Apogee Enterprises Inc (APOG) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006, Apogee Enterprises earnings conference call. My name is Michelle and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to the turn the presentation over to your host for today's call, Ms. Mary Ann Jackson. Please proceed, ma'am.

Thank you, Michelle. Good morning and welcome to the Apogee Enterprises fiscal 2006 third quarter conference call on Thursday, December 15. This call is being webcast live over the internet from Apogee's corporate website at 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 are Russ Huffer, Chairman and CEO; and Jim Porter, CFO. Their remarks will focus on our third quarter results and the outlook for the remainder of fiscal 2006.

During the course of this conference call we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and the current economic environment and are, of course, subject to risks and uncertainties which are beyond the control of management.

These statements are not guarantees of future performance and actual results may differ materially. Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the Company's Annual Report on Form 10-K for the fiscal year ended February 26, 2005, and in our earnings release issued last night and filed this morning on Form 8-K.

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 they 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 Jim will cover the financials. After they conclude they will answer your questions. Russ?

Good morning, thank you, Mary Ann, and welcome to our conference call. We continued to build momentum in the third quarter, and met our internal expectations for growth in both revenues and earnings. We remain optimistic about the remainder of the year.

In the third quarter we earned $0.32 per share, up from $0.20 per share in the same period last year. Our current quarter results include a $0.07 per share net tax benefit resulting from resolution of certain tax matters. Our earnings, excluding the tax benefit, were $0.25 per share, up 25% compared to last year' third quarter.

Our revenues also grew 13% in the period. In the quarter, our architectural segment increased revenues 13% as it gained share. Our two largest businesses, installation and architectural glass, were the strongest contributors to this growth. We are gaining share as awareness of the benefits of energy-efficient, and hurricane-resistant glass products and systems drive demand for our value-added products and services.

We expect that as more and more states adopt and then implement energy and hurricane building codes our opportunities will continue to grow. Apogee is well positioned to meet the growing demand for these value-added products, and recently brought on additional architectural glass capacity when an expansion at our Georgia plant began operating in the third quarter.

We have also announced plans for a new architectural glass fabrication facility in the southwest. Architectural operating income was up 11%. We achieved an operating margin of 4.0%, an increase in the first half architectural segment margin of 2.7%. This is consistent with our expectation as the second half performance will be stronger than that that of the first half.

Our architectural backlog now stands at 316 million, it grew 15% from the second quarter and 49% from last year's third quarter. The majority of the growth in the backlog from the second quarter is work scheduled for late fiscal 2007 and early fiscal 2008.

Our third quarter capital expenditures included approximately $5 million for a use coater that we will modernize to the state of the art technology. This coater will then be installed in our new architectural glass fabrication plant. We expect to complete the site selection process for this facility in the fourth quarter with start up a year later.

The large scale optical segment again grew revenues and operating income in the third quarter. Revenues increased 15% and operating income grew 10% from the prior year. Revenue growth came from converting framing customers to value-added products, and also from our small pre-framed art business.

Operating income benefited from framing glass conversion and from improved profitability of the remaining consumer electronics products.

Now I'll cover our outlook for the remainder of the current fiscal year. We have increased our fiscal 2006 guidance from $0.81 to $0.87 per share to reflect the $0.07 per share net tax benefit, and we are focused on delivering results in the top half of this range. We are encouraged by our performance today in improving market conditions. The timing of architectural project flow in the fourth quarter could impact our performance within the guidance range.

Based on our positive revenue trends year-to-date, we have slightly increased our revenue outlook for the year to 10% to 12% growth. In the fourth quarter we are anticipating a stronger operating performance from our architectural segment, which continues to build momentum.

Markets are strengthening, we're seeing pricing increases in our architectural glass business, and project mix is improving in both our installation and architectural glass operations with the flow of our backlog. The strength of our backlog is also very encouraging with a solid fourth quarter position and a good base of business going into next year.

Our fiscal 2006 full year outlook for the architectural segment includes slightly stronger revenue growth than previously expected, and improved, but somewhat lower, full year margins. The margin change results from the carry-over effect of unplanned equipment downtime and start up of new equipment earlier in the year.

Our fiscal 2006 full year outlook for the large scale optical segment is for stronger growth over the prior year driven by growth in the first half. We have also slightly increased our full year operating margin outlook. We are excited about Apogee's prospects for the current year as our initiatives deliver results and our architectural market strengthens. Jim will now cover the financials. Jim?

Thanks, Russ. Good morning, and welcome to our conference call. We continued to make good progress in our third quarter, both revenues and earnings were ahead of last year and continue to meet our expectations. I'll start out with the earnings per share reconciliation between the current quarter earnings of $0.32 per share, and the $0.20 earned in the prior year period.

First, the net tax benefit from resolution of certain tax matters added a net $0.07 per share this quarter. The architectural segment added $0.01. Large scale optical was $0.01 better than last year, and auto glass, including the income from our PPG auto glass joint venture reported in equity and affiliates, was $0.03 better than the prior year.

Architectural segment revenues and operating income both had double digit increases. Our operating margin of 4% increased from the first half margin of 2.7%, as we had expected. However, the margin was flat compared to the prior year period as architectural results continued to be impacted by unplanned equipment downtime and start up of new equipment earlier in the year. These factors are now behind us.

We also had double digit increases in our large-scale optical segment revenues, and operating income. Increased sales of both value-added picture framing products and framed art contributed to the revenue growth.

Operating income continues to benefit from our success in converting the picture framing market to value-added glass, and we also had stronger earnings on our remaining consumer electronics business compared to the prior year. Over the past few quarters we rationalized our consumer electronics business to focus on a limited number of profitable products. This now constitutes approximately 10% of large-scale optical segment revenues.

The large-scale optical operating margin in the current period was down from the third quarter of last year due to the stronger than expected product mix we experienced in the first half of this year.

The auto glass segment, which is our small windshield manufacturing business, has slightly positive operating income as expected on 11% revenue growth. Earnings for our windshield distribution joint venture met expectations. These results, in equity and affiliates, have improved over prior year, each quarter due to better performance at the joint venture.

At the end of the third quarter our long-term debt was $44 million. This compares to 39 million at the end of the second quarter and 35.2 million at the end of the prior year. Debt increased, as expected, as a result of working capital needs, capital expenditures and stock buy-backs. Non-cash working capital, current assets excluding cash less current liabilities, was $73.7 million compared to 68.2 million in the second quarter and 61.6 million at the end of fiscal 2005.

The increase was driven by growth in the accounts receivable balance in line with our business activity. Regarding stock purchases, during the quarter our stock repurchases totaled $2.4 million, or 148,500 shares. Our tax rate for the quarter was 10.9% due to the non-cash net tax benefit.

Turning to our outlook for fiscal 2006, we're feeling good about the current year. Our guidance was increased to reflect the net tax benefit and we've stated that we're focused on delivering earnings in the top half of our new range of $0.81 to $0.87 per share. Timing of architectural segment project flow in the fourth quarter could impact our performance within this range.

Regarding our outlook for the architectural segment, although we slightly reduced our operating margin guidance range for the fiscal 2006 full year, the third quarter was the third sequential quarter of margin improvement for this segment, and we're anticipating that the fourth quarter will be even stronger to meet our expectations of a full year operating margin range of 3.4% to 3.6%. As we continue to improve our project mix, product mix and pricing, in a strengthening construction market, we expect to further increase our margins in this key part of our business.

Our architectural backlog of $316 million includes about $130 million of work scheduled in the fourth quarter, supporting our outlook for annual revenue growth of 11% to 13% in the architectural segment. Of the remaining backlog more than $100 million is currently scheduled for the first half of fiscal 2007, nearly 60 million for the second half of next year, and nearly 20 million for fiscal 2008.

We'll be ending this year and moving into fiscal 2007 with a strong base of architectural business. For the large-scale optical segment, we slightly increased our margin guidance for the full year to an estimated 16% operating margin.

Continue to expect the increased revenues, 10% to 12% for the year, driven by growth experienced in the first half. Growing sales of both picture framing glass and framed art are contributing to this outlook.

SG&A, as a percent of sales, is expected to be slightly higher than 14%. The effective tax rate for the full year is now anticipated to be 27% to 28% compared to our prior guidance of 34%. This is based on an overall rate of 35% offset by adjustments.

I'm going to briefly cover the elements of cash flow for the full year fiscal 2006 estimate. We're estimating EBITDA, earnings before interest, taxes, depreciation and amortization, from continuing operations of $47 million to $51 million for fiscal 2006. We estimate net cash provided by continuing operations of $26 million to $30 million for the year.

This range has declined slightly from previous expectations as the outlook for our fourth quarter working capital requirements is increased based on the timing of business activity. Capital expenditures are projected to be approximately $30 million. This includes approximately $5 million of the planned $25 million total cost for the new third architectural glass plant to be built next year.

We anticipate this will give us neutral to slightly negative pre-cash flow, and we define pre-cash flow as net cash flow provided by operating activities minus capital expenditures.

Including our normal ongoing dividend program, we now project year-end debt will increase to approximately $45 million to $50 million. Regarding guidance for our next fiscal year, we expect to provide guidance for fiscal 2007 later in our fourth quarter. We feel good about our current position. We continue to be focused on implementing our growth strategies for the short and long term, while we're also making our operations more efficient and reducing cost. Thanks. Russ?

Thank you, Jim. I'd like to go ahead and open up the call for questions at this time.

Thank, you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Cliff Walsh of Sidoti & Company. Please proceed.

Good morning everyone.

Good morning, Cliff.

Can you guys quantify the extent of the price increases that you mentioned in the press release that you're seeing in the architectural segment?

Yeah, Cliff, this is Russ, we -- we certainly are seeing recovery. We have not -- and from where we were a year ago, so there's no question that the pricing on the different product lines that we have have moved forward. They have not recovered to where their peaks were a couple of years ago, though, so they are still well below those peaks, but they are up significantly from a year ago. We have to be careful when we talk about those because overall productivity, and therefore, profitability flows from the mix of business as well as the efficiencies to the factories, which we have talked about some of the things that have gone on, so maybe --

Hey, Cliff, this is Jim. A couple things. First of all, as we have talked in the past the price increasing opportunities that we have been seeing are largely in our architectural glass business. We haven't seen much improvement in pricing in the architectural segment in the installation business, or in the window business. In the architectural glass business, you know, we have rolled out some price increases during this past fiscal year, ranging from 5% to 10% and there's a lot of differences depending on which segment we're serving, as you know, you know, these projects take a long time before they start to kick in, and we're really just starting to see some of the projects flowing through at the end of our fiscal year with some improved pricing.

Okay. So can you touch on maybe the pricing differential that's in the backlog now, or the margin differential, what you have now and what you've done over the last year or so?

You know, I don't know that we have an overall number relative to pricing in the backlog compared to a year ago.

Okay.

The problem with giving -- Cliff, the problem with giving guidance on that is that you can look at pricing on a square foot basis, but it has to be the flow rate through the factories that ultimately drives profitability, so that's why we have to be very careful in discussing that.

Okay. Can you -- can you talk a little bit about the shift in product mix that you are seeing, how extensive is it? And maybe you can just talk -- talk a little bit to that.

I -- there is no question that the shift -- the demand for -- for higher -- higher value-added products, whether it's hurricane or -- or even energy efficient products involve multiple steps, both of those have been big drivers for us.

We have also seen, clearly we've seen a lot of government institutional work, which is -- you know, harder bid, so some -- in our installation and window businesses, you know, that's one of the reasons why we have not seen pricing moving there as much as we have seen in glass fabrication.

Clearly, we benefited from a decrease in competition in glass fabrication that has helped us move some of those along, but as Jim said it takes time for all of this to flow through. I think the most important thing to look forward to is there's more stability, more predictability in our backlogs today than we have seen for some time.

So variation in margin projected versus accomplished is getting better, it's getting -- we're seeing that, and then, obviously, with our additional capacities and completing the work that we have done, and now having adjusted to the increased demand, we're starting to see us return to the kinds of efficiencies that we had before we were doing equipment modernizations and expansion.

So, hopefully that -- that will give you the best picture of an -- an improving backlog and improving opportunities.

Okay. That definitely does. And in terms of your -- your guidance for the year, you know you said you were hoping to get towards the higher end of the range. What do you think has to happen in terms of that? Can you talk a little bit about what you need to see to hit the higher end?

Yes. I think under normal circumstances we would hit the higher end. So we're not asking for extraordinary things to happen. Our concern always is how much our -- how much movement can there be? And if you remember a couple of years ago, we saw movement at the end of the year. Movement throughout the year we always feel like there's better opportunities to make it up. Movement in the fourth quarter it goes from one fiscal year to the other. So normal circumstances we're projecting to be in the higher end. It would take sort of less than optimal movement out that would take us to the lower end.

And, Cliff, as Russ said we normally experience some level of project delays or project move outs, and we have built into our guidance a normal level of activity like that. What Russ is saying is that periodically you can have an unusual level of delays outside of our control. And those are going to be factors of, for example, job sites waiting for steel or something like that and we come in later in the process and are affected by that. At this point we don't have visibility for unusual delays but that is a variable they we can't control that could affect it.

Okay. Final question, you mentioned the shift to value-added products in terms of hurricanes. Can you touch on the Gulf Coast region and what you are seeing down in Florida, as well, and along the East Coast in terms of hurricane resistant type products?

The demand in Florida remains very high, and we are certainly responding to that. Along the Gulf Coast, what we're -- our sense is and some -- and it's almost anecdotal, we don't have good -- we can't identify all of the regions and what they are doing, but certainly the indications are that -- that people are understanding, know full well how much hurricane construction makes a difference and we anticipate that new construction will be built to that standard.

The amount of renovation, though, is very unclear. I would say -- you know, I get that question a lot as well, and that does not -- we -- we don't have good clarity on what is going on there.

But new construction, I think we're just going to see more and more of it, especially on the higher-end buildings, the kind of construction projects we're on are going to adopt and follow these building standards.

The majority of the after effect from these hurricanes is longer term, as we talked about in the past, and we'll see that. The short-term impact is, you know, we have seen some business in architectural segment in Florida and in the New Orleans area that's been coming through, but not meaningful levels of activity, but longer term we do anticipate the benefit from those.

Okay. Great. Thanks very much, guys.

Yep.

And our next question comes from the line of Steve Denault of Northland Securities. Please proceed.

Good morning, everybody.

Good morning.

If I look at your backlog of $40 million, approximately, sequentially, can you provide some color regarding where that's coming from? Whether it be office, condo, or what not?

Yes, it's still a lot of condo. Office is still a very small portion. Do --

Yes, this is Jim. In terms of the mix of our backlog, we haven't seen dramatic changes. You know, I think in the growth of the backlog, less of it has come from the condo business, and, frankly, we actually are okay with that.

So in terms of the growth of our backlog, we are seeing a little bit of pick up in office, but again, office still represents less than 30% of our backlog, compared to in our peak a few years ago, where it was close to a half. And probably a majority, or a good portion of the growth has come in the education and health care sectors.

Okay. When you make reference to gaining market share, how much of the gain is relative to high-end glass gaining share over that of conventional glass and how much of the market share gain is relative to Apogee specifically gaining share within the high-end glass segment?

I -- I would say to you in glass fabrication, probably there's more high-end glass being used today. So that -- that -- I would -- I don't think that we're taking more share of the high-end use of glass, but it's being used more broadly. You have to remember the basis was somewhere south of 35% of commercial buildings using high-end glass.

So as non-residential construction uses high value-added glass, that's a lot of projects that are not necessarily the kinds of projects we focus on. So there's a broad usage that's coming across.

And we're nicely gaining our share, but we do exceptionally well on the bigger projects, our share falls off on the smaller ones, and we think that's probably true. However, we're still buoyed by that, that's good news for us.

On the window and especially installation business, we're seeing some geographic expansion, as well as increase in activities in local areas that are adding to our share of that business, but -- but -- but there you have to remember our overall market share is so small, it's a such a fraction market, that even a very small market share increase is a lot of dollars.

Steve, and it is in both areas, both in the architectural glass, the comments Russ talked about, but from an overall segment perspective, we reference the McGraw-Hill Construction Dodge data and based on the lag in our business relative to when that data is. We're working off of last year's growth of 5% in the total non-res market, and so we look at our architectural segment growth as a comparison to that.

As Russ said, in the installation side of our business we have grown that business both in current and in new geographic markets, partly through organic growth, and partly from some of the talent available from the acquisition that we did a year ago, as well.

My sense is with energy prices where they're at that it's quite a bit easier to justify economically the use of high-end glass in commercial construction. Where do you think market share, if you reference 35% of commercial construction uses high-end glass today, if energy prices hold constant relative to where they are today, where could that market share go?

We have -- we have seen various industry projections, not Dodge so -- so these are -- I would quantify these as more single data points, or industry, almost anecdotal, but the comments seem to indicate that north of 50% is -- is a realistic trend for non-residential. If you look at residential construction, it's all -- it -- it too is growing a great deal, but it's already north of 50 growing to more than that. It only seems likely that non-res would -- would experience a higher growth rate for the next couple of years.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Tyson Bauer of Wealth Monitors. Please proceed.

Good morning, gentlemen, and hopefully you are enjoying your new blanket of snow the last two days.

[LAUGHTER] Yes, we are.

A couple quick questions. When you talk about price increases it would seem, at least on the face of it, that's probably more prone to affect you on the large projects, or where you truly dominate in the market. Has that filtered down to some of the smaller regional jobs that, say, are for the small offices or commercial side of the business that, you know, you have not as much in backlog longer out? They are more of the more short-term nature.

No, actually it has. We have been very careful to look at the balance of business going through our facilities. And so we are -- we are -- we are very cautious in looking at all of those details. So you have to be careful.

We -- we have to be careful,because we have to -- we have to understand that we have to be competitive, but we have seen that -- the kinds of business -- things that we do well are in demand across the board, and -- and we are working to make sure that we get competing returns from all segments of the business we serve.

And, Tyson, the smaller projects in nature the size alone doesn't necessarily drive different pricing. The smaller projects continue to look for high-value added products and their drivers frequently are driven by factors such as lead time rather than pricing.

Jim, you broke out the backlog in terms of this next quarter and then first half '07, second half '07. Are there any directional or trends that can be taken out of your ability to price those going forward? Are there improvements seen?

You know, I -- I think we have talked in general terms directionally about improvements both in our performance and in pricing, and you know at this point we're not giving any more direction or guidance for next year.

That's fine. Your capacity level, especially at the architectural sites in Georgia, with the new expansion, and also in the Minnesota facility, where do you stand there? And how -- how quickly were you able to get that expansion filled in Georgia and get it up to speed?

You know, we completed the project in Georgia in September as the second -- the original coater there was modernized, as well. It has been showing improvements in production ever since. We anticipate they will continue to bring up production there over the next couple of months to reach their -- their potential.

Owatonna, modernization of that factory was also completed this fall, I believe in late October, early November, the last of the conversions took place, and that facility has already shown some very nice rebound in -- in productivity over the last 30 days, pretty consistent improvement.

So we think -- and we'll be doing some other minor improvements to both facilities through the winter, but they will be far less disruptive. We don't expect the challenges that we had this year as we make these minor tweaks to continue to enhance productivities.

For our architectural glass business I think it's fair to say, Tyson, that we're essentially full in terms of capacity there. And as the capacity has come on and continues to come on we fill that up. In our other manufacturing businesses, in the architectural segment, our capacity utilization is up in the upper 60s percent.

Given that type of information, you -- I guess from our perspective would anticipate better margin reaction if you have full capacity that your through-put, your flow within those facilities, should help your cog situation, and then if you are also having pricing increases, what has really not allowed you to expand those margins faster?

Well, you got to remember, Viracon is only a portion of the overall segment, so where we are experiencing that, it is being reflected in our projections for the fourth quarter and the future. We -- and what we have seen is better stabilization in the other half of the architectural business.

And just to remind you, Tyson, in terms of from the pricing perspective, the lag that occurs, there's a long lag time between when we're actually bidding and being awarded a contract and when we're actually providing the products or services associated with that.

So we are still working off of projects that were bid 12 to 18 months ago, when the market wasn't as strong and pricing hadn't start to recover. So that's one of the factors that's -- that's delayed, and we have talked about a little bit in terms of the mix of our projects and working through the lower price point being replaced by better priced projects at the end of this year.

Final question for me, on the installer base where you haven't been able to flex your muscle as much as the other sides. You are a year removed on the A Wall transaction. Grade yourself a year later on how that was implemented and integrated with your business, and how that has proved out? And do you use that as a blueprint going forward for other opportunities?

Yes, I would say B plus, A minus. It clearly did exactly what we wanted. It brought talent, and we needed talent, and we got that, absolutely got that.

I think that what we're seeing is the -- with the realignment and the focus, now we're getting much more predictable results, and we think that that will carry over going forward. So pretty good marks there. You got to remember the acquisition was of people, not -- not a business or a backlog, we can build business and backlog if we have the talent.

Thank you, gentlemen.

Our next question comes from the line of Kevin Frean [PH] of Mutual of America. Please proceed.

Good morning.

Morning.

As we think about your start-up of new equipment earlier in the year, does this mean we should potentially see a margin improvement because of this new equipment, or is it more of a neutral factor?

This is Jim, it -- you know, we have seen the improvement this year as it has come on, and as we have been saying for a little while, we expected the second half of the year in our architectural segment to have stronger operating margins in the first half of the year. In part, driven by the fact that this equipment is up and running, and we have the efficiencies associated with it.

Okay. Could you please talk about your unplanned equipment downtime?

t is -- we had -- you know, we had -- we had several -- we had two things going on, we had an expansion, a significant expansion in Statesboro, where we're adding on to the building and putting in a coater and other equipment, and then we had a modernization of tempering activities in our Owatonna facility.

At the same time we had a competitor go out of business so we had a flow of demand that came to us, and then we also had some operational issues associated with that. When you get all of these factors going together, we -- we made some short-term decisions to try to really support the marketplace and customers and do things and that added some costs, and it caused us -- and -- and there was some snowballing of these different activities at the same time that caused these overall inefficiencies. So it wasn't one thing by itself, but it was sort of this combination of things that caused this, and it ended it to being -- in being a significant disappointment and not achieving as much profitability as we felt we could during that period of time.

Today, we feel like these factors are behind us, and we have clearly seen the results now for a period of time to support that -- that contention,.

And, Kevin, just in terms of the unanticipated nature of it is, in light of really being at capacity, there were some unexpected aspects related to those items that Russ talked about, such as having lightning strike a transformer that knocked us out for a couple of days, and some wiring errors, in terms of the supplier of certain equipment.

There were really those complications in conjunction with the full factory that led to these issues.

When you have those things on a full factory, there's nowhere to go. It just wasn't.

Okay, thank you.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's conference call. I would like to turn the presentation to Mr. Huffer for closing remarks.

Yes, we are -- we are pretty excited. The strategies that we effected a few years ago, are carrying forward. What we are seeing in our architectural glass with the growth and demand and the margin improvements that we see down the future, we're very optimistic. We think the marketplace has really moved to our favor, and we still are looking for office to rebound at some point down the line, which would affect all of our architectural product segments. The addition of A Walls, has clearly given us more talent.

We have been able to use that talent to become more predictable in our operations there, and as you know, we have also done some major re-work in realignment of our window business in the past year. All of these things, I think, are falling in line for us with a positive market to move us forward.

And at the same time we have seen our picture framing business position itself and continue to show it's leadership and it's markets, and leave us optimistic about it, as well. So with that I'd -- I'd like to close the conference and thank you very much.

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