Apogee Enterprises Inc (APOG) 2004 Q4 法說會逐字稿

Good day ladies and gentleman and welcome to the Q4 2004 conference call. My name is Elise and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Ms. Mary Ann Jackson. Please proceed.

Thanks Elise.

Good morning and welcome to the Apogee Enterprises fiscal 2004 full year and 4th quarter conference call on Thursday, April 8th. The call is being webcast live over the internet from Apogees' corporate website, 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 and CEO, Mike Clauer, Executive Vice President, and Bill Marchido, our new CFO, who joined Apogee in late February. Their remarks will focus on the fiscal 2004 full year and 4th quarter results and the outlook for fiscal 2005.

Before we begin, I would like to remind all of you that our discussion today contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's expectations or beliefs at of the date of this release. Please note that the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

All forward-looking statements are qualified by factors that may affect the operating results of the company, including the factors described in our press release. The company wishes to caution investors that other factors may, in the future, prove to be important in affecting the companys' results of operations. These factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the the business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. For a more detailed explanation of the foregoing and other risks and uncertainties see Exhibit 99.1 to the company's report on form 10K for the fiscal year ended March 1st, 2003.

The information in this conference call related to projections or other forward-looking statements may be relied upon, subject to the previous Safe Harbor Statements, as of the date of this call and may continue to be used while this call remains on the Apogee website.

Russ will now give you a brief overview of the results and Bill will cover the financials. After they conclude, Russ, Mike and Bill will answer your questions. Russ?

Thanks Mary Ann.

Good morning and welcome to our conference call.

This has been a difficult and disappointing year in terms of our architectural markets but a rewarding one from the perspective of progress we are have made on our strategies. I am energized by the strategic plan we have developed for growing our core businesses and obtaining new revenues from extensions of these businesses. With this three-year road map, and buoyed by improvements in back logs and controls, we have a clear vision for replacing the revenues lost with the sale of Harmon Auto Glass with significantly improved profitability. Through these initiatives, we are focused on creating greater value for our shareholders. Here are our strategic achievements to date.

Late in the fiscal year we completed the sale of Harmon Auto Glass, an unprofitable, nonstrategic asset. Completing this large, complex transaction was key to launching our focused strategy. We are nearly done integrating our two large scale optical segment businesses to focus on our promising picture framing glass and acrylic market. Late in the fiscal year we signed an agreement to sell our nonstrategic framing mat board product line and we closed the transaction March 31. We have cut $5 million in overhead, a strong start to our initiative to restructure our organization and management around our new portfolio.

Mike Clauers''s new role, leading to three architectural businesses, and our large scale optical segment is an important early step in this process.

We have also validated the business case for expansion within the broader architectural glass market. With our current assets in Minnesota and Georgia, we have produced almost 30 million in sales for this market last year.

Strategic initiatives that we are focused on in fiscal 2005 include: increased penetration of our value added architectural glass markets, which should lead to growth in market share; Expansion into broader markets for architectural glass and (INAUDIBLE) and entrance products for our window and curtainwall manufacturer; Continued conversion of custom picture framing markets to our value added glass and acrylic products and penetration of museum, gallery and international markets with these products; Improvement of our architectural products and service businesses to increase their contribution to Apogee's earnings through better execution and more aggressive planning in an unpredictable market; Further overhead cost cutting, in part through our successful six sigma lean initiative;

The ongoing slow down in commercial construction markets significantly impacted our performance in fiscal 2004. Our earnings from continuing operations were 17 cents per share, compared to $1.02 per share a year ago. Revenues declined 8% to $535.3 million. These results were consistent with the guidance we provided in February, excluding charges of 3 cents per share related to the sale of our nonstrategic picture framing mat board line. This opportunity came up quickly. And we signed an agreement to sell the line the last week of the fiscal year.

Our net results for fiscal 2004 were a loss of 20 cents per share, compared to prior year earnings of $1.06 per share. Our net results include discontinued operations and the charges related to the sale of Harmon Auto Glass and it's operating losses. I am very pleased that despite our difficult year we increased our dividend 4.4%, funded $1.3 million in share repurchases, and reduced our long-term debt by $7.6 million to $39.7 million at year end.

Looking at the quarter, we reported a loss from continuing operations of 14 cents per share, as expected, compared to earnings of 27 cents a year in the prior year period. As we had anticipated, significant construction project delays, along with challenging job margins, impacted architectural segment results.

Also contributing to the quarter's continuing operations losses were charges resulting from the sale of our mat board product line and the integration of our two large scale optical businesses to better serve picture framing markets. As well as a one-time reduction in auto glass segment earnings due to previously discussed pricing amendments. The net loss in the quarter was 24 cents per share versus earnings of 31 per share last year. This reflects discontinued operation losses related to the sale of Harmon Auto Glass.

Fiscal 2005 outlook. We are anticipating a better performance in fiscal 2005 than we delivered this year due to our strong architectural backlog, which is up more than 50% from a year ago. Improving performance in our glass installation business and success with our picture framing strategies. We are continuing to face uncertainty though as we enter the year since the commercial construction markets have yet to begin a sustained rebound. As a result, our guidance for fiscal 2005 earnings from continuous operations ranging from 30 to 50 cents per share, with our architectural segment being the key driver within this wide range.

Looked at another way, this earnings range means we expect to grow our EBT, earnings before taxes, from $1.5 million in fiscal 2004 to a range of 13 to $21 million in fiscal 2005, a significant improvement. The low end of the range reflects flat markets for our architectural segment, but some increased penetration in education, healthcare and government sectors served, as well as a continuation of the current rate of project delays. To achieve the high end of our guidance range, we'll need to see overall market improvement and stabilization of project timing. Also impacting our performance within the range is the rate at which we improve the predictability and performance of our glass installation business.

A key metric to measure our architectural progress is our backlog, which currently provides a solid level of work for us in the first half of fiscal 2005. We are starting out this fiscal year with a much larger backlog than we had last year as our markets have somewhat stabilized and our goal is to continue year on year growth in the architectural backlog.

We are generally experiencing positive trends related to our architectural business as seen in the improved inbound order rates that are building our backlog and two months of strong increases in architectural inquiries and billings, according to the American Institute of Architects. But there is a new concern. This year's sharp increase in steel prices have made the nonresidential construction market -- construction upturn in calendar 2004 less certain, according to industry forecaster, F. W. Dodge. The large scale optical segment will continue to convert picture framers to use of value added glass. With sales of these products expected to grow 10 to 15% in fiscal 2005. However, we anticipate revenues for this segment well be flat with our strategic sale of the low margin mat board product line and exit from low margin consumer electronics coatings.

We expect our large-scale optical segment profitability will continue to improve as we sell more value added framing glass and acrylic products. We will continue to use our positive cash flow to pay our dividend, fund capital spending, and finance our growth as markets improve. Other uses for cash including debt reduction and stock repurchases, will be considered in conjunction with strategic opportunities, including expansions in value added architectural glass and storefront markets.

This year will be pivotable(sic) in repositioning Apogee for a stronger future through our execution of strategies for growing our architectural products and services and picture framing glass businesses. These strategies are designed to help grow our core businesses, obtain new revenues from extension of these businesses, and achieve higher profitability on our revenues.

I will now turn to Bill Marchido, our new CFO for the financials. Bill, who joined Apogee in late February, replaced Mike Clauer, who has been promoted to Executive Vice President responsible for our glass installation, window and curtainwall manufacturing, and finishing businesses. As well as our large scale optical segment. We're counting on Mikes' leadership to improve contributions from these businesses.

Bill had been CFO at a large Seeman's division in Grand Rapids, Michigan since 1988. His expertise in construction, financial management controls will be an asset as we strive to improve our earnings predictability while implementing our growth strategies. He also has considerable experience in consolidating back room services across multiple businesses and implementing productivity improvements, which will be invaluable as Apogee realigns it's overhead costs to better serve our growth opportunities and improve returns.

Bill?

Thanks, Russ. I'm excited to be with Apogee and be part of the team implementing the strategic initiatives you've outlined.

This morning I'll cover earnings per share reconciliations from fiscal 2003 to fiscal 2004 and then move to to the fiscal 2005 outlook. We earned 17 cents from continued operations in fiscal 2004. The earnings per share reconciliation to the $1.02per share in 2003 underscores the challenges in the architectural segment.

Architectural was down 82 cents from last year, 3 cents of which represents one-time items.

Auto glass, including PPG Auto Glass, which is reported in equity in affiliates, was down 12 cents from prior year, 4 cents of which represents one-time items.

Large-scale optical was down 3 cents, 5 cents of which represents one-time items.

Fiscal 2004 one-time charges totaling 12 cents that were included in operations were: the auto glass pricing amendment change; sale of the mat board product line; integration of our large scale optical businesses; shut down of the Atlanta architectural finishing facility; and restructuring of our glass installation management organization. This is offset by a 13 cent improvement from our tax rate reductions.

Our net results for the year were a loss of 20 cents per share compared with prior year of earnings of $1.06. Discontinued operations reconciliation from 4 cents per share earnings last year to a loss of 30 cents, 37 cents this year is: Charges and writedowns related to the sale of Harmon Auto Glass were 31 cents.

Harmon Auto Glass operating performance was down 8 cents. Prior year included a gain of 13 cents at discontinued European curtainwall operations.

Our long-term debt was $39.7 million, down from $41.7 million at the end of the third quarter and $47.3 million at year end. Our total debt to -- our debt to total capital ratio was 19% at the end of the year, compared to 21% at the end of fiscal 2003. Our cash flow from reductions of working cap and the sale of nonstrategic property helped us reduce debt in the quarter despite the losses we incurred.

To update you on our share repurchases in fiscal 2004, as we had anticipated, we started purchasing after we closed on the sale of Harmon Auto Glass in Q4, and bought 113,000 shares for $1.3 million. As Russ stated, any buy backs in fiscal 2005 will be considered in light of debt reduction and strategic opportunities.

Now I like to move to the outlook for 2005. We are expecting improved performance in fiscal 2005 for the reasons Russ articulated. I will provide more detail in our guidance for this year. As we stated in our earnings release, we are giving only annual guidance in year and not quarterly numbers because of the unpredictability of architectural markets and project flow timing.

Overall revenues for the year are expected to increase 3 to 8%. We are confidence in a stronger growth rate in the first half versus the second due to our solid first half backlog. We expect a lower growth rate in the second half because there is currently more unpredictability in our backlog for the second half of the year.

Architectural segment revenues are expected to increase from 6 to 11% with market improvement required the high end of the growth range. Large-scale optical revenues are expected to be flat compared with to the prior year period. However, sales for our value added picture framing glass products are expected to grow at 10 to 15%, offset by the sale of mat board business and declining consumer electronics revenues. Auto glass manufacturing revenues are expected to be more than 15% lower than in fiscal 2004. Annual gross margins are expected to be 2 percentage points higher than the prior year. We anticipate that operational improvements and cost reductions will be somewhat offset by higher costs for wages and insurance. Our expected annual operating margins by segments are: architectural, approximately 1.5 to 3%, large scale optical, 6 to 11%, and auto glass, 6 to 7%.

We expect sales, general and administration costs to be slightly lower as a percentage of sales with costs savings offset by increased -- increases in wages and setup costs and insurance, as well as costs related to our strategic initiatives. Equity in affiliates is expected to have income of approximately $4 million, with the earnings resulting from amending existing PPG Auto Glass joint venture pricing amendments to better reflect market pricing.

We are anticipating EBITDA, earnings before interest, taxes, depreciation, amortization, from continued operations of 30 to $40 million in fiscal 2005. We estimate net cash provided by continued operations of 35 to $45 million for the year. We are targeting capital expenditures of $15 million excluding any strategic initiatives. This will give us anticipated free cash flow of 20 to $30 million. We use our free cash flow to pay our dividend and fund growth as markets improve. Other uses that we'll evaluate include debt reduction, stock repurchases and strategic opportunities.

The effective tax rate for the full year is anticipated to be 34%. The more normalized rate, this is significant change from last year when we had a negative tax rate. Earnings per share for continued operations are expected to range from 30 to 50% for the full year.

We are anticipating that Q1 will improve over our operating losses in Q4 of last year due to our stronger backlog and cost cutting efforts, as well as elimination of significant one-time items. Year over year quarterly growth in the architectural backlog is key to our progress within the earnings per share range. Discontinued operations in early fiscal 2005 are expected to reflect limited costs related to the finalization of the sale of Harmon Auto Glass. We're doing what we can to make our operations even more efficient in these challenged architectural markets and we're focused on implementing growth strategies for the short and long-term.

Thanks, Russ.

Thanks, Bill.

We didn't perform well last year due to down architectural markets and performance issues in some of our architectural businesses. The construction cycle seems to be at the bottom and I'm encouraged that we are seeing trends indicating improvement in our business and our markets. I would like to underscore that we have a solid three-year strategic plan and focused vision that should enable us to replace the revenues lost with the sale of Harmon Auto Glass over this period and create greater value for our shareholders.

I would like to go ahead and open up the call for questions at this time. Mike Clauer also will be joining us to answer any questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press star, two. Again, that is star, one to ask a question.

Your first question comes from Cliff Walsh from Sidoti. Please proceed, sir.

Good morning.

Good morning, Cliff.

Quick question about, you know, you mentioned that you possibly see a flat second half performance. Can you talk about what's -- what's driving that, what the assumptions are?

Yeah, Cliff, we really feel that there is a strong indication that the second half can actually grow. In fact, we talk about that. We expect our backlog to grow quarter on quarter. What we have is less certainty about it, and with the cycle, sort of the nonresidential cycle at its bottom, this uncertainty is just more of -- we look out and there's more of it and then we tried to cite a few of the other items. So we think that our first half growth will just be stronger than our second half until we can get a better look. That's what we know today, until we can get a better look at the future.

Okay.

Now, the project delays that you had in the fourth quarter, I guess it was about $16 million in revenue. Have you rescheduled that activity?

Yes.

Yes,we have and that's rescheduled. Actually it rescheduled over between now and November. I think it's spread out over that period.

And it actually, they actually started working on it in March.

That was Mike's comment there. That's one of his businesses, they have moved forward.

Okay. Can you talk a little bit about the product mix in the backlog?

In the architectural backlog, the product mix has continued to see more of the nonoffice in the non res, and more of the special kinds of projects, institutional, educational kinds of projects. Clearly, hurricane and blasts(ph) continue to be a, although smaller part, an important improving part of those businesses. On the picture framing side, we continue to see conversion taking place. The other thing we see in our backlogs is a stabilization of margin and pricing pressures. So we don't have as much of that as we saw in the past.

Okay. So even though you're going with, you know, the schools and the nonoffice-type work you're still seeing decent margins there?

Yes.

Okay. Can you give some details as to what you expect to happen with PPG going forward?

On the PPG, we -- when we put our auto glass business up for sale, we were fully aware that the whole value chain of supply and joint venture and that would be the sort of the balances would be changed. And as a result of that, we knew full well also that there could be and would possibly be a renegotiation.

What has happened in the meantime, is clearly there has been a shift of supply of where windshields are coming into the aftermarket. They're coming in from overseas, China, South Africa, South America. They're coming in from all locations. What we believe and what we have seen so far is that we have been able to carve out a competitive position within this and we think that that -- all of those changes really will lead to a total renegotiation. So we think that we're in a strong position to add value to PPG through quick turns and short runs that we're having advantage and core capability to the market, and that these market changes are just driving both sides to relook at an agreement that no longer reflects the market conditions that existed at the time the original agreement was struck.

Okay. Great. Thanks so much.

And your next question comes from Rob Ryan from Craig-Hallum Capital. Please proceed.

This is Rob calling in for Eric Marinuzzi. Actually, I wanted to get a little update on the steps you're using to gain better visibility in your Harmon Auto (INAUDIBLE) businesses.

What the Harmon and Wausau and Line Tech, the visibility at Line Tech is really developing strategic relationships and they have moved forward, and are having some nice successes with nonarchitectural customers which has improved the basis and the predictability of that business.

On Harmon and Wausau, what we're benefiting from and what we have -- what's giving us confidence is that we have improved our controls in our execution. We had some problems last year and we responded to those by implementing various controls and we think those controls are now more widely used and will -- you know, give us improved confidence of the backlog as it's going through. We also have seen margins steadily improving over recent months in those businesses so that's given us confidence.

Yeah, this is Mike.

I think just to -- a couple of points to add to what Russ said, is that one of the things that we have put in place is the job project review process that we look at monthly and really are on top of what's going on as far as the progress on the jobs. And the other thing, and Russ alluded to it, is we did make some organization changes where I believe this company has become a lot closer to the customers and markets served so we don't -- we have better visibility and we will be able to respond quicker to changes in the market.

Okay. Good. Thank you.

And also you mentioned on your PPG contract, kind of looking relooking at it in terms of the new market dynamics. Could you maybe give just a little more detail if possible on kind of what the issues are? Are they -- is it just price related or are there other issues around -- that are being discussed there?

It is the -- certainly the overall issues are the size of the joint venture and how many windshields it was able to move through. And as the foreign competition came in and that ability got spread around the marketplace, there were some differences and reactions to that. Clearly, the pricing has really driven those mixes more broadly. So what has happened is that no longer is it -- are most of the windshields for the aftermarket just going to come from the Apogee operation and the PPG operation, but it's a mix now that comes in. And so reflecting that new mix is what we're discussing and working through is how to best support that business moving it forward.

We do have to remember though that our business does have- about 20% of the business and actually even a larger percent of our manufacturing businesses, RV and Bus, which is stable, which is ongoing. It lies outside of the PPG contract and it really is -- I think it's closer to half of the profitability. So it -- it's a negotiation that has to take place recognizing market changes.

Okay. Great, thank you.

As a reminder, ladies and gentlemen, that is star, one to ask a question. And your next question comes from Frank Visk from Pilot Advisors. Please proceed.

Hi. Good morning.

Good morning.

Not to keep harping on the auto glass segment, but I guess most -- so 80% is this PPG contract revenue, I guess did you $44 million in -- of sales in '04. 80% or so in general terms is the PPG, is that --?

That's correct.

That's correct, okay. And obviously so the margins you're now saying are going to be 6% versus I guess for the whole year they were, you know, high --

Okay. Just -- yeah, let us address that. Mike?

First of all, Frank, you need to look back at what we had said that we modified the pricing amendment. You look at auto glass, take auto glass plus equity and affiliates, the joint venture earnings. And in reality, the total between the two, I think on a year over year basis, we see profitability improving slightly.

'05 versus '04?

Correct. But you to look at the two in the aggregate when you're looking at your models or understanding because there was some changes on how the pricing was calculated in that. The margins for going forward are really, you know, good margins and probably is one of our most predictable businesses in '05.

Okay. And then I guess are there any other -- in our other segments with the, you know, competitors coming from abroad, do you think we -- are we going to now hear about maybe competitors on the supply side in architectural or large scale optical, you know, they've hit us in auto glass. Do you see -- ?

No.

Okay. Let me go back.

One of the - just to make clear to follow up with what Mike said on the amendment, you have to remember, 15% of the revenue reduction is due to the amendment changes. So it is flowing from one year to the next. If you went back when we made the amendments, there was actually pick up. Now this goes out. So that's not -- that -- it's not as significant as one might think.

Now, to address the issue of foreign competition. Clearly, it is very true that foreign competition is a -- would be a concern for anybody in any industry that's in manufacturing today. And it is a clear message of mine to our businesses and we have been able to see the impact of this is -- is to make sure that we have speed to market that's continuously improving, continually moving forward. You have to remember that in our architectural markets, we are in a custom company. There's no standards. So there's nothing that can be manufactured overseas, shipped into the United States with a long -- with a long -- in it's very heavy wait and long lead time, and get into our markets with, and then be sold out of the warehouse. That just doesn't exist. That is not a possibility.

Clearly, the more we're able to -- the quicker we are to markets, the shorter our lead times, the faster our service, the greater the barrier is to foreign competition. Not that it can't be successful or can't come, but there are significant barriers and we will continue to accelerate our excellence in these areas to make sure that we raise that barrier as high as we possibly can.

The other thing that's really important here is the sensitivity to the markets and to the decision makers and the architects and the building owners. These are high-risk items and the confidence that they have with our products and services is very good and a reputation that we clearly intend to maintain.

Our advantages in picture framing really relate to our technologies and our abilities to do things that have not been successfully copied or duplicated in our markets. So we -- as strong, as (INAUDIBLE) as we can be, we are watching these markets, but we're also making sure that we leverage every opportunity we can to lower our cost to make sure that we're competitive and more profitable no matter what happens in these markets. So we've got a pretty good level of confidence about those areas in our other business lines.

And this is Mike, just to add on on picture framing. I mean, clearly we've seen at the -- at the clear glass bottom end, you've seen, you know, foreign competition coming in, but we are not seeing any competition at the higher value added products, which is really the key to our strategy. I mean, our goal is not to the sell clear glass it's to sell coated glass.

Sure. Okay. One last question and I probably should know this. Forgive me.

With regard to, you know, commodity costs are up, you know, how steel could possibly hurt us but, you know, we don't manufacture- I mean, we don't use the steel. But, what are the costs for the glass, are they going up as well and do we get to pass that along? Or maybe they're not going up.

Glass, actually is flat. Primary glass is maybe even down slightly. There have been some energy surcharges but we have largely been successful in passing energy surcharges through to the customer.

Okay. Thank you.

There are no more questions at this time, I would like to turn the presentation back to Mr. Huffer. Please proceed.

Could we wait one more moment just to see if there are any other questions, please?

As a reminder, ladies and gentlemen, that is star, one to ask a question.

Alright. Well, thank you very much. We really do appreciate the opportunity to serve you and be caretakers of your investments. We assure you that we're looking forward to a much improved year and we will keep you informed. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.