Apogee Enterprises Inc (APOG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises 2008 first-quarter earnings conference call. My name is Cammie and it will be my pleasure to be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct 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 Ms. Mary Ann Jackson. Please proceed, ma'am.

Thank you. Good morning and welcome to the Apogee Enterprises fiscal 2008 first-quarter conference call on Wednesday, June 27, 2007. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our first-quarter results and the outlook for fiscal 2008.

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 March 3, 2007 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 website.

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

Thanks Mary Ann. Good morning and welcome to our conference call. We are very pleased with our first-quarter results. Our architectural segment met our expectations for a very strong quarter. It was especially satisfying that our large-scale optical segment exceeded our expectations. Our strategy to drive conversion to our best value-added picture framing glass products delivered strong growth sooner than we had expected this fiscal year.

When framing customers get a look at our best products which combine reflection control and ultraviolet protection, they can easily see the visual benefits of using them. This improved mix brings higher margins and thus stronger earnings. Thanks to this momentum in our picture framing business and a slightly better outlook for our already strong architectural segment, we have raised our earnings outlook for fiscal 2008. We are now expecting earnings of $1.37 to $1.47 per share, up from previous guidance of $1.27 to $1.37 per share.

In the first quarter, earnings from continuing operations were $0.34 per share, double what we earned a year ago. Revenues were up 12%. Our architectural segment operated well in a strong market. Revenues grew 14% and operating income more than doubled. We achieved an architectural segment operating margin of 6.2%, up significantly from 3.4% in the prior year period. Operating margins are benefiting from improved pricing, productivity and product mix, as well as the replacement of older and less profitable projects by better margin jobs.

During the quarter, the onetime cost of starting up our new architectural glass fabrication facility in Utah was 1.2 percentage points of margin. We anticipate that the full-year impact of the new plant startup will be 3/10 of a percentage point. We maintained a high level of backlog as we grew revenues 14%. Our architectural backlog at the end of the quarter was $414 million, up 15% from the prior year period and down slightly from year end.

This level of backlog supports our growth outlook for the year. We are not concerned that the backlog declined slightly from year-end. As we previously communicated, we need to see continued high levels of backlog not necessarily sequential increases. Our bidding activity and commitments that have not yet hit backlog remain very strong.

Turning to our large-scale optical segment, operating income grew 25% on flat revenues. Our operating margin was 18.1%, compared to 14.4% in the prior year period and well ahead of our original fiscal 2008 outlook of 11% to 12%. Performance improved as we converted customers to a high margin product mix. Our focus is to continue to expand sales of our best value-added framing glass products.

Next I'll cover our outlook for the remainder of fiscal 2008. We feel good about our prospects for fiscal 2008 and have increased our earnings guidance to $1.37 to $1.47 per share up from $1.27 to $1.37 per share. Our improved outlook is based on increased expectations for both our large-scale optical and architectural segments. For our architectural segment, we are now anticipating operating margins of 6.6% to 6.9% and revenue growth of 11% to 14% both up slightly from our previous guidance. Our architectural segment backlog of $414 million with improving margins supports this level of performance.

Our commercial construction markets continue to be strong based on our backlog, bidding, and market forecast. The sectors we serve value our energy-efficient hurricane and blast value-added glass, window and curtainwall products and services.

With the success we are seeing in converting customers to a mix of our best value-added picture framing glass products, we are now expecting operating margins of 14% to 15% for the large-scale optical segment. Large-scale optical segment revenues will grow slightly in fiscal 2008 as picture framing growth is somewhat offset by the planned sale of our preframed art product line and continued transition away from consumer electronics products.

In order to meet growing demand for our best value-added products, we will be investing in additional picture framing glass coating capacity this year. This capacity is expected to start operating at the beginning of fiscal 2009.

We are very optimistic about fiscal 2008 and anticipate another year of significant growth. Jim will now comment on the financials. Jim?

Thanks, Russ. Good morning and welcome to our conference call. We were pleased with our strong start to fiscal 2008. The architectural segment continues to deliver strong results and it is rewarding to see the picture framing glass business benefit from its successful efforts to convert customers to our highest value-added framing products.

Earnings per share in the first quarter doubled on revenue growth of 12%. The earnings per share reconciliation between the current earnings of $0.34 per share from continuing operations and the $0.17 per share earned in the prior year period is the architectural segment core operations added $0.17 per share. Large-scale optical segment added $0.02 per share.

Lower interest expense added $0.01 per share and other items which are all reported as components of segment operating results were onetime startup costs this quarter for the new architectural glass facility of $0.05 per share and the last year's first quarter, there is a $0.01 per share net gain on the disposition of assets and unusual healthcare costs of $0.03 per share.

Discontinued operations reported non-cash earnings of $0.06 per share in the first quarter, bringing net earnings to $0.40 per share versus $0.17 per share in the prior year period. These earnings were primarily due to reduction of a discontinued operations reserve with favorable resolution of an outstanding legal matter related to a significant French curtainwall project that the company worked on in the late 1990s.

Debt increased to $43.4 million up from $35.4 million at year end due to seasonal increases in working capital including normal distributions for incentives, pensions, and taxes along with some growth working capital.

I'll turn to our outlook for fiscal 2008. We remain very optimistic about fiscal 2008 and have raised our outlook for the year. We are now expecting an earnings range of $1.37 to $1.47 per share on revenue growth of 10% to 13%. The increased outlook reflects our higher expectation for both the picture framing business and our architectural segment.

We have raised our operating margin outlook for the large-scale optical segment to 14% to 15% as we've converted customers to a mix of better products, faster and at a greater rate than anticipated. Late in the first quarter we really began to see this mix improvement with customers already using our best value-added products as well as with those using more basic value-added framing glass along with the benefits of productivity improvements and higher capacity utilization.

Somewhat offsetting the impact of positive mix on operating margins for the balance of the year will be costs to increase both existing and new coating capacity to meet increasing demand for our best value-added picture framing glass products. We'll also be increasing spending on sales and marketing to drive this growth. We still anticipate the sale of the preframed art product line in our large-scale optical segment by the end of the third quarter, which will slightly dampen year-on-year revenue growth for the segment.

The fiscal 2008 preframed art product line revenues will be approximately $0.5 million to $7 million of fiscal 2007 revenues. Our current outlook is for slight growth overall for the segment this year.

Our architectural segment is positioned for fiscal 2009 operating margins to exceed the operating margins achieved in the peak of the last commercial construction cycle. This year we are now expecting operating margins of 6.6% to 6.9% due to better productivity across our businesses. Architectural margins will be impacted in the balance of the year as this improved productivity is offset by the lower operating rate at the new plant throughout its ramp-up process as well as the timing of installation and window projects.

Our architectural segment operating margin guidance is up slightly from our prior outlook of 6.4% to 6.7% and well above our fiscal 2007 full-year operating margin of 5.8%. Our current revenue guidance has also increased slightly to 11% to 14% growth, up from 10% to 13%. The higher growth rate will be supported by our large backlog and strong markets. $261 million or 63% of our backlog of $414 million is expected to be delivered in fiscal 2008.

It is a positive that our backlog remains nicely balanced across nonresidential segments. Approximately 35% of our backlog was in the institutional sector, which includes education, healthcare, and government buildings; 30% to 35% in office; 20% in condominiums; and 10% in entertainment and hotel projects. I will note that the sale of the recreational vehicle and bus windshield business now reported in discontinued operations is expected to be completed in the third quarter.

Regarding the seasonality of our business, revenue flow will be roughly even in the first half/second half to slightly larger in the second half. We anticipate that the second half volume growth from the new architectural glass facility will be offset by the timing of jobs in our installation and window business.

I'm going to briefly cover cash flow for full year fiscal 2008. We're estimating EBITDA, earnings before interest, taxes, depreciation, and amortization from continuing operations of $83 million to $88 million. We estimate net cash provided by continuing operations of $55 million to $65 million for the year. Capital expenditures are projected to be approximately $60 million.

Fiscal 2008 strategic investments include completing a number of architectural glass expansions currently underway, adding picture framing glass coating capacity, and spending on productivity improvements and expansions in our window business. We anticipate this will give us free cash flow of breakeven to plus or minus $5 million. And we define free cash flow as net cash flow provided by operating activities minus capital expenditures.

Including our dividend program, we project year-end debt will range from $35 million to $45 million. As Russ stated, our businesses are well positioned to deliver a strong performance in fiscal 2008. Thanks. Russ?

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

(OPERATOR INSTRUCTIONS) Michael Cox, Piper Jaffray.

Congratulations on a great quarter. My first question is on the large-scale optical business. The quarterly operating profit margin here is the best we've seen in a couple of years. I was wondering if you could comment on the guidance of 14% to 15%. Is there something from a seasonality perspective that will lead that number down through the balance of the year or just comment on that?

This is Jim and I'll comment on it, which is I think we've been saying for awhile that quarter-to-quarter we see a fair amount of fluctuation in the operating margins in this segment, partly with the impact of national customers on the segment, overall in the segment national customers are about 40%. And it has kind of taken us away from traditional seasonality and more based on seasonality and their promotional activity. So that is just one dynamic that we see at a quarter-to-quarter.

But in terms of the balance of year, really with the success of the conversion that we're seeing in this business is that we are really getting to a point where we are running towards capacity constraints in the best value-added products. So as we articulated in the balance of the year, we're going to see some expenses associated with ramping up both existing and new capacity as well as doing some investment for the balance of this year and into the future to drive growth in this business.

Okay and you commented that you started to see a significant uptake on the best glass. I assume the museum glass late in the quarter. I was wondering if there was anything that had changed there, any tools that you were using that was different that drove that uptake?

It's Russ. What we saw was that the tools and the marketing work and the help that we are able to provide our customers became effective sooner than we had anticipated. So the kinds of things that we have been doing are just proving to be successful sooner than we had originally forecast.

And we did actually start out the fiscal year really with a refresh of new point of purchase items and those kinds of things in the hands of the retailers, which I think they have seen the power of using those tools more effectively and we are seeing the effects of that.

Okay, great. My last question is on the architectural building segment. In terms of the sequential decline, you commented that you are not -- you do not need sequential increases in that backlog number. I was just curious if you could comment as to what would result in a sequential decline from Q4 to Q1 since we have not seen that in a few years?

We really -- the backlog, the way it has been going is we've been adding larger projects. It has been stretching out. And also because of that we see the timing of when things are added or coming off affect that. Overall when we look at it in more detailed levels, we are confident that it's still on an increasing basis not portending a transition or an inflection point. Certainly we will watch it, but there is nothing to support a downward move or a leveling, a significant leveling that from our bidding, from our quoting, from samples, architectural inquiries, those kind of things remain very robust. So we're confident that this is not a sign of a downturn or a leveling.

I will add to a little, Michael, in Q4 we actually saw if you recall, a significant increase in our backlog and I think at the time we called out that there were a small number of actually large projects which actually did not even begin to flow until the end of fiscal '08 or early fiscal '09. And so on a straight quarter-to-quarter basis, it is possible that you could have some larger, longer lead projects that will kind of flow through and move that around.

We report it quarterly. On a monthly basis, it is not uncommon for us to see small decreases on a month-to-month basis just based on timing of workflow in terms of revenue and then when the work gets booked. I think as Russ mentioned, what is important is the activity in terms of bidding and commitments that is not in our backlog yet continues to be strong.

Okay, great. Thank you very much.

Steve Denault, Northland Securities.

Good morning, everyone. Nice quarter. I would like to hone in a little bit more on LSO. I think, Jim, you may have mentioned how much of the LSO segment is preframed art on an annual basis?

Last year it was between 5% and 10%, probably about close to 7%.

Okay, so how do we interpret your sort of flattish topline guidance for the year, assuming the business gets sold in the third quarter? Is this literally capacity constraint that doesn't allow you to grow it?

In the LSO segment?

Yes.

Well, I think really our outlook for this year -- I mean there's two factors. I think what we've said is approximately 10% kind of rough numbers of that segment is not picture frame. So a combination of consumer electronics and preframed art. And so as I call [value], about half of that preframed art level is basically going to be gone and then we continue to reallocate capacity away from consumer electronics into picture framing.

Then one last component is we have also really been strategically as we convert product in this business, a lot of it really is conversion, which is we're taking existing lower-priced point product and converting it to higher price point product. So we are seeing core growth. We're seeing strong growth in our best value-added category, somewhat offset by exiting preframed art, reduction in consumer electronics, and I guess some cannibalization of the non value-added or low value-added picture framing products.

When we look at the growth of value-added sales, we are very satisfied with that trend and we anticipate that to continue at a very robust rate.

Has there been any change in your international exposure versus last quarter?

No.

So it is still quite well below 10%?

Yes.

Would you say on the architectural side of things -- even though backlog is flattish, are you suggesting that the bidding activity is every bit as healthy as you saw in the prior six months?

Absolutely.

Okay, thank you.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen, another great quarter. A couple of quick questions. One, last few years we've had significant CapEx as you bought coating machines, expanded capacity at Georgia, Utah now in the optical side. What has been the decision? Obviously before you did not have quite the valuation you do now between are there opportunities to buy capacity in the marketplace as opposed to greenfielding it yourselves? And do you become more aggressive if those opportunities exist in today's environment?

In fact we are evaluating and do believe that we will be able to outsource some of our coating capacities, which we'll be able to improve what we are doing. Acquisitions of coating capacity are unlikely.

I think in general I think, Tyson, your question is looking at kind of M&A or acquisitions as opposed to greenfield, and I think we have to look at it business by business. In any enviro cons, architectural, glass business, there are very few candidates that represent themselves as a fit. So greenfield really is the best solution. In the core high value-added best product mix for Tru Vue, that is also a similar situation.

What about installers that's more fragmented that you've done in the past?

Yes, in the installation and the window business, those do represent opportunities where we can look at acquisition or a greenfield startup based on really what makes the most economic and strategic sense.

At least sitting from afar, it looks like you get cash or capacity constraints but then you are obligated to get -- expand that and given the outlook that you are giving us, that would be something that would probably be on the front burner for you.

We continue to look at strategic growth opportunities for the business.

The last one then is with a new energy bill coming up, are there any items that you are aware of or your lobbyists have told you that are included that would be beneficial to Apogee as far as energy-efficient buildings or other trends or directions leading to a greater use of your value-added product?

This is Russ. Here's how this really I think is going to work out. It is the trend and awareness and value, that value-added energy-efficient products contribute to a building, so they actually make buildings more energy-efficient. They lower the cost to the tenants or to the owners and they make that -- they make the lease rates people willing to pay more to be into a value-added building. They're willing to pay more to build that in.

What it's doing is it's finally getting people to appreciate the value of the energy-efficient products, the ongoing value of the energy-efficient products that we provide. Historically our products have sold more on aesthetics even though they provided significant ongoing energy savings. So what I sense and what I think is real for us is that this movement simply is raising that awareness. People are asking more questions and because our products are doing what they need, we will get assigned a higher value than we have in the past and therefore that will increase demand and just puts us in a great position.

You have to remember that these codes even though they get adopted at the top level and there are some incentives, federal tax incentives, the rest of the requirements tend to be adopted or enforced locally. So we have to be careful of saying, gee, this is going to transition this market because of XYZ.

Yes, the federal energy bill that was extended several months ago did include in it some benefits specifically related to energy efficiency in buildings. In the latest energy bill we're not aware of specific aspects that relate to our business.

Russ, it really sounds like we're still just scratching the surface here. There is an enormous amount of potential here obviously cautiously looking at that but we have yet to really immerse ourselves in what could potentially be for Apogee.

I firmly believe that there is significant value that's still being missed in the marketplace and as that is appreciated by builders, developers, and tenants, then you'll see an increase in demand and therefore valuation of the kinds of things that we do. So I think, yes, I think there is still much to come here.

So you consider yourself a green company?

Absolutely. We have always been green in terms of energy-efficient. We just have had to compete on aesthetics and initial savings as we have discussed in the past. It has been the initial offset of heating and air conditioning or other things on a project that gave us value.

Okay, thanks a lot gentleman.

Scott Blumenthal, Emerald Advisers.

Congratulations on a nice quarter. To touch on the LSO segment again, you appear to have done a very nice job in converting some of the customers or converting your customers over to the higher value-added products. Could you give us any sense of your efforts and new customer acquisition and how you feel that is progressing?

I think overall when we looked at the highest value-added products last year, they were mixing about 1% of the marketplace for us, so very small share. And what we are seeing is significant growth in those and that is what is helping us. We think that there is -- so from that point of view, we think that there is significant opportunity for these products to grow in this marketplace for several years to come. So we do not think that we are approaching the saturation point.

Scott, this is Jim. The key drivers really are with the existing customer base and it is with customers that were already using the kind of best value-added products that have really increased their mix on it, but then also it is having existing customers convert from lower value-added products to these highest value-added. Those have been really the drivers of the improvement in the segment.

Sure. How concerned should we be then, Jim, since you mentioned I believe during your comments that you were delivering a large number or some initial pre-buy or whatever it is -- I can't remember what you called it into the customers -- your initial deliveries into customers I guess, that this is going to be kind of a blip here and then maybe taper off?

If I indicated that, I might have misspoke. I think what I tried to indicated is that what we did deliver is new point of purchase kind of sales materials and these are actually just refresh materials where we have updated the items that the retailer actually use on their counter to help sell to their consumers. So primarily these -- we had existing point-of-sale materials and we just really came up with what we feel are some enhanced ones that make it easier for the retailers along with some of the training activities that we have been working on.

And really many of these customers as I said, they are not new customers and they are customers we've been working with for a long time. We really think it is a longer-term transition for the retailers themselves because what is really the key to this business is that our customers or the retailers are actually making more money with this conversion as well.

Sure, that sounds great. The $20 million increase, projected increase in CapEx, are you buying a coater for large-scale optical segment?

We're going to modify an existing coater and add the cost associated with upgrading it that are requirements to service the picture framing business are different than architectural.

What is the capacity utilization of your existing equipment in that segment? Are you running at 100% right now?

Yes, in large-scale optical we are approximately 100% operational.

Okay, terrific. I guess I have to ask at least one question about the backlog. Is that -- I understand that these are just [sized] and identified products, but can you give us any idea how that breaks down amongst the business segments? I would imagine the largest part of that Harmon?

Correct.

Okay, that's it. Thank you very much and congratulations again.

(OPERATOR INSTRUCTIONS) [Stan Westhoff], (inaudible) Management.

Good morning, guys. Excellent quarter. Actually my question was just answered, but I guess maybe if you could provide a little bit more color on some of that CapEx? I mean it is quite a significant jump from the guidance you provided in the last quarter.

Sure, I think really in terms of the increase from the last quarter, the primary driver of the increase is our acceleration in terms of adding coating capacity to service our large-scale optical picture framing business.

All right. Like I said, that was it and great quarter.

A follow-up from Scott Blumenthal.

Jim, you indicated in your remarks that cash flow from operations was going to be pretty much close to covering the CapEx for the year. Can you give us any idea as to what happens if you need to increase working capital inventory for receivables whatsoever, how you plan to finance it if you fall a little bit short?

With our revolver. We will use our working capital bank debt to do that.

Okay and can you remind me how much you have left in that? I'm in my car, so I don't have all the (multiple speakers).

Okay, sure. We have a line outstanding of $100 million, so we are projected at year-end to be using less than half of that, $35 million to $45 million. And we do have an expansion feature on that line as well.

Okay, terrific. Thank you.

At this time we have no more questions in queue. I would now like to turn the call back over to Mr. Russ Huffer for closing remarks. Please proceed, sir.

I am really pleased with our first-quarter results. We are executing on our strategies and our business is improving. And our key architectural markets remain very strong. We are excited about the opportunities for Apogee in fiscal 2008 and beyond. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.