Apogee Enterprises Inc (APOG) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises fourth quarter conference call.

At this time, all participants are in a listen-only mode. Later, we will conduce a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Ann Jackson. Please go ahead.

Thanks, . Good morning, and welcome to the Apogee Enterprises fourth quarter and full-year conference call on Thursday, April 4th. This call is being Webcast live over the Internet from Apogee's corporate Web site, www.apog.com, and a replay of the call will be available on the investor relations section of our site.

With us on the line today are Russ Huffer, Chairman, President, and CEO; and Mike Clauer, CFO and Executive Vice President. Their remarks will focus on the fourth quarter and fiscal year 2002 results and the outlook for fiscal 2003.

Before we begin, I'd like to remind all of you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's current expectations or beliefs. There can be no assurances given that Harmon AutoGlass will effectively leverage its operational improvements to recapture market share and increase sales. There can be no assurances that PPG Auto Glass, Apogee's automotive replacement glass distribution joint venture with PPG Industries, will achieve favorable long-term operating results. In addition, there can be no assurances that Apogee's architectural segment, which serves high-end markets with value added products will not be further impacted by the slowed economy. There also can be no assurances that there will not be additional erosion in large scale optical segment revenues due to the severe downturn in the PC industry and a slowdown in retail markets.

The company cautions readers that actual future results could differ materially from those described in the forward-looking statements, depending upon the outcome of certain factors, including the risks and uncertainties identified in exhibit 99 to the company's report of Form 10-K for the fiscal year ended March 3rd, 2001. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor Statement as of the date of this call, and may continue to be used while this call remains on the Apogee Web site.

FYI, there was an SEC 10-K filing earlier this week attributed to Apogee. It was actually for Apogee Technology. The Apogee Enterprises 10-K will be filed by mid- May.

Russ will now give you a brief overview of fourth quarter and full year results, and then Mike will cover the financials. After they conclude, we'll open up the call to questions. Russ?

Thank you, Mary Ann.

Good morning, and welcome to our conference call. I'm pleased with our fiscal year 2002 results. We almost doubled earnings from continuing operations, which is evidence that we're achieving operating improvements, one of our objectives. We now have significantly improved earnings for the past two years, and recognize we must continue to grow earnings. We stated that in the short term, we are focused on growing our bottom line faster than our top line, and this is evident in the fiscal 2002 results. Our revenues were down slightly after being adjusted for the PPG Auto Glass formation.

In fiscal year 2002 specifically, we earned 91 cents per share from continuing operations, compared to 48 cents last year, for a 90-percent increase. We also made significant progress on our debt, reducing it 34 percent to 69.1 million at year end.

Turning to our Q4 performance and the fourth quarter, we were able to maintain our earnings compared to an especially strong period last year, even as our architectural segment was impacted by the slowing construction industry. Our margin improvement from 4.6 percent in last year's fourth quarter to 5.5 percent this year highlights our progress on improving operations.

The architectural segment turned in a solid performance, with revenues up eight percent and operating income flat compared to last year's Q4, the segment's highest quarter in several years. The backlog was up slightly from the third quarter to 193 million but reflects a shift from shorter to longer lead time projects, which have less predictable schedules.

The large scale optical technology segment continues to be impacted by the slow economy, with revenues down significantly from last year and an operating loss in the quarter.

Automotive segment revenues were down, impacted by reduced volume and competitive pricing. The segment had operating income of 3.1 million versus a loss last year. About half of the increase was due to asset sales and cost reductions with the other half resulting from changes made to the supply agreements related to PPG Auto Glass.

As you saw in the release, we are maintaining our guidance of $1 per share for fiscal 2003 with improvements in our markets expected in the second half. We need to see a solid turnaround in the economy, especially in commercial construction to achieve this level of earnings. Despite the economic uncertainty, we expect that our Six Sigma initiatives will continue to help us improve operations and margins this year. I'll say more about this in a moment.

Although the slowdown in construction is impacting our architectural business, we remain focused on our largest segment and the opportunities here. We anticipate that our focus on higher end, Class A office, educational, and institutional markets, our new glazing renovation initiative, and our leadership in value-added, energy efficient hurricane and protective glazing products should somewhat offset the slowdown.

We are encouraged by increased activity in this segment which should benefit us in the second half. The points below provide some confidence in this outlook. We've had strong fiscal 2003 renovation sales in the Twin Cities, our pilot market last year, and already made progress in the second group of markets we are entering this fiscal year. We've seen a modest increase in inbound orders for our architectural business after two quarters of decreases. In addition, the American Institute of Architects has shown an increase in architectural inquiries since last September, although billings have remained soft.

Our auto glass segment, which faces ongoing tough industry conditions, remains focused on making further operational improvements and leveraging our expertise and quality installations to recapture market share and increase sales. We have started to see a rebound in some of the retail markets served by our large scale optical segment, and expect to see a positive impact on our business by mid-fiscal year. We also anticipate improvement through expanded distribution for picture framing markets with a major national retailer adding additional distribution centers in the upcoming months. We are also making progress in new product penetration, particularly for higher end projection television.

Regarding our balance sheet, we plan to keep using our strong cash flow to pay down debt in fiscal 2003. As we stated before, in the shorter term, we are focused on organic growth through maximizing current operations and leveraging existing technology into new markets. One of the tools we're using to maximize existing operations and to create consistency in our earnings and improve margins is the Six Sigma business improvement process.

I'm pleased with our efforts in the startup year of the Six Sigma initiative. We achieved a total of 4.4 million in savings during fiscal 2002, including ongoing and one-time benefits. We have a strict process for measuring savings, so these are very real benefits. For fiscal 2003, we're expecting savings of $9 to $12 million. We've already identified 65 projects with estimated savings of more than nine million when they are completed during this fiscal year. I'm comfortable that we're well on our way to meeting our goal here. Operating efficiencies and the relative -- and the related savings achieved through these Six Sigma efforts will help us offset increases in wages, healthcare, and insurance costs.

Our performance in fiscal 2002 and commitment to the $1 guidance for fiscal 2003 underscore our commitment to achieving consistent earnings growth.

I'd now like to turn to CFO Mike Clauer. Mike?

Thanks, Russ.

We are pleased with our fiscal 2002 earnings from continuing operations of 91 cents per share compared with 48 cents per share the prior year. These results represent a significant improvement. Revenues decreased one percent compared to the prior year after being adjusted for the formation of the joint venture. EBITDA was up eight percent to 71.2 million in fiscal 2002. Our margin improved 180 basis points to 5.5 percent.

During the year, we reduced debt by $35.1 million, ending the year at 69.1 million. We are planning to use the cash that we generate in fiscal 2003 to pay down debt further. Our debt to total capital ratio is now at 29 percent, and we remain focused on achieving investment grade status for Apogee.

Capital expenditures were 10.5 million in fiscal 2002. Approximately five million of capital projects have been delayed into the first half of fiscal 2003. Capital expenditures were 14.8 million in the prior period -- prior year.

Shifting to Q4, in the fourth quarter, revenues were down slightly, with growth in the architectural segment offset by a decline in large-scale optical and auto glass. Despite the slowdown in the construction industry, we held the fourth quarter flat at 15 cents per share from continuing operations.

Regarding segment operating income, architectural is essentially flat compared to prior year quarter, when the segment had its highest quarter is several years, and the margins declined 60 basis points due to a change in product mix, project size, and insurance cost.

Large-scale optical was down five cents per share from last year. The segment moved from a slight profit last year to a loss as a result of the slumping PC industry, related closure of the San Diego facility earlier this year, and the soft but improving retail picture framing markets. The negative variance was offset by a gain of three cents per share on interest, taxes, the closure, and other miscellaneous items, and two cents per share contribution from the auto glass segment and PPG Auto Glass joint venture contribution.

The auto glass segment reported operating income of 3.1 million this year compared to a loss of 1.7 million last year. About half this increase was due to asset sales and cost reductions, while the other half resulted from amendments made to the supply agreements related to the PPG Auto Glass joint venture, owned 34 percent by Apogee. As we indicated previously, these amendments permanently adjusted pricing agreements for Apogee's windshield manufacturing business, resulting in higher income for the segment.

Apogee reported a loss from investment and affiliated companies of 2.8 million in the fourth quarter versus income of $200,000 in the prior year period. This decline was due to the amendments made to the supply agreement related to PPG Auto Glass, seasonality of the auto glass industry, and rationalization benefits recognized in the prior year period as a result of the joint venture formation. The decline was somewhat offset by lower costs of the joint venture, which was shut down during the third quarter. EBITDA improved to 17.1 million for the quarter, and working capital decreased to $47.8 million.

For fiscal 2003, the economic downturn and backlog shift has changed the seasonality of our business from historical trends. We are providing targeted quarterly guidance for fiscal 2003 to these changes. Please see our release issues yesterday for our complete guidance.

For the year, we anticipate that overall revenue growth will be flat to the low singe digits, with a year-on-year growth occurring in the second half. We expect the architectural segment to have a flat to low-single-digit revenue growth for the year, with second half growth dependent on improving construction industry trends. The segments' focus on complex, value-added projects results in longer lead times from project approval to production, creating the temporary softness, moving from the fourth quarter of this year into the fiscal first quarter of '03.

The large-scale optical technology segment revenues are expected to grow in the high single-digit driven by the timing of improvement in retail consumer electronics and framing markets and the success of some new product initiatives.

Automotive replacement glass segment revenues are expected to be approximately flat. Revenue growth will be dependent on improving industry conditions and our retail's ability to gain share.

We expect gross margin percentages to improve slightly, with operating efficiencies achieved largely through Six Sigma initiatives offsetting inflationary increases. At the same time, we expect increased margin pressure in the architectural and automotive segments, driven by competitive actions and soft markets. Sales, general, and administrative expenses are expected to grow slightly due to investments in marketing and information technology initiatives.

Equity in affiliates is expected to have a nominal contribution. The wholesale auto glass market served by our auto glass distribution joint venture is expected to be impacted by increasingly competitive pricing environment. The equity in affiliates contribution will be helped by the elimination of funding for the TerraSun joint venture, closed in fiscal 2002.

Capital expenditures are targeted at $20 million, primarily for repairs, maintenance, and safety projects. This figure does include the carryover from last year that I noted earlier.

We expect to reduce our debt to less than 50 million by year end 2003. We remain focused on further improving the quality of Apogee's balance sheet in order to achieve solid, investment grade status for the company.

Finally, earnings per share is expected to reach the $1 per share, with year-on-year growth anticipated to begin starting in the third quarter, when the improved economy should positively impact the company's value-added architectural and large-scale optical businesses. Our internal quarterly EPS targets are 10 cents in Q1, 35 cents in Q2, 35 cents in Q3, and 20 cents in Q4. We continue to provide evidence we are building momentum and staying focused on delivering consistent earnings growth for Apogee.

I'll turn it back to Russ at this point.

Thanks, Mike. I would like to go ahead and open it up for questions at this time.

Thank you. If you do have a question at this time, please press one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Our first question is from of U.S. Bancorp. Please go ahead, sir.

Morning, Russ, Mike, and Mary Ann. How are you doing?

Great.

Good

Good. Good. Say, I'd like to start with a question in -- kind of in each segment. In architectural, could you talk about what kind of capacity utilization rates you're currently at?

Yeah, Steve, we talked about this in the past. One of things that's happening -- it's continuing to happen is that our Six Sigma initiatives are continuing to free up additional capacities. And so it becomes -- if we're looking for growth and the need for capital, we're going to be able to grow faster and more without additional capital than we originally thought. So, for example, Viracon may be operating at, you know, say 60 to 70 percent capacity today, where they were higher than that before on the same capacity that's in place. So they really have some nice opportunities.

Wausau has found new capacities in their factories as well, and we're seeing more and more of their work, for example, go to these pre -- what they call or configured orders, where they're able to make custom windows -- custom-look windows in the traditional sense. So that's, you know, they are able to grow as well.

Harmon Inc., the other part of our architectural is really -- their capacities are people, and we've added people this past year, and we plan to add more, and they are our fastest growing segment. So I hope that answers your question about segment -- or about capacities. There really is -- I guess the answer is there's no need for a lot or significant new capital and -- to support our ongoing operations in growth of those.

jacobs. Yeah, I understand that, Russ. I'm aware of, you know, the Six Sigma.

Right.

I guess I was hoping for a more definitive number. You know, recognizing that as you roll out more Six Sigma initiatives, we're kind of looking at a -- at a, you know, a moving type of number here. But at the end of the year, if you were to look at what you're total plant capacity in architectural was versus what you actually produced, is there -- I guess what I'm looking for is a -- is a measurement of, you know, some way of identifying exactly how successful you have been in Six Sigma and, you know, how much more capacity do you have?

Right. We think that our, you know, specifically Viracon and Wausau, you probably have you're probably operating at 65 to 70 percent. So you've got significant capacity in those two businesses. Maybe $100 million ...

Yeah.

... kind of capacities left. And I think that ...

Well, Inc. -- Inc.'s, you know, with ...

Yeah, Inc. is just strictly people.

Right. Yeah, I understand that. OK. Then moving over to, you know, large-scale optical, you, you know, talked about projection TV and an improvement in the -- in the framing business based on, you know, stronger retail signals. Could you talk on what you're seeing on the -- on the privacy screen PC business?

We really have seen that -- the privacy screen business deteriorating over the past year. We finally have seen -- we think we've seen the bottom. We've actually seen an improvement in projections recently, and of course, some of that was not only the softness but working off inventories. So that -- there is a little glimmer of hope and a glimmer of a sign there in something that's been very dark for us for some time.

The real optimism in those areas are the things that we talked about in terms of converting additional distribution to value-added in the picture framing marketplace, those are -- those are real material significant new events that'll help us, especially as we get to the busy season third and -- third quarter.

On the large -- on the Viratec side, projection TV side, we now have actual purchase orders for initial deliveries, and commitments for significant ramp up as we go through the year, so we believe that that program is on its way and will impact us again -- have significant impact in the second half of the year with real things going on now through the first two quarters.

OK. And then lastly on automotive, you comment here about, you know, half the increase was due to asset sales and cost reductions. Is the other half kind of sustainable and that'll continue into this year, or a lot of those one offs also?

No, the other half is the change in the agreements. So it just reflects the way that we ...

It's sustainable.

Yeah, it is sustainable.

OK. So that'll continue though this year.

Yes.

OK. Thanks. I'll get back into the queue. Thank you.

All right.

Our next question is from of . Please go ahead.

Yes, good morning. What did you say the net debt was at the -- at the end of the period?

69.1 million.

69.1 but what -- how ...

And that's minus the cash?

No, minus the cash that we could apply against the debt, the net debt would have been about 60 million.

About 60 million. All right. And ...

Sixty million.

Yeah, 60 -- 6 - 0.

Right.

And on the dollar estimate that you -- that you've given out for next year, what would the EBIT -- what would the parallel EBITDA be on that number?

We have that.

Yeah, we have that. We're going to pull it out.

Just a moment.

74.1 million.

74.1 million. And what was the fully diluted share count at the end of the quarter?

It's 29,102,000.

Twenty-nine-one. And you gave a debt goal for the end of the year. What would the equivalent net debt be minus the cash? That goal for the end of the year?

I think it would probably be, I mean, , a lot has to do with our ability to continue to sustain our working capital initiatives, but ...

Right.

... that number would be approximately 40 million.

Forty million. So it'd be down 20 million from the 60 net debt.

Right.

Yeah. OK. And how low do you want to go on this debt? I mean, are you trying to get the debt down to zero, or ...

You know, , I mean, we actually have some, you know, our debt is variable debt, and we have some fixed rate hedges in place. I think our optimum level, short term, is about 35 million. Clearly, at some point after, you know, we feel a lot more comfortable with the turnaround that we've been effecting, I mean, we are going to be looking at opportunities again to grow Apogee.

I think, you know, I think, , that it is very important that we make sure that we have relationships, that we've identified those potential people in our industries or associated industries, and know what those opportunities are and we're working to do that. And as we do that, we will find, I think, that our debt position and our discovery process will lead us in -- to make good decisions. And that's what -- we'll make great decisions for our shareholders. We -- but it's nice to be in that position after having to work so hard to reduce this debt ...

Yeah.

... don't want to make any mistakes.

What was the peak of the net debt a couple years ago? Wasn't it like 160 million or something?

I think ...

No, it was more than that.

... quarter end, it was around 160, but within one quarter, we actually peaked at about 190 million.

One hundred ninety million. So over this period, you're going to have paid off 150 million in debt.

Right.

That's correct.

Yeah. That's great.

Yes, sir. Thank you.

Thank you.

I -- in terms of the architectural area, what are you really seeing out there in the market? Is it really stretch-outs of projects, or are the number of projects going down, or are the number -- or are there some cancellations? Give us some flavor of what you're seeing out there in the market which would bolster one's conviction that that business could pick up in the second half of the coming year.

I'll start with what we know are facts, and clearly, late in the fall and January and February, our order entry rates for our shorter-term projects got very soft. We were able to continue to book longer-term projects, and that's why our backlog actually grew slightly. But -- and that's also why we have more confidence later on in the year. So, you know, there's, you know, there's pluses -- obviously pluses and minuses to both of that.

What we have seen now -- January and February and, in fact, I was at a -- I've been to a couple of recent industry events late February and then again in March, and tried to take the pulse there, as close to the market as you can possibly do it. At late February, it was -- it was still very weak. By late March, activities had changed considerably. Our -- and our data is showing that architectural -- architects' activities have picked up significantly. Bidding activity has picked up significantly. Sampling, mock-ups, billings by architect, all are showing positive trends in the last 30 days. That's, you know, and that will be good for helping us fill in short term, because that shows that a lot of the projects that may have been delayed or put on the back burner are starting to break loose for us.

Is that retrofit repair business, or is that new construction you're referring to, Russ?

I'm talking about -- largely, I'm talking about new construction. Clearly, our renovation business has sparked some nice growth in our glazing contractor business as well as glass for the -- for the segment. And we're really excited about that. We've really -- we saw a thermograph, if you will, for a building that we did here in the Twin Cities where we changed the interior temperature of the glass in the building by 20 degrees. And if -- and if you've ever sat next to a cold, drafty window and have it change by 20 degrees, you can well understand what we're saying there. And that's really leading to more and more business. And we've rolled it out now to the Midwest, and we've won projects and are winning projects as fast as we're able to roll out our capacities and capabilities.

So it really seems that we've hit a sort of an under-served piece of the marketplace that's looking for these goods -- these goods and services.

So your indicators for the market are flashing positive. It's ...

...

... not just -- it's not just hope ...

No.

No.

... that's hanging out there.

No, you got -- you have about 30 days now of that flashing positive.

Yeah. Yeah. And the tone of the market, it sounds like, is improving.

Everybody -- in February when I was talking to people, they were watching their expense accounts, and they were sad. And in March, it seemed like there was a, you know, they were going to nicer restaurants and having a little better time.

OK. Thank you.

Yes.

Our next question is from of . Please go ahead.

Good morning, Russ, Mike, Mary Ann.

Good morning.

.

Hi, .

The first question I have is about the backlog that you talked about.

Right.

You said it's about flat year over year.

It's -- it is -- it's up slightly even from the last year and I think from the last quarter. I think 190 to 193.

OK. OK. Could you compare basically the -- those two numbers in terms of the number of projects that would make up the 190 versus the 193?

Yeah, we -- yeah, we we don't necessarily track it to the number of projects. We look at glazing, window, and glass fabrication are the sum -- it's the sum of those three, and what I would say to you is that we've seen longer-term projects basically booked more into it rather than shorter-term, and that's what accounts for some of the softness that we're indicating currently.

Hey, ? This is Mike. You know the divisions would track the number of projects. What we look at up here is manufacturing, windows, and then ...

Glazing.

... glazing. And what we're seeing right now is we're seeing a decline in manufacturing, and we're seeing a -- actually has Russ has been articulating, a very big up-tick in glazing.

OK. OK. And you also mentioned I guess before some pricing pressure in the auto glass division. Would you say that -- what would you say the downside is from here? Would you -- would you say that, you know, the worst of that is behind you, or are we in the middle of it right now?

I think -- I think the -- I think the worst of it is behind us. And, you know, the pricing pressure a lot is driven by the insurance industries. But the other pricing pressure we were alluding to, , is just the pressure we're seeing in the distribution side of the business related to imports.

Right.

And that's going to be a volume rate for the LLC.

OK.

And we have to -- we have to remember that even though the LLC may have to be sensitive to that, there is a pass through to our retail to benefit from that. Now, don't expect us to be able to recover dollar for dollar, but we do somewhat offset that as it passes through.

OK. And how is the Six Sigma program going? You know, how are you done training all of your black belts? How many black belts do you have now?

We have the equivalent of 60 full-time black belts. We actually have I think almost 80 total trained, but not all of them are full time. So the equivalent is 60. And they have, for the most part, all completed now one project. So they all have their feet wet. They've gotten through the process. Our organizations understand more of how to engage others in the process to get, you know, to fill out teams, to make it work, to understand, you know, how -- what we have -- what counts, so to speak, in terms of savings and what doesn't count.

It really is an exciting process for us. We are seeing savings in transactional areas, support areas, as well as manufacturing and other. Our savings last year exceeded our expectation, and our original goal for this year was, you know, nine to 12 million. We're starting the year essentially with $9 million worth of projects that are either -- have been completed -- they'll have that -- nine million in impact this fiscal year that have either been completed or are underway with that target amount, and clearly more to come.

So that is an effort that's making a big impact on the company. One of the things that we try to watch overall to sort of test the reasonableness of that is our headcount. And although our headcount is somewhat seasonal, so you, you know, you can't say that it's, you know, that it's always going to be the same, we are very encouraged that our -- that our need for our productivity improvements have substantially reduced some of the need for headcount, and we think that savings is clearly going to offset the normal kinds of increases you get in insurance, wages, other areas -- other benefit areas.

And , this is Mike. We are actually planning on training additional black belts ...

Right.

... in this current fiscal year.

And we -- we'll also expand what's called a green belt. That's sort of a person who's gone through maybe 50 percent of the black belt training, and they're all part time. But will have a significant impact as well.

OK. My final question -- just a minor point, but you mentioned before LSO -- that division having some opportunities in high end projection TVs. Would that include flat screen TVs in that technology?

We did flat screen supply a couple of years ago. There -- where that could return -- and we obviously are looking at several new products for our -- what we consider our proprietary technology of coatings on plastic -- we are looking at some of the larger TV, not necessarily the bigger ones, but some of the ones in between that are using some plastic covers as well. Flat -- actual flat TVs as well as projection TVs.

So those are a potential. Some of the new CRT displays are looking at that technology. There is -- there is an underlying concern about continuing to improve contrast, not brightness. And our technologies are actually able to help them do that very economically. So that seems to be the driver, and we're excited because we've already developed the product, we just need to develop the way that product fits into -- potentially fits into several new markets.

OK. Great. Thank you.

Thanks, .

Our next question is from of . Please go ahead.

Good morning, all.

Hi, Craig.

Hi. Most of my questions have been answered. Can you elaborate a little bit though on the recent rulings on the Chinese anti-dumping windshields, and does that offer any glimmer of hope that pricing competition might be alleviated a little bit?

Yeah ...

If there ever were dumping duties imposed?

There were duties imposed. They were well below what we had hoped for, although they are still -- they're still material. They will help some. But I -- but we're not -- we still feel that even with those results that we've got to get more competitive in our pricing, or the joint venture will, to sustain the levels that they've been in, and to move forward. So -- it -- yes, there was a win, but it wasn't as good or as impactful as we had hoped.

All right. OK. Thank you. That's all.

We have a follow-up question from Steve Jacobs. Please go ahead.

Just a couple of more points. In the architectural area, you comment, Russ, that your focus in kind of Class A and institutional and educational markets might offset some overall softness, and in this morning's "Wall Street Journal," page two, there is a -- some pretty good data showing that the Class A office market is imploding. There was a -- San Francisco was specifically mentioned, and then just overall. What -- would you be able to just provide some sort of a -- as a percentage of total revenues, if you look at renovation, Class A, educational, and institutional, could you look -- could you kind of discuss, you know, your -- as a percent of revenues what each one of those four categories provide?

I, you know, I can't -- I can't tell you specifically. I could put in this, you know, Class A office space is our largest market for our architectural segment. That is true. It is more than half. Educational and institutional are major portions of it, but I don't have an actual breakdown, and then renovation is becoming a significant piece of that.

What we have found, and we wouldn't dispute what, you know, I mean, that's -- I don't know that that's necessarily all new news, but what we have seen is very regional differences in our markets. And, in fact, when you look at Harmon, Inc., and their growth significant growth not only due to renovation, but of concentrating on hotter markets and hotter segments of the U.S. And that's a significant portion of what we have seen with all of our businesses.

So, yes, that is true. We have to remember, though, that are businesses are serving the high end. They're valuable products. The customers derive significant value from them, and for the most part, we have -- even though we have major businesses leading brands, we have small market share. So our people have been able to work and survive in that environment for some time now. And we think they will continue to do so going forward.

But notwithstanding that, clearly, the impact is still short term.

Right.

You know, that's there. That's ...

Steve, this is Mike. I mean, the data we're looking at, as an example, San Francisco's a very soft market.

Right.

But we don't do any glazing, and the number of Wausau Window Systems up in that area would be extremely small anyway. It would only -- it would have the most impact on a Viracon.

On Viracon.

But we're still seeing like a lot of strength in D.C., Baltimore, seeing a lot of strength up in New York. We're seeing a lot of strength in Chicago.

Yeah.

Right.

And we've got a lot of activity going on in Asia Pacific and that would be more ...

Right.

... Viracon.

Yeah. OK. And then with regard to your guidance for the first quarter, you've given us top line and bottom line. That would imply, on a sequential basis -- not year over year, but sequentially -- that would imply a pretty major margin erosion. Was wondering if you could maybe, Mike, speak with that, you know, segment- wise at the operating income level? What ...

Yeah ...

... kind of dynamics are you seeing in this quarter ...

Well ...

... that is significantly different than the fourth quarter?

Let me -- let me -- let me pull the data out in front of me, OK?

OK.

While Mike is taking a peek at that, I would make a comment on first quarter versus first quarter of last year. First quarter of last year, our San Diego operation was still contributing significantly. Viratec -- or the picture framing had yet to see the softness that came on later in the year, and so those were some bigger differences year on year. Let me see if they've kind of ...

You know ...

... the fourth quarter.

You know, Steve -- this is Mike. Really, where we're seeing, you know, the biggest sequential decline is in the architectural group, where we're also seeing a, you know, a pretty -- a pretty significant decline in revenue.

Yeah.

And what's being driven there is -- and even though the decline is -- from a percentage basis might not be significant, there's a huge shift going on between glazing and manufacturing. And manufacturing for us is a higher margin ...

Right. The ...

... revenue.

Yeah, the -- manufacturing clearly is a shorter-term -- shorter lead times, and we've benefited as the economy slowed from the lag time that occurs in that, and now we're -- what we're seeing now is the worst of what happened generally to the economy last year. So that's the time frame that we're in. And like I said, I think we've reached the bottom of that late in February, and we're starting to see that ...

Right.

... pull out now.

And Steve, Mike again. I guess -- I guess to also answer, you know, this is a very leverage -- leverageable business, so to the extent that we continue to see the positive inbound order trends that Russ mentioned earlier, there is a -- there is an -- there is a opportunity for us to do better ...

Right.

... in the first quarter. But this is a, as Russ mentioned, I mean, and it's been really in the last month that we have just started seeing more of a positive trend versus when we built our plans and calendarized the business.

OK. So on a sequential basis, fourth quarter versus the first quarter of this year, operating income in architectural will be down. Large-scale optical will be down.

Right.

Well, I think large-scale optical will be kind of flat.

OK. Flat-ish ...

...

... and auto glass will be down.

Well, actually auto glass would be moving up.

Will be moving up.

Because you're starting to move into their season of the kind of March through August.

Yeah. April and May are some of their -- are ...

Right.

... couple of ...

Their stronger months.

... stronger months.

Yes. OK. Great. Thanks a lot.

You're welcome.

Once again, ladies and gentlemen, if you do have a question, please press one at this time.

We have a follow-up from . Please go ahead.

Yes. On the earnings estimate that you've given out, the dollar a share, if you were to put some sort of upside or downside brackets around that, you know, how would you describe that at this point? Do, I mean, do you think the buck a share is a conservative estimate at this point, or do you think it's a base case estimate, or how would you describe it?

This is Mike. We have internal plans for each of our operating groups that clearly give us the strong line of sight to the dollar a share. I mean, I guess the only other way to answer this is from an executive compensation percentage -- perspective, you know, and you're aware of this, , we're highly -- a big portion of our compensation is really linked to us achieving our shareholder goals, which is the dollar a share. I mean, and I don't -- we don't feel like we come out with that type of guidance if we didn't feel we had a nice line of sight to it.

I think the one thing that we are counting on is that the economy recovers. And we're not we're not using data that we haven't gathered from the outside. I mean, I think in general, the U.S. economy is kind of forecast to start seeing a little bit of a rebound more robust in the second half of the year, as is some of the construction data we look at from is -- targets the latter half of calendar year 2002 and early 2003 as the recovery periods.

So unless -- if those things don't occur, the dollar a share is challenging, as we've mentioned on this call and in our earnings release.

Now, does that construction data include, you know, the completion toward the end of the project or, I mean, I would imagine that the glass is something you order later rather than sooner, right?

No, actually, the glass -- it's -- when the -- when a office building -- the steel goes up, and the curtain wall goes up -- wall goes up next.

OK.

So ...

It's fairly soon.

about mid- ...

Yeah.

mid-project, right?

So, I mean, what would be -- what would be the case for some upside to it -- to the dollar estimate?

I think the case would be that the construction industry turns faster in the first half of the year -- our year, that the auto glass -- our retail auto glass segment, their sales and marketing initiatives take hold a lot quicker than we are forecasting them to and they are able to effectively take share.

That's a sales and marketing issue?

Yes.

Yes. Those would be, I think, in our case, the two areas that would drive the most opportunity for us.

And then continued success with Six Sigma. That -- as we see productivity improvements, those can be very impactful to the bottom line.

OK. Thank you.

You're welcome.

There are no further questions at this time. Please continue.

All right. Well, we really appreciate the opportunity to speak with you today, and in closing I'd like to reiterate that, you know, we really did and have done what we said we would do. We were going to continue to improve our operations and our bottom line, and we're going to do that again for you this year. So thank you, and have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.

END