Dan Smith - IR Vern Nagel - Chairman, President and CEO Ricky Reece - EVP & CFO.

Jed Dorsheimer - Canaccord Genuity Tim Weiss - Baird Brian Lee - Goldman Sachs Kathryn Thompson - Thompson Research Group Sven Eenmaa - Stifel Ryan Merkel - William Blair & Company Jeff Osborne - Cowen & Company.

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 the call, we had some minor adjustments to operating profit in both periods as well as a pre tax benefit of $10.5 million or $0.15 diluted per share in the third quarter of 2015 resulting from a net gain associated with financial instruments that hedge the foreign currency exposure related to the previously announced acquisition of Canadian based Distech Controls.

I find it helpful to add back these adjustments to both quarter results as well as exclude the net gain in the current quarter to make the quarter’s results comparable. Adjusted operating profit for the third quarter of 2015 was $100.9 million compared with adjusted operating profit of $71.8 million in the year ago period, an increase of almost 41%.

Adjusted operating profit margin for this quarter was a robust 14.8% up 290 basis points from the adjusted margin reported in the year ago period. Adjusted diluted earnings per share were a quarterly record of $1.37 compared with adjusted diluted EPS of a $1 in the year ago period up 37%, 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 $650 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 on further analysis. While net sales for the quarter grew over 13% compared with a year ago, we estimate our sales volume was up more than 14%. This growth was partially offset by the impact of foreign currency primarily the Canadian Dollar.

The impact of price mix was not significant this quarter. While it is not possible to precisely determine the separate impact of price and mix changes, we believe the ongoing decline in certain LED component prices this quarter was offset by a more favorable mix of product sold.

The increase in net sales was broadbased along most product lines, channels, geographies and verticals.

Our sales growth this quarter was primarily due to our continued focus on projects from new construction and renovation in both the nonresidential and residential markets as well as continued emphasis on selling higher value added lighting solutions, especially LED-based luminaires where sales of our LED products grew by 55% 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 46% of our total sales, which as you know include non-fixture related lighting products.

We believe our growth rate 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.

Looking at market conditions for the third quarter, we believe that North American lighting market was up mid to high single digits during the quarter. This was in contrast with the growth rates of our net sales in North America, which was up more than 14%.

Lastly, we believe our channel, product and vertical 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 third quarter operating profit was a quarterly record of $100.9 million, a robust 14.8% of net sales up 290 basis points from the adjusted margin reported in the year ago period.

Our gross profit margin for the quarter was a record 43.2%, up 290 basis points compared with the year-ago period.

The expansion of our gross profit margin was primarily due to the benefits of higher net sales, productivity improvements and lower material costs, partially offset by unfavorable changes in foreign currency exchange rates primarily for the Canadian Dollar.

Next, adjusted total selling, distribution and administrative expenses were up $23.1 million or a little more than 13% similar to the increase in net sales. Adjusted SDA expenses as a percentage of net sales this quarter were essentially flat compared with the prior at 28.5%.

The increase in adjusted SDA expense was primarily due to higher commission expense to support the increase in net sales and higher employee related cost, including incentive compensation and continued investments necessary to drive our tiered solution strategy.

These higher cost were partially offset by past streamlining efforts and productivity gains. This next point is very important. Another way to view just how robust our third quarter results were is to examine our variable contribution margin for adjusted operating profit and the increase in net sales.

In doing so, one can see our adjusted variable contribution margin and the incremental sales of $80 million was over 36%. All in all we had another great quarter. On a strategic front, we continue to make great strides setting the stage for what we believe will be strong profitability growth for the balance of 2015 and beyond.

From a product and lighting 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 in 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 digital lighting solutions portfolio, including controls. As I mentioned earlier, our LED sales for the third quarter grew 55% compared with the year ago period, far outpacing the growth rates of our largest competitors.

We continue to invest in and expand our capabilities to drive our integrated tiered solution strategy.

The purpose of this strategy is to lever 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 their indoor and outdoor needs and everything in between, all with the promise and security from Acuity that these solutions are in smart and simple, both to install and to use.

This is a compelling and powerful value proposition for our customers. While sales information for our tiered solutions is still in precise and expanding off a small base, we believe our sales were up significantly again on a year-over-year basis in these key 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 now become the majority portion of our fixture sales.

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

Because Acuity truly understands how best to fully utilize the unique capabilities of digital lighting 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 solution strategy, Acuity Brands is a leader in the evolution to smart buildings and smart cities.

We're 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're delivering profitable growth and strong financial returns for our shareholders while making important investments, including acquisitions and strategic alliances to broaden our capabilities to serve customers.

As we noted last quarter, we expect the pending acquisition of Distech Controls as well as the strategic partnership with Sensity Systems to help drive our tiered solution strategy, particularly as it relates to our holistic approach towards the advancements of smart buildings and smart cities.

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.

We expect the combination of Acuity with our broad based industry-leading solid-state lighting portfolio, innovative control technologies and integrated digital solutions and Distech to contribute to our tiered solution strategy, by offering true end-to-end optimization of all aspects of the building including enhanced occupant experience, quality visual environment, seamless operational energy efficiency and operational cost reductions and increased digital functionality due to a unique capability to collect vast amounts of data to better enable the internet of things for building owners.

Distech, while relatively small today with 2014 annual sales of approximately CA$70 million, would enhance our tiered solution strategy going forward as we enable smart buildings.

As Ricky will explain later, we now expect this transaction, which is subject to Distech shareholder approval as well as other customary and closing conditions to close in September. We will have more to say about this once the transaction is complete.

We expect the strategic opportunities such as these, coupled with our internal efforts to 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 of over more than 7,000 associates who are maniacally focused on serving, solving and supporting the needs of our customers. I would like to now turn the call over to Ricky before I make a few comments regarding our focus for the balance of 2015.

Ricky?.

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 associated with the financial instruments to hedge the foreign currency exposure related to the pending acquisition or Canadian based Distech controls.

Adjusted results for the third quarter of last year excluded the benefit of a pre-tax $0.8 million or $0.01 per diluted EPS recovery related to a fiscal 2013 loss resulting from a fraud perpetrated by a former freight service provider. In our earnings release and our Form 10-Q, we provide a detailed reconciliation of non-GAAP measures.

The effective tax rate for the third quarter was 36% compared with 32.2% in the third quarter of last year. The prior year effective tax rate benefited from favorable adjustments to certain income tax reserves, which did not recur in the current year.

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.

Cash flow generated from operations for the first nine months of fiscal year 2015 was an impressive $158.2 million, which is a $29.4 million increase over the prior year. For the nine months ended May 31, 2015, we spend $42.3 million on capital expenditures compared with $24.8 million in the prior year.

We currently expect to spend approximately 2.5% of revenues in capital expenditures in fiscal year 2015.

This expected uptick in capital expenditures compared with recent prior years is primarily due to investments necessary to support our growth, including the expansion in our production capacity to support our increased volume along with the build-out of our innovation and technology center in Metro Atlanta as well as expenditures related to certain projects that were delayed from the prior fiscal year.

At May 31, 2015, we had a cash and cash equivalents balance of $652 million, an increase of $100 million since August 31, 2014. Our total debt was $354 million. Consequently, our cash exceeded debt at the end of the fiscal quarter. At May 31, 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 cash generation to enhance shareholder value. I will conclude with some additional comments on the pending Distech acquisition.

On March 9, 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 US$255 million, which we intend to fund using cash on hand. Because of significant volatility in the U.S.

and Canadian dollar exchange rates over the last year or so, we thought it was prudent to enter into a foreign currency contract in an effort to mitigate nearly all of the foreign currency exposures 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, a net pre-tax gain on these contracts totaling $10.5 million or $0.15 per diluted share was recognized in net miscellaneous income for the third quarter of fiscal 2015.

On June 30, 2015, the company entered into another foreign currency forward contract. As we explained further in the Form 10-Q, which was filed earlier today, Distech has identified certain prior transactions involving shipments of standard commercial building control products that may constitute violations of U.S.

and Canadian sanctions on export regulations. The shareholders of Distech have jointly agreed to indemnify Acuity for damages in respect of potential violations or any inaccuracies or breach of the representations made by Distech to Acuity related to this matter up to a specified aggregated amount.

These indemnity obligations will be supported by an escrow account containing proceeds from the transaction equal to the specified aggregate amount. The company currently believes that this indemnity will be sufficient to cover any damages related to potential violations and any related cost and expenses and any associated remedial actions.

The company does not expect this matter to have a material adverse effect on the business, financial condition, cash flow or results of operation of the company.

The company delayed the closing of this transaction while we reviewed Distech's investigation of these issues and their potential impact and while we address the associated identification that I just mentioned.

The closing of this proposed transaction is subject to approval by certain Distech shareholders and other closing conditions, which we expect to successfully conclude. We remain excited about the opportunity presented by this transaction. We expect to complete the acquisition of Distech in September 2015.

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 remainder 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 this transaction. Thank you and I’ll now turn the call back to you, Vern..

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 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 our fourth quarter as some commodity cost have waned while others continue to rise.

Further we expect employee related cost to continue to increase as we invest in people skills necessary to execute our teared solution strategy, 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.

To help offset these higher costs, we continue to be vigilant in our pricing posture as well as furthering our efforts to drive productivity improvements to help deliver continued favorable variable contribution margin and incrementally higher sales.

Another observation, while our gross profit margin is influenced by a number of factors including sales volume, price, product and sales channel mix as well as innovation, we expect our annual growth profit margin to improve over time as volumes grow, 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 typical gains and manufacturing efficiencies.

Our gross profit margin improvement in the third quarter was a good example of our potential, but we prefer to look at our marginal improvement over 12-month periods to remove quarterly anomalies to discern proper trends. You should do the same. It is a positive picture.

Additionally, we continue -- 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 of 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 the next step in the evolution of our overall growth strategy.

This includes expected benefits from the pending acquisition of Distech, which we believe will menaingfull expand our addressable market as well as add much greater opportunities to offer customers even more broad based holistic solutions to optimize the performance of their buildings.

Our company-wide strategy is straightforward, expanding leverage of our industry-leading product and solutions portfolio; coupled with the existence -- our existence, excuse me, market presence and our considerable financial strength to capitalize on market growth opportunities that will provide our customers with unmatched value and our shareholders with superior returns.

This all takes focus and resources. We are aligning our resources and continuing to make additional investments in certain areas today, because we see great opportunity for future profitable growth. 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 solutions industry along with the broader electrical industry, including the market for building management systems will experience significant growth over the next decade, particularly as energy and environmental concerns continue to 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 the broader lighting 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 to fully participate in this exciting industry. Thank you.

And with that, we will entertain any questions that you have..

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..

Thank you for your participation. That does conclude today's conference. Your may disconnect at this time..