Apogee Enterprises Inc (APOG) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises first quarter 2006 earnings conference call. My name is Rachel and I will be your coordinator 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 2006 first quarter conference call on Tuesday, June 21st. This 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 first quarter results, and the outlook for fiscal 2006.

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 operation. 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 may cause actual results to differ materially from those contained in any forward-looking statements. For 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 26, 2005.

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. I'm very encouraged that we started the new fiscal year exceeding our expectations, with both first quarter revenues and earnings ahead of prior year and our plans. I am optimistic that we are building momentum. We earned $0.14 per share, up from $0.11 in the first quarter of last year, and our operating margin increased to 3.8% from 2.9% a year ago.

Revenues increased 12% with the architectural segment accounting for the majority of the growth. Our architectural segment continues to grow market share in an improving commercial construction market and our picture framing business is experiencing better than expected conversion to higher value-added glass products. Based on the positive trends we see in our business, we have increased our earnings guidance for the year to $0.74 to $0.80 per share, from $0.72 to $0.76 per share. We also are expecting stronger revenue growth and have increased our guidance to 9 to 11% from earlier expectations of 6 to 8% revenue growth for fiscal 2006.

Turning to first quarter segment results, architectural revenues grew 15%, and operating income was up 14% from the prior year period. Our operating margin was flat at 2.7%, as current lower margin projects are completed. During the second quarter, we expect to fill in our remaining second half production capacity, and anticipate securing a more profitable mix of projects and modest price improvements, especially in our glass fabrication business.

Contributing to stronger than anticipated revenue growth was strength in high end condos, government and institutional work. The office market is modestly improving, and we have won the architectural glass contracts for the majority of the recent large office project starts. Our architectural backlog at the end of the first quarter was $235 million up from 220 million at the end of fiscal 2005, and 233.7 million in the prior-year period. The first quarter backlog increases came from our architectural glass and glass installation businesses. And we are seeing very strong bidding activity throughout the segment.

Our Large-Scale Optical segment saw first quarter revenue increases of 12%, while operating income grew to 3.1 million from 575,000 a year ago. Our operating margin here increased 14.8%, from 3.1% in the prior-year period. We had better than anticipated conversion of the customer framing market from clear glass to value-added as well as to higher end value-added products. Margins also benefited from reallocation of manufacturing capacity from consumer electronics to picture framing glass.

We anticipate that our revenues from consumer electronics will decline to approximately 10% of segment revenues in fiscal 2006 as we have shifted our focus to the picture framing market. Our margins are also stronger due to the significant cost cuts we made in the process of consolidating the two businesses in the segment in late fiscal 2004. I'm very excited that our architectural and picture framing glass strategies are continuing to deliver better than anticipated results.

Now I'll cover our outlook for the current fiscal year. We are encouraged by our performance to date in ongoing market conditions and therefore, have increased our guidance for the year. As I mentioned earlier, our new EPS margin is $0.74 to $0.80, up from $0.72 to $0.76. We now expect revenue growth of 9 to 11%, an increase from our prior range of 6 to 8%.

Two key factors will impact our performance within this increased guidance range. With the Architectural segment, as we fill in open second half capacity, better mix and pricing will help us in reaching the high end of the EPS range. In the Large-Scale Optical segment, the ability to maintain our current stronger mix of higher value added picture framing products is key.

We have also increased our Architectural revenue growth expectations to 10 to 12% for the year from 6 to 9% growth. This increase is based on our success with our initiatives to increase sales of energy-efficient hurricane and blast products as well as market improvement, and the departure of another smaller competitor for high-end architectural glass products. Our Architectural growth guidance is well above the nonresidential construction market outlook for the current year of 4% improvement. This dodge calendar 2004 outlook correlates to Apogee's fiscal 2006 due to the average 9-month lag between project starts and the installation of glass on buildings.

The healthier economy is helping income properties. Job growth has led to lower vacancy rates with CB Richard Ellis reporting a 15.4% metropolitan vacancy rate for the first calendar quarter of 2005, down from 16% in the 2004 fourth quarter and 16.8% in the prior-year period. At the same time we've narrowed our architectural segment margin outlook to 3.5 to 4% operating margin for the year on higher revenues, as we are completing some lower margin work booked at the lowest point of the construction cycle. Our margin in this segment last year was 3%, and a 0.5 to 1% increase on the high level of revenues here will make a significant contribution to our bottom line.

Regarding the outlook for our Large-Scale Optical segment, we increased our segment operating margin guidance to 13 to 14% for fiscal 2006 up from 12%. We also increased our revenue growth expectation to 7 to 9% growth. We're seeing a better product mix in the segment, as the market converts to higher value-added products and we move away from less profitable consumer electronics products faster than expected.

It's very encouraging that we're achieving growth in all picture framing customer categories, ranging from large retailers like Michaels, to our largest distributor Larson Jewel, to smaller independent distributors. We're excited about Apogee's prospects for the current year as our initiatives deliver results and our architectural market strengthens. CFO Bill Marchido will now cover the financials. Bill?

Thanks, Russ. I'm feeling good about the continued progress we made in our first quarter. Both revenues and operating income were stronger than we had anticipated. We continued to improve operations and reduced cost while implementing our growth strategies.

The earnings-per-share reconciliation between the current-quarter earnings of $0.14 per share and $0.11 earned in the prior-year period is Architectural was up $0.01 from last year, Large-Scale Optical was $0.05 better than last year, Auto Glass including the results of PPG Auto Glass, which was reported in equity and affiliates, was flat compared to prior year.

Lower interest expense in the quarter resulted in a $0.01 improvement, the prior year period included an IRS interest refund that increased the prior results by $0.02, and also a tax deduction that increased prior year results by another $0.02. Long-term debt was 47.2 million at the end of the first quarter, up from 35.2 million at the end of the prior year. The increase in debt was due to the timing of capital investments and seasonal working capital changes.

Turning to the outlook for fiscal 2006. We raised our outlook for the current year based on the momentum we are building. Our guidance was increased to earnings of $0.74 to $0.80 per share on revenue growth of 9 to 11%. We also increased our outlook for Architectural segment revenue growth to 10 to 12%, and Large-Scale Optical segment revenue growth to 7 to 9%. We expect annual gross margins for the year to be slightly less than 1% point -- one percentage point higher than last year, as operational improvements and cost reductions are somewhat offset by higher cost of wages, materials, utilities and freight.

Our outlook for segment margins is Architectural, 3.5% to 4%. Margins are expected to increase from the fiscal 2005 margin of 3%, with improved pricing and capacity utilization. Our previous guidance was a range of 3.5 to 4.5%. Large-Scale Optical, approximately 13 to 14%. This is relatively flat with our focus on making picture framing glass products more affordable for consumers. Our previous Large-Scale Optical guidance was 12%. Auto Glass, break even or slightly better. The decrease from prior year is due to competitive market dynamics. SG&A as a percentage of sales is expected to be approximately 14%, down from our previous guidance of 14.5%.

I'm going to briefly cover the elements of cash flow for fiscal 2006. We are estimating EBITDA, earnings before interest, tax depreciation and amortization from continued operations of 49 to $52 million for fiscal 2006. We estimate net cash provided by continued operations of 44 to $48 million for the year. Capital expenditures are targeted at $25 million. This will give us anticipated free cash flow of 19 to $23 million. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. We expect to reduce debt to approximately $30 million by year end. Our tax rate for the year is anticipated to be 33 to 34%.

Regarding stock repurchases, we anticipate purchasing about 0.5 million shares in fiscal 2006, to be antidilutive to our compensation programs. We are focused on implementing both strategies for the short and long term but we continue to make our operations more efficient and reduce our cost. Thanks, Russ.

Thanks, Bill. I would like to go ahead and open the call up for questions at this time. Mike Clauer, Executive Vice President, responsible for three of our Architectural segment businesses, and our Large-Scale Optical segment, also is available to answer your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Cliff Walsh with Sidoti & Company.

Good morning.

Good morning, Cliff.

Can you comment a little bit on how much more activity you're seeing in the office sector now than you were maybe a couple quarters ago, and how much better the pricing is on that bidding activity?

Cliff, the office sector remains -- it's improving. But it's improving over a pretty small number. If we look at the most recent data, what we find is that it's coming up in around 10% over the prior year, but that prior year number was less than half of the peak. So it's still a pretty small number overall.

I think in the office sector, particularly what we're seeing is that we're seeing a little bit, we're seeing more energy efficient glass, and we're seeing the sort of the status of it demanding our higher end products and services which is helping us take a little more market share there. So the office, I think the office still has a ways to go before it's going to have a volume impact on us, just pure volume.

Okay. And can you give us a sense of what your winning percentage is on terms of projects that you're bidding on?

As you know, Cliff, our winning percentages vary from business to business, and what we find is that the activity in all of our businesses is higher than normal, and we are certainly winning our fair share. As we near our capacities, that's allowing us to be a little more active in terms of picking the kinds of projects that fit better, ones that we feel will be better for us. That's pretty forward-looking. You remember, bidding predates actual shipments and billings by 12 to 18 months.

Okay. And how are things progressing with the new Architectural capacity that you're working on?

It's going on target and on budget. The Statesboro expansion, the coder is in, it's been producing testing products. As you know, it will come up and then we'll do a slight modernization of the other machine. So it will be around the first of September before we see full impact of trained people and both machines up and running to full capacities.

In the meantime, we have been able to get the other equipment up and running, and we are filling that out as we speak, and it's been helping us make shipments and maintain lead times. The tempering equipment expansion in Owatonna is on track as well. So both of those projects are going as planned.

Okay. Great. Thanks so much, Russ.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our next question comes from the line of Tyson Bauer with Wealth Monitors.

Congratulations, gentlemen, that was a fantastic quarter you just reported.

Thanks, Tyson.

Just to kind of follow up on Cliff's question, your backlog numbers, and as you're bidding the business coming up and you're having more activity, since there is such a long lag within your business, can you -- even though you may not be able to give me hard numbers, kind of give me a sense of what kind of margin you're being able to bid now that you're gaining market share, and seeing more value-added products being in demand, as opposed to really what you have experienced as far as reporting the results. Kind of what that 12-month, 18-month outlook is as far as the spread for your bidding?

Well, again as we look at the whole division, the margin spread and the ability to achieve that differs from business to business. Viracon, as we've said before, has the ability to move -- quicker turns of backlog, and with another departure of a competitor, is able to move things along faster. They have made several moves and we feel that we will see, as we've said before, we'll see pricing and margins improving throughout this year.

Our other businesses are in largely fragmented industries, so it becomes the ability to project mix or range of margins in those particular businesses much more difficult to do, although as the market improves we know that there will be improvement. So as we come off this bottom and we see things come, we know that that will happen. So we would expect to see our ability to pick better projects, perform better against that mix over the next couple of years, just to be improving on a continuous basis.

Within that Architectural division, it seems like Viracon is kind of leading the way for the time being. Is it the expectation that the other segments within that division should catch up eventually, and that will also really get you guys going at full throttle, and it does appear that in fiscal '07 should be fairly robust the way things are kind of playing out here.

Tyson, as you know, we're not giving guidance for '07 but certainly we feel that our other businesses both have some opportunities for improvement and we think we will see those. As we've discussed before, Mike Clauer has been very busy with our window group to reengineer that and is doing a great job. We're very excited about the work and the potential that's coming out of that.

And we also see our Harmon installation business able to move ahead with a more solid backlog, which we think we'll continue to improve that as well. All of our businesses really are progressing, and really participating, certainly participating in an improved market.

Last question. Can you gauge the success of your AWallS transaction you did a couple quarters ago, and is that a prototype of what we should be seeing going forward?

This is Mike Clauer. I mean, we've owned AWallS now for about, what -- six months and I can tell you from an expectation perspective of bringing in that organization we're seeing real positive impact in bidding and growing the Company, so to answer the question, I feel really good about what the AWallS acquisition has brought.

To answer your second question, should we see more of it? At this point in time we're more focused on kind of integrating AWallS into Harmon and aren't really thinking about other potential acquisitions.

As you remember too, Tyson, we talked about the unique ability to acquire just a real first class team of people with that acquisition, and that's the critical measure on whether you make an acquisition in that business or not.

Thanks a lot, gentlemen.

Tyson, This is Mike. To answer your question on bid margins and the other part of the business, the bid margins are the same as they were a year ago. I feel better from an execution perspective we will be executing jobs better, but we're not seeing significant improvement in margins. But I want to caution you, I think the margins that we were bidding a year ago and today are good margins for the industry.

On a historical perspective or just where we are in the cycle?

Where we are in the cycle. Clearly when you're at the absolute peak and you're out of capacity, margins are going to be better, and when you're at the absolute bottom everybody is trying to fill up their capacity but I feel really good about the margins that we bid, and it really is about executing and bringing those margins home as we run the jobs.

Okay. Thanks a lot, gentlemen.

Thank you, sir. Ladies and gentlemen, at this time there are no further questions. I'd like to turn it back to our management team for any closing remarks.

Thank you, Rachel. And thank you for listening in today. Certainly we feel that we've got very good first-quarter results, and we're making progress on our strategies and our business is improving. Certainly our key Architectural markets and Large-Scale Optical markets are all moving in the right direction, and we're excited about the opportunities for fiscal 2006. Thank you.

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