Apogee Enterprises Inc (APOG) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Apogee Enterprises earnings conference call. My name is Lacie and I will be your coordinator for today. (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.

Good morning and welcome to the Apogee Enterprises fiscal 2008 fourth quarter and full year conference call on Thursday, April 10, 2008. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our fourth quarter and full year results and the outlook for fiscal 2009.

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 risk 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 reports and Forms 10-K for the fiscal year ended March 30, 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.

Good morning and welcome to our conference call. We had a strong finish to the fiscal year which had recorded earnings of $1.49 per share. And we are feeling very good about our growth prospects for fiscal 2009.

In fiscal 2008 our revenues grew 13% to almost $900 million. And our $1.49 in earnings from continuing operations were up 33% from the prior year.

In the fourth quarter we earned $0.49 per share from continuing operations compared to $0.32 per share a year earlier. At the same time, revenues grew 18% in the quarter. Full year Architectural segment revenues grew 15%, with fourth quarter revenues increasing 21%. Architectural segment operating income was up 33% for fiscal 2008 and 64% in the fourth quarter.

Our Architectural segment had strong operations serving markets that are using more and more value-added designed and energy-efficient products. Project mix, pricing, high-capacity utilization and productivity improvements contributed to our strong performance and improving operating margins in the fourth quarter and for the full year.

Our Architectural operating margin for the year was 6.7%, up from 5.8% the prior year. Without the impact of two unusual items, third quarter costs related to completing three installation projects in Florida that were poorly managed and first quarter start up cost for our Utah architectural glass facility, we would have had an operating margin of approximately 7.8% for fiscal 2008.

Speaking of the new Utah facility, the ramp up exceeded our expectations in fiscal 2008, and the facility delivered about $20 million in revenues, or 50% of its original capacity. We are already adding capacity with some additional equipment to be installed during fiscal 2009. With current pricing and operational improvements, along with the added equipment, we are now expecting the Utah architectural glass facility will be able to deliver approximately $55 million in revenues by fiscal 2010.

With the Utah growth potential, the conversion of our Minnesota windshield manufacturing facility to architectural glass, the success of our program to outsource some coating, ongoing productivity improvements, and other minor incremental investments planned throughout our Viracon facilities during fiscal 2009, we now expect our architectural glass business will reach $475 million to $500 million in potential capacity by fiscal 2010.

This is approximately a 15% increase from our expected fiscal 2009 architectural glass capacity level of $425 million. We currently have unmet demand and anticipate that we will fill the new capacity as quickly as it comes online.

As we enter fiscal 2009 we are positioned for continued strong growth for our Architectural segment. We started the new year with our highest architectural backlog ever, $510.9 million. We have strong visibility for fiscal 2009 and into fiscal 2010 due to our backlog, project commitments, strong bidding activity, and the construction levels and green building trends in markets we serve.

We are pleased with the strategic acquisition of Tubelite, with annual revenues of approximately $60 million completed in the fourth quarter. Tubelite is a solid business with good management and market position. It is a good operational fit for Apogee, and the transition has gone smoothly. Tubelite fabricates aluminum storefront entrance and curtainwall products for the U.S. commercial construction industry, a large adjacent market we hadn't previously served.

Turning to the Large-Scale Optical segment, earnings again benefited from an increased mix of our best value-added framing glass products. Full year operating income was up 51%, while fourth quarter earnings increased 33%. Revenues for the year were flat. Although retail and picture framing market conditions softened during the year, we continue to convert framers to these great products.

In the fourth quarter we repurchased approximately 339,000 shares at an average price of $15.96 per share, for a total of $5.4 million. We hadn't repurchased shares for several quarters as we have used free cash flow to grow our businesses. We felt purchasing stock at this time was an attractive investment.

Next I will cover the outlook. We are expecting another outstanding year in fiscal 2009. We are entering the year stronger than ever in our Architectural segment, which will drive our performance this year. Demand for our architectural products and services remains healthy. Our backlog is at a record level, new capacity is in place, and we have opportunities for further operational improvements. We expect to earn from $1.82 to $1.94 per share from continuing operations, which would represent a 22 to 30% increase over fiscal 2008 results. Regarding revenues we anticipate revenue growth of 12 to 15%.

In fiscal 2009 we are anticipating 13 to 16% growth in architectural revenues, and an operating margin ranging from 8.0 to 8.3%. The margin outlook shows continued improvement from our fiscal 2008 operating margin of 6.7%. We have essentially sold out all our large projects in engineered work capacity for fiscal 2009, and have capacity only for minor or quick turn business, giving us good visibility to margin potential.

For fiscal 2009 and 2010 architectural glass will come primarily from our architectural glass business, as well as from the acquisition of Tubelite, and to a lesser extent from our window business.

Our picture framing business continues to convert customers do our best framing glass and acrylic products. As a result in a soft retail and custom framing market, we expect to maintain revenues with margins ranging from 17.5 to 18.5%. With new framing glass and acrylic capacity coming on mid year, we will be exploring new markets for the these high-end products.

Looking ahead to fiscal 2010 are longer-term goals of 8% annual revenue growth and 20% average earnings growth remain achievable, despite mixed signals from industry forecasters. We're positive about the prospects for our business based on the size and mix of our backlog at this point for fiscal 2010 and our bidding activity, as well as the increase in green building and our ability to expand into markets currently underserved by Apogee, including broader small projects and international market.

I would like to spend a few moments on the state of our markets and on the accelerating green building trends. First our markets. Forecasters are calling for a slight decline in commercial construction markets, which are currently at high levels. We don't need market growth to support our continued growth, given our backlog, the markets we serve, and the focus on energy efficiencies. We currently have unmet demand and underserved markets.

We are often questioned about the stability of our backlog. Over the ten years of my leadership at Apogee the cancellation of signed projects in our backlog, or committed projects waiting final specifications before hitting the backlog, has been rare. We do see delays on a few committed projects.

There are two reasons our backlog is solid. The lag between the start of a project and the need for glass products and services means significant costs have already been expanded on a typical large project before Apogee gets involved. In addition, we have a conservative policy for project and customer selection. I'm confident that we will experience minimal cancellations in the record level of backlog that we carried into fiscal 2009 based on current or forecasted business conditions.

I'm very enthusiastic about the accelerating green building trend and what it should mean to Apogee. Two recent studies underscore that green buildings achieve higher rents, higher occupancy rates, and higher prices and lower operating costs.

The CoStar study analyzed more than 1,300 LEED certified and ENERGY STAR buildings and assessed them again similar nongreen properties. The study found that LEED buildings command rent premiums of 36% per square foot, 5% higher occupancy rates, and sales prices per square foot approaching 64% higher.

The New Buildings Institute analyzed energy performance for 121 LEED new construction buildings, or 22% of building certified through 2006. The study, which required at least a year of energy usage data, indicates that new buildings with LEED certification are on average performing 25 to 30% better than non-LEED certified buildings in terms of energy use. The study also showed that higher LEED certification means more energy savings, with gold and platinum LEED buildings having average energy savings approaching 50%.

We believe these compelling trends will accelerate the demand for new LEED certified buildings and will encourage renovation of existing buildings. The outside of a building is key to higher LEED ratings and the building's energy performance. Achieving a LEED sustainable building requires to a large extent shifting budget from heating and air-conditioning systems to more energy-efficient façade, which also enhances daylighting, a contributor to a more healthy working environment.

Greater demand for green building products should mean growth for Apogee's highly energy-efficient architectural glass and aluminum systems. We have the wide variety of aesthetic products architects want, with the best energy-efficient properties available in our markets. We're excited about our growth potential related to accelerating green building trends.

I'm feeling very good about the future prospects and potential for Apogee. We have a great business, solid markets and backlogs, new capacity, and our businesses are executing well. Jim will now comment on the financials.

Good morning and welcome to our conference call. We completed a great fourth quarter and a record year. We feel good about our performance, market conditions and trends supporting our value-added products and services.

We earned a record $1.49 per share from continuing operations in fiscal 2008 on revenues of $881.8 million. Earnings were up 33% and revenues 13%.

We feel especially good about our architectural glass performance, as it successfully ramped up considerable new capacity. We increased the full year Architectural segment operating margin 90 basis points to 6.7%, despite the disappointing third quarter write-downs on three Florida projects in our installation business. We are pleased that all of our architectural businesses, including installation, finished the year strong.

Our Architectural segment ended the year with a record backlog of $510.9 million, which gives us good visibility into upcoming fiscal years. Approximately $368 million, or 72% of the backlog, is to be delivered in fiscal 2009; approximately $125 million, or 25% of the backlog, in fiscal 2010; and $70 million is even booked at this point into fiscal 2011.

Our picture framing business, again, achieved high conversion rates for its best glass and acrylic framing products to achieve an operating margin of 18.6%, despite soft retail and framing market conditions.

The full year earnings per share reconciliation between the current earnings of $1.49 per share from continuing operations and the $1.12 per share earned in the prior year period is the Architectural segment operations added $0.50 per share, not including the effect of the unusual items.

The Large-Scale Optical segment added $0.11 per share. In addition, we had unusual items in the current year which were onetime startup costs of $0.05 per share for the new Utah architectural glass facility in Q1, Harmon installation business write-downs of $0.15 per share for the three Florida projects in Q3, the impairment charge of $0.11 per share in Q3 related to the PPG Auto Glass joint venture reported in equity and affiliates, with some offset from the positive $0.08 per share tax benefit from resolution of certain tax matters recognized in Q3. The remainder of the difference, $0.01 per share, was related to prior year items and the impact of higher shares outstanding in the current year.

Turning to the fourth quarter, earnings from continuing operations grew 53% to $0.49 per share, and revenues increased 18%. Architectural segment revenues grew 21%, and operating income increased 64%, with strong operations in solid markets.

In the fourth quarter our picture framing business earnings increased 33% due to a positive product mix, despite an expected drop in revenues. We had said that we could make up for the majority of the third quarter shortfall in earnings from the installation project problems, and we delivered.

Our fourth quarter acquisition of Tubelite, which provides storefront and entrance products for commercial construction markets, was neutral to earnings and added approximately $10 million in revenues.

The fourth quarter earnings per share reconciliation between the current earnings from continuing operations of $0.49 per share and the $0.32 per share earned in the prior year period is the Architectural segment added $0.17 per share, the Large-Scale Optical segment added $0.02 per share, and earnings per share was reduced $0.02 from equity and affiliates operating losses for Apogee's portion of the PPG Auto Glass joint venture, and the higher tax rate in the quarter.

We had very strong cash flow performance for the year. We had $86 million in operating cash flow before $55 million in CapEx. We have had strong working capital management practices in place throughout the year. Our increased focus on receivables and strong market conditions resulted in a reduction of our days sales outstanding by nine days this year.

We ended the year with $58 million in debt, which includes absorbing the $46 million acquisition of Tubelite, as well $5 million for the fourth quarter share buyback.

I will turn to our outlook for fiscal 2009. We remain very optimistic about fiscal 2009, despite the uncertainties related to the commercial construction market. Our fiscal 2009 outlook is for earnings of $1.82 to $1.94 per share from continuing operations on revenue growth of 12 to 15%.

Growth will be driven by our Architectural segment, primarily architectural glass. We expect segment revenues to increase 13 to 16%. Architectural operating margins should continue to improve, and we expect it to range from 8.0 to 8.3%, exceeding our prior cycle peak of approximately 7% operating margins.

We have substantial visibility into fiscal 2009 operating conditions, with backlog for the year currently at $368 million, or 72% of our full backlog, and all our longer-term capacity for the current year is essentially already committed.

Our total backlog is not only the largest ever for Apogee, it is also balanced with projects that match our strengths and spread across the commercial construction sectors. The office sector is approximately 35% of our backlog. Institutional, which is education, health care and government, is about 30 to 35% of our backlog. High-end condominiums are approximately 20%, and hotel, entertainment, casino projects are 10 to 15% of the backlog.

For our Large-Scale Optical segment we anticipate operating margins of 17.5 to 18.5%, down slightly from the current year as we bring on new capacity and invest in new business development to leverage the capacity and to offset framing market softness. In soft market conditions we expect to maintain revenues compared to fiscal 2008.

We expect selling, general and administrative expenses to be slightly less than 14%, similar to fiscal 2008 from a percent of sales standpoint, but up in dollars, with Tubelite and as we invest in systems, business development and sales and marketing to support future growth.

I'm going to briefly cover cash flow outlook for fiscal year 2009. We are estimating EBITDA, earnings before interest, depreciation and amortization, from continuing operations of $115 million to $121 million. Depreciation and amortization will increase to approximately $32 million in fiscal 2009, due to depreciation on the recent capital investments and amortization of intangibles related to the acquisition of Tubelite.

We estimate net cash provided by continuing operations of $68 million to $80 million for the year. Capital expenditures are projected to be approximately $60 million.

Fiscal 2009 strategic investments include a new architectural window facility for modernization and expansion, other capacity expansions, and productivity improvements in both operating segments. We expect this will give us free cash flow of $8 million to $20 million.

We will continue to focus on ways to invest in growing our business as a use for our free cash flow. And we do have remaining authority to repurchase approximately 1.2 million shares. We define free cash flow as net cash flow provided by operating activities, minus capital expenditures.

We don't see our business slowing in fiscal 2009, and expect that we can achieve our longer-term goals of 8% annual revenue growth and 20% average earnings growth in fiscal 2010. Our businesses offer products ideally suited to today's building trends. In addition, they continue to improve their operations and performance. The prospects for Apogee are very positive.

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

(OPERATOR INSTRUCTIONS). Michael Cox, Piper Jaffray.

Congratulations on a great quarter guys. My first question pertains to quoting and bidding abating activity. For the better half of the past year you have talked about this being at all-time record high levels. I am just wondering if you could comment on that as we are moving through calendar 2008 term?

The bidding activity remains as strong as we have seen it in recent times. So we are very optimistic on the opportunities that are out there in front of us.

That's helpful. As I look at the guidance within the segments, the Architectural segment, if I were to exclude the Tubelite contribution, it appears you are forecasting about 10% segment sales growth. And that compares to the 20% year-on-year backlog growth you have had for the past couple quarters. I was wondering if you could discuss the disconnect there?

I think the key thing is half of our business is in that segment. So as we articulated, the key growth is going to be coming from our Viracon business, and then as, you are right, we add in the Tubelite business associated with it.

We're not forecasting much growth in fiscal 2009 in our installation business, Harmon, our Wausau business, and in our finishing business, Linetec. Harmon, our focus really is on execution of work. And as you know, capacity there is really driven by people and project managers. And growth there is more a function of leveraging some larger projects with the existing workforce. So really not looking for growth in that business as much as execution.

Similarly in the window business capacity is engineering, and as we move into a new facility during this fiscal year, we are somewhat constrained in capacity in that business as well. Some of it is driven by capacity constraints in our installation and engineering side of the businesses, but with nice growth in our glass business and adding Tubelite in.

That is very helpful. As it -- look at the fiscal 2010 backlog jumped nicely in the February quarter. I was wondering if you could provide any additional detail to that? Is the Freedom Tower now in that -- is that project now in the backlog, or were there any possible delays from your previous 2009 backlog that moved into that?

Maybe first of all, I will just kind of reiterate how we capture backlog in our businesses. In our backlog we capture the full contractual value remaining to be done in our Harmon installation and our Wausau business. In our Viracon business what we capture in backlog is basically -- it is kind of roughly eight to ten weeks of production once a commitment has been spec'ed out and scheduled for production.

So in that total backlog, as we get out longer than two to three months, it is virtually all our Harmon and Wausau business, with the Viracon backlog primarily being shorter term in nature that we have commitments beyond that.

So we are actually -- but specifically to the Freedom Tower, we're actually do have our first load of production relative to that project in our backlog. But again that will just be for that very first phase of production.

That very helpful. Lastly, if I could here, looking at commodity costs, and certainly seeing some increases there from -- at a minimum freight cost, I was wondering if you could just comment on your ability to pass those along?

We have always been able to pass along the energy surcharges. That continues to be a program that is working well. Other than energy, we really have not seen that significant of a shift in commodity, except for aluminum. And aluminum, as you know, in our business we tend to naturally hedge that once we get orders in.

With shorter-term in aluminum commitments, and now primarily our Tubelite business which is more shorter term in nature, there are more exposed to the shorter-term volatility of aluminum. And that market actually has seen a price increase corresponding to the cost increase.

That's great. Thanks again. Congratulations.

Steve Denault, Northland Securities.

Nice quarter. Russ, I was hoping you could expand on the Crystal Grey opportunity in terms of not only the addressable market, but potentially if you see an expanding market, and what the price difference is versus your most -- or your highest grade energy-efficient glass?

I have to apologize first of all, I need to correct a couple of things that were in that Crystal Grey article. There was an article in the Wall Street Journal that got picked up -- for the Star Tribune, I'm sorry, Star Tribune. Crystal Grey, first of all, is a trademark product of Guardian Industries. It is a basic glass type.

The interview was about what was new in our industry, and I gave them the basic glass type, as well as new coatings that we have developed or are now outsourcing. So there was a list of several things that went together.

We are very excited about this product. And we are using it, and we're probably -- we're the primary user of this product with Guardian Industries. And what it does for us is it gives us a slightly different appearance and a nice energy boost to our high-performance coatings. So it is combining that glass type with our proprietary coatings that generate the pizzazz and the value in the marketplace. I want to be clear about that. I think the article was somewhat unclear about that and I apologize. But still the article was great, and it was very directional.

The other thing the article talked about was the potential sales volume that is associated with this product. The reason we are so excited about it is about half of our products today are high light transmitting. Half of Viracon's production is high light transmitting products. This being a high light transmitting product, combined with our coating, giving superior energy performance, and we think a new aesthetic, has the potential to be substituted, and actually for a lot of what we currently do, as well as grow availability of this product in the market.

When we talk about the potential is out there for a couple of hundred million, I think that is very real. That was in the article. But it is not all new growth. It is an exciting new product that would be -- you would see transition from current products to this product, as well as some growth. We didn't really identify the growth associated with that.

We're just excited about it because it provides us with something very new, very high-performance that will meet the aesthetic as well as energy demands that are developing with the green trends in the marketplace. I'm trying to be as excited about this without overstating it, if you will, like maybe it was perceived in the article.

It really was representative of just one additional product offering that we have that differentiates Viracon to offer a combination of the highest energy efficiency levels and the aesthetic choices desired by the architects and owners.

We need to be very clear that Crystal Grey is a trademark product of Guardian Industries, and its value to us is when we combine it with high-performance coatings. That is the key element here.

Does it at all on average change the ROI for installing energy-efficient glass?

No, it really doesn't change -- well, yes, it does. I apologize. It doesn't change -- the cost of the product is very similar to existing products, but its enhanced performance does improve the ROI. You're absolutely correct.

Robert Kelly, Sidoti.

Just a question on the quarter and the project -- the projects that had gone bad in 3Q. Is there any sort of reversal of accrual there or anything, or is that behind us at this point?

No reversals of accruals. Maybe just an update of the three projects. Two of the projects are really essentially complete. And we're essentially off on -- there is one project that we are continuing to wrap up and continuing to incur costs on.

Now the guidance that you have given on architectural for F'09, if we compare that to the adjusted number you gave earlier on F'08, there's not a lot of margin expansion there. Is that just -- are you seeing the mix of business shift downwards, or are you just being conservative with your outlook?

I think what we have tried to articulate in the past, and I think we are going to continue to see, is we're not going to see the same rate of expansion in our operating margins. We were really well-positioned in the past to take advantage of the really key drivers, which were pricing, capacity utilization, and productivity improvements. So we really saw the step change the last two fiscal years.

As we go into fiscal '09 we remain on the pricing side of things, we remain able to see the kind of pricing that we saw in fiscal '08, but we don't see the same kind of expansion in pricing. That is consistent with what we have been seeing for quite a long time.

The continued expansion in margins is really going to be coming from the productivity improvements and the improving mix of project margins, as we have talked about project selection in our insulation and window businesses.

If you could just help me out with the backlog. Entering 4Q in your last press release you had $160 million for architectural, yet you finish up the quarter with $225 million. Is that all the short-term business, turning over in two months of Viracon which gives you the upside? I just have difficulty reconciling it.

Right. It really is those two pieces. You're right. For example, in our total Architectural segment roughly 30% of our revenues is coming from really the short-term kind of book and bill type work. But then the other gap, as you said, is going to be Viracon, which is we have visibility out there for the work, but we will only have roughly eight to ten weeks of their revenue in our backlog at the start of the quarter.

Just one final one. As far as the backlog that you have into fiscal 2010, and the coating bidding activity that you see, and you say it remains strong, is it projects that are -- they're moving dirt on, buildings are coming up out of the ground, they are expected to break ground? How do we think about the stuff that is currently in your backlog? Does it only get into backlog after the project is started? A little help there.

Things in our backlog are things that we can actually bill against. There is activity, mockups, engineering, tests, as well as production that takes place on things that are in the backlog.

There is really a mix in terms of it to answer your question. And some of it depends on the business and some of it depends on the project itself. For example, in some of these monumental projects that say Viracon is bidding on, that is not going to be into our backlog until, as you said, there may even be steel coming up on the project.

In the other businesses it is going to be a mix. In some cases the project is already funded. In some cases they have actually already dug a hole in the ground. But in some cases it is further out and the work hasn't been started, but generally the project has been funded.

Is that something that you go into the research on to be sure that the project will in fact -- or is secure before you allow it into your backlog? How does that [happen]?

Yes, in some -- again, it is a little bit of the mixed situation because in some of our backlog we have that line of sight all the way into the owner. In some of them we're supplying to a manufacturer who is supplying to a subcontractor and a GSE and we don't have all that visibility.

Eric Prouty, Canaccord Adams.

Rock solid quarter folks. A quick question putting on -- taking out the crystal ball a bit. You mentioned and you talked a lot about the green building industry. When we look at the transformation of construction towards green building, and you look at the envelope that you guys dominate, what are new products that we might see, beyond just the architectural glass, new market segments that you can play into, new products that exist in green building, yet might not have existed or been a big part of traditional construction?

We certainly are very -- first of all, let me say this. The green building trend and the use of high-performance glass is going to accelerate its penetration in the market. High-performance glass has been less than half of the products used in commercial construction to date. And so the opportunity for that to expand in the marketplace is our biggest opportunity. So I want to be clear about that.

When we talk about what other products can be used in the walls of buildings and roofs, certainly there are things like sunshade, light shelves, building integrated photovoltaics, operable systems that have to be -- most of these do require some coordination of the -- not just the [pressures] they're active, require coordination of lighting systems. These buildings become fairly sophisticated, like the New York Times Building is, that shows some of those kinds of products.

New coatings for us are very important. We will continue to bring new cuttings that bring superior light ratios to energy performance. People are always trying to make sure that they get that kind of product, so we concentrate on that. That was one of the benefits that the new Crystal Grey Guardian's product brought to us as well, to help combine that with these high-performance coatings.

I think we will see more of those. I particularly am a fan of light shelf. And I remain very interested in building integrated photovoltaics. I think that we will watch carefully the efficiencies that come out of the new technologies in these fields. And we have been a leader in doing these in test applications. And we will continue to stay close to that, so that when the economics are there we will be ready to provide them to the market.

I think, other than growth of high-performance in new construction, renovation really remains a prime opportunity. If we see these trends on building values, occupancy rates and lease rates continue to be sustained, and I believe they will, the differences between an energy-efficient building and a non-energy-efficient building, now the cost of renovation to bring a building, an older building, and renovate it, and glass being the primary item that can help that building the most, we are very excited about that potential down the road.

We have not seen that in a major way yet. But I think that these new numbers that just hit the street in building values will drive that. I'm very excited about that potential.

Just a follow-up to the retrofit market. Are you seeing interest accelerating out there with -- oh, I guess -- more standards coming about like LEED for existing buildings?

Yes, we are seeing more discussion about that, more interest in that.

Tyson Bauer, Wealth Monitors.

Good morning gentlemen, another great quarter. A couple of quick questions. Regarding the architectural side you mentioned that is mainly going to be driven by Viracon. Have you seen already late in calendar '07 here, early in calendar '08, some softening or flattening in the Harmon and Wausau division, or how has -- how have those trended compared to how you see Viracon trending?

Actually we have not seen any softening in those divisions. As Jim stated earlier, Harmon -- and Harmon has -- it is a project manager constraint that determines its size. And with the issues that we have last year, we're just -- we're hiring people from the outside. We're just concentrating on our own team and executing with what we have, and been doing that very well. Because we believe that that will substantially enable us to substantially improve the performance of that particular business and deliver better value that way than doing some other things with it.

Wausau on the other hand is again, as we stated, moving into a new building. There are some major transitions in this business this year. Being limited by engineering and major projects, that capacity sold for major projects this year, that is what gives us that level. It will be -- it will grow slightly, but they're not being constrained by the market, it is more of what delivers the greatest value to shareholders that is driving our decision-making here.

This is Jim. I guess the key is, as Russ said, is that we are really managing to capacities in those two businesses. Then the other businesses, they are smaller businesses, don't have that longer leadtime. They are also the businesses that are more susceptible to the general economic conditions. So we are seeing in those businesses a little bit of this market condition, especially as you're dealing with smaller projects, in some cases in the storefront business, where you're dealing with the retailing sector and the strip mall sector, they are starting to see a little bit of that softness, but consistent with what we would have expected.

When we talk about capacity a lot of times, other than the announced capacity expansions in Utah and some of the operational things you're doing -- some of the auto glass, switching over to more that architectural glass, are you -- it appears or sounds like you guys are kind of pulling back a little bit on your aggressiveness since we have started up new facilities or expansions in Georgia and Utah. Is there a balance now within the industry that after we've had a couple of years from Interpane and Hitachi those companies leaving and yourselves expanding? Is there a fairly decent balance that you're seeing right now and that is why you may be looking at different areas of growth or attacking different areas within your own industry to grow long term?

First of all, let me make sure it is clear. Viracon business continues to grow as fast as we can add people. And it is really adding people and get them in place. The outsourcing has actually helped us reduce our capital investments and sustain growth. So it is a combination of incremental capital, as well as outsourcing, and then people, and we're really still pretty aggressive on that front. We have not pulled back from that at all. In fact, I would tell you that we still feel there is unmet -- underserved markets for Viracon and unmet demand. So we are charging forward on that pretty aggressively.

Are we trying to minimize capital? The answer is yes, we are. Because we feel that that is the best way to improve returns as well as margins.

The core, you said it is a very active bidding market. Are you still saying the pricing on those quotes basically stabilize? Are you still able to dictate the pricing atmosphere at this time?

I think the uncertainty is in our market -- the uncertain mentality. Even though our markets are relatively strong, bidding activity is strong. We have the excess demand. All those kinds of things are out there. But it doesn't mean that people don't mentally adjust to that.

As Jim described earlier, we have seen -- we don't think we will see the pricing continue to accelerate the way it has. We think the pricing will probably level off, if you will, where we are here. There may be some pressures on that. But our real opportunity, save that, is efficiencies and productivity and utilization of these new recently added capacity.

Those have been running pretty inefficiently as we have really ramped them up. We've got to high levels of productions out of St. George by acceleration that. That is a lot of cost in terms of training and putting people in place and doing a lot of things to ramp that up. So all of that provides us with some nice opportunities to see efficiencies improve through this next fiscal year.

Richard Nelson, Jesup & Lamont.

I have been trying to understand the dichotomy between (technical difficulty).

Rick, we can't hear you, I'm sorry.

In trying to understand the dichotomy between your end markets and some other segments of the economy, which are somewhat sluggish, your markets are obviously robust. I'm going to ask a question which may not have relevance, but I was just curious, and you might not even be able to quantify this, but has the weak dollar encouraged foreign actors to expand in the U.S., build facilities, and grow in that sense?

Do you sense that happening? Because it would seem to me that if that were indeed the case, it would perhaps even reinforce what already appears to be a fairly steady foundation going forward.

Two questions there. The first one was about markets. The markets for commercial construction have -- certainly they are forecasted to be softening a little bit. We think that is probably true. But inside of that, the demand for energy-efficient product continues to grow. So that is why we feel so good about the potential of this market. So it is a robust market for us, but that robustness is inside of a market that is probably softening a little bit. I think it is important to understand that difference.

On the weak dollar part, we have not seen any foreign investment come in to compete with us directly. Certainly there are -- when we can't meet capacity or things, as we have talked in the past, there have been foreign products come in here, but they have been imported. We have not seen the dollars invested here.

I would just comment that the import product that we've seen on projects, we really haven't seen any acceleration relative to that. We see it in two ways, one on major projects. Where we have seen imported product has more been a function of capacity, whether it be our capacity, or probably more often it was aluminum fabrication capacity, where they are taking the work off site. Then we do see imported product in some of the standard window line.

Actually I was thinking more in terms of foreign companies expanding in building.

Right. And as Russ said, we have not seen any foreign investment in our markets.

Very good. Thank you and excellent quarter.

Scott Blumenthal, Emerald Advisers.

Congratulations on the quarter. Can we get back to the quoting you mentioned that -- Russ, you mentioned that quoting was very strong. And if you could maybe drill down into that. There was a comment made during your prepared remarks about how there is a lot of potential in the replacement business. And I guess with the cost of energy now, are you seeing some of that come through? Is there anything going on here?

We are hearing more discussion on it. We have not actually seen a significant increase in projects. We have seen normal trend of replacement projects so far.

We estimate that roughly 25 to 30% of our revenues are servicing the retrofit market. We don't always have visibility in terms of the end project. We continue to see that. As Russ said, we definitely see more discussion and activity around potential renovation.

With the retrofit fits, are those just replace, I guess -- those aren't just replacements of old products they are improved performance enhanced high-value coated products?

They would be replacing non-high-performance products with high-performance glass and metal.

That is very helpful. In your unmet demand comments, Russ, how much of that at this point enable you to be selective in the projects that you're choosing? And have you actually, at this point, turned away business that you didn't think was going to meet your profitability metrics? Can you talk about whether you have seen any demand for your products from overseas now with the weak dollar?

Yes, we have turned projects away. Basically our installation business probably is the most active of looking at projects that don't meet capabilities. When things are outside -- there are certain things that they do they do well. And so they have been able to continue to be very selective and put those kinds of projects in their backlog, and avoid the ones they don't do well. That has been a very plus for installation.

On the window business some of that statement would remain true, but not to the fullest extent. On our glass business, most of the time we're turning away business, simply because we cannot meet the leadtime requirements for the job. So it is not -- occasionally you lose bids. I'm not saying you don't lose a bid now and then, but basically the real loss -- when we talk about work that we could have done, it is basically work that we could have done at our price, but we couldn't meet the leadtime. And because of not being able to meet the leadtime that went away.

We believe that that is material. That amount of work is material. It is hard put a number on it, but we think -- but we know that is out there. We know and we believe we can fix that up as we continue to expand in our capacity. Hopefully that answered that question.

On the international side, international demand for our products remains good. We are -- I have been -- that has been reinforced to me recently by some major international players. And their point is that we have the leading brands. And whether it is in Dubai or Tokyo or Singapore or Hong Kong or Sydney, and they really would like to see us be able to meet that. So we have chosen not to. We still are out there. We are doing some work, but we're not meeting all of it. We have chose not to because margins were better domestically.

If there was a change in domestic margins, certainly the international place is the place where capacity could go, and we would do that. And it would be good business. It is just maybe not as great as some that we've had before.

We do continue, as Russ said, we do continue to service probably between 10 and 20 major international projects a year, and continue to book nice projects in our backlog. The demand remains strong. And we have seen relative to the value of the dollar some increase in interest in our products. But again, as Russ said, at this point the margins are still more attractive in North America. But international definitely remains an opportunity for us to really invest some energy in this year to look at for future potential.

Can you -- how many shifts are you running in Owatonna and St. George?

We are full out everywhere now. We are around the clock pretty much seven days a week. The different lines do balance out, so they are not -- all lines are running that, but the constraint is basically running at that level.

Okay.

And the constraint wanders. I would hate to be -- I would hate to give you a non-answer about that is the nature of our business.

We know you have been a straight shooter, Russ, so I do appreciate that. The installation businesses, Harmon, is that possible to run those more at you know regular hours, or does that have to be done 9 to 5?

Pretty much it is -- the installation on commercial projects is a day job. I think certainly you see some projects that do work at night, but the cost to do that gets pretty prohibitive. It is a very expensive labor proposition to work other than day shift.

Although, I'll speak briefly here to the renovation market, because actually our Harmon installation business has a lot of success and some good competencies specific to that. Oftentimes the differentiator for us is being able to do renovation on occupied buildings. And that frequently then requires us to work kind of off-hours relative to when the building is occupied. So we do do that when we can obviously bill the cost associated into it. But again that business is really constrained by project managers and the ability to have them to work the right schedule.

Robert Vermillion, Axial Capital.

A question, you mentioned that the Freedom Tower project has started to hit backlog. I was just wondering are there other projects down at the World Trade Center site that you're working on, or other large mega projects that are either in backlog now or coming down the pike in the commitments?

There actually are three more buildings coming up at the World Trade Center site. And we're consulting on all three of them and believe we have -- we typically on the major projects are winning 70, 80%. We think that we have that kind of percentage of opportunity on future projects there as well.

How about the mega projects outside of New York, for instance, maybe the large casinos or anything like that?

We still are seeing new construction, planning. I would say that if there is any place casinos have probably -- the aggressiveness of which they were moving forward that has probably been dampened somewhat. But we're still seeing projects on the boards, continuing works, supplying samples, mockups and putting some projects into the backlog. So that remains a very good business for us.

Then in terms of backlog at the end of the quarter you stated that about $17 million of that backlog was for two fiscal years out. I was wondering, looking back at the fourth fiscal quarter last year, how much of that backlog was two fiscal years out?

I don't think we had any of that went that far out. We might have had a very nominal amount that would have trickled two years out at that point in time. The fiscal '11 backlog is related to a relatively small number of projects in our installation business. So what we have seen in both our window business and our installation business is, in some cases, some larger projects with longer duration to them. So in this case we have a small number of projects where we actually have the projects are scheduled to start in the second half of fiscal '10 and run into fiscal '11.

So each of those, they are projects that would actually begin work in fiscal '10.

[Joseph Real], [Baker Brook Capital].

I'm sorry to ask -- to repeat this, but I know you gave a breakdown of backlog between the different sides of commercial construction. I was wondering if you would mind during that again.

Sure. The office sector was about 35% of our backlog. The institutional sector, which we capture education, health care and government, is 30 to 35%. High-end condominiums about 20%. And then entertainment, hotel and casino 10 to 15% -- 10%.

One other question too. As far as the depreciation increase from about $23 million to $32 million, do you have in front of you there how that is broken down between the additional depreciation on the new facilities and the intangibles from the Tubelite acquisition?

The intangibles in the acquisition is about $2 million. I don't have the breakup between the specific projects, but we had major investments for the new factory, conversion of a factory, and then expansion of our picture framing business. It would be split between equipment, depreciation and building depreciation.

Do you know roughly how long the $2 million goes for -- like how many years approximately?

On average about ten years.

Robert Kelly, Sidoti.

Just a -- maybe you can help us with maybe your assumptions for the backlog. You talked about the mix there. To get to the 13 to 15% in architectural, can you give us how you see those four subsegments growing, any more color possibly?

I think, kind of in rough numbers what we're looking at is low to mid single digit growth in the window and installation business. Basically flat in the finishing business. Obviously we will see probably about $40 million incremental relative to Tubelite roughly. And then the balance of the growth from Viracon -- double-digit growth in Viracon.

So it is still Viracon bribing the bulk of the growth?

Yes.

In FY '09? And then just maybe as a rule of thumb the lags between bidding, quoting, when it hits backlog, when it hits income statement?

It is about nine months from bidding to backlog, and then nine months to revenue.

So 18 months from bidding to P&L.

On average, with a wide variation in there.

Yes, a wide variation, right.

George Melas, Lord Abbett.

Can you break down the revenue on the Architectural segment by [Farrakhan] and Harmon and Wausau and the others?

Kind of where we ended up for the year with our Viracon business, approximately $340 million; Harmon, roughly $290 million; Wausau roughly $100 million; Linetec roughly $55 million; and then Tubelite, for their portion of the year, roughly $10 million. It is going to be a couple of million off in total, but that kind of roughly gets you there.

I think earlier you talked about capacity in Viracon being $475 million to $500 million by 2010. Right? So that corresponds to the $340 million number?

There would be a slight correction to it, because capacity would not -- includes intercompany eliminations. So there would be some elimination that would take place as we publish the numbers that Jim just talked about. Those are all net of intercompany sales.

Great. Just to understand the backlog again, most of the backlog I think you said was Harmon and Wausau. Basically Viracon is a fairly small portion of that. If you look at the Viracon capacity, what you expect to -- the revenue expected from Viracon in '09, how much of that is already committed by your customers?

Not in backlog, but in commitments, the major projects are all in their commitments. So they have -- that means that they have done samples. They may have done a mockup. The project has been committed to them. And for the major projects for the next 52 weeks those are committed to Viracon.

You mean -- is it 80% of what you expect is already committed? Is there a way to quantify that?

No, they are fully committed in major projects -- they just have capacity for quick turn business.

Yes, they do maintain part of their capacity to be able to service some short leadtime business. But of their longer term capacity, it is essentially committed.

It is committed.

Is there a way to say how much of this -- is it sort of three quarters? How much do they keep in the way of -- for short-term lead projects?

They keep around 20 to 30%, and that does vary throughout the year.

Joseph Real, Baker Brook Capital.

I'm sorry. I just wanted to ask one other question. I forgot. Will you be recording any goodwill for the Tubelite acquisition?

Yes, we will.

Do you have an approximate number for that or --?

Just hold on a second. About roughly $20 million will be the goodwill portion of that.

At this time there no questions in queue. I would like to turn the conference back over to Russ Huffer for closing remarks.

Thank you. We really are very -- our business remains strong. We have great backlogs, high levels of backlogs with commitments, as well as great market demand for our products. We are executing our strategies, including leveraging the green building trends, and we're excited about the opportunities for Apogee in fiscal year 2009 and beyond. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.