Apogee Enterprises Inc (APOG) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2007 Apogee Enterprises earnings conference call. My name is Janell and I will 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 toward the end of this 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. Please proceed, ma'am.

Thank you. Good morning and welcome to the Apogee Enterprises fiscal 2007 first-quarter conference call on Wednesday, June 28. With us on the line today are Russ Huffer, Chairman and CEO; Jim Porter, CFO; Mike Clauer, Executive VP. Their remarks will focus on our first-quarter 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 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, 2006 and in our earnings release issued last night and filed last night 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, Russ, Jim and Mike will answer your questions. Russ?

Thank you, Mary Ann. Good morning and welcome to our conference call. We had a solid start to fiscal 2007 with strong revenue and earnings growth in the first quarter. Revenues were up 19% while EPS grew 21% to $0.17 per share compared to $0.14 per share in the first quarter of last year. Our operating margins increased to 4.1% versus 3.8% in the prior year period due to improved market conditions and better operational performance and margins would have been approximately 0.5 percentage point higher had we not experienced greater-than-expected healthcare utilization that cost us $0.03 per share. Regarding healthcare, we are self-insured and had an unusual number of larger claims than we had previously experienced or anticipated for our quarter.

We had good operational performance in our architectural segment manufacturing businesses while our glass installation business continues to flow some older, lower margin projects that are nearing completion. Architectural segment revenues were up 23% on higher volume and pricing in architectural glass and job flow in our installation business. Operating income increased 54% as pricing and manufacturing operations continue to improve.

Our architectural operating margin grew to 3.4% from 2.7% last year. The margin increase from improved pricing and operational performance was somewhat offset by the higher-than-expected healthcare costs. Our backlog again increased, totaling $360 million at quarter end, up almost $40 million from the end of the fiscal year. We have a wide range of projects in our backlog. For example, projects added to the backlog in the quarter included an institutional project; a Navy apartment building with blast-resistant glass; high-end hotel and casino projects in Las Vegas and New Jersey; and large private education, healthcare and office projects.

We are also starting to see some momentum in standard window sales, one of our growth initiatives. Our bid activity and inbound order rates continue to be strong. We broke ground for our new architectural glass fabrication plant in Utah and are looking forward to start-up in the first quarter of next year.

As we had anticipated, our large-scale optical segment picture framing business was impacted by a negative mix shift within value-added framing glass. Segment revenues increased 5% from the strong prior year period. Higher volume of value added products was offset somewhat offset by product mix. Large-scale optical segment operating income increased 2%. Our operating margin for this segment declined slightly from the prior year to 14.4% as expected. Performance of our auto glass segment declined from the prior year, as has been anticipated, due to lower sales of aftermarket automobile windshields.

Next I will cover our outlook for the remainder of fiscal 2007. We continue to be optimistic about fiscal 2007 and expect our momentum to build throughout the year as we provide value-added architectural products and services for our stronger commercial construction markets. We have increased our fiscal 2007 outlook for overall Apogee and architectural segment revenue growth. We have also slightly increased our architectural segment operating margin guidance. Our strong architectural backlog of $360 million with improving margins gives us confidence in stronger growth for the year.

The improved outlook for our architectural segment is somewhat offset by a decrease in our expectations for large-scale optical segment revenues and operating margin. Our large-scale optical segment is anticipating some reduced demand due to softness in certain national retail accounts partially offset by increases in picture framing glass sales to distributors. A number of our retailers have publicly discussed lower sales of craft furnishings or wall decor categories.

In addition we expect the first-quarter trend of a less rich mix of value added framing glass to continue. We sell a spectrum of value-added products and are expecting an ongoing shift during the year to greater sales of low to medium value products which have somewhat lower margins.

We have been notified that we will receive proceeds of approximately $2 million from a class-action lawsuit settlement with a flat glass manufacturer. The proceeds which we anticipate receiving as soon as the second quarter have been included in our earnings outlook; however, we expect the proceeds will be offset by higher anticipated healthcare costs during the balance of the year.

We are maintaining our fiscal 2007 earnings guidance range of $0.88 to $0.94 per share, which includes $0.05 per share for the non-cash expensing of options. After adjusting for the option expense and the fiscal 2006 impact of one time net tax benefits of $0.07 per share, we expect earnings growth of 19% to 27% in fiscal 2007. Contributing to this strong earnings growth outlook are more robust commercial construction markets and continued improvement in architectural segment operating performance.

Before Jim continues with color on the financials, I would like to note that we are not planning any share repurchases this year as we dedicate our free cash flow beyond dividends and maintenance CapEx to increasing our capacity in order to grow our business. We will be investing approximately $25 million this year in a new architectural glass fabrication plant now under construction in Utah. Jim?

Thanks, Russ. Good morning and welcome to our conference call. We had a solid start to fiscal 2007 and experienced such strong new business activity in our architectural segment that we significantly increased our revenue expectations for the year and we are pleased to also bring our architectural margin guidance for the year up slightly.

Our earnings growth to $0.17 per share from $0.14 in the first quarter of last year was driven by good operational performance in our architectural segment manufacturing businesses somewhat offset by the higher healthcare costs already discussed. The earnings per share reconciliation between the current earnings of $0.17 per share and the $0.14 earned in the prior year period is the architectural segment core operations added $0.06 per share; the large-scale optical segment was up $0.01 from a strong first quarter last year; combining the auto glass segment with the income from our PPG Auto Glass joint venture reported in equity and affiliates. This was $0.01 per share below the prior year. Other items in the quarter were charges of $0.01 for expensing options, $0.03 for unusual costs for higher healthcare utilization, and a $0.01 gain from architectural segment fixed asset dispositions. These items are included in our reported segment operating results.

Our architectural segment performance continued to improve. The architectural margin of 3.4% for the quarter increased from the prior year period and was up slightly from our fourth quarter. We benefited from improved pricing and operational performance which was somewhat offset by the increased healthcare costs. Our backlog again increased in the quarter to $360 million, our strongest backlog position ever. About $280 million of this backlog is scheduled for the remainder of fiscal 2007 with about $80 million currently planned for fiscal 2008.

As Russ explained, we saw modest growth in our large-scale optical segment compared to the strong prior year period as we had anticipated. The operating margin in the current period was down from the strong first quarter of last year due to a less favorable mix of picture framing glass products, a trend we had anticipated.

At the end of the first quarter, our long-term debt was $59.9 million. This is up from $45.2 million at the end of the prior year. Debt has increased as expected to fund working capital needs and capital expenditures. Non-cash working capital grew to $90.6 million due to seasonal requirements. These range from increases in receivables and inventory for growth to incentive, pension, and dividend payments in the quarter. Our tax rate for the quarter was 34.2%.

I will turn to our outlook for fiscal 2007. We continue to feel good about the current year. Our earnings guidance range continues at $0.88 to $0.94 per share, strong earnings growth compared to last year. The increase we have made in our core architectural segment outlook for the remainder of the year has been offset by a decrease in our outlook for the large-scale optical segment. For fiscal 2007, we are expecting overall Apogee revenue growth of 11% to 15%, up from previous guidance of 5% to 9% growth.

Architectural segment growth expectations have increased to 14% to 18%, double our previous growth guidance of 6% to 9%. Our record backlog of work, of which almost 80% is scheduled to be completed this year, along with our continued strong bidding and inbound order activity give us confidence in these higher growth rates. We have also increased our architectural segment operating margin range slightly to 4.5% to 4.7%, up from 4.4% to 4.6% based on leveraging our overhead on the increased volume.

Our fiscal 2007 outlook is for our architectural operating margin to be more than 1% greater than in fiscal 2006. We are achieving an improvement versus the prior year through anticipated ongoing price and mix improvements net of cost increases along with continued improvement in productivity and project execution.

Our outlook for the large-scale optical segment has declined slightly. We anticipate continued overall growth of value-added product sales including growth to picture framing distributors who are anticipating lower than previously expected demand for picture framing and pre-framed art products for the year due to softness in certain retail markets. We expect to increase total square feet of glass sold. We anticipate that we will have a less favorable mix of value-added framing and pre-framed art products. We're now expecting flat to slightly down revenues, a decline from previous guidance of 3% to 5% growth. Operating margins are now expected to be 11% to 12%, down from 14%.

Despite the changes we are seeing, we continue to feel good about our picture framing business and its contribution. We continue to have strong relationships with our large picture framing customers and our product mix shift is occurring as we partner with them to accomplish their objectives.

I will cover some other key element of our guidance. Our news release contains the full guidance. SG&A as a percent of sales is expected to improve to approximately 13.5% compared to our previous guidance of slightly more than 14% as we leverage our fixed architectural overhead over increased revenues and benefit from the architectural asset disposition. SG&A includes the impact of expensing options which is anticipated to be slightly more than $2 million. Our effective tax rate for the full year is expected to be 35%.

I'm going to briefly cover cash flow for full year fiscal 2007, which remains unchanged from our earlier guidance. We are estimating EBITDA, earnings before interest, taxes, depreciation and amortization from continuing operations of $57 million to $62 million. We estimate net cash provided by continuing operations of $45 million to $55 million for the year. Capital expenditures are projected to be approximately $40 million 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 positively free cash flow and 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 million 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. Russ?

Thanks, Jim. I would like to go ahead and open the call up for questions at this time.

(OPERATOR INSTRUCTIONS) Steve Denault, Northland Securities.

Can you provide a little bit more color on what specifically is happening within LSO within the value-added segment?

Steve, as Jim mentioned, we really feel that we're very well positioned with our customers and distributors and national accounts, so we have got great relationships and we have got great ongoing improvement programs and we feel like we are in a wonderful position. What we have happening are a couple of things. One as we mentioned, there is some softness in those national accounts. And second, there's some repositioning of the use of the value-added products within those accounts. Those are the kinds of things that are driving these mix shifts and it tends to even cover up some of the good things and growth things that are going on. So long-term we're very excited about this division and what's happening. You have to also remember last year we benefited from a shift in a very positive direction that gave us some extraordinary earnings and impact. I will let Mike or Jim make any other comments.

This is Jim. Just really echoing what Russ said is it is really a mix shift within our value-added segment of products and we offer a range, a number of products of value-added picture framing, glass and acrylic products. And during fiscal '06 we had some great progress of customers going from non-value-added to in some cases our highest value-added products which carry in some cases the highest margins. During this fiscal year what we see and continue to anticipate is customers adding value-added options to their mix which -- so those will be lower value-added but still value-added products, which will have somewhat of a cannibalization effect on the highest value-added products, or just offering a broader range of options to their customers to give them more choices. Again our assumption is that we will see some cannibalization from the highest value-added products to other value-added products in the mix that the customers are offering.

Okay, that makes sense. And on the healthcare utilization front, do you have good visibility on either what you expect to be an uptick in severity of claims or frequency of claims?

We certainly anticipate rising healthcare costs. That was part of our plan and is part of our understanding. What we also know is that there is sort of -- you have some years that are not as good as other years. You have years where you have higher demand for major claims and even the numbers that we are talking about, the $0.03 is beyond what we would have anticipated as a higher sort of a cyclical shift to our shift. So we had some very unusual number of high claims and unusually high dollar claims in the first quarter. That is what we're calling out. We are not calling out just normal variation of which there was some of that as well.

Forecasting the future, I don't have a crystal ball. I don't know that there is one in forecasting the future except that we know that healthcare costs will go up and we anticipate that.

Steve, this is Jim. So there will be two things affecting us. One is just overall increase in healthcare costs which we all have visibility of and frankly I think we've seen a little bit higher than we expected on an overall basis this year. But we did have some unusual higher level activities and we do work with outside actuaries to help us in analyzing our experience and projecting our experience and that's our basis for looking at it.

Okay. Within the architectural segment, the wonderful growth in the quarter, can you further fillet that out, volume versus price for us?

In terms of the overall growth?

Yes, but if it is up 23%, was half of it or a one-third of it incremental volume and two-thirds improved pricing environment or --?

I will try and give you a couple of pieces. First as we did point out in the earnings release, we did have one extra week in the quarter relative to last year, so that is probably worth about 6 or 7 percentage points in terms of that 23% growth. Then in the volume I'm going to take a risk at estimating here but the pricing improvement that we would have seen in the quarter would have really been primarily only in one business, the architectural glass business. The growth in the other businesses, the window business, installation business really would've been driven by volume. So there would have been some growth associated by pricing, but the majority of the growth would've been associated with straight volume.

Okay, one final question. What do you anticipate -- within the backlog itself, the $360 million, how much of that would be condo related?

In terms of the backlog an estimate that we have is in the 15% to 20% of the backlog is in the high-end condo related work. That is down a little bit in mix from last quarter. I think maybe from a mix perspective probably the growth that we saw in our backlog is in the grouping of categories of healthcare, education and government while maintaining in terms of dollar level the office and high-end condo work.

Okay, perfect. Thanks, guys.

(OPERATOR INSTRUCTIONS) Tyson Bauer, Wealth Monitors.

A couple of quick questions. On the $2 million settlement, obviously we are pretty much within the next quarter here so you should be relatively certain that you're going to get that. How will that be recorded and since you're including that in your range and using that as an offset to your higher healthcare costs, I guess we need some reassurances that both items are really onetime in nature to be a true offset as opposed to a onetime event offsetting a possible ongoing increase in expenditures going forward.

We are very confident. We certainly would not be talking about the settlement and this is the second time too. If you remember we pointed out in '05 that there was for the same case, there was a partial settlement at that time. This appears to be the remainder of that, so we are relying on what happened the last time and the court decisions that have been made to give us that confidence. So we feel good about that coming. And truly that makes it a onetime.

The healthcare is a little more difficult. Certainly I think we're taking a prudent position to look at this and saying that this could be just one of those extraordinary years and but at the same time we have to also as we look forward understand that we're going to have to continue to reflect rising healthcare costs. Having said all that let me be careful. Let me point out that our healthcare costs are still below national norms and national averages even in this extraordinary year. So we do have a vibrant program, one that we manage well, that we continue to look at many options and improvements and things that we can do to improve the health and welfare and therefore the costs of our program, so it is that combination.

Tyson, relative to the flat glass settlement, that will flow through in gross profit and then it will actually flow through at the segment level and it actually gets allocated based on the purchases of glass during the time period by each of the segments. So we will see roughly a little bit more than half of that in our architectural segment and the balance split between large-scale optical and auto glass.

So it will be buried into the segment data. Will you be able to provide excluding that benefit in the next part?

Yes, we will comment (inaudible).

Okay. Of the $0.03 in the healthcare costs, what -- have you been able to identify what was due to extraordinary claims and the higher costs per case as opposed to a general underbudgeting of increased healthcare costs?

The $0.03 is all extraordinary. Clearly we look at what our healthcare costs are up and we look at sort of a distribution curve even of where things could have been. This is well -- the increment that we are talking about is well beyond what we expected our highest to be.

So we did incur some overall increase in healthcare costs that we did not call out. The usual level that we are talking about is the $0.03.

Okay, so employee 101 had a heart transplant obviously not in the budget when you entered the year.

Correct. We have the information to the activity level and looking at it that way.

One of the more macro question that seems to be getting asked at least by myself is of your backlog what is really at risk or can you give us some color due to an environment of increasing interest rates if that should stymie some of these projected growth rates in the construction?

I think that what we have seen in the past and that is all I can reflect upon and we'll talk a little bit about the current status is that for the most part these projects have financing lined up by the time they are hitting our backlog. So financing or interest rate impact on backlog traditionally is pretty minimal. So we don't see that -- I think that we would see -- so I really feel that what we see in our backlog and what we can see in terms of bidding activity still remains pretty robust. We are pretty optimistic on that front. That doesn't mean the continued interest cost won't have an affect further out. You got to remember we lag this cycle quite a bit, so even with continuing changes and then a subsequent adjustment -- any kind of adjustment that takes place that is pretty far down the road for us at this point in time.

Okay. Last three questions real quickly is of your new backlog what kind of bid margins are you seeing? Are we still seeing that improvement going forward? Then lastly, as the office market vacancy rates continue to come down ever so slightly but still going in a downward trend, do you anticipate that at some point in the future of getting to that sweet spot where we can finally see some revitalization in the office area?

Maybe first of all regarding margins, our visibility of margin in the backlog is reflected in our guidance which we've increased slightly architectural segment to 4.5% to 4.7% and that is for the full year outcome our 3.4% in the current quarter, so the improved margins to get us to those levels are reflected in our backlog.

What I anticipate in office and vacancy rates is that any sort of short-term impact on from interest rates or conservatism in the construction market will primarily slow down speculative buildings. Frankly from our point of view that is not all bad. When we see a more reasonable buildings being built by buildings owners, that tends to work in our favor. I think that sustains the growth cycle. That prohibits the market from overreacting and swings in vacancy rates. So frankly I see that as a positive for our business in sustaining the current construction cycle.

Thank you.

Cliff Walsh, Sidoti & Co.

Can you comment on the regional aspects of your business -- what areas are seeing strength; what areas are maybe a little bit behind?

The business in our architectural side that's mostly regional or more regional than the others is our installation business and what we certainly -- the coast, Northeast, Southeast, West Coast are more robust than the central portion of the country but they are all pretty solid. But that's probably the geographic, sort of macro geographic comment that I could make for you.

I think geographically Russ is right. Installation business is going to be depending on where we have our presence and we do see continued strength in the coasts. Our presence we have presence in a number of areas in the eastern half and then in the west it's really only Denver and Seattle. We do see strong activity in those markets. On the glass business which really is national really focused on the major metro markets and the high-end where it has seen pretty balanced strong demand across the country.

Okay. In terms of the backlog and what you've got slated for fiscal 2008, can you talk maybe about the margin differential that you have got on that business or what you're doing to ensure that you take into consideration rising raw material costs and any other issues that could affect margins down the road?

I think the margins that are in our backlog that we see give us the confidence as I said in the trend of improving margins through this fiscal year as well as our longer-term outlook in terms of revenue and earnings per share growth. Definitely we are factoring into our activity as we bid it our current projections relative to the key material costs and energy costs and those kinds of things.

And as we have said before, a lot of the improvements continue to come from the ability to be more selective.

Okay. Great. Thanks very much, guys.

At this time there are no further questions. I would like to turn the call back over to management for closing remarks.

I'm really encouraged by our first-quarter results. We're making progress on our strategies. Our business is improving and our key architectural markets continue to strengthen and provide us with high levels of bidding and interest activity. We are excited about the opportunities that we can deliver to you from Apogee in fiscal 2007. Thank you very much.

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