Apogee Enterprises Inc (APOG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter and full-year fiscal 2006 conference call. My name is [Shakira] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Mary Ann Jackson, Apogee. Please proceed, ma'am.

Thank you. Good morning and welcome to the Apogee Enterprises fiscal 2006 fourth-quarter and year-end conference call on Thursday April 6. With us on the line today are Russ Huffer, Chairman and CEO, Jim Porter, CFO and Mike Clauer, Executive Vice President. Their remarks will focus on our fourth-quarter and full-year results and the outlook for fiscal 2007.

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 and 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 risk and other 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 may continued 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?

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

We've built momentum throughout fiscal 2006 as our architectural markets further strengthen. We saw strong growth in revenues and earnings due to improved results in our strategic architectural and picture framing businesses. We are solidly positioned for fiscal 2007. We earned $0.85 per share for the year, coming in as expected in the top have half of our guidance range. This is a 42% increase from last year's earnings of $0.60 per share.

Revenues for fiscal 2006 increased 11% to nearly 700 million. Our Architectural and Large-Scale Optical segments achieved strong growth in fiscal 2006. Architectural segment revenues were up 11% and operating income increased 18%. At the same time, Large-Scale Optical revenues increased 14% and operating income increased 53% compared to fiscal 2005.

For the fourth quarter, our earnings were $0.19 per share, up 46% from earnings of $0.13 in the prior-year period. Revenues for the quarter increased 4%.

Architectural segment revenues were up 6% in the quarter and operating income more than doubled compared to the fiscal 2005 fourth quarter. Our Architectural segment saw a continued improvement in commercial construction markets and pricing in the fourth quarter compared to the prior year. In the fourth quarter, all architectural businesses performed better than in prior-year periods, although operating margins were slightly below our expectations. The performance of our glass installation business held our margin down as costs on some projects nearing completion were higher than expected in the quarter and our mixed included more lower-margin, older projects. We're confident that our improved project selection process and improved market conditions will deliver better performance in this business this year.

We maintained a high level of backlog in the fourth quarter. Our current backlog is 321 million, up slightly from the third-quarter backlog of 317 million. Backlog in the prior-year period was $220 million. About 186 million of this backlog was scheduled for the first half of fiscal 2007 with 91 million expected to flow in the second half and 44 million currently scheduled for fiscal 2008.

We have selected the site for our third Viracon architectural glass fabrication facility scheduled for start-up in a year. We will soon break ground in St. George, Utah, a location that allows us to serve the robust Southwest market for high-performance architectural glass products. The new plant will cost approximately 30 million and add about 40 million to annual capacity at full production.

Large-Scale Optical segment results for the quarter reflected the unusually positive first-half inventory and promotion activities at some of our national framing glass retail accounts. Our fourth-quarter picture framing sales and earnings were down compared to the prior-year period as the strong fiscal 2006 first half displaced higher value-added sales in the current quarter. Our stock repurchases in the quarter totaled 1.6 million or 101,500 shares. We have been making modest repurchases to be anti-dilutive to our compensation plans.

Now, I will cover the outlook for fiscal 2007. Our vision going into fiscal 2007 is distinctive solutions by Apogee for enclosing commercial buildings and framing art. We will continue to leverage our customer focused competencies to satisfy market needs. We are looking forward to another year of improved performance as commercial construction markets continue to strengthen and we provide value-added products and services to meet energy-efficient, hurricane and glass-resistant building requirements.

We are anticipating earnings of $0.88 to $0.94 per share for fiscal 2007, which includes the required non-cash expensing of options of $0.05 per share. While modest net improvement, this earnings increase represents 19 to 27% growth compared to fiscal 2006 after adjusting for the $0.07 net tax benefit in fiscal 2006 and $0.05 option expense in fiscal 2007. These anticipated earnings are based on expected revenue growth of 5 to 9%.

Our markets are expected to support this growth based upon the positive outlook from industry forecaster Dodge McGraw-Hill Construction, improving architectural inquiry and billing trends in the American Institute of Architects and declining office vacancy rates. Our strong architectural backlog of more than $300 million in worth, which is almost half of our expected fiscal 2007 architectural revenues, gives us additional confidence in our outlook for the year. Within this backlog, we're seeing some improvement in office projects though not in all markets. Our mix of education and healthcare projects is holding, while we are seeing some growth in high-end hotels. Overall, our backlog contains improved operating margins but quarterly margin results can be impacted by project mix and timing.

I'm excited about the prospects for our Architectural segment in fiscal 2007. We expect to deliver strong improvement in Architectural segment operating margins this year. Our outlook is based on strong markets and backlog as well as new capacity, improved factory operations, and improved execution in our glass installation business. We also anticipate another year of solid performance from our Large-Scale Optical segment with continued conversion of the market to value-added framing glass that reduces fading and reflection. Although we are seeing some recent changes in national retail chains that raise some uncertainty as we enter fiscal 2007, we feel we are well-positioned since we have strong ongoing strategic relationships with these companies. We are also positive about the momentum we have achieved in converting the rest of the market to value-added products. We are excited about fiscal 2007 and look forward to continued growth as we expand and improve our operations.

Jim will now cover the financials. Jim?

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

We made continued progress in our fourth quarter and our full year with both revenues and earnings ahead of last year. Our earnings growth of $0.85 per share in fiscal 2006 from $0.60 the prior year was driven by strong improvement in our core Architectural and Large-Scale Optical operations. Our full-year segment operating margins other than for auto glass improved over last year with a stronger second half for the Architectural segment. We'd did, though, fall slightly short of our architectural segment operating margin expectations of 3.4 to 3.6%, instead finishing the year at 3.2%. As we completed some glass installation projects in the fourth quarter, we had higher than anticipated job costs along with a higher mix of older, lower margin projects.

For the fourth quarter, the earnings per share reconciliation between the current earnings of $0.19 per share and the $0.13 earned in the prior-year period is Architectural segment operations added $0.06 per share; the Large-Scale Optical segment was down $0.04 from a strong fourth quarter last year. Combining the auto glass segment with the income from our PPG Auto Glass joint venture reported in equity and affiliates, this business was $0.01 per share below the prior year.

In the fourth quarter of last year, there was a fixed asset write-off of $0.02 and the tax rate contributed a favorable impact in the quarter of $0.03 per share over last year.

In the fourth quarter, all of the architectural businesses performed better than in the prior year with the operating margin improving to 3.3% compared to 1.8% in the prior-year period. Our manufacturing operations all showed continued productivity improvements. The Large-Scale Optical segment turned in a solid quarter but as we expected, it was below last year due to a shift from traditional seasonality. As we have previously explained, the first half of the current year had an unusually high value-added framing glass product mix reducing higher margin product sales in our fourth quarter. The Large-Scale Optical operating margin in the current period was down from the strong fourth quarter of last year due to the higher-than-expected product mix we experienced in the first half of this year.

At the end of the fourth quarter, our long-term debt was $45.2 million, which was up slightly from 44 million last quarter and 35.2 million at the end the prior year. That increase, as expected, funding working capital needs, capital expenditures and stock buybacks.

Our tax rate for the quarter was 19% and for the full year 24%, below our expected full-year rate of 27%.

I will turn to our outlook for fiscal 2007. We are feeling good about the current year. Our earnings guidance range is $0.88 to $0.94 per share. I would like to summarize this guidance versus fiscal 2006 results to clarify the comparison. Fiscal 2006 earnings were $0.85 per share. Excluding the $0.07 per share one-time net tax benefit resulting from the resolution of certain tax matters and recognized in the fiscal 2006 third quarter, the fiscal 2006 earnings were $0.78 per share. Fiscal 2007 earnings guidance is $0.88 to $0.94 per share. Excluding the anticipating $0.05 per share for expensing stock options in fiscal 2007, the full-year range is $0.93 to $0.99 per share. Adjusting the fiscal 2006 actual results and anticipated fiscal 2007 earnings for these items yields an expected earnings per share growth range from core operations of 19 to 27%.

We are expecting revenue growth of 5 to 9% in fiscal 2007. Revenue growth will be driven by our architectural segment, which is somewhat capacity-constrained as we build new architectural class capacity that will be available the following fiscal year. The growth for our architectural revenue is expected to come from all aspects of our business, including from the incremental capacity increases put in place over the past year in our architectural glass business from productivity increases across the businesses, and pricing and mix improvements in most businesses.

I would like to reiterate our confidence in achieving Architectural segment margin improvement of more than 1 percentage point during fiscal 2007 from 3.2% in fiscal 2006 to the range of 4.4 to 4.6% in fiscal 2007. We anticipate that price and mix improvement, net of cost increases in materials, wages, healthcare and energy, will contribute about half of the increase with the remainder coming from productivity improvements, project execution, and capacity utilization.

For the Large-Scale Optical segment, we are anticipating revenue growth of 3 to 5% and operating margin of approximately 14% as we continue to convert framing customers to value-added glass products. We are seeing some recent changes from our retail chain customers with custom picture framing businesses. We have good relationships with these customers and remain confident in the benefit value-added frame glass brings to both our customers and consumers. We also continue to have a great position with the independent custom framing market and anticipate ongoing conversion to higher value-added products.

I will cover some other key elements of our guidance. Our news release contains the full guidance. SG&A as a percent of sales is expected to continue to be slightly more than 14%, including the impact of expensing options, which is expected to be a little more than $2 million. Our effective tax rate for the full year is expected to return to our normalized rate of 35%.

I will briefly cover cash flow for the full year of fiscal 2007. We are estimating EBITDA -- earnings before interest, taxes, depreciation and amortization from continuing operations -- of 57 to $62 million. We estimate net cash provided by continuing operations of 45 to $55 million for the year. Capital expenditures are projected to be approximately 40 to 45 million. This includes the remaining $25 million of the planned $30 million total cost for the third architectural glass plant. We anticipate this will give us neutral to slightly positive free cash flow. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Including our normal ongoing dividend program, we project year-end debt will range from 50 to 60 million.

As Russ stated, we believe our businesses are well-positioned to deliver strong performance in fiscal 2007, allowing us to achieve solid growth in core operational earnings. Thanks.

Russ?

Thanks, Jim.

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

(OPERATOR INSTRUCTIONS). Steve Denault, Northland Securities.

Can you provide a little bit more color on the comments regarding changes in the retail trade on the Large-Scale Optical side of things?

Yes, there have been announced by a big couple of the large custom framing chains of some senior management changes, so there are announcements in the industry of that. Although when you see those that you feel that you need to be cautious and watch that and we have been. We have been in connection. We still remain very close to our customers and their strategies, but that's the reason for that comment.

Steve, this is Jim. I will just answer that which -- there were a couple of recent announcements that Russ mentioned about some changes. We don't have any reason to assume that those are negative changes for us at this point in time. We just wanted to highlight that. There are some uncertainties, because we don't know what changes may be, whether it be in management or structural changes.

But from an economic perspective, it is still -- I would imagine nothing has changed in regards to their proposition selling value-added glass versus -- (technical difficulty).

We certainly believe that that is true.

With your 6 to 9% architectural growth guidance, how much of that is volume versus favorable pricing and mix?

I think it is probably about one-third pricing and about two-thirds volume.

That sounds about right. As you go through the year, you have -- mix issues can drive price as well. Those aren't necessarily always reflecting true price increases but the markets have been favorable and trending in that way. So I think Jim's got a good handle on that.

Have you seen any dramatic changes in your condo market backlog?

The condo information that we would describe to you is going to be more anecdotal. It still remains strong overall. But there are some sort of anecdotal stories of the, you know, 126 condo projects planned in Las Vegas has been significantly reduced. I think one would have reasonably expected that, for example.

This is Jim. We haven't seen any material change relative to that. Even though that's been an important part of our business and represents approximately 20 to 25% of our backlog in our Architectural segment, it still represents a smaller percentage in terms of number projects. We have a few larger projects and they are isolated in different parts of the market. So we don't have big exposure and not subject to significant changes in churn.

Our involvement in condo projects almost is exclusively to the high end. There's real value. It's not -- it's less of a speculative -- it's more the value proposition.

One final question -- the lower tax rate in both the third and fourth quarter was the result of what again?

The tax rate in the third quarter was primarily a one-time item related to a specific resolution of issues and related back to some donation of intellectual property actually in the prior year.

The fourth quarter, what we saw are really normal course types of activities, but that related to -- as we have statutes expire, exams completed, in the normal course, we review our tax reserve position and make adjustments corresponding to that. In the fourth quarter, it was that normal course activity.

Richard Holt, Wealth Monitors.

Just a question about the Georgia expansion and how it has met your expectations -- have you learned anything that is going to be able to be applied to the new Utah facility? Will that help the plant to hit the ground running or do you expect that plant to ramp up gradually?

Yes, Richard, we do expect to do significant pre-training and develop some experience in the unskilled workforce that will be associated with it. We're looking at various programs that are supported by local and state governments to help us do that. We will be moving, transferring knowledgeable, experienced people into that facility from our other facilities. We look at that. It only takes a handful of really key people with particular skills to make the facility highly functional. We have some 1200 -- or almost 1700 employees in this business today. So finding that number of right people and great people is something we have a lot of confidence in.

So there always is a ramp up because it is multi-shift, so it will be ramping up one shift at a time so that you get through the normal de-bugging things. But we are optimistic that we will do this faster than we have done it in the past.

Okay, great. Could you talk a little bit about the market for small and midsize projects in the competitive environment -- in that market?

The small and midsize projects -- our entry into that in the last couple of years has been very successful because we have been able to offer considerably more choice to the architect or to the building owners in what they want. So that has been good. At the same time, that market has become quite aware of and increasing its utilization of high-performance products. So there are other competitors in that market as well. They are doing quite well. So it is a market that is getting better both ways. So, it's (indiscernible) growing slightly if you look at Dodge numbers, but it is increasing its use of high-performance glass. That is sort of racing the tide for all participants, including us, in that marketplace.

Richard, this is Jim. I'll just add to that. I think those comments are specific to our architectural glass business. One of the key differences in the smaller projects is related to lead times. That also ties into our geographic expansion in the Southwest, which is they're smaller size projects that also want these high value-added products but need them a little more quickly. And so now this will give us -- we have the Midwest, the Southeast and this new plant will give us the Southwest and allows us to service more of that.

And also, our installation and window businesses also -- I mean, they serve as all range size of commercial projects. That's small to midsize projects as well as larger projects.

(OPERATOR INSTRUCTIONS). Cliff Walsh, Sidoti & Company.

Can you talk about demand in Florida and the coastal regions for hurricane products?

Clearly, demand in Florida for these products have continued to increase. Last year, we well exceeded our plans for delivering product into that marketplace. The number of hurricanes and the anticipated continued number of hurricanes also has kept us optimistic that we will continue to see (inaudible) projects being built more than complying with that.

We have Mike Clauer on the line today. I think, Mike, if you might comment about Harmon and Florida as well.

Yes, Russ. We still -- we see, on the Gulf Coast and the Atlantic coast of Florida, just continued demand for the hurricane products and in fact, I can't think of many projects anymore that aren't on the coast that aren't hurricane. You still have some inland areas, like in Orlando, that not necessarily there will be a hurricane, but everything else is bidding out with hurricane systems in glass.

In terms of with where energy costs are now, it seems like a payback period on energy-efficient type products should be declining. Can you discuss any changes you are seeing there and where demand has been recently for those type of products?

Demand for those continues to increase in the service levels for them. The codes have largely been adopted. I think we've spoken about this before. The codes for energy-efficient products have widely been adopted by over 80% of the states. It is still local enforcement and we have seen growth and I think we will continue to see growth. I think this is something that we will benefit from probably for the next eight to ten years. You will see that the high-performance products continue to take more and more market share of the total market being served. So it's not an abrupt step change. It would be nice if it was. Maybe it's better but it is not. But I think we will see benefit from it for quite a while.

In terms of like the payback period on energy-efficient products?

They are very fast, most of the time less than a year, sometimes even at point of construction because of redemption in cost of the HVAC systems needed to service the buildings.

The other thing that is driving this, and we think that this is quite important, and we've got some focus on it, is green construction or [LEED] . [Leed] is a government agency that certifies green buildings. Achievement of a green status by architects and building owners, as you can well imagine, especially in government, institutional, hospitals, schools, and certainly occasional commercial buildings, they are being much more cognizant of total energy requirements of a commercial building. Of course, we are great leaders in this area and benefactors of that trend.

Cliff, the energy cost increase has really had the effect of increasing awareness. It has accelerated the payback period. But it still seems to be that code and the architects are the ones that are driving it more than the payback in and of itself. The codes and the architectural influence continues to be more of a driver. The cost of energy has just increased the awareness relative to that.

Switching gears a little bit to automotive glass, we have seen margins continually decline over the last couple of years. What can you do, if anything, to improve profitability there?

Yes. Clearly, on our manufacturing business, our RV and buss business is still our primary driver of our profitability. We have now completely transitioned away from our supply agreements that we had with PPG and are focused on the total market and servicing that market with parts that are inefficient for them to import and parts that sometimes the supply chain is surprised with in terms of its need for them or availability of them. We are doing a good job of meeting those kinds of requirements. We have controlled the overhead structure, cost structure associated with this. So we remain optimistic that that small division will be non-impactful to our operating results going forward.

Cliff, this year really was a transition year for our windshield manufacturing business. As you know, we transitioned away from the supply agreement. That really transition happened in our third quarter and so we are completely transitioned out. This is a very seasonal business and the fourth quarter is really one of the slowest quarters in that business. So our results were a little less than we expected but it is a seasonally slow quarter.

Our outlook for the business really is a roughly breakeven margin business, but it is generating nominal positive cash flow. Really, that is the way that we will be focused on managing that business.

Rodney Hathaway, Heartland Funds.

I just wanted to clarify. You gave guidance for your Large-Scale Optical business of 14% for '07, correct?

Yes.

That is down from this past year. Are you expecting operating profit growth in '07 over '06 for that segment?

Yes, I think we are expecting it to be relatively neutral.

Because if you apply to 14% to your sales growth guidance, you are looking to be, from my estimations, down about 2 million in operating profit.

Yes. Actually, I am looking at it. We are expecting it to be slightly down in dollar level.

Could you give some color on that? That 14% margin -- is that just merely conservatism due to some of the I guess the changes you mentioned in these retail customers?

I will explain the way we've actually been talking about the business is that this year was a great year in terms of high levels of conversion. When we talk about conversion in the picture framing, there's really two steps that we talk about. There is conversion from using non value-added clear glass to using value-added products. Then we convert to higher value-added products as we continue to operate in the market.

During fiscal '06, we made some great progress and actually made drastic jumps from either non-value or low value to some of our highest value-added products and experienced a real jump in terms of the margin benefit that comes from that. There was also -- as customers transitioned to that, we had some pipeline fill in the marketplace to get those customers stocked up for those new product lines. So that's one factor that helped us this year.

As we go to next year, our focus is really continuing to penetrate the broader picture framing marketplace. We have got some plans that include -- really the way we're looking at it is making the products more affordable to the end consumer, which includes looking at some reduced pricing in certain product categories to be able to satisfy some of the customer requirements. That's really, I think, the key driver in terms of assumptions that we are looking at in terms of strategic direction in that market from a pricing standpoint.

In the Architectural segment, your guidance there for operating margins -- roughly around 4.5%, in the midpoint there. If you look historically, this segment a few years ago, it did as high as 7%.

Right.

Is there anything structurally different going forward that would be different from a few years ago or could you conceivably get back to that 6, 7% level as volumes ramp here?

Our architectural business is clearly a cyclical business, and so when we were achieving those peak margins of a little over 7%, it was in the peak of the commercial construction, the non-residential commercial construction cycle. Also, at that time period, office construction, which tends to be the most favorable segment of commercial construction for our businesses, was at levels that frankly are unlikely to be seen today.

That said, we really look at managing our business through the cycle. We believe that we are early on in a commercial construction cycle. As the cycle continues to improve and our businesses continue to participate in that growth, we expect to continue to grow our operating margins in that segment.

What did you mention your tax rate is for '07?

35%.

35. And D&A?

D&A is about 19 million.

There are no further questions in the queue. I would now like to turn the presentation over to Mr. Russ Huffer.

Thank you. We are clearly encouraged by our fourth-quarter and full-year results and we feel that the strategies of repositioning the Company in Architectural and Large-Scale Optical are delivering the kinds of results that we expect to have. We are very excited about the way our architectural markets continue to strengthen and as we go through this building cycle through the next several years. Thank you very much for your time today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.