Apogee Enterprises Inc (APOG) 2005 Q2 法說會逐字稿

Welcome to the Apogee Enterprises, Inc. Q2 2005 earnings conference call. My name is Rachel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Mary Ann Jackson.

Thanks, Rachel. Good morning and welcome to the Apogee Enterprises fiscal 2005 second-quarter conference call on Thursday, September 16th. 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 and CEO; Bill Marchido, CFO; and Mike Clauer, Executive Vice President. Their remarks will focus on our second-quarter results and the outlook for the remainder of fiscal 2005.

Before we begin, I'd 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 as 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 Company's results of operations. New 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 in the business or the extent to which any factor or a combination of factors may cause actual results to differ materially from those contained in any forward-looking statements.

For a more detailed explanation of the foregoing and other risks and uncertainties, see exhibit 99.1 to the Company's report on Form 10-K for the fiscal year ended February 28, 2004. 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 website.

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

Good morning. Thanks, Mary Ann, and welcome to our conference call. We again achieved our internal expectations in the quarter. Both our second-quarter revenues and earnings were ahead of last year's performance, with revenues up 11 percent and earnings increasing to 16 cents per share from 9 cents per share in the prior-year period. Our second-quarter earnings included 5 cents per share from net proceeds of a class-action lawsuit settlement with certain flat glass manufacturers covering 1991 to 1995. The proceeds are included in segment operating income.

Our Architectural segment again turned in a solid performance in soft commercial construction markets and nearly maintained its backlog on high revenue growth. The Large-Scale Optical segment is benefiting from the consolidation of its 2 businesses into one as it enters the traditionally strongest part of its year. I am very encouraged by our success in executing initiatives to increase architectural market share and the improving performance in this segment, along with some market strengthening. With this momentum, we commit to a key strategy in our growth plan which is focused on expanding our core businesses and obtaining new revenues from extensions of these businesses.

With our 3-year strategic plan, we have a clear vision for replacing the revenue lost with the sale of Harmon Auto Glass and at significantly improved profitability. Through these initiatives, we are focused on creating greater value for our shareholders.

In our earnings release last night, we announced that we are investing approximately $12 million to expand the capacity of an existing architectural glass fabrication facility by about $20 million in annual revenue. This equates to adding about 10 percent to our glass fabrication capacity. We are excited about this investment and expect to have returns that will bring value to our shareholders. We are estimating a return in excess of 12.5 percent return on invested capital. This new capacity will be available to serve anticipated growth in our core higher-end markets. We are experiencing success with our initiatives to grow sales of value-added glass, including energy-efficient hurricane and glass products for the office, health care, education, and institutional markets.

Also an architecture glass fabricator, which we estimated had 17 to 20 million in annual revenues, exited the U.S. market this summer. We expect to gain sales as a result of their market exit. In fact, we purchased a used coater and other equipment from them after their shutdown in July. The fabricator, Interpane, closed both of their U.S. plants, but they continue to operate overseas would they are based.

We will also leverage this core market capacity to serve a portion of the broader market for smaller, less complex projects within 500 miles of our two facilities. We will be breaking ground for the expansion in the current quarter and expect to begin full operations on the additional line at our Statesboro, Georgia Viracon facility next summer during our fiscal 2006 second quarter. Our $12 million investment will include the coater, an insulating line, a 60,000 square foot expansion of the Statesboro facility, and miscellaneous equipment, labor, and interest. We will initially add 125 employees.

The manager of our Statesboro facility since its startup in 1999 will be responsible for this expansion. He has an experienced workforce on-site, and Viracon has solid systems to incorporate and utilize the new capacity. Today we are seeing growth opportunities in our core market for more complex value-added products. When we analyzed the returns for expanding into various markets, it became evident that we currently have greater immediate opportunity for success in expanding an existing facility to service the growth in our core markets. We will continue to evaluate further expansion to capture additional core and select broader markets. Initially, our strategic planning process, we are evaluating an expansion related to the broader markets served by regional fabricators.

We are achieving success with our other strategic initiatives. In the Large-Scale Optical segment, we continued to convert custom picture framing markets to our value-added glass and acrylic products and to penetrate museum, gallery, and international markets with these products. Results include year-to-date value-added picture framing glass growth of more than 20 percent, a rate which we expect will continue in the second half. This month we agreed to market a line of picture framing grade acrylic glazing products that matches our current glass line product by product, and features fade-resistant and reflection-control choices. While we expect this agreement will add a nominal amount of revenues for the Large-Scale Optical segment, approximately $1 million annually, it supports our strategy of serving as a single source for the full range of glazing products required by the custom framing market.

Improvement of our Architectural Products and Services businesses to increase their contributions to Apogee's earnings through better execution in an unpredictable market. Our Architectural businesses are making significant operational improvements, both through our Six Sigma/Lean effort and by leveraging synergies within this group. These efforts are starting to yield improved margins. We will continue to evaluate strategic opportunities to leverage assets and grow these businesses. Our Architectural segment is expected to improve its finishing capacity utilization from its current level of approximately 60 percent, pending finalization of an agreement with an extruder who will be relying on our finisher to provide anodizing and paint services for its customer. As a result of the agreement, we also will be able to offer customers a full array of extrusion and fabrication options.

I would like to make one final comment on growth opportunities related to hurricane-resistant products. Last year's sales of these products grew about 15 percent. We expect that we will see stronger growth as more and more states and municipalities adopt and then implement hurricane building codes. We also expect to see more buildings renovated with hurricane-resistant systems. We have had questions regarding a short-term bump in our hurricane product sales with the recent storms in Florida. Our employees have been working hard to respond to demand for window and curtainwall repairs, but they have yet to complete much of the work as customers await insurance checks. We thank these employees and others we have in Florida for their work on behalf of Apogee while dealing with the challenges of damages to their own homes and just finding gas and food.

We are hearing product successes from Florida, and Mike Clauer and I will be visiting a number of locations in the state next week to see projects firsthand. All in all, we expect the success of hurricane systems during these storms will lead to growth in installation of hurricane glass. Harmon recently renovated a major hotel with a hurricane-resistant system, and it came through one of the hurricanes unscathed, while another nearby hotel in the same chain that did not have hurricane systems experienced major damage. A luxury high-rise condominium in Punta Gorda is a Viracon success story. The building's maintenance staff rode out the storm in the clubhouse and witnessed large roof piles slamming into the windows. The glass did its job. The laminated inner layer held the shattered glass intact in the frame. There was evidence of deep gouges in the concrete retaining walls and building exterior from the same roof tiles.

Let's take a look at the outlook for the remainder of fiscal 2005. Based on achieving another solid quarter for our Architectural segment and the flat glass settlement of 5 cents per share, we're increasing our fiscal 2005 guidance range to 45 to 55 cents per share. The previous range was 35 to 50 cents per share. We anticipate that our overall revenues will increase 9 to 12 percent from last year's level, which is up from our previous guidance of 8 to 11 percent revenue growth. In order to achieve this guidance, we will need to see the current architectural market trends continue with no significant external events. We will also need to see our normal project flow continue versus the timing delays we experienced last year. The performance of our Architectural segment is the key driver within this range. We expect that our Architectural segment will continue to do better than the commercial construction industry this year. We are anticipating architectural segment growth of 14 to 17 percent for the fiscal year, increase from our previous outlook of 8 to 11 percent growth.

We are pleased that Apogee's inbound order rates have trended up for the first 6 months of this fiscal year. The midyear forecast from F.W. Dodge showed a flat total nonresidential construction market for calendar 2003 and an 8 percent decrease in office construction. Dodge calendar 2003 correlates to Apogee's current fiscal 2005 because of the timing of our products and service lags construction starts by about 9 months. Looking ahead to our fiscal 2006, which relates to Dodge calendar 2004 forecast, they continue to expect growth of 4 percent for total nonresidential construction and 10 percent growth in the office construction. Dodge said in its midyear report that overall, it's viewed that the pluses are beginning to outweigh the negatives for the office market.

The Large-Scale Optical segment is expected to grow value-added glass sales more than 20 percent in fiscal 2005. This is increased from our previous expectation of 10 to 15 percent growth. However, we anticipate revenues for the segment will be flat to down slightly for the year, with our sale of the low-margin matboard product line and exit from certain low-margin consumer electronics coatings. But 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 generate positive cash flow that will allow us to pay our dividend, reduce debt, and fund capital spending, including current growth initiatives. We do not anticipate making further stock repurchase during this fiscal year, as we evaluate additional strategic opportunities. We have repositioned Apogee for a stronger future through our strategies for growing our Architectural Products and Services and picture framing glass businesses. CFO, Bill Marchido, will now cover the financials. Bill.

Thanks, Russ. I'm feeling good about the continued progress we made in our second-quarter. Our increased earnings are primarily the result of improvements we have made, with only a slight turnaround in market conditions. We continue to improve operations and reduce cost while implementing our growth strategies. The earnings per share reconciliation between the current earnings of 16 cents per share and the 9 cents per share in the prior-year period shows why we are encouraged by the performance of our Architectural segment. We had a 5-cent increase in the prior year due to the flat glass settlement, which is not reflected in the segment reconciliation that follows. Architectural is up 6 cents from last year, while the prior year includes 1 cent for the Atlanta finishing plant closure. Large-Scale Optical was 1 cent better than last year. Auto glass, including results for PPG Auto Glass, which is reported in equity in affiliates, was down 5 cents from prior year. We also had a 1-cent improvement from interest earned in the quarter on a federal tax refund and a 2-cent reduction due to tax credits taken in the prior year.

Russ covered the performance of our Architectural and Large-Scale Optical segments. I would like to briefly cover our Auto Glass segment and equity in affiliates. Our Auto Glass segment revenues were down 28 percent in the quarter, and operating results were essentially breakeven without the flat glass settlement. Results here were impacted by soft market conditions with reduced demand of 6 percent lower pricing, along with termination of certain supply agreement pricing amendments during fiscal 2004. At the same time, earnings from our investments in PPG Auto Glass were down slightly from the prior year. As a positive impact from termination of the price amendments to the joint venture supply agreement was more than offset by reduced volume and pricing.

Looking at the rest of the year for Auto Glass businesses, we are anticipating that segment revenues will be down 20 percent versus the prior year annual operating margins will be 4 to 5 percent. Both of these metrics have declined from our first-quarter guidance. Regarding equity in affiliates, we are now expecting the loss of $0.5 million to $1 million for the year, again a lower performance than we had anticipated a quarter ago. The very challenging auto replacement glass market conditions are leading to lower demand in pricing.

Our long-term debt was 43.2 million at the end the second quarter, up from 39.7 million at the end of fiscal 2004. Purchase of a used coater and other equipment for the architectural glass expansion and share repurchases increased debt. Stock repurchases in the quarter totaled 1.9 million or 172,325 shares. Our prior repurchase against our 1.5 million authorization occurred late in fiscal 2004. At that time we spent 1.3 million to purchase approximately 113,000 shares. As Russ stated, we do not anticipate making further stock repurchases during this fiscal year, as we evaluate additional strategic opportunities.

Our debt to total capital ratio was slightly higher at 20 percent. We continue to expect to reduce our debt from our fiscal 2004 year-end level, excluding any additional strategic initiatives. In discontinued operations, we finalized remaining adjustments related to the sale of Harmon AutoGlass, resulting in no earnings per share impact in the quarter. This compares to a year loss -- prior year loss of 16 cents per share, reflecting operating results for Harmon AutoGlass were more than offset by a charge of 18 cents per share for reducing its carrying value. The remaining issue from the sale of Harmon AutoGlass is the sale of several retail locations, with net proceeds anticipated to exceed 3.3 million. The sale is expected to be completed by year-end.

Now let me turn to the outlook for the remainder of fiscal 2005. We have increased our earnings guidance for the year to 45 to 55 cents per share. This reflects improved results and a 5-cent per share from the flat glass settlement. We also increased our overall Architectural segment revenue growth numbers. In addition, we expect to see stronger growth of high margin, value-added picture framing glass and acrylic products, although segment revenues will be flat to slightly down. Finally, we increased our estimate annual operating margin ranges for the Architectural and Large-Scale Optical segments.

Please see our earnings release for details of our outlook. I'm going to briefly cover the elements of cash flow before I turn the call back to Russ for the Q&A. We are estimating EBITDA, earnings before interest, tax, depreciation and amortization, from continued operations of $39 million to $44 million for fiscal 2005. We estimate net cash flow provided by continued operations of $31 million to $36 million for the year. We are targeting capital expenditures of $25 million to $30 million. This includes the new investment in architectural capacity, but excludes any additional strategic initiatives. This will give us anticipated free cash flow of $6 million to $11 million. We are focused on implementing growth strategies for the short and long-term, and continue to make our operations even more efficient in these slowed architectural markets. Thanks, Russ.

Thanks, Bill. I am encouraged by our second-quarter performance, but recognize we have much ground to gain in returning to previous levels of profitability. We're making progress on our strategies. The construction cycle seems to be improving slightly, and we are seeing trends indicating improvement in our business and our markets. I would like to underscore that we have a solid 3-year strategic plan and focused vision that should enable us to replace the revenues lost with the sale of Harmon AutoGlass over this period and create greater value for you, our shareholders.

I would like to go ahead and open up the call for questions at this time. Mike Clauer, who was our CFO and is now EVP responsible for 3 of our Architectural segment businesses and Large-Scale Optical segment, is also with us to address your questions. Let us open it up to questions now.

(OPERATOR INSTRUCTIONS) Cliff Walsh of Sidoti.

Good morning, everyone. Can you give me an idea as to where you stand right now in terms of architectural capacity?

Our architectural capacities are varying from, within the businesses, from about 60 to 85 percent. I think we reported about 55 to 60 percent last year or throughout fiscal 2004, so we are -- depending on which business, we are within those ranges. We think that the other thing we have to remember in capacity utilization is that it really depends a lot on mix. There's certain items that can take up more capacities than others, but that is about where we are at today.

Okay, can you let us know where Viracon stands in that?

Viracon is probably running at the higher end of that right now, closer to 85 percent. As they do more laminated product, that ties up multiple processes, so that is one of those mix issues that is consuming a lot of capacity.

Now can you talk a little bit about the opportunity you see from Interpane exiting the market?

Yes, Interpane was a core competitor of Viracon's, 1 of 2 North American core competitors. Asahi or AFG Canada is the second one. They had about 17 to 20 million, is our best estimates of the volume they did in the most recent 12 months; all core products, things that are right at the heart of what Viracon does. So we believe that Viracon will have a significant opportunity associated with that shutdown.

Okay. Now at the end of the first quarter on the conference call, you had mentioned that you were a little concerned that Q4 might be a little bit soft. I am assuming with the increase in guidance and the way the backlog is looking now that that is not so much a concern?

That is true. Our third and fourth-quarter opportunities appear to be on target. As I said in my earlier statement, we just have to make sure that there are no unusual circumstances or delays. We believe normal things would still be accommodated within our guidance.

Okay, thanks so much.

John Walthausen of Paradigm Capital Management.

Good morning. I guess my first question is about the change in guidance in Architectural. The 25 million roughly that you are adding to the expectation in revenues is a big number in the context of, I think you are saying, the marketplace is improved slightly. Can you talk about what you are seeing that caused you to make that big an increase in your guidance?

Well, it's the backlog. The backlog has continued to be held at high levels and still showing significant growth year-on-year, so that is really the basis of that. So we feel we have got a pretty good line of sight to that top line.

And the bookings that you are bringing in, are there some very major programs that are coming in there, or is it just an across-the-board improvement at the rate that people are bringing projects on?

I think it is across the board. Everybody is shaking their head. We believe it's an across-the-board. We think we are winning market share. There is a little bit of a difference here between being risen by the market. The markets are still, as I said, last year's starts which really indicate our business shipments for this year still pretty soft. So a lot of this gain is market share gain, which is very positive news, and along with that is that it's still at the bottom of the market. So the margins and the competitive nature of those markets is still very high, very intense.

Okay, the other question is about the decision to put your capital in expanding Statesboro rather than open up a regional facility. Is that a change in your view of what the market -- how the marketplace is developing and where your opportunities are?

Well, certainly with the exit of Interpane and that core business being available, it is faster to expand an existing facility than it is to start up a new one. And also because we are leveraging an existing facility, the returns are greater. So the immediate opportunity with that set of circumstances is really what led us to do that. We still firmly believe that a new location is part of our future.

Right. Is that likely to be a little bit later, simply because of the cost and complexity of adding to Statesboro?

I think we want to make sure that Statesboro expansion is under control, on target, and highly assured. But I would say to you that as soon as we feel that that is the case, we would probably be aggressive in making sure that reevaluating the growth of a new location, and if it still is what we believe at that time, we're going to move forward.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Ben Sun (ph) of Adams Harkness.

Just a quick question. On a broader stroke in terms of strategic plans, do you see any new opportunities out there that might make an interesting acquisition?

Yes, we do. We continue to pursue those kinds of opportunities, and we are enthusiastic that they may become available.

Okay, thanks.

Jeff Karanski (ph) of DePrince, Race & Zollo.

Just one question. Can you compare the margins that you're getting right now versus the ones that are being reflected in this release? Do you see them improving right now? Are they trending the same way?

Let me make this comment first. Clearly, in our Architectural Products and Services group, the work we are shipping today was largely bid 6 to 9 to 12 months ago, which was at the very bottom of this marketplace. So we believe and it seems to be indicated that those margins are at the bottom of that cyclical trough. So our belief and indications are that we think that these will improve in the Architectural segment.

So what about the ones -- are the margins you're getting right now --?

We think they will be up about 2 percent in the quarter going forward.

Are you seeing that currently, that they have improved over say --?

Over a period of time, because it takes a while because of the long lead of bidding, but we believe they will move up.

Okay, I think that is all I have. Thanks.

Ladies and gentlemen, at this time we have no further questions. I'd like to turn it back to management for any closing remarks.

All right, I really appreciate the time that you've spent with us today. We continue to be very encouraged by our growth of our Architectural Products and Services and Large-Scale Optical businesses within the strategic parameters that we have laid out to you before, and we believe those strategies are going to yield significant growth opportunities and improve profitability as we have stated over the next 3 years. That has been our goal, that's our strategy, and we are very committed to it and believe that we are on track. So thank you for your time today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a great day.