this year?.

Let me think about your comment. You said the comps get easier. Let me think about that. We grow by double digits for the last eight quarters in a row..

I am sorry. Let me clarify, Vern. The incremental margin comps, so in the first half of last year according to my model, you did about a 20% incremental margin of 17%.

Back half it goes to 9% and 14%, so you have been running 30% on those, what amount to be tougher comps on the incremental side, with your incrementals getting easier, should your variable margin thus increase from the 30% range or is there something else to keep in mind?.

Matt, I am just giving you a little bit of a hard time. .

That is okay..

Our variable contribution margins in the second half of last year were impacted by the increase in incentive compensation.

This year we are performing at a very high level, so the incentive compensation should be at or slightly above where it was last year, so therefore it should have a de minimis impact, if you will, on the contribution rates that we will experience this year, which we would expect to be higher than what they were last year.

Again, through the first half, our variable contribution margin rate has been very robust.

When you think about your models, we are investing in our business, we are investing in people, skill sets and technology, so we continue to be more comfortable with a variable contribution margin that is kind of mid to upper 20s, but again we are trying to deliver nickel and every dime we can to the bottom-line for our shareholders.

I am very, very pleased with the teams drive around productivity not just in terms of our supply chain, but throughout our organization and you saw the benefit of that this quarter. Our gross profit margin was up by 210 basis points over the year ago period.

While we continue to invest in people and skills and capabilities, to really pursue our tiered solution strategy, particularly tiers, two, three and four, which we think provide great growth opportunities over the next decade..

Perfect. Thank you, Vern..

The next question is from Christopher Glynn from Oppenheimer..

Thanks, good morning everybody..

Good morning..

Just wondering if you could provide an update on how the market for Lumicast seems to be developing?.

Sure. As people would recall, Lumicast is our visual internal light system for both retailers and other spaces, so visual light guide system. That capability and customer response to it continues to be very favorable.

We are past certain test data sites with certain customers and we are now moving to a broader platform and broader capability, so we are very excited about what its future can mean, and we will provide more detail on that as those opportunities continue to rollout, but we think that there will be a contributory part of our growth rates on a go forward basis..

Great.

As you do lots of different things to further lighting's role in Internet of things and your tiered solutions and if we take the Sensity partnership, conceptually, could we go into a little bit more detail how that fills in gaps around, say, what a Distech and Lumicast get you?.

Sure. I think, Sensity, again, the strategic partnership there is a great opportunity for both Acuity and Sensity to combine their disparate, but consolidated skills to bring great value to cities, to people that operate large malls.

Their capability coupled with our luminaires and our control systems combined will allow us to provide a great deal of incremental opportunities for the end-user.

If you think about President Obama came out and has an initiative, I believe, Ricky it is $1.5 million street lights?.

Right..

To renovate those and when you think about wherever there is people, there is light, so here's an opportunity to take advantage of the electronic aspects of LED both, from Acuity and Sensity to now collect information and data that can be used for security, safety, traffic patterns, all sorts of information where this data can be collected and then manipulated through apps and provide real-time opportunities with those, so think about parking structures, think about streets and cities and traffic patterns and weather patterns and so on and so forth.

That kind of information can be collected from these types of polls, if you will, because of both, Sensity and Acuity's capability to really provide unique value..

I would just highlight Chris that Sensity is predominantly outdoor, focused on the smart city, the applications that Vern was describing Distech is obviously a much more indoor. We did have an offering and do have an offering in ROAM.

ROAM is still acceptable of technology for certain outdoor monitoring of lights, but Sensity brings a much greater bandwidth and capability to expand our participation in this move to smart city in the outdoor space..

Okay. Thank you, guys..

The next question is from Jeff Osborne from Cowen & Company..

Great. Congratulations on the strong results. I just had two questions. One, I was wondering if you could give us a sense of perspective on the attach rate of tiered solutions within the LED sales was the question one. Question two is just a bigger picture question on the Distech acquisition.

I am trying to get a sense of where the borders or boundaries stand between what Distech would be doing and say Johnson Controls and Honeywell and Schneider Electric would be doing in terms of the future of building automation just how deeply if you look out three to five years, do you want to get into that space?.

On the first question, the attachment rate of LED to our tiered solution strategy, again, overall this quarter about 43% of our revenues were LED-based luminaires.

If you think about a Tier-1 solution which is really an individual devices of some type as some functionality that expanding all the way to say Tier-3 solution, which is a holistic, fully integrated capability inside a building or the outdoor application.

The growth rate that we are seeing in kind of Tier-2 and Tier-3, to be particular is now north of 50%. Our data is not exactly precise. It is coming off a small base and most of that capability, particularly in Tier-3 would be LED-based solutions.

That is where we are integrating our controls platform into our luminaires and making a part of a holistic solution. Again, very exciting for Acuity and for our customers and we will continue to drive that capability going forward.

If you then think about again, visible light communication that we just spoke to think about the opportunity, all the Distech an opportunity of the Sensity coming together, allowing is not only to take advantage of Tier-3's solutions in terms of that capability in the marketplace and now offering it as a backbone to provide capability around the Internet of things and giving us the opportunity to generate revenues in the Tier-4 capability, so I think it is all very robust in what we are doing.

When we think about Distech, you know, Distech supports the industry in terms of building energy management components as well as overall solutions, so to a degree we would be a provider of capability to those folks.

In addition, Acuity will be offering its [ph] solution set to building owners that will attach both, lighting HVAC building management into a more holistic approach to allow these folks a more simple, more elegant solution to managing their facilities as well as the combination of these two businesses to really get after collecting information throughout the building and facilitating that information flow into the Internet of things to now provide that data back in real usable ways back to the building owner.

Think about our visible light communication capability in the retail space just as an example. That is a huge opportunity going forward.

If you tie that into the building management side, it can provide more information to the building owner, so we are very excited about not only the opportunity to support those that are in the industry today, but to create our own value proposition around key verticals and key customer sets where we think we can provide a unique value..

Great. Appreciate the detail. Thank you..

The next question is from Mike Ritzenthaler from Piper Jaffray..

Good morning.

Another question on Distech and the partnership with Sensity, I just wanted to get some additional perspective on Acuity's growing presence there and controls if there is a way to quantify where software and controls are now versus where they could be in one to two years, how accretive the margins - could those initiatives be? It does not sound like, I guess this one is a little bit more for Ricky, it does not sound like Distech will add any sort of FX complexity other than sort of the hedging program on the purchase price..

Let me attempt on your first question. Unfortunately, you are probably not going to like the answer. We have hypothesis around how controls and solutions will come together in a Tier-3 and Tier-4 opportunity and Distech and Sensity are all part of, if you will, offering that capability in Tier-3 and Tier-4 enhancing it.

For me it is a bit of a blank sheet of a paper. It is coming together. We think that the world really, they always have a first cost person thinking of an individual component, no issue.

We want to continue to really drive capability there, but more and more, and just think about in your own personal life, a phone decade ago was just a phone, because technology has advanced, because micro processing and all of that stuff has advanced. Your phone now does so many more things and it is really based on software and capability.

We believe that we will see that kind of trajectory in our space and to be able to provide customers with those types of solutions both Tier-3 is the backbone, and then providing additional capabilities that in a Tier-4 world, because that backbone is robust. To say that, today, it will be this size or that size, I think, is a bit of a challenge.

We are trying to really get our data more precise and that is why we said earlier, we are coming off a small base, our data is not exactly precise yet, but we will start to report out the kinds of growth rates that we will see in our various Tiers to help answer that question more possibly in the future..

On the FX question, Mike, yes, it actually will help us a little bit. As I mentioned, the sales of Distech into Canada is less than 10% of their total revenue. Approximately half of it into U.S., but yet they do have a pretty large presence in the Montréal area of Canada.

They also have a presence in Europe, so today we are very long the Canadian dollars as we sell into there, but do not have any production and so forth.

Now they will help to some degree balance that out as we have a bigger cost base and their base will overshadow the revenue base there, so it will provide us a little bit more of a natural hedge into Canada.

Again, not a huge impact in the whole scheme of things, but it will be slightly favorable to managing the fluctuation between the Canadian dollar and the U.S. as it provides a bit of a natural hedge..

I appreciate your answers on both of those.

I am curious about, on the investment side on investing in growth and how that manifests in the P&L over the coming 12 months or so?.

Vernon, I think you mentioned that ongoing pruning has already been partly reinvested, so that is going to continue.

Is Acuity temporarily over earning a little as costs are pruned out before investments are made and will future investments in the next couple, say, 12 months be step-wise or smooth? In terms of expectations, how should that manifest in the P&L?.

Sure. That is a great question. Two responses to it, one, the way to get at your question is really to think about our variable contribution margin rate. Through the first half, again, very favorable, due lots of things internally.

We are investing in people at a fairly aggressive rate, so you are seeing, if you will, both, investment and you are seeing our productivity improvements as well as value gain and it is manifesting itself in a variable contribution margin that is in that kind of upper 20s.

We said that we are comfortable in mid-to-upper 20s, so I think that is the way to really think about our business going forward.

Each quarter, quarter-to-quarter, you are going to have some anomalies in there, but for the most part, we think that we are on a pretty good trajectory to talk about variable contribution margins in the mid-to-upper 20% range..

Fair enough. Thank you very much..

The next question is from Ryan Merkel from William Blair..

Thanks.

You know, when you look at your recent order trends, do you see a mix towards new non-res construction? Then sort of secondly, are you still thinking that new non-res can improve in the second half of this year?.

We do believe that new non-residential construction will improve in the balance of the year and well into the next couple of years.

I think all the trends that we articulated earlier, employment, availability, absorption, just availability of credit, all of these things I think bodes very well for the new construction forecast that whether it would be Dodge or Global Insights [ph] any of these organizations, we think that there is a groundswell facts that support that longer-term contention of growth, so we do see that.

We expect to fully participate in that growth. We are very good at new construction, but I would also say we are very good at the renovation side of the world.

We have learned how to fish in that pond, and we continue to play there and play there well, so that is why I believe we can continue to outperform the growth rates of markets we serve because of our diversification into those markets, balance and the strength of our portfolio and our access to market..

Then my second question, I get the sense that large national industrial distributors are investing in lighting in a bigger way, hiring many more people, adding more products.

Are you seeing this as well? Are you adding more distributors to your network? Then, do you think this trend could help add to growth in the future?.

We are not adding more to distribution. We are investing heavily in our key strategic distributor partners to help them grow in the lighting space. We see lighting both, for new construction and renovation as a huge opportunity for them and us.

We are picking and choosing those partners to help really drive growth by capturing more share in both, new construction and renovation, so that is where we have been.

Again, another area of significant investment for us is our relationships with our key strategic partners, and yes, we are seeing them investment and we are encouraging their investment and we are working with them to new hone train their people and to understand how to sell the benefits of lighting a longer tiered solution approach..

Great. Thank you..

Thank you..

The next question is from Tim Weiss from Baird..

Hey, guys. Nice job. I guess, just to go back to the end markets, something that we have seen in some of the data that you referenced, and just anecdotally as we are starting to see an improvement in K-12s and the hospital markets.

I guess, could you talk specifically about maybe what you are seeing in quoting activity and bidding activity in those two specific end markets? Then how we should think? Could you just remind us about how important those are to Acuity from a revenue perspective?.

Sure. Those markets have really been quite soft for the last two to three years. In fact, you have seen declines in those markets. You are now starting to see improvements, so the rate of decline has stopped.

You are now starting to see a little bit of growth, and understand K-12 and hospital have obviously very different dynamics, but in the K-12 world, it is very dependent on the state governments and their budgets and tax revenues so and so forth, so it is kind of.

As employment improves, you are seeing more taxes come into the state and local municipalities, the population continues to grow, so the need for K-12 schools, whether they are existing and they need to be updated or new, is a growing opportunity.

We do well in the K-12 world, because we just have the portfolio, we have the access to market, we are very, very skilled at doing that, so it is an important market. It will contribute to our growth on a go forward basis.

Similarly for healthcare, healthcare I think much of that industry and you know more about this than I will, has been in a kind of a status quo pattern trying to understand what does Obamacare mean and so and so forth. I believe that has the demographics of our population continue to evolve.

You just need more physical capacity to be able to handle the aging population. Again, we have made investments in our past, healthcare lighting for example to have and in patient room. We do very well in hospitals. I do not know the exact percentage of what hospitals represent to the whole market. We have that data.

I just do not have it off the top of my head. It too was an important part of our growth on a go forward basis..

That is helpful, yes, because really that has been a piece of the non-res market that has been very sluggish, so it is good to hear that that is starting to turn.

Then I guess a clarification, you called out that the 1% to 2% impact to shipments from weather and port, I just want to clarify that shipment, so really have you seen an impact? Has that helped? Have you seen that kind of reverse in March as some of that has kind of normalized I guess?.

From a weather perspective, unfortunately, I hate to use the analogy, but it is like pushing snow. You just move aside and go.

Just kind of put down, it is rare that you recapture that sale to a very small degree and certain projects you may, but if you are person living in an area that was impacted by weather, let's call it the New England area and you are going to doing in home improvement is simply you delayed it and then you never existed another day, so you did recapture days with revenues.

On the port side, again, the problem there is that the slowdowns have occurred, so you now trying to get your product out to your various customers set and it did have an impact on us.

It had an impacted in two areas, one in shipments, but also we incurred the fair bit of expediting cost to help meet our customers' demands in some of these areas, so here is almost the force majeure kind of situation and yet we are experiencing incremental cost.

We have spent a lot of time trying to quantify what that was, but the 1% to 2% in top-line that is a reasonable estimate for the impact, but no. I do not think you capture that back.

If you recall last year second quarter, we had similarly difficult weather conditions and it was our expectation that we would see the uptick for that in the third quarter and yet we do not believe that we did, so we are not expecting that to happen here..

Great. I appreciate the color, guys. Thanks..

The next question is from Jed Dorsheimer from Canaccord Genuity..

Hi. Thanks for taking my question.

Just one, Vern, I guess if we take a look at the tiered solution and sort of where you are going with or what seems to be the direction with the recent acquisitions most notably Distech, from a controls perspective in the total solution, and we look at that percentage of sort of a Tier-3 as a percentage of your total sales, am I looking at this wrong that it seems very similar to where we were probably four years ago with respect to LED as a percentage of your sales and yet it would seem that the competitive landscape for a tiered or a total, including control solution or a value-added solution seems to be more favorable for you than what you faced from an LED perspective versus traditional lighting? Am I missing something there or would you agree or what would you note are the differences?.

Sure. First of all, we look forward to Distech becoming part of the family, but that is still a little ways off. We hope to complete it again before the end of our fiscal, to really take advantage that, but Distech and our strategy around say Tier-3 or a holistic solutions approach to a building owner, is we think will be very powerful.

Again, as technology comes in, as controls become more and more embedded into the luminaire as software becomes more of a facilitator how people will use their space, I think that your analogy is right, so we are betting and investing, maybe not betting, but investing heavily to deliver a comprehensive Tier-2, Tier-3 and then that will enable a Tier-4 opportunity on a go forward basis.

I mean, I do not know what the percentage could be, but it is going to be significant, because again people will want to take advantage of a holistic system and will be less enamored about having just a single device that may not tie well into the overall, if you will, building energy management, lighting environment-type system, so our feeling strongly is that we will continue to see proliferation and really demand from the industry around these types of solutions, particularly in key verticals like office buildings and healthcare facilities and universities and retail spaces.

It is just very excited, but we are in the early innings of all this..

One comment though I would may Jed, it is while I agree with Vern, that there is a lot of similarities to the LED transformation and all, one difference is Distech and HVAC is the channels, the lighting and all was as we moved LED was a similar channel.

There will be a need to manage and reconcile the HVAC, the controls that Distech have tended to go through a different channel than the lighting.

That is blurring emerging together as well as clearly their channel or building controls or including lighting controls and our lighting control channel partners are getting into building, so that is coming together but I would just note a little bit of a difference in this move versus the transformation to LED..

Ricky, that is a great point, because both of those channels and those channel partners will continue to expand their capabilities and have great growth. It will be around certain customers' sets that you will see this combinations and this capability that will occur first, but we think that this is a migration.

This is not something that is going to happen immediately overnight, but I do believe that both, Distech's channel partners as well as Acuity's channel partners will continue to experience strong growth in Tier-2 and Tier-3 whether the combination of the value proposition, it will be how that customer wants to be served I think drives that, but we see growth continuing in both channels and fairly aggressive growth..

Great. That is helpful. That is all for me. Thanks, guys..

Thanks, Jed..

The next question is from Rich Kwas from Wells Fargo Securities.

Hi. Good morning. Just a question back on the incremental margin, as we think about the back half of the year, I know this was asked earlier, but if the $11 million is going to be the number that is net that is a little bit better than I would have expected.

I would have thought there have been a little more reinvestment, so Vern I am getting a sense that you are pretty comfortable with the mid-to-high 20s incremental, but it sounds like sensibly [ph] that could be end up being conservative.

Am I off base with my thinking?.

Well, again, we do not give forecast. I would refer us all back to sort of that mid-to-upper 20s, we work hard every day to drive higher incremental margins, but we are investing in our business I mean to really capture the opportunity of Tier-3 and Tier-4, we are adding skills sets and capabilities to our business.

Yes, the question earlier, we have made decisions, streamline actions, to say we are going to disinvest here and we are going to reinvest over here that process is going on, went on in the first quarter, went on in the second quarter and we saw with our variable contribution margins are we expected to continue to go on, but we are looking at every opportunity to drive our incremental margins as best we can.

As I said, there is just look at one quarter, but I think as we think about the whole year that mid-to-upper 20s is a good number and it reflects investment back in the business, hopefully and hope is not a strategy, but our strategy is to really start to see improvements in our incremental margins as we get into '16 and '17, because these investments in the human capital side of our business start to pay off in terms of solutions Tier-2, Tier-3, Tier-4 to our customers that are now paying for, if you will, those investments and giving us the return.

That return should be in the form of higher incremental margins within the out years of it, not in terms of 2015..

Okay. Thanks. Then second question on Distech, just two separate questions. They are somewhat intertwined.

Investment, I know you have not closed a deal, but do you envision that you will have to make meaningful investments in educating the agent and distribution partner network that you have as well as the acquisitions, other partners in terms of their distribution, in terms of educating them on the holistic offering that you guys will be able to deliver going forward.

How does that end up working in terms from an investment standpoint? Then second with the meaningful presence in Europe, does this potentially give you a platform to expand your business a lot more meaningfully looking out 5 years, 7 years, 10 years in the European market?.

Sure. If you look at Acuity's current access to, say, the commercial industrial market, our agency network which is the best of the best, the opportunities for us to continue to drive growth and innovation around Tier-3 approach, we are going to continue down the path that we are on right now.

Similarly, Distech Systems integrator partners, where they have robust connectivity there, what we are going to do is continue to invest in those channels, invest in the education so that they can bring value to their customers.

We think that there will be some overlap where locally folks can work together, but we still have an awful lot of work to do with those channel partners to figure out what is the best and most effective value proposition for the customer who can deliver that, but to be clear, it is going to be an accretive situation.

Both channels will continue to grow because of what they do and how they are doing it and the opportunity to work together to provide a differentiated value proposition is our goal, but we have to get these folks -- other and that is why we are hopeful to close this transaction and get these people working together to figure out what is the best most effective way to do that we have hypotheses around that but we are not really ready to say here's is exactly what we are doing with that until we get those channel partners together..

Okay.

Then in Europe, your thoughts on the ability to expand in Europe?.

Yes. As I mentioned about a third of their revenues are in Europe they have a presence in Lyon, France. That certainly is something we can build on we do have a presence as where we have an operation in the U.K. and one in Spain, and I think there we do see opportunities.

As Vern mentioned earlier, Distech does have a global offering that meets the codes in the European Union as well as around other parts of the world Middle East, Asia and so forth and we have some of that so we will be in a good position I think as you pointed out to be patient it will be over a multiple years, but an opportunity to enhance our capabilities in Europe..

Okay. Thank you..

The last question is from Sven Eenmaa from Stifel..

Yes. Hi. Thanks for taking my questions.

First, I wanted to ask in terms of, if you think about Acuity's M&A and acquisition activity over the next 12 months or so, what are the key areas of focus there?.

Ricky, do you want to address?.

Sure. I would put it in several buckets. First is technology.

You have certainly seen us continue to invest in that and again it could be in acquisitions or it can be in alliances in certain type of a relationships as we are doing with Sensity, so technology is an area to build out to support this tiered solution having gap fillers of tuck-in bolt-on type of acquisitions both in controls as well as in the luminaire area, will continue to be a focus we have done a quite a number of those and I think it is likely to see us continue to do that.

Then thirdly would be geographic expansion and it would be in that order less of a priority, but if the right opportunities came up whether it is in Europe or in other parts of the world, we would certainly look to expand geographic or market presence and other way, so I would put it in those orders of priority..

Got it. The last question, I just wanted to clarify regarding the institutional markets.

Are you across state digital, education, healthcare, are you seeing increased quoting activity there or are you actually seeing increased revenues currently?.

Ricky?.

More on the quoting side, the education season is coming upon us. They tend to do much more of their actual shipping and building in the summer months, particularly K-12.

At this stage, you would expect it to be more quoting and last in the shipping area and I would say healthcare is more this stage, projects they have got architects involved doing design work and getting quotes, but several of those projects have not been released to orders yet.

I think, we are seeing some pickup in the shipments in the healthcare, but it is more in the order rate..

Got it. Thank you very much..

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

Thank you for your time this morning. We strongly believe, we are focusing on the right objectives, deploying the proper strategies and driving the organizations 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..

That concludes today's conference. Please disconnect at this time..