Apogee Enterprises Inc (APOG) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Apogee Enterprises, Incorporated, earnings conference call. My name is Francine, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Ms. Mary Ann Jackson. Please proceed, ma'am.

Thanks, Francine. Good morning and welcome to the Apogee Enterprises fiscal 2009 third quarter conference call on Thursday, December 18th, 2008. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter CFO. Their remarks will focus on our third quarter 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 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 1st, 2008, and in our earnings release issued last night and filed this morning on Form 8-K.

Russ will now give you 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 performed well in the third quarter, delivering on a healthy backlog of architectural projects booked nine to 12 months ago, when our markets were strong. The projects generally had good pricing and margins, as is evident from our results. Our large scale optical segment also had a high mix of its best value-added glass and acrylic framing products. This performance is indicative of what we can do when the economy and commercial construction are growing.

Although we expect future periods to be impacted way the commercial construction slowdown, we have entered the downturn with a very strong balance sheet. We are generating significant positive cash flow, our long-term debt has declined to less than $30 million, and we have a strong bank facility with available capacity. Revenues were up 14% in the quarter, and operating income increased 111%, compared to the prior year. Earnings were $0.63 per share, up from $0.26 per share last year. We had several adjustments in the current quarter, as well as in the prior year period. I will highlight some of them in my comments.

Architectural segment revenues grew 16%, with growth coming from our architectural glass, storefront, and entrance, and installation businesses. We acquired the Storefront and Entrance business last December, and continue to be pleased with their performance. Architectural segment operating income was $19.6 million, compared to $7.7 million in the prior year period. The segment operating margin was 9%. This compares to 4.1% in the prior year period, when we had write-downs on three Florida glass installation projects. Excluding the prior year write-downs the operating margin would have been 7.5% in last year's third quarter.

In the current quarter, as we had anticipated, overall installation project margins continued to increase as we saw continued solid execution by the team on work flowing through backlog. In addition, production in our Architectural Glass business improved to expected operating levels. The second quarter had been impacted by production challenges in this business, which were successfully resolved midway through the third quarter. Backlog declined to $373.2 million, compared to $456.7 million in the prior year period, and $446.7 million at the end of the second quarter.

Project delays and cancellations and slow bid to award timing, which is extending beyond the normal nine to 12 months, are impacting backlog levels, despite strong bidding activity and the ing trend, which we believe is increasing demand for our energy efficient glass products. Large-scale optical segment operating earnings grew 43% on a 2% revenue decline. A higher mix of our best value-added products more than offset weak market conditions for picture framing.

Early in the quarter we concluded the sale of our 34% interest in the PPG Auto Glass, LLC joint venture, reported in equity and affiliates. Our strategic exit of the Auto Replacement Glass industry yielded proceeds of $27.1 million in cash. Our quarterly results also reflected long-term executive compensation adjustments, which added $0.06 per share. As the outlook for our markets and business near term has declined, we have projected lower payouts of stock-based long-term incentives.

Next, I will cover our outlook. Our fiscal 2009 guidance for earnings from continuing operations remains at $1.65 to $1.82 per share. This outlook includes declines in revenues and earnings per share in the fourth quarter compared to the prior year, as we experienced the first full quarterly impact of the commercial construction slowdown. Despite the anticipated fourth quarter declines, we expect to complete fiscal 2009 with record revenues and earnings.

To manage through the downturn we have already implemented a number of cost-cutting initiatives, and continue to evaluate further actions, ranging from a reduction of headcount and discretionary spending to productivity improvements. Actions already implemented will result in more than $10 million in annual savings; headcount has been reduced 7%, and most of our manufacturing facilities across our businesses will be taking week-long shutdowns in December. The slowdown in large projects for our Architectural Glass business has opened up production capacity and reduced lead times, allowing this business to pursue opportunities to generate revenues by penetrating underserved markets, including smaller US projects and international projects. By offering capacity in existing markets, we expect to be able to significantly grow our international glass sales.

At the same time, we continue to focus our sales efforts on markets that demand our value-added, energy efficient, aesthetic hurricane and glass products. The institutional market for education, healthcare, and government projects traditionally tends to be more stable through the ups and downs of commercial construction cycles, and green building is a growing trend that is here to stay.

We also are continuing product development efforts, particularly related to energy efficiency. I am encouraged that as part of its economic stimulus proposals, the new administration is focused on efforts to make public buildings more energy efficient, and to modernize and upgrade school buildings.

Finally, we remain strongly focused on cash flow and managing working capital, and will tightly control capital expenditures. Current conditions are unlike any I've seen in my 30 years in this industry, and are creating a higher level of uncertainty than I've previously experienced. Delays and cancellations and slower conversion of bid projects into awards have impacted the size of our backlog, and have lowered our visibility in fiscal 2010. At this time, we estimate that our fiscal 2010 revenues are likely to be down at least 10%.

As we have demonstrated with our strong third quarter performance, we have good businesses with strong brands and operations that are poised to serve the growing demand for green, energy-efficient commercial buildings. In the third quarter alone, we launched a new highly energy efficient coated glass product at Breen Build, completed the move into our lead registered window manufacturing facility, and renewed sales efforts on underserved architectural markets. In addition, our Picture Framing Glass business brought its new, more efficient production capacity on line.

We anticipate that with our focus on quality, service, and productivity improvements, Apogee will move stronger than ever after the economy improves. Jim will now comment on the financials. Jim.

Thanks, Russ. I will provide some detail on the third quarter results. We earned $0.63 per share in the quarter from continuing operations, versus $0.26 last year, on revenues of $240.4 million, which were up 14%. Operating income was up 111% to $24.8 million.

As we highlighted in the earnings release, there are several significant items to consider when comparing third quarter results to the prior year. The key drivers for the $0.15 improvement shown in the table as adjusted earnings per share from continuing operations of $0.58 this quarter, where the Architectural segment core operations added $0.10 per share. The Large Scale Optical segment added $0.03 per share, and we picked up $0.02 per share with contributions from Tubelite, which we acquired last year, and lower shares outstanding.

We continued to see nice Architectural segment growth at 16%, with growth split between organic growth and the inclusion of our Storefront acquisition. Our Architectural segment operating margins came in at 9%. This compares to 4.1% last year, or 7.5% when you exclude the prior year write-downs of the Glass Insulation projects.

Our Installation business improved its overall margins in the quarter, with solid execution of its backlog as we had had anticipated. And our Architectural Glass business achieved expected operating performance levels late in the quarter, recovering from the production challenges we experienced in the second quarter. These achievements were somewhat offset by lower earnings in our Window business, where revenues were down largely due to project delays.

Our Large Scale Optical segment operating margin came in stronger than expected at 30.4%, on slightly lower revenues. We had a higher mix of value-added Picture Framing products on lower square footage, in generally weak retail market conditions. Sales to retail chains and distributors were slightly stronger than expected, in part due to timing of customer promotional activities. We are encouraged that despite tough retail markets, customers continue to convert either from plain or low value-added framing glass to our best value-added products. We continue to have good cash flow performance.

In the third quarter we generated $32 million in cash from continuing operations, double the prior year number. We ended the quarter with $28.4 million in long-term debt, proceeds of $27.1 million from the sale of Apogee's interest in the PPG Auto Glass joint venture were used to reduce debt, and we continued to drive working capital improvements. Accounts receivable is our largest working capital component. Through focused efforts we are recognizing historically low day sales outstanding, 46 days, which is impressive for our industry. In today's environment, we continue to manage our outstanding accounts receivables carefully, including protecting lien rights we have with most of our Architectural business.

Year to date capital expenditures were $49.5 million, with spending in the quarter of $10.2 million. This year, we have made key investments in our Architectural and Picture Framing businesses. During the third quarter, we repurchased approximately 675,000 shares at an average price of $9.73 per share, for a total of $6.6 million. Year to date, we have repurchased approximately 1.1 million shares, for a total investment of $14.6 million. We have remaining repurchase authorization for about 1.2 million shares.

I will turn to our outlook. We are maintaining our fiscal 2009 earnings guidance for continuing operations of $1.65 to $1.82 per share, with the expectation that fourth quarter revenues and earnings will be down from the third quarter and prior year period, as the slowing economy and commercial construction markets impact our business. We expect our full-year operating margins for both our Architectural and Large Scale Optical segments will be below our high third quarter margins and slightly down from year to date levels.

We expect that the Architectural segment will be impacted by the commercial construction slowdown, as well as lower capacity utilization, and some impact from pricing pressures. While demand for our Picture Framing Glass products will likely be down from the third quarter levels, due to fewer promotional activities after the holidays and expected soft market conditions. Our Architectural segment backlog has declined and reduced our visibility into fiscal 2010. One half of the decline was from the Architectural Glass business, with the balance split between the Glass Installation and Window businesses.

Just a reminder of the makeup of our backlog. Our Architectural Glass business, our largest business, only includes the portion of a project committed to production in its backlog. This is generally about two months of work. Our other Architectural businesses capture the full contract value of a project in backlog. Project cancellations, along with delays of targeted projects that we had expected to move into backlog from the slower bid to award timing, accounted for our backlog decline of about $80 million, despite strong bidding activity.

Our total backlog remains spread across Commercial Construction sectors. The Office sector makes up 40 to 45% of our backlog. Institutional, Education, Healthcare and and Government, continues to be 30% to 35% of backlog. High-end condominiums declined slightly to 10 to 15% of the backlog, down from range of 15 to 20% in the second quarter, and Hotel Entertainment and Casino projects continue to be 5 to 10% of the backlog. Approximately $141 million, or 38% of the backlog, is to be delivered in the fourth quarter of fiscal 2009, approximately $205 million or 55% in fiscal 2010, and approximately $27 million, or 7% of the backlog in fiscal 2011.

I'm going to briefly cover our cash flow outlook for full year fiscal 2009. We're estimating EBITDA earnings before interest, taxes, depreciation, and amortization from continuing operations, of $95 to $105 million. Depreciation and amortization is expected to be approximately $30 million in fiscal 2009, including depreciation on recent capital investments and amortization of intangibles, related to the acquisition of Tubelite. We estimate net cash provided by continuing operations of $85 million to $95 million for the year.

Capital expenditures are projected to be approximately $60 million. Fiscal 2009 strategic investments include capacity expansions and productivity improvements in both operating segments. We expect this will give us free cash flows of $25 million to $35 million, and we define free cash flow is net cash flow provided by operating activities minus capital expenditures.

As Russ has stated, our outlook for fiscal 2010 is uncertain due to the current economic environment, which is causing architectural project delays, cancellations, and slower conversion of bid projects into awards. We currently expect fiscal 2010 revenues to be down at least 10%. We have good businesses, supported by growing demand for green, energy-efficient building products and other value-added aesthetic and hurricane and blast-resistant glass products and services.

We continue to generate positive cash flow, and are carefully managing working capital and capital expenditures. At the same time, we have implemented several cost cutting measures and are evaluating further actions, including reductions in headcount and discretionary spending, as well as productivity improvements. We are focused on effectively weathering the slow down and emerging stronger than ever when our markets rebound.

Thanks, Jim. I want to reiterate that we have a strong balance sheet, continue to generate positive cash flow, and expect to maintain our leading market positions during this challenging time. I would now like to go ahead and open the call to questions.

Thank you. (Operator Instructions) Our first question comes from the line of Tom Hayes of Piper Jaffray. Please proceed.

Great, good morning, gentlemen.

Good morning.

In your expectations, when you talked about FY 10 for a sales decline of at least 10%, are you expecting that the order activity would remain stable at the current levels, or change materially up or down from these current levels?

You know, Tom, what I expect is that the market will come to some normalized level of activity. What we're seeing right now, in terms of this stretching of bid to award, I think some of that, there are different reasons why that's occurred, and I think that once that gets normalized, whether it's financing or just hesitation, or people just being cautious, once they get into a more of a normalized role, then we'll see that start to come back to a different number and see awards start to go up.

Okay. I guess next, could you just comment on the projects that are currently entering the backlog, some indication for the margin profile of those projects? Obviously they were projects that were awarded before the slow down. Would they have a more typical margin profile than we saw the business had in the third quarter?

It's consistent, but we are seeing some down. We knew, if you recall, we talked before about, especially in our businesses that were sold out, that we were concentrating on North America and larger projects because the margins were better. As we move into broader market international, margins will come down a little bit in those areas, but the other areas are holding up at this point in time. I'm not saying that I know that will happen long term, but right now, there's pressure, downward pressure, but they're not radically moving.

Okay.

John this is Jim. I will just kind of add as well. To echo what Russ said, there are some pressures from a pricing standpoint, but it's not across the board. But then also, as we indicated, we have taken a number of measures relative to costs, so not a dramatic impact on margins based on what we're seeing in projects entering the backlog today.

So there's not a lot of pricing pressure from competition, or is it just slow demand or a combination that's putting the pressure on the pricing?

We're seeing in some markets, and in some projects, definitely increased competition. Obviously, where we have unique offerings or situations, obviously we can maintain things, but in other areas, we're definitely seeing significant increases in competition, but it's local competition, but people that just were busier on either the Residential sector other other types of work.

Okay, just two more. As far as you mentioned the Institutional business, could you provide us any outlook or view as far as the Office, which continues to make up the biggest piece of the backlog?

Office certainly is trending down more than the institutional side. The institutional side has held up, and as I said, I'm very encouraged to see the new stimulus bill by the new administration concentrate on funding these Institutional projects that are ready go, and there are many of them out there that are ready to go. And we're also concentrating our resources more on bidding Institutional work than we are Office work, so we're purposefully shifting our emphasis in that direction.

Okay. I guess just lastly, Jim, if you could just provide just a little view on the charges that hit in the quarter to wrap up the Florida project.

Yeah. Really, the primary driver of the increased costs that we had in the quarter, frankly was related to some hurricane and tropical storm activity that happened down in the Florida market, which basically identified some underlying defects that we hadn't previously identified, in terms of some leaks on one of the projects. So as a result, that required us to increase our cost estimate relative to the final completion of the project.

That wasn't tied to the other Florida issue that happened several quarters ago, was it?

Well, it was, one of the projects was the same project that we identified in the third quarter, and what happened was, and we thought we had covered the costs relative to that one project. And as I said, the storms that went through identified some additional problems with the project that we hadn't previously identified.

Are you pretty comfortable now that you have shaken out most of the costs?

We believe that we have.

We believe that there will only be small changes going forward from this time.

I guess just lastly, and I appreciate it, any insight, Russ, you mentioned that you are actively managing the liens opportunities. Have you seen any escalation in bad debt or contractors having problems?

No.

Okay. Thank you.

Our next question comes from the line of Steve Denault of Northland Securities. Please proceed.

Good morning, everybody. Very nice quarter.

Thanks, Steve.

I guess this question maybe is directed at Russ. We're obviously heading into a downturn, and I think you made some comments about it being more uncertainty than you've seen in your history with the Company. Can you do any comparison or contrast it, versus kind of what you saw coming out of the office building boom in the late '90s?

Yeah, the biggest difference to me is the over-construction that took place in the late '90s. There was rapid downturn there as well, but the rapid downturn followed way too much construction of, especially office put in place, and that's different this time, and we've looked at a lot of data from McGraw Hill, and we watch employment numbers. I always emphasize employment versus unemployment. And we believe that the market did not get overbuilt, as McGraw Hill, Dodge says as well, and so therefore, when the market turns this time, we should have our normal lag time, we're late in the market, nine to 12 months, to the economy, so it should be a normal turn time for us to come back versus the last tame, which took several years, quite frankly, because of the over building that took place in the high performance commercial markets.

Another big difference is High Performance Glass is now much more, Glass, Metal, Installation services, much more widely used in the commercial market construction place than it was in the last downturn. So those are two things that are quite favorable compared to the last downturn. They help you somewhat during the downturn, but I think the real plus will be, as we come out of this, we'll come out of it much sooner and stronger and better.

Does that imply that, I know in the past cycle from peak to trough within your Architectural Glass segment, revenues dropped about 15% and it took 18 months or so for that to occur. Does that imply that this time that maybe that is a realistic proxy for what could happen this time?

The 18 months doesn't - - whatever number I say, I know it is going to be wrong. That's the problem. But that sounds as comfortable as any other number that I could think of right now. I'm telling people, we probably have 24 months before we get back to some kind of normalized level of activity. That's what I'm preparing for.

Okay. And if the LSO timing, it sounds like there was some timing of some customer promotions in the quarter. Can you provide more color there?

Well, yeah. We certainly had some nice things going on, and we had some accounts that did some promotions and have been very successful. Having said that, we continue to be very excited about the conversions that take place in this business. Fourth quarter is a normal slow quarter, because they get real busy right before the holidays, so fourth quarter is a normal slow quarter. This industry is very seriously affected. It is only the conversion that's really held us up. So although we anticipate somewhat of a weak fourth quarter, we think conversion will continue, and we'll be able to see that compensate for the softness in the overall market on more of an annualized cycle coming out of the fourth quarter.

Specifically, in the Picture Framing part of the business, where you saw in general a lot of retailing do a lot of promotional activity around the Thanksgiving time period, we actually saw several retailers that kind of followed that trend, and so we're actually pulling some buying forward into what was our third quarter from what we normally would have expected in our fourth quarter to meet those requirements.

Okay. Any significant new distribution in the number?

No.

Okay, so no new accounts or anything like that. And the final question is, the international markets, and you made reference to chasing more international projects. I know in the past you have said they're lower margin projects. I'm trying to get a sense of directionally how much lower margin are they, and what does the recent strength in the US dollar, how does that play into margin thoughts?

Let me address the dollar first. Most of the markets we addressed are pretty closely tied to the dollar, so that has little effect on the markets served, so we're not necessarily trading against the dollar in the markets that we're servicing, or where we have our best brand presence. There is a slight decrease in margin, but there's also an opportunity of efficiency improvement. These tend to be very large project which do offer us some efficiency improvements, so it's not as dramatic as one might make it. But we think it will be close to what we're doing today.

Have you come to any conclusions on international capacity, I know you were assessing that initiative over the last several quarters?

Certainly as we had little capacity for the international work, we were assessing whether we were going to put capacity overseas. That's still part of our thinking and part of our process, but we'll probably be a little more cautious about spending the capital now, and especially since we have capacity to service it.

So the good news is that we've already picked up some very nice interest in our newest energy-efficient product. It is creating quite a buzz. We're seeing sampling and mock-ups around it. I think we'll see some orders turned our way quickly because of that kind of activity. So I feel very optimistic that we're going to be successful in the international markets, helping offset the softness domestically.

Okay, thanks, everyone.

Our next question comes from the line of Brent Thielman of D.A. Davidson. Please proceed.

Nice quarter.

Thanks, Brent.

I know you guys work to some extent on the front end with some of the architects developing specifications for projects and so forth. Maybe if you could just talk about what you are seeing from a planning perspective in the non-res building side, maybe where there are pockets of strength and weaknesses.

The weaknesses really are easy to talk about. It's the larger projects. And we dominated at the larger end, so that's where it has some more effect on us, but as you come down off of that, we actually are seeing - - it's really the mega projects. I should be careful saying mega projects, but the larger ones, the mid-size ones, those kinds of projects continue to have a lot of activity, a lot of planning, work around them.

The hesitation has been turning them into orders. And again, we expect that hesitation - - that's got to get to a point where it starts to turn, and people say, all right, I've seen where this market is going. Yes, I'm going forward, or maybe they're not, but I think that we'll see a lot of those go forward. I think it's just people want to get over this uncertainty that's out there and see something start to happen that's more normal.

The Education and Healthcare markets, I'd say in today's environment are the strongest markets that we're looking at for new work.

Okay, that's helpful. Then I just am trying to get a sense on the margins in the fourth quarter. Given your implied guidance for operating margins for the Architectural segment, you get to a roughly 5% operating margin level in the fourth quarter. Is that more indicative of where we should look for margins, looking out into 2010 and beyond for that segment?

What I would indicate is that, I mean, the fourth quarter is affected by some excess capacity, and then while we're taking some actions, where we talked about some headcount reductions and also closing some factories during the quarter, probably doesn't reflect the full-year savings associated with those types of actions. So I'd say there's opportunity for it to be better than that.

Okay. That's helpful. And then, Jim, maybe just this one for you. Do you have an update on share repurchases during the quarter, and then what's left under your authorization?

Yeah, we have left about 1.2 million shares, and during the quarter we purchased about 675,000 shares.

Great. Thanks a lot, guys.

Your next question comes from the line of John Braatz of Kansas City Capital. Please proceed.

Good morning, gentlemen.

Good morning.

And Mary Ann. I know it's difficult to compare one period against another, but if I go back and look at 2004, fiscal 2004, you had a sales decline of 8.5%, your gross margins fell about 7%, SG&A expense ratio had improved a little bit. The Architect product division was at a break even. Can you look at the two periods, then and now, and from an internal standpoint, in terms of how does the Company compare today from then, and are you in a better position to maintain margins in a declining environment? I know obviously it has a lot to do with the level of sales, but I'm trying to get a sense of how improved the position is of the Company today, relative to yesteryear when the economy turns down.

John, this is Jim, and I'll start out addressing that. I think specifically speaking (inaudible) before, really, in that year we really had basically some problem projects in our Insulation business that we lost money on. And other than those projects, we had, I guess what you would say is kind of normal performance in a declining revenue environment. So the operating margins were clearly skewed in fiscal '04 by the impact of some losses on a number of projects in the Installation business. So that's one important dynamic.

When I think a little more in terms of structurally, how we're positioned differently today than we were during that time period, one is we've talked a bit about the balance in the segments that we participate in. Back in fiscal '04, we were very heavily concentrated in the Office sector in the non-res marketplace. And also back at that time period, Office tended to be where higher amount of the value added products were being used, so they tended to be higher margin activities.

In today's environment, as we've talked about our backlog, we're more balanced across the different sectors, all sectors were servicing with high value added products and services, which have comparable margin characteristics associated with them. And so the balance in terms of markets that we participate in is different, and the demand for value added products and energy efficiency hurricane blast and those kinds of things is stronger today.

Then also some of the initiatives that we have in place in our Glass business, going after smaller projects, or looking to expand international, in our Installation business, where we're located in 10 markets, more aggressively looking for attractive projects outside of those markets with a broader geographic region, that business is different than how we were servicing the market previously.

I would like to ad to that point. In the last downturn we tended to stay home, and how did we get into some of those bad projects that affected us then? We took projects in locations where work was very tight, very competitive, and projects that we probably shouldn't have taken, types of project. As we prepared for this downturn knowing we're in a cyclical business, we began a couple years ago of training people to travel to avoid exactly that situation when this downturn did come, and we've been very successful at that. Today we've qualified people to be able to run jobs and are running jobs in many areas. That's really helped keep our margins up, keep our people busy, critical resources, and I think will have a major impact, a positive impact on this Company as we go through these difficult times. So I wouldn't want to under-emphasize how important that shift has been.

If would you look at today, again, today versus 2004, with 10, 15% sales decline, and I know this is probably a tough figure to come to, but what about capacity utilization? Obviously you have the Utah facility today. Would you have less of a capacity utilization today on a 10 to 15% sales decline than you - -

Yeah, let me address that. In the last downturn, the market was 25 to 30% coated glass. Now marketplace is over 50% coated glass, and still growing. So I expect our utilization to stay higher this time than did it the last time, because of that shift in the market to a much higher percentage of glass. Remember, we don't participate in the non-coated side, so that can shrink to zero and it wouldn't affect our capacity utilization.

Okay. One follow-up, and I know you don't want to talk too much about 2010, but if we were looking at cash flows, and I know that's what your focus is on, can you give us a sense as to two things. Number one, with a 10 to 15% decline in revenue, what kind of working capital, let's say dis-investment you might be able to make next year, and what the CapEx spending plans might be in 2010?

Yeah, first of all, from a working capital standpoint, as I mentioned with receivables as the largest working capital component, on a revenue decline we'll see the collections of receivables and would expect to see positive cash flow from working capital. And while we're not prepared to give specific guidance from a CapEx standpoint, our outlook at this point is that we would be spending at or less than our level of depreciation. So our depreciation alone is in the $25 to $30 million level, so we would see our CapEx going down to at least that level.

I would say to you this. I am very confident that we can meet those spending guidelines on capital and still maintain our factories at a very modern competitive level and, in fact, continue to enhance our competitiveness and green product delivery to the marketplace. So I'm actually very confident we can do both going forward here.

It would look like, then, obviously, you have to make an assumption what net income is going to be, but it would look like you would still be generating a decent level of free cash flow then next year. Would you look at retaining that cash, or maybe continuing a share repurchase program?

At this point in time, I'm certainly in favor of retaining the cash. And the main reason is, we lag the economy. So we know that we're going to be - - the good news is once the economy turns, availability of cash will come back. The financial markets will certainly fund growth, so I'm not worried about that. But because we lag it, we'll hold on to our cash.

Gentlemen, thank you very, very much.

Our next question comes from the line of Robert Kelly of Sidoti. Please proceed.

Good morning. Thanks for taking the question.

Good morning.

Just maybe on the quarter just ended, in the Architectural segment, maybe some help on the sequential improvement in 3Q versus 2Q. Looks to be a down sales. Like order of magnitude as to why you saw such a big jump in operating profitability, relative it to the second quarter?

Yeah, I think, this is Jim, two key drivers. One is just the productivity improvements in the Architectural Glass business that we talked about. Obviously in the second quarter we talked a lot about the production problems we were having in Viracon and the challenges that created. Probably halfway through the quarter actually seeing it return to the levels of productivity that we are targeting to get to. So that was very important driver. And then also, even despite some of the charges that we had relative to Installation projects, we've been talking for a while about the expectation, continuing to expand the operating margins from project margins in our Installation business, and we do continue to see that.

So the issues related to the 2Q pressure are completely resolved?

Yes. In fact, I would even say this to you. As we come off running, especially on our Glass Fabrication business, as we come off running at seven by 24, we'll actually see productivity improvements continue to go up. So not only have we recovered to where we were, but I think we'll continue to get better.

So I guess like the Installation operating margin expansion, what is the driver of that? Maybe just a little help there. And how do we think about that over the next two years?

Could you repeat that again, please?

Jim just mentioned, in addition to the issues falling away in the manufacturing facilities, just talking about widening the operating margins on the Installation side of the business? How do we think about that as it relates to what you are implying for 4Q, and as far as like fiscal '10? Is there up side to that? Maybe a little help there.

On the Installation side of the business, we'll continue to see the improved project margins flowing through, and as we have the work in the backlog, we'll continue to see that flowing through as well. But then we'll see kind of a normalization of that level. As we mentioned, we're starting to see some pressures in some aspects relative to that business in terms of additional work that we're bidding, but we'll continue to see those good margins flow through, but we'll start to see some mix of new projects being booked that [won't] allow us to see the sequential increases to that.

So the stretching out of bid to award, that kind of presses the Installation and the Fabrication side, as far as operating profits?

Combined with increased competition.

Okay. Great. And then as far as F10, clearly the market, what you are seeing, seems to be trending down. Could you maybe help us with how much fixed, how much variable cost is in the mix within Architectural? How do we think about contribution margins on a 10% sales decline? I don't know if you will share that.

Well, you know, this is going to be pretty high level, but probably a third of our cost is material. A third is going to be variable cost, and a third fixed. That's pretty high level, with the key being that the variable costs do have step changes associated with them. But I think the actions that we have outlined that we've taken to date, and that we'll continue to evaluate, will allow us to address as much of the variable costs as possible.

So we should think about fixed being around a third of the Architectural business?

That's a reasonable estimate.

And then as far as cash balances, as you collect on receivables, as the projects kind of ramp up in backlog, we should see significant acceleration in cash generation for F10? Is that correct?

We'll continue to collect our receivables, and if revenues are declining, we would see increased cash generation from working capital.

And that covers until - - when does that kind of run out?

We would probably see that rate of increase probably go through mid year.

Thanks, guys. Good work on 3Q.

Thanks, Rob.

Our next question comes from the line of Tyson Bauer of Wealth Monitors. Please proceed. Good morning, gentlemen.

Couple quick questions. Do you have a dollar amount that was included within the backlog, that was considered delayed or canceled, as opposed to lower new order levels?

In terms of cancellations from the backlog, my estimate is probably between $15 million to $20 million, I think, across the businesses.

Is that evenly spread out during the quarter, or did that accelerate as we got into October and November?

Actually we're talking about a very small number of projects, and frankly, they were early in the quarter. We actually haven't seen any cancellations in a while.

Part of the precipitous drop was in the Glass business. Remember, we only traditionally had eight to 12 weeks of backlog anyway, and the delays really ate away at that backlog. So a lot of the drop, I don't know if I could tell you what percentage, but it was a material part of the drop, was delays in projects not being converted into orders that normally would have during this time period. And so there was a significant portion of it that we think will still come, but it's being held up right now.

Would you then expect further backlog erosion over the next couple quarters, given that outlook?

I think that's a fair guess. The bidding remains high. The offset to that, that seems like a logical conclusion, but the bidding remains high, and that sort of goes counter to that conclusion. But until we see it happen, it's hard to project.

Okay. And just on the other topic to address, the first question there, how did you arrive at that 10-plus percent decline in the top line? Is that going to be mainly focused on the pricing, capacity, product mix, moreso in Fabrication as opposed to Installation, or vice versa? Give us a little better clarity on how you arrived at that kind of broad outlook right now.

A lot of it is just based upon experience at this point in time, of being able to look and understand, talk to the people, talk to the markets. Clearly one could make an argument for a range. We felt that that was very difficult to do. That's why we came up with the greater than 10% number.

There are offsets that we believe we can make to that international broader market, more geographies that we can make to a greater than 10% decline that keeps it in that sort of close to that range. And that's pretty much how I came to that conclusion.

Would you rather try to keep higher capacity utilization and keep the Installation working at the offset of lower pricing, so you are ready to go on a turnaround, or what's kind of your strategy, Russ, there? Are you really trying to cut the costs now and really be trying to maintain some of those pricing levels, at the risk of lower capacity?

Yeah, in the Installation business, the critical resource is the project manager. We certainly want to keep all A players. There's no question about that. Do we have to keep all offices open? No, you don't have to keep all offices open, but you try to maintain that, you find good work for them to do, geographically.

Remember, this is a business that has very small market share, less than 2% market share nationwide, servicing 10 markets, 50 markets meet their business model. We think we can be successful doing this without too much sacrifice on the pricing side.

On the Glass side, we can certainly take some pricing pressure there. We've seen prices move up. We can take some coming back. We can offset some of that through efficiencies gained at operating off of peak capacity. We believe we can operate more effectively at the lower levels, but there still is a net decline in income, after all that is said and done. But those are offsets to what you would, if you just simply took the sales off the top and applied today's margins, we believe we can offset those margin compressions.

And the last question is you've had to address in the past the opposite of having Asian producers coming in on the West Coast, and taking some of the Casino contracts in Vegas, or a little here and there type projects that they have been able to do, and your comeback has always been the main issue is their inability to service those contracts or those projects for being so far away. How do you avoid those pitfalls when you are going to enter into the international market? Will you sell mainly as a Fabricator, or will you have Installation on foreign lands?

We won't do Installation. We'll be selling to an installer. But the main driver here, great point, thank you, is that when product is being shipped in here, and it disrupts the schedule, there's very high labor cost on US commercial construction. When we go the other way, the service levels are not as costly in terms of labor on the projects in those areas, so the impact of the time delay that we have of delivery, cost impact on a project, is much less than the impact coming in this direction, because of the labor cost differences on the job site.

Okay, thanks a lot, Russ.

We can take one more question.

Our next question comes from the line of Mike [O'Martin] or the Small Cap Report. Please proceed.

Good morning. Congratulations. I was wondering, there's potentially a big opportunity with the new President and the infrastructure program. Can you give us any more details on your thinking about that than you've already given?

We agree with you. In fact, we're quite excited about it. Certainly, what we see in terms of the emphasis on making renovation, I think, can be a significant part of this, because there's an awful lot of buildings out there with single pane glass in them that where renovation of the glass makes a big difference, and now we're talking about schools, government buildings, exactly where this proposal seems to be focused. It also brings a level of awareness of energy efficiency to all new construction, instead of just the major buildings that were being built by government and state and local and federal government. We see all that as very positive.

Clearly we believe that our products and services are really well positioned, as well as our focus on Institutional, to really benefit from that, and we're really excited about the emphasis towards renovation and new construction with a focus towards energy efficiency in both the Government and Education sectors.

Our newest energy efficient product we introduced at Green Build, has a significant improvement in energy efficiency over the most common high efficiency products that are being used in today's marketplace. So we think we have really raised the bar.

What percentage of your business is Institutional right now?

30 to 35%.

30 to 35. And you indicated that there were a lot of projects that could get going pretty quickly?

We believe that that's true, that there's projects out there that more state and local that are waiting for bonding issues of things to go through. The Federal projects have still been moving, but when I back up from there, out of the Institutional, there's more of a hesitation in the other sectors, whether it's Office, even Condos remains a good part of our backlog, surprisingly.

Thank you very much.

All right, thank you.

Ladies and gentlemen, that concludes the question-and-answer portion of the presentation. I would now like to turn the call over to Mr. Russ Huffer. Please proceed, sir.

Yes, thank you very much. Thanks for the questions, and best wishes for the holidays.

That concludes today's conference. You may now disconnect. Have a good day.