Apogee Enterprises Inc (APOG) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the APOG Enterprises 4Q conference call. At this time all participants are in a listen-only mode. Later we will conduct 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, Jason. Good morning and welcome to the APOG Enterprises fiscal 2003 4Q and full year conference call on Thurs., April 2. This call is being webcast live over the Internet from APOG'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 Russell Huffer, chairman, president, and CEO and Mike Clauer, CFO and EVP. Their remarks will focus on the fiscal 2003 4Q and 2003 full year results and outlook for fiscal 2004. Before we begin I'd like to remind all of you that this call contains 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 to assurances that APOG's architectural segment, which serves high-end markets of value-added products will not be further impacted by the continued slowed economy. In addition, there can be no assurances that Harmon Auto Glass will reverse its loss of market share or overcome pricing pressure in the challenging auto replacement glass market. There can be no assurances that PPG Auto Glass, APOG's automotive (inaudible) distribution joint venture with PPG Industries will achieve favorable long term operating results. There also can be no assurances that the large scale optical segment businesses will continue to increase revenues YoverY. The company cautions you that actual results could differ materially from those described in the forward-looking statements depending on the outcome of certain factors including the risks and uncertainties identified in exhibits 99 to the company's report on Form 10-K for the fiscal year ended March 2, 2002. 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 APOG Web site. Russ will give you a brief overview of the results and Mike will cover the financials. After they conclude, we will open up the call to questions. Russ?

Good morning. Thank you Mary Ann, and welcome to our conference call. I'm pleased with our achievements in the 4Q and full year. Due to the slowed economy and the pricing pressures impacting all of our segments. We did exceed our previous guidance due to some one time items that occurred earlier than we had anticipated. In addition, we also had earnings from discontinued operations in the quarter that added to total earnings. We have been able to somewhat offset our market challenges for three reasons. First, our architectural segment continues to outperform the commercial construction market. Second, we achieved significant improvement in the performance of our large scale optical segment throughout throughout 2003. Finally, we benefited from continued improvements in operation and cost cutting initiatives including our Six Sigma program. Our Six Sigma initiative generated ongoing expense sales of $12.7m exceeding our goal of $10-12m, and is becoming an important part of our corporate culture. Our strong cash flow remains an asset for APOG, especially in the down economy. Last year we used our cash to reduce long term debt 32% to $47.3M and to fund $18m in share repurchases. I'm not going to highlight 4Q results by segment, which are in our news release since these results are consistent with the trends that we see impacting us in 2004. Looking forward to 2004, so moving on to the fiscal year despite the uncertainties we face we expect to grow revenues slightly. Our two greatest challenges are the economy, which is now delayed the expected rebound in the commercial construction market from late calendar 2003 to early 2004. And the ongoing competitive environment for the auto glass segment. Due to these circumstances we continue to anticipate performance at the lower end of our guidance range of $0.85- $0.93 CPS provided earlier. For us to achieve the higher end of the range we will need to see more improvement in the commercial construction industry than currently anticipated. Even in these difficult times we have many good things going for us in fiscal 2004, including our well running manufacturing operations, which are currently at approximately 60% of capacity. This means we are well-positioned to deliver product when the economy turns and also that we don't need to invest capital in the short term to meet increased market demand. We had an ongoing commitment to continue this improvement in cost running. Our goal for Six Sigma savings in fiscal 2004 is $6m. It is lower than last year's going to give our businesses the flexibility to focus on other priority projects and improve operations capacity and customer relationships but don't necessarily deliver measurable bottom line savings this year. Regarding cost reduction, we have made cuts to help in offsetting our slowing business. We anticipate annualized savings of $4m in the architectural segment and $4.5m in the auto glass segment from reductions made in 4Q and early in 1Q. We have a clear focus on market opportunities. We see continued growth in our large scale optical business through new products and deeper market penetration. We are winning institutional architectural projects which today is the stronger segment of the commercial construction market. We are also seeing success with penetrating hurricane and protective glazing markets. Hurricane business remains a positive value-added market. [Wausau] is doing hospital projects and [Viracon] sells to all customers. [Wausau] and [Harmon Inc.] are also developing new systems to meet hurricane requirements. Together our architectural businesses are attracting more than $100m in hurricane projects in Florida and other hurricane-prone areas. Hurricane projects we have been awarded include a new airport terminal and a courthouse in Miami. Protective glazing is primarily for governmental projects and our projects include court houses in seatbelt, San Jose Miami a government office building in Washington, D.C. and the lower floors of two office buildings housing financial service firms. [Viracon] is tracking about $10m in blast mitigation projects and generally has a high hit rate on project targets of about 70%. I am very encouraged that we are beginning to grow retail auto glass share which is key to bringing predictability to this segment. We've seen strong growth in the fleet business which is more predictable but at lower margins. Our significant financial strength and solid cash flow also position us well. We expect EBITDA to range from $65-68m this year. We are evaluating uses for our strong cash flow beyond paying our dividends and reducing debt including renewing the stock repurchase program and investments in our businesses. Regarding stock repurchases, we remain committed to preventing dilution of our shares outstanding as a result of stock options issued to management. Turning to 1Q, it will be challenging, even with the strengths I've highlighted. We are experiencing committed architectural projects shifting to later schedules, new projects not closing, and margin pressure due to price erosion and the shift to institutional and smaller projects. On a positive note we are seeing increased bidding activity which is consistent with American Institute of Architects report that inquiries for new projects continued to strengthen in February. However, current trends are still uncertain. As I noted we have made cost reductions in this segment and will make more if market conditions warrant. The auto glass segment remains under pressure due to competitive pricing resulting from industry over capacity. The bright spot continues to be the large scale optical segment which should continue with a strong performance but builds on its progress and success in fiscal 2003. We are maintaining a wide guidance range for 1Q of $0.04-0.10 per share. This is due to the current business and political uncertainties. In closing we feel that we have the factors that we can influence under control and in this difficult economy we will continue to build on our strengths. I will now turn to CFO Mike Clauer, Mike?

Thanks, Russ. Our performance in fiscal 2003 improved over the prior year with EPS from continuing operations increasing 2% and net earnings up 16% per share compared to FY 2002. For the twelve-month period our earnings from continuing operations were $0.93 EPS or $26.4m compared with $0.91 EPS or $26.1m a year ago. Our net earnings were $1.06 EPS, or $29.9m, including 4Q income from discontinued ops. Our strong cash flow of $41.9m during the year allowed us to support capital expenditures of $12.8m, up from $10.5m the prior year giving us free cash flow of $29.1m. This free cash flow allowed us to reduce long term debt by $21.9m to fund stock repurchases of $18m. Our long term debt was $47.3m at the end of the year, down 32% from the $69.1m at the end of fiscal 2002. Our debt:cap ratio declined to 21%, a significant improvement from 29% at the end of the prior year. We ended the year with cash and cash equivalent of $10.1m. 4Q was stronger than anticipated due to one time items. We earned $0.18 CPS from continuing operations or $5m compared to $0.15 CPS or $4.4m in 4Q02. We exceeded our expectations due to earlier than anticipated one time items totaling approximately $0.05 CPS. These items have not been included in our 4Q or 1Q guidance because the timing was uncertain. $0.03 of the gain resulted from a lower tax rate due to a significant donation of certain intellectual property. Our tax rate dropped to 12% for the quarter as we donated the patents and technology from our [Terrasun] [inaudible] joint venture. We also gained $0.02 per share from the sale of an auto glass facility and a large scale optical facility. Revenues in 4Q of $147.7m were flat compared to prior year. Net earnings in 4Q were $0.31 EPS, or $8.6m, including income of $0.13 CPS or $3.6m from discontinued operations. This compares to net income of $0.15 CPS the prior year when there was no discontinued operating income. The non-cash gain resulted from favorable resolution of certain exposures as well as from reductions in estimated future liabilities for the discontinued European curtain wall operation. In the quarter the architectural business has slowed as anticipated but both revenues and earnings forward segment were slightly better than expected due to project timing and cost reductions. The operating margin did decline as expected with the slow down in mix change from 7.9% a year earlier to 5.7% in the fiscal 4Q03. The backlog decreased again slightly consistent with the continuing economic uncertainty and related slow down in commercial construction which is causing delays in projects, project commitments and scheduling. The other two segments performed as schedule. Large same time last year optical [inaudible] and continuing pricing pressure in the auto glass segment led to an operating loss vs. last year. Although our retail volume increased 17% from the prior year period, which was good progress, pricing and customer mention led to a 12% decrease in average unit selling price which significantly impacted margins. Comparing the fiscal 2003 4Q to the prior year period here is the EPS reconciliation. Operations including PPG Auto Glass reported an equity from affiliates declined $0.05 from the prior year. Gains vs. the prior year included $0.02 for [inaudible] adjustments, $0.01 for amortization of goodwill, $0.01 for interest, $0.03 for the tax rate deduction and $0.01 from the share buy-back program. With respect to next fiscal I will add some color to the outlook Russ has already provided. We are expecting overall revenue growth this year with a tough start in 1Q followed by second half growth. We anticipated the architectural segment revenue will be flat to slightly up. This is based on 2H growth due to backlog timing and improving market conditions toward the ends of the year. As Russ noted market forecasters are now looking at a turnaround in early calendar 2004 rather than late 2003. Auto glass revenues are expected to be slightly above fiscal 2003 levels. Retail growth will be offset by competitive pricing and manufacturing. We expect large scale optical revenues to grow eight to 10% as initiatives started last year to produce further results. The segment plans continue to expand distribution of value-added picture framing glass products and to further penetrate projection TV and other consumer electronics industry's. GM percentages are expected to decline slightly. We anticipate that productivity improvements and cost controls, including new estimated Six Sigma savings of $6m, will somewhat offset increases in material cost, insurance and wages. Competitive pricing pressures are expected to continue in the architectural and auto glass segment. Equity and affiliates will likely show a loss higher than in fiscal 2003 due to competitive marketing pricing conditions. We again expect the effective tax rate to be 31%. We estimate operating cash flow of $45-50m. We are targeting capital expenditures at $20m but will tightly manage them as we leverage excess capacity. This will give us free cash flow of $25-30m We expect to reduce long term debt to below $40m, although working capital needs may causes the debt level to increase slightly in 1Q. For the year our EPS is expected to be at the low ends of the range of $0.83-95 EPS with a YoverY decline in 1Q followed by improvements in the remainder of the year. Please see our release issued yesterday for our complete guidance. In summary, we have challenges this year especially in 1Q, but remain focused on optimizing our operations, minimizing cost and maximizing sales of products and services within current and targeted markets. The balance sheet improvements we've made over the past two years will serve us well as we whether the economic downturn hitting our businesses. We have our eye on growth when the economy improves and are preparing the strategies that will drive this growth. I will turn it back to Russ at this point

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

Thank you. If you have a question at this time please press the one key 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. Once again, if you have a question at this time please press the one key now. One moment please for our first question. Our first question is from Eric Martinuzzi from Craig-Hallum Capital. Please go ahead.

Good morning, gentlemen.

Morning Eric.

My first question has to do with the architectural segment. I know part of the reason for the short fall on 4Q was due to some deal push outside. Can you elaborate on whether those are to be recaptured on 1Q or are those on a permanently postponed basis.

For the most part they are just delayed. There was one significant project which was being rescoped, so we are not sure how long that one will be delayed. But with didn't see very many, I don't think we saw any major ones at all just go away. They've been pushed into 1Q and 2Q.

Then as far as the shortfall in 4Q, you talked about impact from slow down of construction, show down reduced pricing power in the auto glass significant. Any measurable impact due to weather.

The weather impact was certainly a concern as we approached the end of the year but it did not turn out to be as significant as we thought. We actually, we had some effect but it wasn't, I would not classify it as a material effect.

Okay. Then lastly on the buyback, last year you had 1.5m share buy-back program. You did mention that you would have some sort of program such that management would not be diluted. Can you put some numbers around hat for us?

The management incentive options are, the programs are pretty easy to define. The number of shares that are exercised are less easy to define. So I would put a range on it from, in order to be nondilutive we would have to purchase somewhere between 300,000-500,000 shares. But even the timing of that and, we would not want to do that at a time where we would cause debt to increase. We would not want to do that during times where there's great uncertainties in our market. So we are committed to that but we will manage that process to do it appropriately.

Okay. So it's safe to say probably not early in the FY.

Probably not.

That answers my question. Thank you.

Our next question is from Shane Glenn of Doherty and Co. Please go ahead,.

Good morning. On the asset sale that yielded the $0.02 per share gain in the quarter, can you be a little bit more specific about what was sold for the auto glass facility and the large scale optical facility and is this, is this in part, is this part of a broader strategy maybe to she had some additional assets?

Shane, this is Mike. We've been over the last couple of years really taken a hard look and selling what we call non-core, nonstrategic assets. The sale of the facility for large scale optical was the building in Orlando. And as far as the one in the auto glass segment, as you might know, we actually own some of the distribution centers that PPG, LLC has leased back from us and we have been aggressively pursuing over the last year and a half the sale of those facilities to financial buyers.

Are there any additional facilities that you are currently trying to sell.

Yeah, we still have facilities up for sale. I mean clearly the magnitude of it is much smaller. Like in 4Q, cash flow, proceeds from the sale of property is about $2.4m. My guess is next year and the year after we would probably have anywhere from $4-9m left, depending on, we are actually evaluating a couple of them but, you know, it won't be very significant.

Okay. And secondly, on the large scale optical business, you continue to really put a great numbers in that segment, and the segment has quickly become a major operating profit contributor for you and you are talking about eight to 10% growth next year following three quarters of 30% plus growth. Is the outlook for, is it a difficult comps issue, or do you see something there that might slow the growth down in that business, what's driving your outlook there given you've got some pretty strong momentum in that segment.

The wins are in two different areas. Most of it has to do, it all has to do with value-added glass, putting coatings on the glass that are enhancing the reflection properties for picture framing and video projection television, or video displays. And inside of this, some of this has been the technology to put these coatings on acrylics, and that's starting to emerge with some strength. Then we are seeing great conversion in the picture framing marketplace to value-added products. So it's more of a conversion of some markets to the using of these products rather than necessarily these product markets growing substantially. So it's continued success in conversion that's really winning the day here.

Shane, this is Mike. Also FY03 was a pretty low base if you recall. We just got, I mean '02, we got completely, we really got hurt with the PC industry falling apart. So part of that accelerated growth is just the base you're comparing it to and then really going forward we actually are starting to have to evaluate some capacity concerns. I mean these products are so successful, and we have in our capital plans some investments that are being made to enhance the capacity so we can meet the demand.

I was just curious, I think 1Q04 seems like you've got a fairly easy comp there based on 1Q03 and you were talking about 8-10% growth. I was just curious if there was some definite room there for some upside there based on an 8-10% growth guidance.

I think in 1Q it's really at lot more seasonality driven.

1Q we are seeing for large came optical.

Okay. Thank you.

Our next question is from [Robert Kirkpatrick] with [Cardinal Capital]. Please go ahead.

Good morning and good release. Written well. A couple of questions. Could you provide a little more detail on the donation of the intellectual property? What it was that you gave up, and why you chose to do it at this time? And I have a few follow-ups.

Rob, this is Mike. If you recall we actually kind of shut down [inaudible] about a year ago, a year and a half ago now. Since that point in time we have been very aggressively working with different universities and institutions on donating those patents to finds somebody that had the funding and the wherewithal to continue to the research. It just so happens that now is the time that we were able to strike an arrangement with a university that has the type of science necessary to continue developing the [inaudible] type process that we have started.

Does APOG retain value in any of that?

No, what we retain, though, is upon, as they continue to perfect the technology we have the first right of refusal in commercial construction to use those products in the future.

Using [inaudible] takes we would have the right of first refusal. It is interesting that the donation did go to an Illinois Institute of Technology, and they seem to be well funded or at least there's every indication that they have funding to pursue this and have been able to attract some scientists to support that development effort. This is something we always felt was important but it needed more work and it needed more investment, and we really thought we had it lined up with venture capital lists but then as 9/11 hit the deal fell apart and so we pursued this route and this appears to be a positive for us. It's a long-term development before it gets back to be building integrated. So this is a good way to see that done.

Great. On the discontinued ops, could you provide some more details about the exposure that you've reduced both in terms of the claims being settled, I think, and then some sort of reassessment where the accruals now stand for that?

Most of the discontinued ops improvements had to do with expiration of statute of limitations, court proceedings, the ability, just different things of that expired that have led us to the positions now and also some court directed efforts of that indicated our exposures have been significantly reduced. And as such we have taken that down to the bond levels and legal levels that remain in Europe and so we can be optimistic that those two will be favorably resolved but as is proven it takes more time then you can really fix on it. you can't really put a timetable on it and until those bonds are fully released or exercised we really can't comment on how it will go. We are optimistic it will be released but given the uncertainty of dealing with French courts we can't be conclusive on that matter. so most of the other issues in Europe are now pretty well resolved. So our original rye serves are down, reserves are down to less than half than they were a year ago about half of what they were a year ago.

Rob, last year our reserves would have been $19.7m they now are at $11.8m, reduced with some payments for settlement throughout the year and then as we articulated this one, the ability to lower an exposure because of some favorable things of that happened in the courts.

As far as cash out this year we know there will be some continued legal fees and there's one, there was one case that we lost that the customer or the winning party just has to submit their claim and the money is already in Europe any way waiting for them to claim it. That's what we know about it. The rest of it, there's still time, we are optimistic but the final resolutions could well take a couple more years.

Okay. And Mike you did say $4-9m in cash flows from selling non-core assets next year.

Over the next couple of years, another $4-9m.

And that obviously was not in your estimate of free cash flow that you mentioned earlier.

Going forward?

Going forward. Right.

That's correct.

Okay then finally, could you provide some details on the architectural segment costs that you reduced and the auto glass segment costs that you reduced? What steps did you take and kind of what timetable are you looking for a pay back.

The architectural cost reductions were mostly head count reductions, overhead capacity. As we have gone into the uncertainties of these markets, we don't want to reduce our ability to deliver on opportunities but we don't want to have a structure in place that's anticipating a stronger market than actually materializes so we went ahead and made those head counts reductions, those are done and the paybacks on those will occur, they are immediate, yeah. And on the auto glass side, same thing. We will have absorbed all of the costs of those within 1Q. So beyond 1Q, in 4Q and 1Q, so beyond that, you'll see those coming back to us. So they are pretty immediate impact.

So there was severance charges in the fourth quarter for some of these employees on both sides?

On the auto glass would have been in 4Q, and it was not overly significant. And then on the architectural, I think it was minor and more of that would have hit in 1Q but again it's pretty insignificant.

Okay. Well I will get back in line and let other people ask questions.

Thank you.

Our next question is from [Clint Morrison] of Piper Jaffray. Go ahead.

Just a follow on to that previous question. I think you kind of projected another $6m in savings that you were going to find. Is that spread out over the year or any kind of sense of when that might hit?

The Six Sigma savings will be spread out over the year. There's always ongoing in the past but that should already be in your models of what's already happened.

And the $6m is annual savings as opposed to one time.

It's annual, new, annual new savings.

Okay. Backlog, did you report a total backlog number today, and then can you talk a little bit about obviously you are seeing some quoting activity building up, you are spilling in your backlog. Given the turnaround in the architectural later in the year beginning the next year when do you as a really see the backlog bottoming out and starting to turnaround?

If they look up the number I think the backlog is going to continue to bounce around. I don't want to say that I know it's the bottom but it appears to be that we are bouncing along the bottom level of it but I don't think that we are going to see a significant turn on it until probably early calendar '04 ore late fiscal '04. Mike do you have a must be.

We reported a number in our earnings release of $147.3m.

It was down slightly from last quarter.

That was the total back-that was...

That was architectural.

You didn't report a total backlog number.

No, most of our other divisions have some line-of-sight into revenue but its not meaningful. Large scale optical is mainly a one or two-month outlook.

That's what I was getting at, the large scale optical is starting to pick up?

No. Large scale optical is not in there. And again, this is a slow time for large scale optical.

That takes care of me. Thanks.

Cliff Walsh of Sidoti. Please go ahead.

Most of my questions have been answered, but I have a couple left. I was wondering, what do you think has to happen in [Harmon Auto] for things to turnaround there, and what's your time frame there.

[Harmon], the real thing, the real accomplishment short term is to continue to execute on building incremental volume which is predictable which gives them a base load of business that enables them to continue to improve their efficiencies and when we do that and we've seen some of that happening, then the business becomes more predictable. So that's really at the core of improvement here is to do that and then to drive in cramped it will drive sales in the insurance markets probably the small insurance levels not the big insurance levels but the smaller ones because the wins there for us tends to be more service or quality or yentsesed where there is some recognition of the value in [Harmon] directly brings to the accounts. So the first priority is volume and driving that through in an efficient manner, and that's what we are building on at this point in time and then to continue to see other wins. And remain very tightly focused on those items to keep the business predictable and under control as we move forward. I'm sorry I forgot your second question

I was wondering what kind of time frame you were thinking about when you think things are going to turn there.

We've already seen their volumes improve significantly, and this is a tough business because there is no backlog. Visibility looking ahead is very short. That's the nice thing about some of these fleet accounts that we wouldn't is that they are predictable and they are delivering the increases that we are experiencing right now. So we have some confidence that those volumes increases will continue. The uncertainties remain around the pricing of the insurance business. That really took some sharp dips, January and February. What we've got to see is some stabilization of that now. And when I say that, some of that was at the manufacturing level not just at retail. So I talk about the whole segment.

Okay. Can you refresh my memory as to what the margin difference is between the fleet business and the retail business there?

There clearly are significant pricing differences but the productivity differences are quite different. So the total margin on material that you're able to earn in a period of time is not, they are all profitability profitable is what I'm trying to say to you. The GM is profitable, they contribute and what you have to do is manage the overhead structure to support that [inaudible] of business. So clearly some [inaudible] has to take around that mix change.

What's the importing situation like there?

The imports, the Chinese imports are down from where they were a year ago. And we've seen their pricing come up slightly. But the, having said that, the effect of those on the marketplace is that they have driven prices down at the manufacturing and distribution level in response to that. So they've had their damaging effects on our marketplace.

Okay. Any update on hurricane legislation on the Carolinas or anywhere else?

The New York State is the one that's most active right now. It's not final, but that's starting to look pretty good. We think if that, and the Carolinas, what we are seeing is we are seeing more insurance requirements than we are state and local. It's sort of a political battle that are forcing things. We are seeing baby step gains all the way along the coast. It will continue to move in our direction. It's just how fast it moves.

Last question, what is the status of the Michael's conversions in large scale optical. I know there's two left of the out of the five. I'm just wondering what the time frame was?

We are actually in the process right now of doing the fourth conversion in the April/May time period.

Great. Thank you very much.

You're welcome.

Our next question is from [Daniel Zeff] with [Zeff Capital]. Please go ahead.

I just have a question about capital spending moving forward it tends to vary widely. You alluded that you had some capacity, some architectural capacity. What can I look for moving forward in terms of variation from D&A?

The capital spending that will continue to be in the architectural side will be pretty much productivity or automation, things that continue to make these businesses stronger not necessarily capacity enhancements. There will be some new product investments in what we call [inaudible] capability that's taking place. That's a new product to protect against response taken uses breakage especially for high-end projects. Also we are looking forward to next year the difference between the $12m the $20m, about half of that difference is large scale optical capacity. So what we are doing is we are doing things to improve capacities in those value-added processes of action coaterings that we use to support those products and services. The other half tends to be more, coatings, more of replacement or maintenance or operating, some of which may, the other half of the improvements that's probably the part depending on current market conditions and whatever develops flew out the year may or may not get spent.

You can expect our depreciation to stand at the $24m range, and we target capital of about $20m. We've done that the last three years, and the last three years we tend to kind of come in a little bit [inaudible].

Thank you.

If there are any additional questions please press one at this time. We have a question from [Derek Delvechi] with [Ironwood Capital Management]. Please go ahead

Good morning, guys.

Good morning.

Just to confirm a couple previously asked questions. In your forward guidance for fiscal '04 are there any one time items baked into that/

No.

Okay. And then just generally speaking you have clearly reduced a lot of costs out of each of the businesses, are there costs that you've taken out needed when volumes, if whether they were needed you are going to need to add this overhead back when volumes do come back?

In the architectural segment the cost reductions we announced in 1Q of this year the ones that point to the bulk of the $4m, most of them will be needed as, if we were to grow the glazing business, there would be some ad back of those. The Six Sigma savings that we talk about, the $12m last year and the $6m this year, those are permanent reduction inside cost. And the $4m that we talked about automotive, they are permanent reduction inside cost. So some of the $4m for architectural, the most recent ones, some of that would come back but all the others are permanent reductions.

Then, just generally speaking what is your long-term plan for the automotive segment?

I mean do you truly consider it core to the long term success of Apogee picks the long term is to look for what we can do with that business that contributes the month most to our shareholders. Right now what we've got to do is make sure that we are in control of it, that it's predictable and we enhance its value short term to the great evident extent that we can. Greatest extent that we can. Long term we will continue to look at all options for that business.

Presumably one of those options would be a divestiture?

All of those options are being looked at.

That's all. Thanks.

Our next question is from a follow up from [Robert Kirkpatrick] from [Cardinal Capital].

Can you break down the auto glass business in terms of your mix of commercial insurance?

Yes, we can. I think insurance, insurance is...

Insurance is a little bit more than half.

Right. And then dealer fleet and retail would be the next increment after insurance?

Is most of the insurance business you have large insurance companies and you are now trying to shift to smaller ones?

There are two ways that we get insurance business. One is through our own direct sales to insurance companies and another one is participating in other insurance networks that are run by, for example run by [Safelight] or by [Links], and others. And the mix of those two is, and they are both significant volumes within that and that's where that insurance business comes from.

Okay.

And the larger companies tends to be through [Safelight] or [Links], the smaller ones through our own.

Rob, a little over half is insurance and then the other half commercial would represent about one-third of that and the rest would be what we call kind of cash retail.

A third of the half is fleet?

Yes.

Okay. Then could you talk about why pricing for the insurance side took such a sharp drop in the January, February time frame?

When we talk about the pricing in January, February, we were talking about manufacturing and distribution pricing more so than retail. The retail, the retail pricing shift that took place was primarily a mix shift, more of...

Away from insurance.

Away from insurance more to dealer fleet, commercial.

And the pricing declines in manufacturing were pretty significant.

They were very significant.

Almost, what, 10%?

Yeah.

At the manufacturing level.

Okay. And that is competitive situation?

Yes. It's just a competitive situation.

Okay. Then finally, Mike, your forecast that you mentioned said that you may expect some working capital needs in 1Q which would cause you to borrow some more money and have your debt go up. Given that you've got, what is it $10m or so in cash, what would be the working capital needs that would be so significant that would cause you to go out and borrow money and that push up the debt?

First of all some of that cash maybe you will see it in our financials is cash dedicated to our captive self insurance company. So it's actually not cash that is available to us from an operating perspective. What would normally drive up cash in 1Q is just, a lot of it is driven by timing of our contributions to our pensions, 401(k)s, etc. And it's normally you are starting to see your auto glass refuse billed, revenues starts building throughout the quarter which is just a use of cash as they build up receivables. You know the seasonality of that business. We have a pretty significant spike starting in the latter part of the first quarter with the auto glass segment.

Rob, we are doing everything possible to minimize it but there is a remote possibility it could be going up.

I appreciate understanding it a little bit better. Then finally, you bought back 1.5m shares last year. I take it that the management incentive plans both in terms of option grants and in terms of deferred compensation that's paid in stock and bonuses that are paid in stock was again last year about 300,000-500,000 shares?

It was more than that last year. Bonuses were higher last year. Bonuses will be down about 35% this year over last year, and because of the spread in stock pricing that existed for a lot of last year there were quite a few options exercised that may or may not materialize this year.

Okay. Well I would urge you to aggressively repurchase your shares, especially at these levels given the cash flow characteristics of your business, but you've heard me say that before, so I will just say it once today. Thank you.

Our next question is from [Richard Friary] with [Delphi Management]. Please go ahead.

Good morning, in your release you talk about the margins compressing in the architectural segment. Part of that is due to price, parted of it is due to mix. You talk about some of the mix shift, what projects you are not seeing any more versus the institutional and smaller projects you are seeing? What's disappearing? What's coming on, and is this a permanent shift.

No, I don't think it's permanent. What we see is a major office construction is down significantly especially in the larger metro areas where vacancy rates, where vacancy plus the lease the unoccupied space is probably approaching 20% in all of those markets, office construction is not at a standstill but from our standpoint it looks like a stands still, some of those markets are down 40 to 60%, those top 10 major metropolitan areas in the United States. So that's the shift, the sort of the sudden stop that's taken place. And then so what's happening is that the government projects, schools, hospitals, airports, stadiums, condominiums those kind of projects are where the business is today and clearly we are winning our share of business in those areas. But they tended to tend to be somewhat less in their demand for complex, complexity, somewhat less in their demand or their desire for sophisticated architectural products and so therefore they've become so far value engineered and the margins then are affected by affected by that general trend.

Can you put some numbers on the margin shift?

It's hard to do that. What, we've made some significant improvements in our business to the point today were where clearly these businesses are attracttive to us but they are just not going to be as good as what we had in the past. That's all.

All right. Thank you very much.

You're welcome.

There are no further questions at this time. Please continues, Ms. Jackson.

All right. Well I would just like to colon included that we continued to things to improve the operations of our businesses. We focus on new market opportunities in the marketplace and we continues to reevaluate our strategies as we move forward. I can just assures you that we are paying attention to all these things and we will take advantage of them as we assess the kinds of markets that we can approach in the future. So thank you for your time today.

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