Apogee Enterprises Inc (APOG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises Incorporated Third Quarter 2007 Earnings Conference Call. My name is Tonya and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. 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.

Thank you, Tonya. Good morning and welcome to the Apogee Enterprise's Fiscal 2007 Third Quarter Conference Call on Thursday, December 21. With us on the line today are Russ Huffer, Chairman and CEO and Jim Porter, CFO. Their remarks will focus on the third 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 November 25, 2006, 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 continue to be used while this call remains on the Apogee's Web site.

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

Thank you, Mary Ann. Good morning and welcome to our conference call. We are again pleased with our quarterly results, especially in the architectural segment where results were better than anticipated.

In the third quarter, our core architectural segment achieved both significant earnings growth and significant improvement in operating margins. We are feeling good about the strength the architectural business is bringing to Apogee's performance this year. As a result of this architectural earnings and margin strength, we have increased our earnings per share guidance. We now expect to earn from $0.98 to $1.04 per share in fiscal 2007, up from previous guidance of $0.92 to $0.98 per share. During the third quarter, overall revenues increased 18% while operating income grew 61% compared to a year earlier.

Our operating margin increased to 7.2% compared to 5.3% in the prior year period. EPS grew 9% to $0.35 per share, up from $0.32 per share in the third quarter of last year. Third quarter EPS increased 40% excluding the prior year period net tax benefit of $0.07 per share resulting from resolution of certain tax matters. We also had $0.02 per share expense in the current quarter for incremental stock-based compensation. We have made great progress in the architectural segment. Revenues were up 24% with all businesses contributing to this growth.

Architectural operating income was up 130% from a year ago. In the quarter, the architectural segment benefited from greater than expected product and project mix, volume, and operational improvements in what is generally our seasonally strongest quarter of the year. We held our backlog at 390 million in the third quarter as new orders equalled shipments. A year-ago, the backlog was 317 million. We expect to deliver 33% of our backlog during the balance of the current year, with the remainder flowing into fiscal 2008 and 2009.

Our architectural businesses are focused on meeting the growing demand for value-added products and systems, driven by the strong commercial construction industry as well as our success in servicing the growing energy efficient hurricane and blast markets. Work on our new architectural glass fabrication plant in Utah continues on schedule. We are looking forward to start-up in the first quarter of our next fiscal year so we will have additional value-added glass capacity available. We've also made our other improvements in our architectural glass fabrication facility this year, giving us incremental new capacity.

Capital investments in our new plant and existing architectural glass facilities total $16 million of our $26 million in capital expenditures year-to-date. We also have begun the process of transitioning our auto replacement windshield manufacturing capacity to support architectural glass fabrication. Capital spending for this transition should be minimal.

In addition, we are expanding production capacity for standard windows. The decline in the large scale optical segment earnings compared to last year was a result of the unfavorable picture-framing product mix within value-added glass that we had anticipated. I want to assure you that this remains an attractive business for Apogee. Our framing business continues to convert the custom framing market to value-added glass products.

Segment revenues were up 1% while operating income was down 25% from the prior-year period. The large scale operating margin in the third quarter was 12.3% compared to 16.6% last year. The segment's performance was impacted by lower preframed art sales and the less favorable value-added product mix at national retail customers. Auto glass segment revenues declined from the prior year, as had been anticipated. This is due to lower sales of aftermarket automobile windshields, a product line we are exiting in early fiscal 2008.

Next, I'll cover our outlook for the remainder of fiscal 2007. Our strong performance year-to-date thanks to continuing improvement in our architectural segment positions us for solid earnings growth in fiscal 2007. We have, again, increased our EPS guidance for the year to a range of $0.98 to $1.04 per share, up from our prior guidance of $0.92 to $0.98 per share. The increase in our earnings outlook on the existing revenue guidance of 16 to 19% growth reflects our expectations for higher architectural segment operating margins for the year.

Our performance is improving due to better-than-expected product and project mix, as well as segment productivity. Our fiscal 2007 architectural operating margins are now anticipated to range from 5.6% to 5.8%, significant improvement from 3.2% in fiscal 2006. We are pleased to be making good progress toward our goal of reaching our prior peak architectural operating margin of 7% in two years. Our strong architectural backlog and bidding activity combined with growing nonresidential construction markets give us confidence in this outlook. The markets we serve, office, education, health care, and institutional remain strong despite higher interest rates in raw material pricing.

Industry forecasters, including McGraw-Hill Construction concur. McGraw-Hill's outlook for our fiscal 2008 is for 14% growth in the nonresidential construction market. Job growth, which helps maintain demand for commercial space is still occurring. Also, the financial position of state and local governments has strengthened, supporting construction for a number of institutional markets. We also expect the Green Building Movement, which includes energy efficiency, to continue to help our architectural businesses.

Our glass products and systems provide very high levels of energy efficiency for buildings. More and more buildings are gaining leadership in energy and environmental design, or LEED certification for sustainable Green design. We've provided products and services for a number of LEED Certified Buildings, including the recently completed World Trade Center 7 Building, which has our glass. Apogee's expertise and strength in hurricane and blast resistant glass system also supports our outlook and ability to provide distinctive solutions for commercial buildings.

Turning to our outlook for the large scale optical segment, we continue to expect revenues to be down slightly and an operating margin of 11% to 12% for fiscal 2007. Throughout the year, we've experienced a less favorable product mix as certain markets have adjusted their value-added offerings. Our picture framing glass continues to be a good one for Apogee. Only 20% of the custom framing market is using value-added glass, and we are the clear product in marketing leader. There remains great potential for our products that reduce fading and reflectivity of framed pictures and art.

We expect a strong finish to fiscal 2007 and anticipate another quarter of year on year growth in the fourth quarter compared to the prior year. I'm extremely pleased with the progress we've made in our architectural segment. Jim will now comment on the financials. Jim?

Thanks, Russ. Good morning and welcome to our conference call. We are pleased to see the solid improvement in our architectural segment performance. Our markets are strong and we have leadership positions with our value-added products and services and focus on customer service. At the same time, our operations have improved significantly during the year. As a result, we're reporting significant growth in architectural segment revenues and operating income, and accordingly, strong overall growth for Apogee in revenues, operating income, and earnings for the quarter.

Based on this strength in the architectural segment, we've raised our earnings per share guidance for the year. Regarding the third quarter, our architectural segment was the driver of our 18% increase in revenues and 61% increase in operating income. The third quarter earnings per share reconciliation between the current earnings of $0.35 per share and the $0.32 per share earned in the prior year period is architectural segment core operations added $0.16 per share.

This improvement was slightly offset by large scale optical segment, which was down $0.02 per share from the third quarter of last year, combining the auto glass segment with the income from our PPG auto glass joint venture reported in equity and affiliates, this was down $0.02 from the prior year. Other items in the quarter were a charge of $0.02 per share for incremental stock-based compensation, and in the prior year period, a net tax benefit of $0.07 per share, resulting from resolution of certain tax matters. Our architectural segment improvement in the quarter was stronger than we had expected. Revenues increased 24%, with all segment business lines contributing to the growth.

Architectural segment operating income more than doubled for the quarter and our operating margin grew to 7.4%, compared to 4.0% in the prior year period and 4.5% for the first half of this fiscal year. We'll be able to leverage the strong market, capturing improved pricing and capacity utilization in our architectural glass and finishing businesses, and we're starting to see the anticipated slower transition of project margins in our window and installation businesses. We maintained or backlog at $390 million with orders offsetting the strong shipments.

Our backlog remains balanced across non residential segments. We have approximately 35% of our backlog in institutional sector, which includes education, health care, and government building, approximately 20 to 25% of our backlog is office; 20 to 25% condominiums; and about 15% in entertainment and hotel projects. As expected, our large scale optical performance was impacted by the unfavorable value-added picture framing product mix we have experienced all year.

Revenues were flat with value-added picture framing growth offset by lower preframed art sales. Operating income was down 25% from the prior-year period. The operating margin was 12.3% compared to 16.6% in the prior-year period. For auto glass, revenues and operating income were down as expected.

At the end of the third quarter, our long-term debt was flat at $56.2 million compared to $56.5 million at the end of the second quarter. This is up from $45.2 million at the end of the prior year. Debt has increased from year end, as expected, to fund working capital needs and capital expenditures. Non-cash working capital was $94.0 million, up from the second quarter and prior year. The increase was driven by growth capital requirements, primarily increases in architectural segment receivables. Capital spending year-to-date was $26.3 million.

Now I'll turn to our outlook for fiscal 2007. We're very optimistic about the full-year outlook.

Based on the strong third quarter performance in our architectural segment, we've raised our earnings guidance. We're now expecting earnings of $0.98 to $1.04 per share for the year on revenue growth of 12% to 15%.

Before moving to the segment outlook, I would like to make a brief comment on the seasonality of our business. The fourth quarter is generally a seasonally lower quarter than the third in terms of revenues and margins for both the architectural and large-scale optical segments. We expect this seasonal pattern again this year. For the architectural segment, our outlook for fiscal 2007 is operating margin of 5.6% to 5.8% and revenue growth of 16% to 19%. As we've discussed previously, our architectural margins peaked in the last construction cycle at approximately 7%.

We've projected getting back to that level in two more fiscal years. We're progressing well, and if strong market conditions continue, we should be able to exceed 7% in the next two years. We expect to accomplish this by holding our current positive performance in architectural glass fabrication and finishing, and continue to transition to better project margins and insulation and windows, as supported by the visibility we have in our backlog. We plan to issue guidance for fiscal 2008 later in the fourth quarter of fiscal 2007. The outlook for our remaining businesses, the large scale optical and auto glass segments remains unchanged. Details are in our press release. I'm going to briefly cover cash flow for full-year fiscal 2007. We're estimating EBITDA, earnings before interest, taxes, depreciation, and amortization from continuing operations of $62 to $66 million. We estimate net cash provided by continuing operations of $35 to $45 million for the year.

Capital expenditures are projected to be approximately $45 million. This includes $25 million of the planned $30 million total cost for the third architectural glass plant. We anticipate this will give us neutral to slightly negative free cash flow for the full year. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Including our normal ongoing dividend program, we project our year end debt will range from $50 to $60 million. Regarding our tax rate, we're anticipating it will be 36% for the year. This compares to the prior year rate of 24%, which included extra ordinary items in the third and fourth quarters. A normalized rate last year would have been approximately 35% excluding extra ordinary items. As Russ stated, our businesses are well-positioned to deliver strong performance in fiscal 2007, allowing us achieve significant growth in core operating earnings.

Thanks. Russ?

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Steve Denault of Northland Securities. Please proceed.

Good morning, everyone. Very nice quarter.

Thanks, Steve.

Absent '08 guidance, how should we think about the auto glass segment, in terms of exiting early in the fiscal '08?

I think probably the way to answer that, Steve, is over time what we'll see is the revenues in contribution from that segment just continuing to decrease.

So essentially walking away from it. Starting early in fiscal '08 --

That's correct.

And winding down over the course of three or four quarters?

Yes, we'll be -- one of the things you have to remember is we will be shifting capacity from automotive to architectural. So it's not as if you're closing the doors on the building.

We still have some small pieces there where we service RV business, but basically we'll just be starting to consolidate the operations and operating that as an extension of our architectural glass business.

Okay. And shifting that capacity from auto to architectural would add what in the way of capacity?

We're still working on that, but we believe -- and the reason this is a little bit difficult is that the constraints in the [Otonna] facility are what we're going to relieve. So you have a business with several steps, and one of those steps typically is a constraint. We're using this facility to leave that to leverage the whole. As we're working our way through that, we think it will have significant impact on sales. That will be part of our future projections. We think it will be very leverageable. And we also believe at the same time, as we look at St. George, we've talked about St. George adding about $40 million. We believe that between what wear doing at [Otonna] and also continuous improvements in our Stagebourgh facility that we can double that 40 million as we go forward, overtime.

Okay. When you reference lower preframed art sales, what specifically is that referencing? What does that product look like?

Yes, actually have preframed art where we sell framed reproductions that would go into a national account, like a Crate and Barrel, or a small independent retailer it represents less than 10% of revenues in that segment. And that part of the business was pretty strongly affected this year by the home furnishings and wall decor sector.

Okay. Anything -- within the backlog, have there been -- the condo, as a percent of overall mix, seems to be pretty steady. Do you still feel good about the health of those condo projects that you have in your backlog?

Yes, we do. We've talked about this before. The kind of condos that we do are high end, they're often mixed use office condo, retail, and that kind of construction has historically been a nice part of our backlog and we actually expect to continue to see that. There'll be quarter to quarter, you'll see the numbers go up and down a little bit, because they're usually bigger projects. And that's what actually can affect quarter to quarter percent of backlog.

Okay, perfect. Thank you.

Your next question comes from the line of Cliff Walsh of Sidoti and Company. Please proceed.

Good morning, everyone.

Good morning, Cliff.

Can you guys comment on -- your implied guidance range for the fourth quarter is a little bit wide, and you could see some seasonal project delays, which is why you have a wide range, but if you can comment on how conservative you think the bottom end of the range is and how aggressive the top end is?

Well, we certainly feel that the top end of the range is achievable and the bottom end, as you stated, does reflect the potential things that are sometimes out of our control that can happen. Just whether it's a project delayed or you have a bad snow storm that shuts down a factory, things like that can happen at this time of year and we have to have that in our range. Those are hard to predict. We feel that we've given you appropriate guidance.

Okay. And Jim, can you rehash what you just said about the extra $40 million-- [inaudible] revenue capacity that you were talking about? I'm not sure I followed, exactly, how you were going --

Sure. I mean, in terms in overall capacity expansion that we're doing for our architectural glass business, the new plant in Utah is expected to contribute about $40 million of new capacity and we've talked about that. And then what we were referring to is that to other capacity enhancements within our existing facilities, primarily in southern Minnesota, including the transition of the auto glass capability to service that over time as a potential to contribute an additional $40 million of capacity.

Okay, great. Thanks very much, guys.

Yes.

Your next question comes from the line of Tyson Bauer from Wealth Monitors. Please proceed.

Great quarter, gentleman and Mary Ann. Just a couple of questions. On a previous topic, I know you're having difficulties trying to pin down a revenue, but are we in a more conceptual nature from the switch of the auto to the architecture, are we expecting a net revenue increase from that switch over? And are we expected to increase margin or contribution margin due to better efficiencies at that [Otonna] plant?

Over time, we would expect the revenue to increase. So if you would add the old automotive to what they are doing architectural, as we are table to transition that and ramp up the architectural, we would expect it to be more than what we have today and at better margins, but it will take some time to do that. That's not a switch.

And another housekeeping item. Should we expect SG&A to have another trueup quarter as we've seen in years past in Q4s?

Yes.

Yes.

Okay. On the margin benefit, you quoted on the architectural side, can you break that down in a little more detail as far as a product versus installation part of the business, [inaudible] where you saw -- what you would call a permanent pickup, say, in operating efficiencies that we should see in quarters going forward as opposed to a one-time quarter event that you just had a lot of installation projects that you may have made better margins on this past quarter.

Yes, this is Jim. And basically, we are characterizing it as, we've really achieved the improvements in our architectural glass and finishing businesses throughout this year and those are at the levels where we're hoping for and continue to operate at those levels. And I think from a combination of just -- I wouldn't call it one-time changes, but continued projection in terms of some productivity improvement along with increased volume as opposed to capacity utilization drove the third quarter to be a bit stronger. And then in the installation in the window business, that just continues to be as we've seen and articulated all year, kind of a quarter by quarter progression of working through some lower margin projects from the past and being replaced by better margin projects going forward.

And that segment you just mentioned gives us the greatest upshot in the near term?

I think going forward, the continued improvement is going to come from the improvements in the insulation and window margins.

Right. Last question for me. You mentioned your backlog and you gave us the split as far as percentages going forward. We have heard from other companies we cover that the states, the federal, those, the municipalities that have taken three to four years to get their budgets back on track after '01. It seems they're at that point in and out, you're starting to see more budget surplus. Of the segment you quote, are there any particular areas that are showing greater strength or greater momentum that you're really focused on capturing?

I don't think that there is a sector -- we're actually pretty pleased with the balance and it seems to be sustaining in a balanced manner. We really haven't seen one drive the other. We're able to move our various businesses around to different locations in the country, focus on where things are stronger and we've been able to do that with a good market.

And the status of the government budgets that you referenced, the area where that asks us is probably more an opportunity perspective is in the school, the education marketplace, and we've been talking about growing what we refer to as our more standard commercial window product line. And the education and health care markets tend to be core markets that we service with that product, and we have seen and expect to see continued strength in the education market, which is an opportunity that we see going forward.

Okay. And last one, in the past, you've really used your repurchase program to neutralize any incentive shares that the Company gives out. You made a comment in the past quarter that you may go offline, at least for a little while, while you have these CapEx expenditures in front of you've. Is that why, or one of the reasons, why we saw a little bit of an uptick in the share count? And do we get back to a more normalized policy in calendar '07?

Certainly, as long as we're reinvesting in the business, then we feel that that's the best use of cash. As we go forward, we absolutely have to watch our capital spending, but right now we feel that the markets are -- will continue to support what we've been doing. So we're looking for opportunities to reinvest versus buyback at this point in time.

And just a quick comment in terms of the increase of shares as they show up, there really isn't an increase in the outstandings, just happens to be more shares in the money.

Okay, very well. Good job, guys.

Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of John Walthausen of Paradigm Management. Please proceed.

Yes, good morning and congratulations on a great quarter.

Thanks, John.

Thank you.

Had a couple questions. One was about the seasonality. I think that was certainly an appropriate caution, because from time to time we do see architectural down in the fourth quarter versus the third quarter, but that -- as I kind of scan back, it seems like that's more likely to happen when the markets are weak rather than when the markets are strong. Is this just a caution about what weather can do to scheduling, or are you seeing things in scheduling that do lead you to believe that there will be a slowdown in the fourth quarter?

Certainly, John, it is a historical reference. We believe that we have opportunities in the fourth quarter, but at the same time there are always those risks that we talked about. On the large scale optical, though, that truly is a fourth quarter phenomenon, as well as auto glass. So there are little pieces to it that we do expect to happen regardless of other events. On the architectural side, there are always is some, and then you're subject to the uncontrollables.

And just added to that, first of all, there actually are -- we actually do have fewer work days in our fourth quarter with the holidays, number one. But number two, in architectural, because of some of the markets in the country that we service, there actually is some acceleration of activity to get the exterior of the building closed in anticipation of some of the winter months. So there really is some element of seasonality associated with that.

Okay, okay. That's helpful. I just wanted to make sure I understood. On the auto business, we should not anticipate any one-time charge to write-off any assets or severance or anything of that nature, just this gradual process --

As we've outlined before, our aftermarket auto business have a very low investment base. If there is some, it shouldn't be of an amount that would cause concern.

Yes. I think the auto glass segment business that we have, it's a low investment base and we should be able to transition that without a significant write you've.

Okay. Thank you very much. Again, great quarter.

Okay, thank you.

There are no further questions at this time. I would like to turn it back over to Russ Huffer for closing remarks. Please proceed.

Well, we as well are very pleased with our third quarter results, and we're really executing on our strategies , our business is improving, and our key architectural markets are strong. We're excited about the opportunities for the balance of the year and beyond. And thank you.

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