Apogee Enterprises Inc (APOG) 2005 Q3 法說會逐字稿

Welcome to the third-quarter fiscal 2005 Apogee Enterprises, Inc. earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time all participants are in a listen-only mode, however, we will be facilitating a question and answer session at the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Ms. Mary Ann Jackson, please proceed, Ma'am.

Good morning and welcome to the Apogee Enterprises fiscal 2005 third-quarter conference call on Thursday, December 16. The call is being webcast live over the Internet from Apogee's 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, Bill Marchido, CFO and Mike Clauer, Executive Vice President. Their remarks will focus on our third-quarter results and the outlook for the remainder of 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 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. 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 business or the extent to which any factor or a combination of factors because actual results could 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-Q 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 based harbor statements as of the date if this call and may continue to be used while this call remains on the Apogee website.

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

Good morning and welcome to our conference call. We are pleased to report a solid quarter. Based on this performance we've increased our guidance for the current fiscal year. We have also provided our growth outlook for the upcoming fiscal year with more detailed guidance to follow at year end. I'll cover our outlook in a few minutes.

We again achieved our internal expectations in the quarter, revenues were up 9 percent from the prior year period, earnings of 20 cents per share continuing operations were comparable to the third quarter of last year. (technical difficulty) earnings included a significant tax benefit. Without this benefit earnings per share would have been 12 cents in the third quarter of fiscal 2004. Operating income from continuing operations increased 32 percent from the prior year period. Our operating margin also increased to 5.4 percent from 4.5 percent in the third quarter of last year. This was due primarily to improved efficiencies on increased volume within the architectural segment.

Our architectural segment again turned in a solid performance in a more stable commercial construction market. Segment backlog grew slightly from the prior year period, and was down slightly from the second quarter level as new orders that went into backlog nearly offset strong revenues. Our backlog remains at a level that gives us confidence in our outlook.

The Large-Scale Optical segment continued to benefit from its success in converting the picture framing market to value added glass during our seasonally strong third quarter. Although revenues were down as expected year-on-year, operating income grew 32 percent and our operating margin in the third quarter increased to 17.4 from 11.3 percent in the prior year period. During the quarter we made significant progress on our initiatives to increase architectural market share and to improve performance in this segment. We broke ground for the addition to our Statesboro Georgia plant that we announced in the second quarter.

As we work on the plant addition we are modernizing the use coder we bought for the expansion. We remain on schedule for a startup in the fiscal 2006 second quarter which begins in June. We are eager to get this new $20 million capacity on line in October. In October Viracon was operating near capacity due to success of our initiatives in our market share gain. This compares to capacity utilization of 60 to 70 percent a year ago.

Our window and finishing businesses were at about 70 percent capacity utilization in the third quarter. We also just completed the acquisition of a glass installer, architectural wall systems, or AWallS based in the Chicago suburb. We signed an agreement in the third quarter and completed the acquisition this past week. AWallS brings a strong organization that complement strengths in our Harmon, Inc. group, installation is a people business, so their executives and project managers will be very important as we continue to improve the predictability and profitability of Harmon.

In addition, the acquisition allows us to expand our presence in the Midwest and enter the Northwest region were AWalls also has an office. We are estimating a return in excess of ROIC target of 12.5 percent in incremental annual revenues of approximately 25 million from the acquisition. In the fourth quarter we will add approximately 30 million to our architectural backlog as a result of the acquisition. Margin on these revenues are expected to be consistent with those we achieve on Harmon, Inc. new construction work. AWallS has installed glass in some prominent projects ranging from the Boston Logan Delta terminal and Ctack (ph) airport south and central terminal expansion, to the Four Seasons Hotel in Miami, the Chicago Transit Authority redline station, and the Washington State football and soccer stadium.

We remain focused on our overall strategic initiatives to grow our architectural and picture framing glass businesses. This includes growing current markets, targeting new markets with current products and looking for new opportunities that complement the existing products and markets. With our solid balance sheet and strong cash flow, we are positioned to support our strategies with investments as opportunities arise.

In the Large-Scale Optical segment we continue to convert custom picture framing markets to our value added glass and acrylic products. In Architectural Products and Services we have identified the need to expand our current limited storefront product line offering longer term. This will allow us to be a single source supplier to customers for first floor building entrances as well as windows and curtainwall on the other elevations. We have determined that we will not need an acquisition to enhance this product line.

Our architectural segment is expected to improve its finishing capacity utilization from its current level of 65 to 70 percent under an agreement finalized during the quarter with an extruder who will be relying on our finisher to provide anodizing and paint services for its customers. As a result of the agreement we also will be able to offer customers a full array of extrusion and fabrication options.

As we finished the first full year of our three year strategic plan, we feel we are on track to achieve our strategic growth objectives of replacing revenues lost with the sale of Harmon AutoGlass by the end of fiscal 2007 and as a higher level of profitability. Through our strategic initiatives we are focused on creating greater value for our shareholders.

Let's take a look at the outlook for the remainder of fiscal 2005 and 2006. Based on achieving another solid quarter of our architectural segments for our architectural segment, we are increasing our fiscal 2005 guidance range to 53 to 58 cents per share. The previous range was 45 to 55 cents per share. We anticipate that our overall revenues will increase 11 to 13 percent from last year's level which is up slightly from our previous guidance.

We expect that our architectural segment will continue to do better than the commercial construction industry in our fourth quarter and are anticipating architectural segment revenue growth of 18 to 20 percent for the fiscal year. We are pleased that Apogees' inbound order rates have trended up since the beginning of this fiscal year. Our commercial construction markets are expected to grow next year after several down years based on the latest calendar 2004 forecast from F.W. Dodge. Dodge anticipates overall nonresidential construction market growth of 5 percent and office building growth of 11 percent. Dodge forecast for calendar 2004 correlate to Apogee's fiscal 2006 due to the average nine-month lag between projects starts and the installation of glass on buildings. Dodge said in its latest forecast issued in October that they are seeing the first gains for office construction in 4 years during 2004. This is good news since we are the leaders in the high-end office market.

We expect to have our architectural glass on the five largest project starts in 2004 that have awarded glass contracts. Our Viracon brand will be on the New York Times headquarters as well as office buildings in DC, Seattle, Atlanta and Des Moines. There also is improvement on the office vacancy front. CB Richard Ellis reported a 16.3 percent metropolitan vacancy rate for the third calendar quarter, down from 16.6 percent in the second quarter and 16.8 percent in the prior year period.

The Large-Scale Optical segment is expected to grow value added glass sales more than 20 percent in fiscal 2005. Our profitability is improving even though we anticipate revenues for the segment will be down slightly for the full year as we continue to transition from lower margin mat board and consumer electronics products to picture framing glass and acrylic. Looking ahead to fiscal 2006, we are targeting revenue growth of approximately 10 percent. We anticipate continued growth in our architectural segment revenues, modest growth in our Large-Scale Optical segment, and an ongoing decline in auto glass segment sales.

Our outlook for architectural segment revenues reflects the market growth we projected by F.W. Dodge and share growth including recent glass installation acquisition, second half production from our new glass fabrication capacity and continued success with our initiatives. When taking into account the approximately $15 million in architectural revenues that moved into the first-quarter of fiscal 2005 from the prior year, our overall growth outlook for fiscal 2006 is even greater than 10 percent. We are anticipating earnings growth of 20 percent next year with architectural Large-Scale Optical operating margins continuing to improve and a further decline in auto glass margins.

Excluding onetime items that benefited us in fiscal 2005, our earnings growth is expected to be approximately 40 percent next year. The fiscal 2005 onetime items were a tax benefit of 4 cents per share in the first quarter, and 5 cents per share from proceeds from a class-action lawsuit settlement with flat glass manufacturers in the second quarter. We have repositioned Apogee for a stronger future through our initiatives for growing our architectural and picture framing glass businesses. Our positive operating cash flow allows us to pay our dividend which we again increased in October, reduce debt and fund capital spending.

We are now delivering improved results and value to our shareholders. CFO Bill Marchido will cover the financials.

I'm feeling good about continued progress we made in our third quarter. Revenues were up in operating income and margins increased significantly. We continue to improve operations and reduce costs while implementing our growth strategies. Earnings per share reconciliation between our current earnings of 20 cents per share, that 20 cents per share in the prior year period shows why we are encouraged by the performance of architectural segment. Architectural was up 10 cents from last year. Large-Scale Optical was 2 cents better than last year, and auto glass excluding the results for PPG Auto Glass which is reported in equity and affiliates, was down 4 cents from prior year. Offsetting the current year improvement was an 8 cents per share onetime tax benefit that we realized in the prior year period.

Without this benefit earnings per share in the third quarter of fiscal 2004 would have been 12 cents. Russ covered the performance of our architectural and Large-Scale Optical segments which both had improved operating margins. I would also like to note that our architectural backlog of 212.5 million continues strong as far as our improved outlook for the remainder of the year. The third-quarter backlog was down slightly from the second quarter and up slightly from the prior year period.

I would like to briefly cover our auto glass segment and equity and affiliates. Our auto glass segment revenues were down 36 percent in the quarter, and operations were slightly profitable without the pricing amendments. Our performance improved from Q2 due to additional operational improvements and cost cutting. Segment results continued to be impacted by soft market conditions, including 9 percent lower pricing year-on-year. At the same time we had a slight loss from our investments in PPG Auto Glass. Looking at the rest of the year for auto glass segment we are anticipating that revenues will be down more than 20 percent versus the prior year and annual operating margins will be 9 to 9.5 percent. The margin outlook increased due to the second quarter flat glass settlement proceeds.

Equity in Affiliates we are now expecting a loss of approximately 1.5 million for the year, a decline from our prior guidance. Despite very challenging auto replacement market conditions, these businesses continue to generate positive cash flow. This meets expectations set forth in our strategic plan for remaining auto glass interests. Our long-term debt was from 35.0 million at the end of the second quarter, down 19 percent from the end of the second quarter, and 12 percent from the end of fiscal 2004.

Our debt to total capital ratio declined to 17 percent. We anticipate further reducing our debt by year end to approximately $30 million. Discontinued operations there was no earnings per share impact in the quarter, this compares to prior year loss of 11 cents per share related to the operations and write-down associated with the sale of Harmon AutoGlass. During the quarter we were successful in selling the majority of auto glass retail locations which provide a proceeds of 2.6 million.

I'd like to talk about the outlook for the remainder of fiscal 2005 and outlook for 2006. We've increased our earnings guidance for the year to 53 to 58 cents per share, to reflect improving results. We also increased our overall and architectural segment revenue growth numbers as well as our estimated annual operating margin ranges for all three segments. I am going to briefly cover the elements of cash flow. Please see our earnings release for details of our outlook.

We are estimating EBITDA, earnings before interest, tax, depreciation and amortization from continuing operations of $42 to $44 million for fiscal 2005. We estimate net cash provided by continuing operations of $32 to $36 million for the year. Acquisition costs to capital expenditures are targeted at $25 to $30 million, this includes the new investment in architectural capacity. This will give us anticipated free cash flow of $5 to $9, we define free cash flow as net cash flow provided by operating activities minus capital expenditures.

I'd like to reiterate the outlook Russ shared for fiscal 2006. We are targeting overall revenue growth of 10 percent, architectural segment revenues are expected to grow from market improvement, and share gain from our acquisition, second half production from our glass fabrication capacity addition and continued success with our initiatives. As Russ noted in the first quarter of the current year we had about $15 million in revenues from installation project work that had been expected to be recorded in fiscal 2004. If you take into account this unusual item our revenue growth for fiscal 2005 to fiscal 2006 would be greater than 10 percent.

Our outlook for earnings growth for fiscal 2006 is 20 percent improvement, again we had a onetime item for this year including the tax benefit of 4 cents per share in the first quarter, to 5 cents per share in the second quarter from net proceeds from a class-action lawsuit settlement with certain flat glass manufacturers. Earnings growth for fiscal 2006 excluding these items is expected to be approximately 40 percent.

We are focused on implementing growth strategies for the short and long-term, while we continue to make our operations more efficient and reduce our cost.

I am encouraged by our third quarter. We are making progress on our strategies and we are seeing trends indicating improvement in our business and our markets. I like to go ahead and open up the call for questions at this time. Mike Clauer, our EVP, responsible for three of our architectural segment business, and our Large-Scale Optical segment is also available to address questions.

(OPERATOR INSTRUCTIONS) Cliff Walsh of Sidoti & Company.

Can you talk a little bit about the state of the auto glass unit and what's being done to try to get things back on track if anything?

Certainly there are two parts as we talk about auto glass, one is manufacturing and is the joint venture that we have with PPG. We have seen that market the PPG effort, the joint venture effort, make some very significant efforts to reduce costs and be more competitive and to create some value in a tough market. There has been some stability in that market. We actually, we are encouraged that we will see some slight improvement as that moves forward. That being said, it remains positive cash flow for us and so it should not be any more of a negative than we've already -- those assumptions are in our 10 percent revenue growth and 20 percent earnings growth. We've got that sort of conservative position.

On the manufacturing side we have an excellent manufacturing facility with very low asset base. Their efficiencies and abilities and flexibilities encourage us that will be able to continue to do various manufacturing activities including auto glass or RV and bus parts there that will leave us also meet our expectations as we have planned going forward. And so we feel that that too is not a high-risk item, in fact we believe that is a pretty conservative position. Those are nonstrategic, they are cash flow and we don't think that they will be significant as we move forward.

Moving on to architectural, can you address where you stand with capacity right now and maybe how much revenue you think you can add without adding any new capacity?

In our architectural side, in glass fabrication, yes, we are running against the top end, as you fill up that capacity in Viracon that's why we put in the expansions for Statesboro next spring because we could see that coming. So there short-term there will be incremental improvements in glass fabrication with some additions in headcount but a lot of that will be also prepping for the expansion in the spring. Spring then will give us 20 million plus of more capacity to come onboard next year. So we would see most of that being utilized in the second half of the year. That is the busiest time of the year for them as well. So that is some pretty good timing.

Our installation and window businesses do have capacity and the constraint there is people. This acquisition did provide us with additional people and we've got some very good strategies going in renovation and service there that we think will continue to grow and utilize the capacities and the people we can add there profitably. That tends to be a very strong part of that business.

Our finishing business still has substantial capacity. And this new effort with an extruder, a partnership with an extruder has brought us a list of non architectural customers to help balance out that business. So it is really glass fabrication, capital assets that we need to look at, continue to look at, and its people in the installation side.

Okay. Can you just detail your acquisition plans going forward?

I think that would be pretty speculative. The key part here is we've got a strong balance sheet, we've got great cash flow, and we have to be very opportunistic in the things, in terms of any acquisition. You have to be adding strong people in order to entertain that, not just a business that where somebody is looking or a team is looking to retire, and that's a pretty tough hurdle. So our plans are really to continue to grow and execute the current acquisition and the current business moreso than anything else at this point in time.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS) At this time we have no further questions. I will turn it back to the speakers on the call for any closing remarks.

We are pretty excited that we've been able to see our market stabilize somewhat especially our architectural markets, and then to see the success of our strategies. To watch our strategies really enable us to take advantage of the market and grow market share in our Architectural Products and Services at a time when our balance sheet remains strong, and cash flow and all of the items that really make up a strong fundamental company through our Six Sigma and our work. We really are pretty pumped up that the future, our future goal of replacing all those sales more profitably by fiscal 2007 is well within our reach and our control. And if there are no further questions, if you want to check one more time for questions?

Non at this time, sir.

Okay, thank you very much.

Thank you very much, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.