2007 was a seminal year for Acuity Brands. We delivered record financial results for the second year in a row while investing considerable resources to bring greater strategic clarity and tactical focus to the organization. These results reflect crisp execution, by our 10,000 associates world-wide, of key initiatives driving better customer service, productivity improvements, and our culture of continuous improvement as we strive for excellence in everything we do for key stakeholders. Importantly, we announced in July our intent to spin off our specialty products business to shareholders. This action lays the foundation to further enhance shareholder value by creating two more-focused organizations, each with the opportunity to accelerate and more effectively pursue its own growth strategy. Our considerable achievements and successes in 2007 served to further strengthen the Company and enhance our ability to achieve consistently our long-term profitable growth objectives.

2007 Results

In 2007, Acuity Brands once again delivered excellent results, exceeding all our long-term financial targets. The following are some of our key financial highlights:

• Net sales grew 6% to over $2.5 billion;
• Net income increased 39% to $148 million;
• Diluted earnings per share rose 44% to $3.37;
• Cash flow from operations increased 55% to $241 million;
• Operating working capital as a percentage of net sales improved to 13.2% from 14.4%, best among our peers;
• Return on shareholders’ equity climbed to a record 24%.

Acuity Brands ended the fiscal year in its strongest financial position ever with nearly $223 million in cash, an increase of $134 million since the beginning of the year. This is even more remarkable, considering we invested $80 million in 2007 in capital equipment and on the acquisition of Mark Architectural Lighting to strengthen further our existing businesses and to accelerate future growth opportunities. Additionally, the Company paid over $26 million in dividends to shareholders while repurchasing over one million shares of the Company’s common stock.

2007 Achievements

Looking beyond our record financial results, we once again made considerable strides to enhance our company and bolster its long-term growth prospects. We continued to invest significant resources in 2007 to understand more deeply the needs of our customers, accelerate the introduction of industry-leading products, and train and develop our associates to become a faster, leaner, more team-oriented company. The return from these investments not only produced record-setting results for our shareholders in 2007, it better positioned and further strengthened Acuity Brands to deliver superior value for our customers and greater opportunities for our associates in the future. Last year, I spoke of our actions to enhance, refine, and better focus our plans and processes as measured by three mission-critical areas we refer to as the 3 C’s:

• Providing unparalleled customer service;
• Pursuing world-class cost efficiency by eliminating non-value added activities and transactional costs; and
• Creating a culture that demands excellence in everything we do through continuous improvement.

We made excellent progress throughout the company in our efforts to differentiate ourselves as measured by the 3 C’s. The following are a few highlights of our progress in each of these areas:

Customers: For our customers, our objective is to exceed their expectations by delivering products and services that are on time and complete, each and every time, without error or defect, and doing so faster and more effectively than our competitors. We measure our performance (both internally as well as to customer requirements from their feedback) in four critical areas of quality, delivery, cost, and innovation. We participated aggressively in the expansion of the non-residential lighting market in North America in our fiscal 2007, where we believe the market grew in the mid-single digits on an inflation-adjusted basis. And, we dramatically improved our profitability in a competitive market by distinguishing our performance in these four customer-centric measures, including our much improved service capabilities and the desirability of our energy-efficient and innovative new products.

Our profitable growth strategy is built on two key objectives: accelerate the introduction of innovative and energy-efficient products and expand our market presence. In 2007, we again invested significant resources to expand our industry-leading product offering as well as our access to market. For example, sales of our innovative, energy-efficient RT5™ volumetric recessed lighting fixture continued to grow significantly, making it the most successful product launch in our long history. We saw immediate market acceptance for our Simply5™ Controls, a system introduced this year which adds intelligence to highly efficient lighting fixtures, and manages components to optimize them for energy usage. Additionally, we won industry awards in 2007 for Hydrel’s new 4426 LED underwater luminaire fixture, and for ROAM™, a wireless networking technology designed to save utilities and municipalities energy and operating costs by remotely monitoring and controlling lighting systems. At Acuity Brands Lighting (“ABL”), we continue to lead the industry in product innovation, meeting the design and performance requirements of the most demanding specifier, while being recognized as the most prolific provider of mass-appeal fixtures to a broad array of customers.

In addition to the robust pace of new product introductions, we invested heavily to extend our market presence in 2007. In May, we opened our Manhattan sales office and Center for Light+Space in an effort to expand ABL’s presence within New York’s metropolitan area, a sizable market of great opportunity, and in nationwide and worldwide business that is specified from New York. Additionally, Holophane relocated and expanded its Light and Vision training center in Ohio. These two new facilities, coupled with the McClung Lighting Center in Conyers, Georgia, serve as “centers of excellence” for the training and development of our associates. They also serve as a learning and creative opportunity for our customers and the lighting specification community on lighting design and the application of energy-efficient lighting, thus advancing the industry as a whole. In 2007, we had more than 10,000 associates, agents, and industry professionals participate in training seminars at our facilities. Additionally, the acquisition of Mark Architectural Lighting, completed in July, represents an important strategic move to expand our portfolio of specialty lighting products while significantly increasing our presence within the design and specification market. These investments, which have been met with great customer enthusiasm, are expected to continue to fuel our sales growth in 2008 and beyond.

Cost: Our objective is to create and maintain a cost structure – as measured by world-class standards – that affords us a sustainable competitive advantage in our served markets. In 2007, we once again made considerable progress at creating a leaner and more efficient and effective organization. At ABL, we invested over $4 million in “continuous improvement programs,” involving more than 600 events and most of our associates. The impact of these programs is evident in key areas such as customer service, asset utilization, productivity, cycle times, and margin expansion. For example, actions taken to streamline our supply chain processes to better meet customer needs has resulted in our “late” backlog dropping to record lows, while our operating working capital as a percentage of net sales declined further to only 13.2% – the best in the industry. Additionally, we made significant strides in improving productivity, which significantly enhanced our operating profit margins in 2007. We have demonstrated that our focus and investment in these areas have significantly benefited our key stakeholders, and we continue to pursue opportunities aggressively to enhance customer service, eliminate non-value added activities, and introduce new products and services.

Culture: We are driven by the desire to deliver the very best for our key stakeholders: customers, associates, and shareholders. We are relentless in our pursuit of excellence in everything we do through a culture of “continuous improvement” as measured by the 3 C’s and we continue to make great progress. In 2007, we once again invested considerable resources to advance the integration of our holistic business system, which is based on “lean” manufacturing principles and is designed to align the interests of each stakeholder, from the board room to the shop floor. This business system incorporates key performance metrics that measure success against strategy, and it institutes discipline and rigor, fostering greater collaboration and team work. Much of our success in delivering strong operational improvements – including enhanced delivery performance to our customers, greater productivity, and better asset utilization – is due to the inculcation of this system into our daily work flow and our culture. We expect this momentum to carry into 2008.

Spin-Off of Zep Inc.

A key objective in 2007 was to create greater strategic clarity at Acuity Brands by narrowing the focus of the organization in markets where we have clear competitive advantages, and to allocate more effectively our considerable resources to capitalize fully on opportunities within those markets. With that goal in mind, we announced in July plans to separate the lighting and specialty chemical businesses by spinning off Acuity Specialty Products into its own independent public company. We believe the spin-off will enhance long-term shareholder value by allowing each business to aggressively pursue and execute its individual profitable growth strategies. By separating, each business will be better able to tailor its investment strategy to its individual cash flows and capital structure, while creating tighter alignment between the performance of each business and the expectations of its stockholders. The spin-off, which was completed October 31, will allow stockholders to value separately the growth prospects, profitability, and cash flow characteristics of these two industry-leading companies. The new company, named Zep Inc., trades as a separate standalone organization on the New York Stock Exchange under the ticker symbol “ZEP”.

2008 and Beyond

For the past few years, we have maintained an intense focus on internal growth. Our customers today enjoy the largest, most effective product offering in the industry, plus superior service. Our associates continue to benefit from additional career and personal development opportunities afforded by our profitable growth performance. And for our shareholders, we have delivered record results, including substantial improvements in margins, top-line growth, and cash flow, as well as in upper-quartile returns, both in terms of profitability growth and share-price gains. These company-wide improvements have built a strong foundation for Acuity Brands to pursue future profitable growth not only organically, but through strategic acquisitions and alliances as well.

As we look forward to 2008 for Acuity Brands, with the lighting company as our sole business, we see a bright long-term future. In the short term, we may experience challenges driven mostly by economic uncertainties triggered by the late-summer turmoil in the global credit markets, though no one can predict the precise impact these events may have on demand for non-residential construction. Our optimism regarding the longer term has its foundation in our increasing ability to focus on those activities that offer the greatest value to our key stakeholders. For our customers, we will continue to provide a superior value proposition through the creation of new and innovative products and services with excellent delivery and quality. For our associates, we will continue to invest in training and development, particularly as we continue to implement our holistic business system and advance our culture of excellence through the maniacal pursuit of continuous improvement. For our shareholders, we will continue to drive programs to sustain our upper-quartile financial performance, including those that enhance the customer experience and accelerate the engagement of our associates. We expect the result of our efforts and focus will be to consistently achieve profitable growth dynamics well beyond the norms of our competitors.

While we are pleased with our performance in 2007, we will not rest on these results. Aggressively, we will seek out and seize opportunities that avail themselves during any market environment. We continue to be enthusiastic about the long-term prospects of the non-residential construction market, as well as the expanding retrofit lighting market. Both hold opportunities to provide significant value to our customers through new and innovative products and services that deliver a better lighting experience and that significantly reduce energy costs. This is positive for the bottom line as well as for the environment. I am very confident and optimistic that as we migrate our culture to one that is more team-oriented and cross-functional through further implementation of our holistic business process, we will continue to improve the performance of our Company as the actions of our associates become more focused around delighting our customers and more effectively utilizing our resources.

Conclusion

In closing, I would like to acknowledge the strong contribution of Jay M. Davis, who did not stand for reelection to our Board of Directors in 2007, and Earnest W. Deavenport, Jr., who joined the Board of Directors of Zep Inc. in connection with the spin-off. Both Jay and Earnie were tireless contributors to the company and I thank them for their wise counsel and strong support of the Board, associates of Acuity Brands, and me. The associates of Zep Inc. are fortunate to have a director of Earnie’s caliber providing a guiding hand in their new world. Also, I thank the associates of Acuity Specialty Products for their contribution to the success of Acuity Brands and wish them well as they embark on their new journey as Zep Inc. And to my friend, John K. Morgan, a 30-year veteran of Acuity Brands and its predecessor companies, who took the helm as Chairman, President and CEO of Zep Inc., my sincerest thanks for your strong leadership and significant contribution to Acuity Brands and our team. I know that John will be a strong mentor to and a great leader for the associates of Zep Inc.

Lastly, our objective at Acuity Brands is to excel in providing our customers with superior value, our associates with great opportunities, and our shareholders with consistent upper-quartile performance. We will only accomplish this through the unbridled commitment and focus of our associates and leaders to be without equal in the industry. On behalf of the Board of Directors, I thank all of our associates for their continued contributions, dedication, and passion for the vision we share. And to all stakeholders, thank you for your support. Our future is bright.

Vernon J. Nagel
Chairman, President, and Chief Executive Officer