Apogee Enterprises Inc (APOG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises second-quarter 2008 earnings conference call. My name is Maria and I will be your audio coordinator for today. At this time all participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). At this time I will now turn the presentation over to your host were today's conference Mary Ann Jackson, Director of Investor Relations. Please proceed.

Thanks, Maria. Good morning and welcome to the Apogee Enterprises fiscal 2008 second-quarter conference call on Thursday, September 20, 2007. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our second-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 to while this call remains on the Apogee website. Russ will now give you a brief update overview of the results and then Jim will cover the financials. After they conclude Russ and Jim will answer your questions. Russ?

Thank you, Mary Ann. Good morning and welcome to our conference on. We are very pleased with our second-quarter results. We completed another strong quarter and look forward to fiscal 2008 being another year of record earnings. In addition we have visibility in fiscal years 2009 and 2010 and remain optimistic about the opportunities for Apogee beyond the current year.

Our architectural segment exceeded our expectations for a very strong quarter with higher revenue growth than we had anticipated generating higher operating income. Revenues were stronger due to project timing and flow and there were fewer project delays than expected in the current strong commercial construction market. Project delays tend to be the norm in this business.

We were also pleased that our large-scale optical segment earnings again benefited from a high mix of our best value added framing glass products. This improved mix brings higher margins and thus stronger earnings. With the stronger performance of our architectural and picture framing businesses we have increased our continuing operations earnings guidance for fiscal 2008 to $1.43 to $1.53 per share, up from $1.37 to $1.47 per share.

In the second quarter earnings from continuing operations were $0.40 per share, up 54% from what we earned a year ago. Revenues increased 20%. Our architectural segment operated well in the strong market. Revenues grew 21% and operating income increased 57%. We achieved an architectural segment operating margin of 7.3%, up significantly from 5.6% in the prior year period. Operating margins are benefiting from good pricing and operating performance and high capacity utilization.

Our new architectural glass plant in Utah is in the process of ramping up production since its first-quarter startup. The facility is operating at forecasted levels and meeting customer commitments. The conversion of our auto glass factory to architectural glass capacity is also on schedule.

In the second quarter we maintained a high level of architectural backlog as we grew revenues 21%. Our architectural backlog at the end of the quarter was $405 million as we reported new orders of $190 million for one of our highest booking quarters. Our architectural second-quarter backlog was down slightly from the first-quarter level and up slightly from the prior year period.

In addition to our reported backlog, we also have significant commitments that are expected to turn into backlog in our architectural glass and installation businesses. Commitments at the end of the second quarter increased from a year ago.

This continued high level of backlog with improving margins supports our positive architectural outlook. We have indicated for several quarters that sequential growth in our backlog isn't necessary for us to meet our objectives. We just need to maintain our backlog at high levels which we are anticipating based on the current market conditions and our strong bidding activity. In addition, this bidding activity allows us to select projects with higher margins.

Turning to our large-scale optical segment, revenues increased 6% while operating income grew 91%. Our operating margin was 18.4% compared to 10.2% in the prior year period. Sales of our best value added framing glass products, which offer visual benefits to consumers, increased significantly as we convert customers to a higher margin product mix.

Next I'll cover our outlook. We remain optimistic about our businesses and markets served and are positioned to meet our longer-term objectives of 8% annual revenue growth and 20% average earnings growth through fiscal 2010. Our solid year-to-date earnings along with our strong backlog commitments and bidding activity give us confidence in our ability to grow revenues and earnings through fiscal 2010.

For the current fiscal year we have increased our earnings guidance from continuing operations to $1.43 to $1.53 per share, up from $1.37 to $1.47 per share. This improved outlook is based on the stronger year-to-date performance of our architectural and picture framing businesses.

For our architectural segment we are now anticipating operating margins of 6.7 to 7.1% and revenue growth of 13 to 15%, both up slightly from our previous guidance. Our commercial construction markets are strong. McGraw-Hill Construction forecasts growth for nonresidential construction markets through fiscal 2009 with markets flat in fiscal 2010 and then modest growth for the following years. Our continued high level of architectural segment backlog with improving margins also supports our positive architectural outlook.

We expect continued strong performance in our picture framing glass business as we successfully convert customers to a mix of our best value added picture framing glass products. Planned second half investments in picture framing glass coating capacity to meet increasing demand for our best products as well as higher spending on sales and marketing to drive this growth will somewhat dampen second half and full year large-scale optical segment operating margins.

We are now expecting an operating margin of approximately 16% for the large-scale optical segment, up from previous guidance of 14 to 15%. As conversion to better products continues strong, this compares to a first-half margin of 18.3%.

We are very optimistic about fiscal 2008 and anticipate another year of significant growth. We also feel very good about fiscal years 2009 and 2010 based on our backlog, commitments and bidding activity as well as market forecasts. Jim will now comment on the financials. Jim?

Thanks, Russ. Good morning and welcome to our conference call. We are pleased with our strong fiscal 2008 second-quarter and first-half performance. Both the architectural and large-scale optical segments continue to deliver strong results.

First-quarter earnings per share from continuing operations increased 54% on revenue growth of 20%. The earnings per share reconciliation between the current earnings of $0.40 per share from continuing operations and the $0.26 per share earned in the prior year period is -- the architectural segment core operations added $0.15 per share; the large-scale optical segment added $0.05 per share; the increase in diluted shares had the impact of a negative $0.02 per share; and the prior year included a $0.04 per share gain from the flat glass settlement which was recorded as a component within segment operating results.

Discontinued operations reported a net loss of $0.01 per share versus no earnings per share impact in the prior year period. This brings second-quarter net earnings to $0.39 per share versus $0.26 per share in the prior year period. The slight loss in discontinued operations was from operating results in the recreational vehicle/bus business. The sale of this business is expected to be completed in the third quarter.

We had strong free cash flow of almost $25 million in the second quarter compared to $1 million in the prior period. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Debt declined to $24.3 million from $43.4 million at the end of the first quarter and $35.4 million at year-end. Strong earnings along with sound working capital management drove the cash flow improvement and decline in long-term debt.

I'll turn to our outlook for fiscal 2008. We remain optimistic about fiscal 2008 and have raised our outlook for the year. And with our market leadership positions we remain confident in the longer-term growth potential of our businesses. Our strong backlog as well as high commitments and bidding activity combined with the ongoing momentum in the nonresidential construction market position us to achieve our longer-term objectives of 8% annual revenue growth and 20% average earnings growth through fiscal 2010.

For fiscal 2008 we're now expecting earnings from continuing operations to range from $1.43 to $1.53 per share on revenue growth of 11 to 13%. This increased outlook reflects the stronger year-to-date performance of our architectural and picture framing businesses along with confidence in our ability to execute well on the second half.

Before covering guidance for our segments, I would like to note that there are three potential second half events not included in our guidance which could impact our earnings for the full year. First, our guidance does not include the impact of initiatives under way that could lower the tax rate. We are analyzing prior year research and development credits; we may be in a position to adjust our tax rate in the period that this analysis is completed.

Second, PPG Industries has announced that it has signed an agreement to divest its automotive glass businesses. If PPG closes on this transaction we could have the opportunity to sell our non-core minority interest in the PPG Auto Glass joint venture. Our interest is reported in equity and affiliates in the income statement. At this point it's premature to project a potential gain or loss on our investment in the joint venture. And finally, our guidance does not reflect any gain from the expected third-quarter sale of the recreational vehicle and bus windshield business reported in discontinued operations.

Turning to the segment outlook, our architectural revenue guidance has increased slightly to a range of 13 to 15% growth, up from 11 to 14%. The higher growth rate estimate is supported by our large backlog and strong markets. $259 million or 64% of our architectural backlog of $405 million is expected to be delivered in fiscal 2008.

It's a positive that our backlog remains nicely balanced across nonresidential segments -- 35 to 40% of our backlog is in the institutional sector which includes education, healthcare and government buildings; 30 to 35% is office; 15 to 20% is condominiums; and 10% is entertainment and hotel projects. There's a slight increase in the institutional portion of our backlog to 35 to 40% from about 35% in the first quarter. This was driven by growth in new healthcare projects. It should come as no surprise that the condominium portion of our backlog has declined slightly from 20% of our backlog in the first quarter to 15 to 20% in the current backlog.

Regarding our backlog and the recent uncertainties in the financial markets, no projects in our backlog have been canceled at this point. Our architectural segment is positioned to exceed the 7% operating margins achieved in the peak of the last commercial construction cycle. We're now projecting full-year operating margins of 6.7 to 7.1% which includes an approximately 3/10 of a percent impact as a result of the first-quarter initial startup cost of the Utah glass fabrication plant.

Our outlook assumes ongoing recognition of the pricing in our backlog as well as the high levels of productivity and capacity utilization that we saw in the first half. The outlook also reflects some second half costs associated with our architectural glass capacity realignments, including -- reallocation of a coater from the architectural glass business to the picture framing glass business; implementation of architectural glass coating outsourcing; and completion of the auto glass factory conversion. As we move beyond fiscal 2008 we believe we will be well positioned to exceed the last cycle peak operating margin.

Turning to our picture framing business, we've raised our operating margin outlook for the large-scale optical segment to approximately 16% on flat revenue. Our first-half success in converting current customers to a higher mix of better products will be somewhat offset in the second half by investments being made in picture framing glass coating capacity to meet increasing demand for our best value added framing glass products. We'll also be increasing spending on sales and marketing to support and continue to drive this growth.

I'm going to briefly cover cash flow for full year fiscal 2008. We're estimating the EBITDA -- earnings before interest, taxes, depreciation and amortization -- from continuing operations of $86 million to $90 million. We estimate net cash provided by continuing operations of 60 to $70 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 frames 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 positive $10 million. Including our dividend program, we project the year-end debt will range from $25 million to $35 million. This is down from our prior guidance of year-end long-term debt of $35 million to $45 million.

As we've stated, our businesses are well positioned to deliver a strong performance in fiscal 2008 and beyond. Thanks. Russ?

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

(OPERATOR INSTRUCTIONS). [Juli] Johnson, Piper Jaffray.

Congratulations on the great quarter. My first question is on the capacity utilization. Can you talk about utilization in the quarter and your expectations for the rest of the year?

Yes. We're operating in the quarter in our architectural segment across the businesses in kind of the mid 80% capacity utilization level and pretty much expect to continue to operate on those rates.

Okay, that's helpful. Thank you. And then for a little bit more color on the backlog, can you discuss your regional exposure?

I'm not sure we have that data here. I mean, we don't -- I'll say it this way, there's no change in the regional representation of our backlog from prior quarters.

Okay, great. Thank you. And then my last question, does the incremental capacity in the architectural segment provide you with an opportunity to sell more projects which in turn enter the backlog? Could you just talk a little bit about that?

I'm sorry, would you repeat that please, Juli?

Sure, yes. I'm looking at the incremental capacity for the architectural segment with the Saint George facility and the conversion of the auto business. Just looking for a little bit of color about how that allows you to sell more projects.

Certainly that capacity will continue to come on board through the balance of this fiscal year. And the significant impact will be in next fiscal year where we believe that that helps us get to our 8% growth in revenue.

And basically we've been selling that anticipated capacity and have backlog associated with that capacity today.

Great, that's very useful. Thank you.

Robert Kelly, Sidoti & Co.

Good morning. Just a question -- what was the drag from the new facilities in architectural in 2Q?

We haven't called that out particularly because -- there definitely is a bit of a drag other than the onetime costs because we really manage across all of our plants and really balance production across our different facilities. It's a little bit hard and maybe misleading to specifically call that out. We continue to see the gradual improvement. I think what we've said is a drag in the first half of the year getting to be neutral by the end of the year.

So just maybe qualitatively, less of a drag in Q2 than Q1?

Yes.

Yes, that's true.

And switching over to LSO, could you give us the timeline for the full conversion out of sort of the lower end products? And what should we be modeling as a growth rate and a margin level once that's all complete?

The additional capacity comes on late spring, early summer of next year. And clearly, as we articulated, the marketing activities will take place through the balance of this current fiscal year. So you should see the continued growth of value added picture framing glass begin to ramp up a little more in the following year.

I think our outlook for revenue growth is really kind of nominal single-digit based really on conversion; with the upside opportunity if we saw more accelerated conversion in the marketplace. And the outlook from a margin perspective, I think in the first half of the year you saw us delivering 18% operating margins, the second half being dampened by these investments. So our expectation as you go into next share with these costs behind us is we should be moving back towards our first-half 18% operating margins.

So that's kind of the bogey for the future once conversion is done, 18?

Yes.

Okay. And then quite a bit of consternation -- economic situation, liquidity crisis. Have you seen any sort of softening in your bidding activity over the summer here over the past six weeks?

Other than the condo activities which I think everybody would appreciate, our total bidding activity remains very strong. And as I have said many times, what I really watch for is how customers are securing our capacity and our commitment levels, although those are liquid, those move, that clearly reflects the behavior of the marketplace, values what we do and our intent on securing our capacities into the future as far as we can see. So that sort of behavior, that sort of activity is at as high a level as we've ever seen it.

And I'll just echo that. The key answer is that we have not seen a change in the bidding activity going on in the future looking at our business. And as I mentioned, we have not seen any cancellations in our backlog. I will note, there are two modest condo projects we're aware of, one which has the potential to cancel, and it is related to financing.

But actually what's interesting is these financing issues were existing prior to the recent issue -- I think that's in California, and then there's actually a final phase of an existing project in our backlog in Phoenix that is delayed just as an overall condo uncertainty. But it really is kind of the exception basis like that that we're seeing.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Steve Denault, Northland Securities.

Good morning, everybody. Very nice quarter. The SG&A had ticked up as a percentage of sales and on an absolute basis in the quarter, and yet you've reduced the expectations for SG&A for the full year as a percent of sales. What's going on there? How should we be thinking about that SG&A level?

I think our full-year level is appropriate. We are starting to see some ramp up related to some back room office investments, implementation of some systems and those kinds of things. We do have a little bit of lumpiness based on the improvement in our performance related to incentive accruals that's driving it. If I were going to call out two items in the quarter, those would probably be the items. But I think looking at our full-year level is appropriate.

Okay. Because the full-year percentage guidance implies an absolute SG&A dollar level in the back half of the year that's below that of the first half. And that's a good way to think about it?

Yes.

Okay. With the LSO capacity expansion conversion happening early next spring, what -- in absolute dollar terms what kind of capacity will you be adding?

Well, it's kind of a step change in terms of capacity that gets added. So frankly we'll be probably more than doubling the potential capacity related to the processes that we're adding. So we'll essentially have excess capacity or capacity to really grow beyond our outlook in that.

Right. That should carry us more than a couple years.

Okay, perfect. Thank you.

And at this time there are no further questions in queue. I would now like to turn the call over to Russ Huffer for final remarks.

I'm pleased with our second-quarter results and we're executing our strategies, our business is improving and our key architectural markets remain strong. We're excited about the opportunities and appreciate your support. Thank you.

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Have a great day.