Apogee Enterprises Inc (APOG) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 Apogee Enterprises Incorporated earnings conference call. My name is Angela, 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 this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

Now, I'd like to turn the presentation over to your host for today's call, Ms. Mary Ann Jackson. Please proceed, ma'am.

Thanks, Angela. Good morning and welcome to the Apogee Enterprises fiscal 2006 second-quarter conference call on Thursday, September 15. 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, Jim Porter, interim CFO, and Mike Clauer, Executive Vice President. Their remarks will focus on our second-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 to 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 make in the future prove to be important in affecting the Company's results of operations. (technical difficulty) -- from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each factor on the business (indiscernible) potential, which any factor or 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 -- (technical difficulty) -- the Company's report at 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 Web site.

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

Good morning. Thank you, Mary Ann, and welcome to our conference call.

We continued to build momentum in the second quarter, and I'm excited that we were able to announce plans for a new architectural glass fabrication facility earlier this week. The plant is part of our strategy to grow this business with increased capacities and expanded geographic presence in the United States and will help us meet growing demands for value-added architectural glass.

In the second quarter, we earned $0.20 per share, up from $0.16 per share the same period last year. We had significant improvement in our earnings, especially when you consider that, in last year's second quarter, we had $0.05 per share income from a class-action lawsuit settlement with the flat glass manufacturers.

Our revenues also grew 15% in the period.

In the quarter, our Architectural segment increased revenues 13%, as it gained share, and our backlog grew by 24%. Our Architectural segment operating income showed a decrease, but was up 18% when you exclude unusual items in both years. These items include a $600,000 charge for realignment of our window-manufacturing business in the current quarter and last year's flat glass settlement income of $800,000.

We also had some production inefficiencies and our architectural glass business related to equipment installation and maintenance, and our installation business continues to work out some lower-margin projects that are nearing completion. A portion of the increase in our backlog during the quarter reflects the growth we're seeing in condominium projects.

The new third Viracon plant we announced this week will cost approximately $25 million and increase our annual revenues by approximately 40 million when fully operational. It will produce the full breadth of Viracon value-added products, including coatings for energy efficiency and hurricane blast-resistant products.

Early in the third quarter, we purchased a used coder, which we will refurbish and install in the new plant. We bought it from a smaller direct competitor which closed its plant in August.

The new plant should start operating in 18 months and will have more than 200 employees when fully operational, a year or so after start-up. By locating the facility in the Southwest, we will be able to better serve the West Coast, including the markets for both high-end, value-added products and less-complex products for smaller construction projects. This is a growth region that includes some of the strongest energy codes in the country. We're very excited that market demand is supporting our strategy to grow our Viracon business.

The performance of our large-scale optical segment was especially strong in the second quarter. Revenues increased 37%, and operating income grew to 5 million from $1.7 million in the prior year. Conversion of the custom framing market from clear glass to value-added, as well as from value-added to higher-end value-added products, was better than anticipated. We also benefited from stocking and promotional programs conducted by some national framing and pre-framed art retail customers in our first half.

Consumer electronics continues to be less and less of our business in large-scale optical, which helps our bottom line. In the quarter, it was 11% of the large-scale optical revenues.

Next, I will cover the outlook for the current fiscal year. We are encouraged by our performance to date in improving market conditions and are reaffirming our full-year guidance of earnings of $0.74 to $0.80 per share. Based on our positive revenue trends in the first half, we anticipate that our revenue growth will be towards the top end of our previous range of 9 to 11% growth. In the second half, we are anticipating a stronger operating performance from our Architectural segment. We expect that our picture-framing growth will be lower in the second half.

Our Architectural segment is build momentum. Markets are strengthening, and we're seeing pricing improvement in our architectural glass business. The strength of our backlog is also very encouraging. We are optimistic that, by capitalizing on operating improvements and leveraging overhead costs as revenues continue to increase, we are positioned to meet our full-year Architectural segment operating margin guidance of 3.6 to 4%.

We have received several questions about the potential impact of Hurricane Katrina on our business. Before I talk business, I would like to say that we have been deeply touched by the plight of the people of New Orleans and along the Gulf Coast and are donating $25,000 to the American Red Cross. We are also matching employee contributions to the hurricane relief effort up to $100,000. We're not experiencing significant short-term impact on our business due to the hurricane. We did have one casino project underway on the Gulf Coast that has been wiped out. As the region requires product for replacement or new construction, we plan to be well positioned to help. We would also expect that there will be increased implementation of building codes requiring hurricane-resistant glass and Window & Wall Systems for commercial buildings. Apogee is a leading provider of these products and services.

Our contract glazing business now has people on-site at the request of customers and are currently evaluating locating a team in the region. Our full-year outlook for the picture-framing business is for stronger growth over the prior year, but we anticipate that the first half will be stronger than the second half. In the first half, some national retail customers had inventory and promotions programs that are not expected to be repeated in the second half. We are excited about Apogee's prospects for the current year, as our initiatives deliver results and our architectural markets strengthen.

Before I turn things over to interim CFO Jim Porter to cover the financials, I would like to briefly introduce Jim. He has been with Apogee since 1997 and has served as a member of my executive management team since 2000. Jim also is our Vice President of Strategy and Planning and had previously been our Controller. He is one of our internal candidates for the CFO position. Jim will now cover the financials. Jim?

Thanks, Russ. Good morning and welcome to our conference call.

I'm feeling good about the continued progress we made in our second quarter. Both revenues and earnings were ahead of last year, and we continue to make progress in implementing our growth strategies. Sales of value-added architectural and picture-framing products are increasing, and we're adding a plant to further grow our architectural glass capacity.

I will start off with the earnings per share reconciliation between the current-quarter earnings of $0.20 per share and the $0.16 per share earned in the prior-year period. The prior-year period included a flat glass settlement that increase last year's results by $0.05 per share. Excluding this impact on the change from last year, our Architectural segment was flat from last year, including a $0.01 negative impact this quarter for realignment charges in the window business. Widescale optical was $0.08 better than last year, and auto glass, including the income from our PPG Auto Glass joint venture, which is reported in equity and affiliates, was $0.01 better than the prior year.

Our large-scale optical segment had the most significant difference in performance compared to our expectations. As Russ indicated, some of our national retail accounts have stronger first-half orders to accommodate their inventory transition or promotions programs. This resulted in a stronger-than-normal second quarter relative to the rest of the year.

Our long-term debt was $39 million at the end of the second quarter, compared to 47.2 million at the end of the first quarter from 35.2 million at the end of the prior year.

I will turn to our outlook for fiscal 2006. With the momentum we're building, we're reaffirming our guidance of $0.74 to $0.80 per share, with revenue growth expected at the higher end of our current range of 9 to 11%. We also increased our outlook for full-year large-scale optical segment revenue growth to 10 to 12%. We expect annual gross margins for the year to be flat to slightly up from the prior year, as operational improvements and cost reductions are somewhat offset by higher costs for wages, materials, utilities and freight.

Regarding our outlook for the Architectural segment, I'd like to reiterate that we feel we can achieve our margin guidance of 3.6 to 4.0% for the year. As the construction cycle improves, we expect to continue to strengthen our margins in this key part of our business. Our second-half margins should benefit from improved operations in our architectural businesses and our ability to leverage overhead cost over our stronger second-half revenues.

For the large-scale optical segment, we increased both our revenue and margin guidance for the full year. We do anticipate different seasonality from past years with most of our full-year growth coming from our strong first half for reasons already mentioned. (indiscernible) we are expecting full-year large-scale optical revenue growth of 10 to 12% and margins of approximately 15%. We're pleased with the performance in this segment. Our strategy of focusing on the more profitable picture-framing market rather than a mix, including consumer electronics products, has quickly improved the profitability of this segment.

SG&A as a percent of sales is expected to be approximately 14%.

We have adjusted our projected tax rate up slightly to 34%, and we will see higher interest expense associated with the increase in our debt projection.

I'm going to briefly cover the elements of cash flow for fiscal 2006. We are estimating EBITDA -- earnings before interest, taxes, depreciation and amortization -- from continuing operations of 50 to $54 million for fiscal 2006. We estimate net cash provided by continuing operations of 30 to $34 million for the year. This has declined from previous expectations as the ever-increasing backlog is driving up future working capital requirements. Capital expenditures are projected to be approximately $30 million, and this includes $5 million of the planned $25 million total cost for our third plant expansion. This will give us an anticipated slightly positively free cash flow. We define free cash flow as net cash flow provided by operating activities, minus capital expenditures.

Regarding stock repurchases, we anticipate purchasing about 250,000 shares in fiscal 2006 to be antidilutive to our (indiscernible) programs. Including our normal ongoing dividend program, we know project year-end debt will increase to approximately $45 million.

We continue to be focused on implementing our growth strategies for the short and long-term while also focus on making our operations more efficient and reducing our costs. Thanks. Russ?

Thanks, Jim.

I'd like to go ahead and open up the call for questions at this time. Mike Clauer, our Executive Vice President responsible for three of our Architectural segment businesses and our large-scale optical segment, also is available to answer your questions.

Operator, I'd like to take questions at this time.

Thank you, sir. (OPERATOR INSTRUCTIONS). Cliff Walsh with Sidoti.

Can you comment on the project mix in the Architectural backlog? You know, how much is office versus more fill-in, government education work? Maybe you can comment on how much is more high-end windows.

Cliff, I think, as you know, most of the work that we do is high-performance work. Office construction still remains a smaller portion of the backlog than was traditional. We've been reporting -- in fact, office is even a little bit below what it has been. I think we've been reporting it close to 25%. It's still a little bit -- it's in that range.

Condominiums do remain stronger. It's probably the part that's growing the most for us. But we have a good strength throughout the backlog with the condos about 25%. But we have good strength throughout the other areas, whether it's government, healthcare, education, in those areas. So, it's a broad-based backlog.

Can you comment, Russ, on recent bidding activity on hurricane-resistant products, maybe in areas elsewhere besides the ones affected by Hurricane Katrina -- maybe on the eastern coast or something along those lines?

Yes, the trends are -- I think, as you know, as we've talked, Cliff, the hurricane -- the demand for hurricane products are primarily driven by the enforcement of the hurricane codes in the local jurisdictions. As those local jurisdictions become more intent on enforcement or compliance with the codes throughout the hurricane regions, then more projects come along. We see that continuing to improve and you know, honestly and truthfully, what happens every time -- unfortunately, when we have a major event like Katrina, more of those do move in that direction. So, we don't have reports of that yet, but we would anticipate that that trend would continue, that we would see more and more areas of the coastline that are subject to hurricanes enforcing these codes.

Our bidding activity remains strong in this area, and it remains a very important part of the growth of our product line for Apogee, throughout Apogee.

Okay, great. In terms of Statesboro, it's up and running. I guess it was a little bit better than -- quicker than expected. You know, are you comfortable with where things are there? Then how quickly do you think you can ramp up?

We have just finished all of the equipment installations. The ramp-ups are coming fairly quickly. Some of the equipment is already fully utilized. The coders probably have a couple more weeks of training and new product or new products to that location development. So we would see positive impact and improvement throughout the fall now, throughout this quarter.

Okay, great. Thanks very much, everyone.

Steve Denault with Northland Securities.

Can you provide a little bit more color regarding the large-scale optical? When you reference the promotional programs, are we talking -- was there any new distribution gains in the quarter, specifically from a multi-unit prospective?

There weren't any gains other than what we were normally expecting. The unusual items were the conversions. There was one shop (ph) chain that we expected to gain in conversion; that was rag shop (ph) when that came through. The unusual things were inventory shifts and decisions that were made by some of our larger accounts, and those accelerated their conversion to higher value-added more quickly. So, we expect that to have leveled off now.

This is Jim. The inventory transitions really were, with some customers, as they transition their product offering or even in some cases product size, there was just a transition in terms of their inventory stocking, in terms of initial stocking orders. So one of the things that happened is it just removed some of their -- some of our revenues that would have happened over time happened in the quarter -- probably pulled some of it ahead from Q3, just in terms of that initial stocking order for some of their distribution centers.

Okay, so you are better penetrating existing accounts?

Yes.

Okay, great. The second question is really in reference to -- with AFG and Interpane having -- it's kind of a two-part question -- having closed their commercially focused glass businesses, part one -- how much business is up for grabs? Part two, can you help people understand why these two would walk away from their commercial glass business, particularly as things are improving?

Certainly, the volume of business was probably north of $50 million that was involved with those two businesses. I think that at their peak -- and I think that what we saw was Interpane is a successful European company, and they were having difficulties and were not investing. It's a private company -- were not investing in their operations, so their operations became somewhat outdated. I think they just decided to concentrate on what they do well in Europe and they do very well there, so they moved away from the U.S. market.

AFG, in their move -- AFG is a division of Asahi, a very large, probably the largest glass company in the world. But they have this small operation in Canada, relative to their overall size that was competing with Viracon. That operation just wasn't at the scale or had the full-service capabilities that Viracon did. I think that what happened there -- and I'm just speculating, but I believe that Asahi sees glass sales as being very important and high-performance products in the residential and in broader markets as being where they could move more glass. So they decided to move -- they decided that instead of investing or trying to compete at the high end, they would move their product lines to these areas where they've made major investments for the residential marketplace, and use that to compete in the commercial markets, which they will. So, they haven't exited all of the commercial market; they've just exited the specialty portion where our business, our glass-fabrication business, enjoys a very strong position.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Tyson Bauer with Wealth Monitors, Incorporated.

Congratulations, gentlemen, on a solid quarter and a positive outlook. A couple of quick questions -- on your new facility, the 25 million pricetag that you put on this, can you break out where those will be classified as building, land, versus equipment? Is there used equipment available that you can modify to save cost as you did in Georgia?

Yes, we are certainly (indiscernible). Right now, the 25 million includes everything, so building, land and equipment. I would say that it's premature at this time to write these things out because we are in a search for locations and buildings and things, so I think it's in our own best interest to maintain that -- our thoughts to ourselves in that area.

Yes, there was used equipment. The AFG Toronto plant had a coder in which we bought, which was very -- a sister coder of the one we bought from Interpane when it closed and of the machines that we currently have. So we have taken ownership of that machine; we will be moving it back to Minnesota, and we will be retrofitting it to make it a state-of-the-art machine. We'll take it down to the bare metal; it will be retro-ed and it will be made a state-of-the-art machine that does specialty high-performance coatings and does those with the technology that we've developed for our other locations. So, there's a significant capital advantage in doing that, which we were successful in achieving in our Statesboro expansion, so we have high confidence we will be able to successfully do that for this third location.

Conceptually, when we talk about the hurricane codes and other glass codes on the coast, in the Gulf, where does that stand now if you compare, such as the Middle Atlantic, the Florida region as opposed to the Gulf region? Can you draw any parallels from your experience in what occurred such as after Hurricane Hugo or Andrew, some of the bigger hurricanes in recent times?

Well, certainly, Andrew was the one that triggered the hurricane codes throughout the -- from Texas to New York City. The hurricane codes apply to that coastal region where wind loads have been experienced over approximately 100 miles an hour. Every time a storm goes through, there are more and more compliants. Last year, when they were four, there were still regions of Florida where compliance was not complete, and now it is. I would expect that with Ophelia and Katrina and the attention -- the disastrous effects that have been seen from hurricanes, that we will see more of that. It's pretty hard to quantify because it does happen in local districts, district by district.

What we've seen is slowness in the Panhandle, Louisiana region to meet these -- broadly meet these. There has certainly been selective construction which met it. We think that will become more broadlay (ph) in that region, and then could eventually go through the rest of Texas and up the East Coast.

Also, separate from the code-enforcement itself, what we have seen, relative to the examples in the Florida, is businesses also having more of a focus on business continuity independent of the codes and more of a focus on hurricane protection for those reasons.

Well, Jim and Russ, do you work with the insurance companies to work that angle in promoting use of your glass?

We certainly provide information or answer their questions when it's project-by-project. So, on individual projects, we are supportive of the performance levels of the products and services that we provide for their use.

The insurance industry, too, is faced with the same problem that we are -- that going after local authorities that enforce and use the codes is a tough way to go, and getting compliance -- widespread compliance has just been a slow process. It's moving, and we expect it to continue to move, but it's been slowly incoming.

The recent energy bill that was signed -- any provisions that you found within that that would be the beneficial for Apogee regarding green buildings for government use or other, more broad-spread provisions?

Yes, there clearly are. The formulas are somewhat complex, so I can't sit here and tell you that, if they just use our products, they get X, but if a project is built with green intent, our products clearly support that and enable people to optimize their rebates from the government. There's true value in adding our products into the project mix. It's the extensive use of the glass that is a factor that varies that contribution, so that's why I can't say it's, you know, $0.50 or $1 a square foot or something like that. It really -- it's there; it's real; it's part of the discussions; it's an influencer in what the architect and owner select. But if you are asking for a certain number, it's a complex process to get to that number.

There are specific components of the energy bill that do provide some additional incentive for buildings that look for value-added glass products -- (multiple speakers).

Absolutely.

-- which benefits us.

So there is tangible money back or credits to those architects or contractors that use green materials or provide energy-saving buildings?

That's correct.

Last topic real quick -- MGM Mirage just announced this morning that they are pushing forward with their $5 billion city project for Las Vegas. Could you characterize your experience in doing business in Vegas, and what kind of market share or business activities you had in the past in that city?

We've had tremendous success in Las Vegas. We were the provider of the glass for MGM; we are the provider of the glass for the MGM condos. We have not been a glazing contractor; we've been a glass supplier more than anything. So if the MGM, the megaproject that you're talking about -- we are aware of it; we've provided information. Our goal is to be their glass partner, but it would be premature, at this point in time, to go beyond that.

In general, we have a very strong share of the high-end hotel and condominiums in the Las Vegas market.

Yes, very strong share.

Gentlemen, at this time, we have no further questions in the queue. I'd like to turn the call back cover to management for closing remarks.

Thank you.

Certainly, we appreciate your support and interest in Apogee. We are very encouraged by our second-quarter results. We believe that our strategies continue to be on target. Our business is improving and we see the market places -- although there are some uncertainties that come about when an event like Katrina comes, we will be sorting through that to give you more information, but in general, we see strengthening markets and great opportunities ahead for Apogee. So, thank you very much.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a wonderful day.