Apogee Enterprises Inc (APOG) 2009 Q4 法說會逐字稿

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

I would now like to turn the call over to your host for today, Ms. Mary Ann Jackson. Please proceed.

Thanks, Shane. Good morning and welcome to the Apogee Enterprises' fiscal 2009 fourth quarter and full year conference call on Tuesday, April 7, 2009. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our fiscal 2009 fourth-quarter and full-year results and the outlook for fiscal 2010.

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. 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 1, 2008, and in our earnings release issued last might and filed this morning on Form 8-K.

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

Good morning and welcome to our conference call. I am pleased with the performance of our business in the fourth quarter as we began to see the impact of the downturn.

We completed the year at the high end of our earnings guidance range and achieved our third consecutive year of record revenues and earnings. But Apogee now faces a tough year, probably two, with the slowdown in the economy and commercial construction.

Apogee operates primarily in a cyclical industry, and we are focused on running our business over a cycle. As we had planned, we are entering the commercial construction downturn in great financial condition, with a strong balance sheet and expectations to continue to generate positive cash flow this year.

We are aggressively managing our costs, including headcount and overhead costs, while we continue to emphasize productivity improvements across our operations. Looking forward, we have production capacities in place.

Our plants have been upgraded to state-of-the-art, and we are committed to strategies that will help us remain profitable. When the markets recover, our Company is positioned to grow, gain share, and deliver significant shareholder value.

Turning to fiscal 2009 results, we earned $1.82 per share from continuing operations, up 22% from fiscal 2008. Revenues grew 5% to $925.5 million. I am pleased to report that we have achieved one of our best operating margins ever at 8.4%, up from 7.5% last year.

We performed well in the second half, showing our potential in stronger commercial construction market conditions. We generated strong cash flow, more than doubling the prior-year level while paying off all our bank debt. The only long-term debt remaining is $8.4 million in low-interest industrial revenue bonds which we intend to retain.

Our cash and other short-term investments totaled $27.1 million at the end of fiscal 2009 compared to $12.3 million at the end of the prior year. With our strong balance sheet we are well positioned to weather this downturn.

Each of our segments also performed well in fiscal 2009. Architectural revenues increased 7% and operating income grew 21%. For the year, the Architectural segment operating margin was 7.6%, up from 6.7% the prior year. The Architectural segment benefited from solid execution by the installation window businesses of projects with good margins and mix, and good pricing in our architectural glass business, slightly offset by midyear operational challenges we experienced in architectural glass as well as lower volumes.

Although Large-Scale Optical segment revenues declined 14% as they operated in extremely soft markets over the last two years, our picture framing glass business grew operating income 10% as it continued to convert customers to our best value-added framing glass and acrylic. Operating margin for the year was 23.6%, up from 18.6% the prior year.

Focusing on the fourth quarter, Apogee achieved strong operating margins and cash flow despite slowing markets for our architectural and picture framing glass products that resulted in lower revenues. Revenues and earnings were below last year's strong fourth quarter, but generally met our expectations.

Revenues were down 17% in the quarter and operating income declined 22% compared to the strong prior-year period. Earnings from continuing operations were $0.40 per share, down from $0.49 per share last year.

Architectural segment revenues declined 17%, and operating income was $15 million, down 25% from the strong prior-year period. The fourth-quarter segment operating margin was 8.1% compared to 8.9% in last year's fourth quarter, which benefited from high capacity utilization, mix, and pricing.

Solid execution by our installation and window businesses on projects with good margins and mix, good pricing in our architectural glass business, ongoing productivity improvements, and cost-cutting efforts later in the quarter were somewhat offset by lower capacity utilization and downsizing expenses.

Backlog declined to $316.2 million compared to $373.2 million at the end of the third quarter and $510.9 million in the prior-year period. As we complete work on existing backlog, project cancellations and slow bid-to-award timings are impacting backlog levels, despite steady bidding activity and the green building trend, which we believe is increasing demand for our energy-efficient glass products. We have recently seen a slowdown in the rate of project cancellations and delays, but it's too early to tell if it is a trend.

The mix shifted in the quarter as expected, with institutional projects now comprising a larger portion of the backlog and office projects a smaller part. The shift reflects both market conditions and our change in focus earlier in the year in anticipation of a slowdown.

Large-Scale Optical segment operating earnings grew 10% on a 19% revenue decline. Productivity improvements and cost management, along with a higher mix of our best value-added products more than offset weak market conditions for picture framing.

As we manage through the economic downturn, we further reduced headcount and cost during the quarter. Headcount is now down more than 20% from the peak earlier in fiscal 2009, and overall costs have been reduced approximately $36 million on an annual basis.

Next I will cover our outlook. This is the third cycle I have experienced in this industry, and today we are facing an unprecedented level of uncertainty in commercial construction markets. As we stated in our press release, we will not be providing EPS and detailed annual guidance at this time.

We do expect continued profitability on revenues that will likely be down at least 15%. At this time we are estimating operating margins in the mid-single digits as lower capacity utilization and competitive pricing are slightly offset by productivity improvements and lower energy and material costs such as for aluminum and packaging.

We expect that our first half will be stronger than the second half of fiscal 2010 as we execute projects in our architectural backlog that were bid in stronger market conditions. The second half could benefit from the addition of stimulus projects to upgrade government and school buildings that would incorporate our energy-efficient green products and services. At this time we have not secured any of these projects.

There is more than $5 billion to renovate federal GSA buildings to improve energy efficiency, and windows and walls should be an important contributor to this effort. I am pleased that we are seeing early success in pursuing work in underserved architectural glass markets, including smaller and international projects. At the same time, we remain focused on delivering new energy-efficient glass products for the green building market.

The new energy-efficient product that we introduced a few months ago is seeing early success in the marketplace. We are focused on bringing to market products with superior energy efficiency, performance, at prices comparable to existing competitive products to further enhance our industry leadership.

Our balance sheet remains strong, and we expect to have positive cash flow in fiscal 2010 as we project working capital declines and capital expenditures of less than $20 million. As a result of our strong balance sheet, our Architectural segment businesses are well positioned with the bonding capacity required by some contractors to assure completion of projects, a competitive strength in today's markets.

I am proud to say that Apogee is in its strongest financial condition in the decade I have served as CEO. We have paid off our entire bank debt and generated a net cash balance.

We have also grown our operating margins and return on invested capital. And our factories are efficient, state-of-the-art, and staffed by the best talent in the industry to produce leading products and services.

Jim will now comment on the financials. Jim?

Thanks, Russ. I will provide some comment on the fiscal 2009 full-year and fourth-quarter results.

Our fiscal 2009 earnings from continuing operations of $1.82 per share represent our third consecutive year of record earnings. We succeeded in reaching the top of our guidance range despite feeling the slowdown in commercial construction markets in our fourth quarter.

Revenues were impacted by cancellations and delays as we grew only 5% for the year. We strengthened our operations and financial position in fiscal 2009, which will benefit us during the downturn and in the better days ahead.

Among our achievements last year, we completed key strategic capital investments that position us for efficient growth when markets improve and allow us to reduce capital spending to less than $20 million in fiscal 2010, a level that adequately funds safety and maintenance requirements as well as expansion of our green architectural product offerings. We generated $61 million in free cash flow, nearly doubling the $31 million generated in fiscal 2008. We define free cash flow as net cash from continuing operating activities less capital expenditures.

We continued to reduce our days sales outstanding to 44 days. We paid off our debt, with the exception of low-interest industrial revenue bonds which we intend to maintain. We ended the year with $27 million in cash and short-term investments.

Our return on invested capital of 12.6% was the best in recent history. Our focus on project selection benefited our glass installation and window businesses and contributed, as expected this year, to a fiscal 2009 Architectural segment operating margin of 7.6%, topping our peak margin in the last commercial construction cycle.

We also continued to implement productivity improvements which will be an even greater focus during the slowdown. Having some excess capacity has allowed us to accelerate some initiatives. This commitment should help us perform even better when markets improve.

And despite two years of extremely soft markets, our picture framing business continued to convert customers to its best value-added framing glass and acrylic, achieving a 23.6% operating margin. In the fourth quarter, we faced tough prior year comps and challenging market conditions but achieved a strong operating margin of 8.6% for the quarter.

I will turn to our outlook. Our visibility into fiscal 2010 is less than normal, with lower backlogs, the extended bid-to-award timing, the impact of tight credit markets, as well as the uncertain potential from the federal stimulus package.

At this time we are not providing EPS and detailed annual guidance. We do expect to deliver a mid-single-digit operating margin on revenues that will likely be down at least 15% for fiscal 2010.

We have significantly reduced headcount and costs and continue to improve productivity in an effort to somewhat offset the impact of declining revenues on earnings. We also expect to continue to generate positive cash flow.

Our total backlog remains spread across commercial construction sectors. Institutional, which is education, healthcare, and government, is now the largest sector in our backlog at 40% to 45%, up from 30% to 35% at the end of the third quarter.

The office sector makes up 35% to 40% of our backlog, down from 40% to 45%. Planned condominiums continue to compromise 10% to 15% of the backlog; and hotel, entertainment, and casino projects remain at 5% to 10% of the backlog.

Approximately $237 million or 75% of the backlog is scheduled to be delivered in fiscal 2010 and approximately $79 million or 25% in fiscal 2011. 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. 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.

We have seen an increase in the mix of bidding activity for attractive projects in the institutional sector for education, healthcare, and government projects. This sector traditionally tends to be more stable through the ups and downs of commercial construction cycles, and green building is a growing trend for institutional projects.

We also are continuing product development efforts particularly related to energy efficiency. I am encouraged that as part of the economic stimulus package, the administration is focused on efforts to make public buildings more energy-efficient and to modernize and upgrade school buildings. We hope to win some of this work this year, though the timing would likely be in the second half.

In conclusion, we have good businesses with leading 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 productivity improvements and are evaluating further actions including reductions in headcount and discretionary spending. We are focused on managing through a cycle, effectively weathering the slowdown, and emerging stronger than ever when our markets rebound. Russ?

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 like to now go ahead and open the call to questions.

(Operator Instructions) Tom Hayes, Piper Jaffray.

Morning, gentleman. Two quick questions. One, we recently saw some news on a portion of Freedom Tower; the lower part is going to be in solid glass sourced from China. Could you just comment? Are you seeing more incidents where customers are looking for lower-cost sourced products, possibly from overseas?

Actually we have seen that trend reverse itself. There have been a number of projects coming in that did come in at the peak when there was capacity constraints; but since the capacities have opened up, we've really seen a reverse in that trend.

So I'm not sure exactly. I'm unaware that there was some glass coming in. There is always some special requirements.

There may have been some special things on that project that they found that was available there that maybe was not available other places. I don't know the answer to that; but it's not a concern to us at this time.

Okay, great. Thank you very much.

I guess just secondly, you've done some good projects. You've managed the account well. What factors going forward will allow you to maintain the margins above the trough margins reached during the last downturn?

You mentioned kind of a guidance towards a mid-single-digits. What other factors are possible for you guys to help maintain those levels?

First of all, in the last downturn we did have some businesses that were underperforming and we have certainly learned some lessons from -- in our installation business, that staying home and bidding projects in the local area was more challenging than traveling. We've been traveling. People have been very successful at it. So we've actually improved our performance in the contract glazing side to the point where it really makes a difference in the overall.

We also, because we're in a cyclical business and anticipate these changes, we changed our institutional focus over a year ago so that this shift in backlog to institutional is no surprise to us. In fact, we are encouraged that the institutional part is showing some strength for us because of our efforts. So that clearly is the strongest part.

The other thing is we are really state-of-the-art in our factories today. It's really very positive to see the improvements in productivity that we are seeing in recent months.

They are significant. They are making a big difference in our outcome, in our earnings, in our margins; and we did not have that kind of performance leading into a downturn the last time. This time we do, so I really feel like we are ahead of the curve on taking actions that are showing us positive results already.

I think even in terms of what is flowing through the backlog today, I really feel that the cancellations have essentially reduced themselves to a near zero level. They are not quite there, but they are way down.

What we are also seeing that you won't see in the backlog is quicker turn business. The broader market business comes in, goes out, really doesn't show up in backlog.

And even some of the international work has very short lead times to it. Where we might have seen things pop in and cause some increases today, some of the international work we will do will turn pretty quickly.

So we feel pretty good about where we are. I think we have just done a lot of things anticipating this downturn, and I think the result of the net of all of those will keep these margins in those mid-single digits.

Great, and just last question. You had mentioned the shifting focus, you guys moved more to an institutional project focus. How is that, the margin profile on those projects, versus the backlog that is being I guess used now versus the profile on the projects that are going into backlog?

Certainly the work that was bid over a year ago is better than the work that is being bid today, in general.

Okay.

Okay? But the good news is that the institutional part that we are bidding today values our energy-efficient products, our green products. And they are showing up in specifications, and that actually keeps that -- that has raised that market's appreciation of value of glass-metal installation services to the point where it's on par with the balance of the markets that we serve.

So we don't see any necessary sort of fundamental change between segments today that you might have seen in the past. It is just because these products are now valued in that sector.

Okay.

This is Jim. Just to elaborate on that, because that is one important change relative to the last trough, which is the institutional market in general today is very different than it was in the last trough, where there is a much higher use of value-added products.

So the margin profiles on those projects in the current environment is more favorable than it was in the last cycle. Also within our institutional, actually a lot of our backlog is actually related to private institutional, which would be private hospitals, private universities, as well as public projects.

Okay. I guess just lastly if I may, you had mentioned that the possibility of getting some stimulus-related projects. When will you -- have you seen bidding activity come out yet? Or when would you expect to see some of that bidding activity begin?

We just saw the project list last week.

Okay.

So the project list has just hit the marketplace, and we are actually quite focused on that. We are trying our best to make sure that we get after those projects, that we influence specifications. And we've got some great tools to show wonderful value for using high-performance metal, glass, and installation techniques.

Great. Thank you. Nice end to the quarter.

Okay. Thanks. Also just let me add to that, that is for the federal GSA projects. But also part of the stimulus actually was providing money at the state and local level, and it's up to those levels to actually determine how that is spent.

We actually have projects where we have been bidding on them that are linked to obtaining funding. So, again, we haven't seen specific linkage to anything from the stimulus, but there is the opportunity that we could see projects that we have already been working on related to financing that could be aided by the stimulus bill.

Great, thanks.

Steve Denault, Northland Securities.

Good morning, everybody. If I can follow up on that, the project list you saw last week, what does it look like? Are there a significant number of projects whereby they want to replace the glass?

All we saw was the list and the dollars. We don't know the scope of work at this point in time.

This is a listing that actually was published by the GSA. So it's an overall listing of projects that they plan to renovate, including energy efficiency. Energy efficiency is clearly a priority.

Also an important priority is the speed to be able to get these projects. So we feel really strongly that addressing the windows and glass on these buildings will be a key enabler. But -- so as Russ said, that list just was published by the GSA late last week, and so we are working hard to try and understand the projects and the opportunities.

Okay, I see. You referenced -- Russ referenced a slowdown in the rate of project cancellations and delays. I know you suggested that -- we don't want to interpret this as a trend. But what do you think is driving that?

I think the projects that had problems or uncertainty around them, I think finally people have made decisions on those. I think that that's exactly what happened.

So the ones that they made the decision to cancel, they canceled. I think they've sort of cleaned out all of the projects, if you will, that needed to go. So now the ones left are the ones that are remaining and going forward.

That is what it feels like to me. Again, until we see that over a longer period of time, we can't say that it's complete.

So it's a pretty short period of time. And then recently the delays have been more like normal delays. So earlier on, we were seeing significant delays in projects. The delays that we have seen factored in recently have really just felt like normal delays.

So again I would like to give you three or four months' worth of data on that. We don't have that length of data at this point in time. That is why we can't confirm that, but that is a good sign.

Okay. No, that makes sense. Historically, at the start of your fiscal year you have tended to have -- if you look at your backlog and the percent of backlog that you've traditionally historically referenced as being business that we will recognize in the coming 12 months or the coming fiscal year, it has tended to be in the low 40% of ultimately what you'd recognize in revenue within your Architectural business segment. Is there anything that has changed that would suggest that that historical relationship no longer holds true?

No, just a second. We are going to check your number there and make sure that we've got this right before we comment.

But first I'll comment, though, that there is definitely, both in terms of our capacity and going after the smaller project market, I mean that has a shorter lead time, a bit more kind of a book and bill dynamic associated with it.

Okay.

Your question about percent of annual revenues versus percent of backlog that flows through the current fiscal year, let me make sure I got your question right.

Right, traditionally as you broke out your backlog at -- let's just say this point in time every year, ultimately when you take a look back, you generally had coverage for the year of somewhere in the low 40% of what you ultimately recognize in revenue within that Architectural glass segment.

All right, that's true and that is consistent with where we are today.

Okay, so that --?

We're a little less, but it's close enough.

So it would be a little less because small projects tend to be sort of quick turn and --?

Right.

Okay. That makes sense. My final question is in regards to -- the gross margin in the February quarter was extremely good. Can you explain what drove that? Was there considerable favorable mix in the quarter? Or what exactly drove that?

It was really the factors that we called out. The driver was what we refer to as project selection and mix.

I think we have been talking for a while that our expectation was our focus on project selection, particularly in our installation and window business, was going to be coming through and improving margins this fiscal year. And we saw a significant factor related to that in our fourth quarter, as well as continuing to see good pricing on projects that we had bid during stronger time periods.

Then we also had worked through the operational challenges that we had at Viracon. Kind of mid-quarter we had really worked through those and saw increasing productivity improvements as well as some lower costs associated with the headcount reductions that we made.

Okay. Is the mix within the Large-Scale Optical segment, can it get better? Or is that being maxed out?

I guess a better question is, what percent of that business now is your best value-added frame glass?

We continue to see over 50% in terms of our best value-added. We continue to look at converting to overall value-added as really our key strategy in that business, both in our core picture framing as well as in other new business (inaudible).

The best value-added product is still a very small percentage of the overall market. We see much higher mixes within some of the big-box stores. Then also the acrylic high value-added product has now just been reintroduced, so that has a pretty -- we think -- we are pretty excited that it has a wide opportunity.

We've seen some initial successes of that product within museums and other places. So we think we've got some good growth opportunity there yet.

Okay. Thank you.

Brent Thielman, D.A. Davidson.

Good morning. Just on, I guess, a follow-up to the Large-Scale Optical business. You saw a 19% decline in sales in the quarter. Can you just break out what piece of that is a function of lower demand and what is a piece of your shift in mix there?

It's really overall reduction in demand.

Yes.

Okay. I guess as I look at that segment, especially given the transformation of the mix toward the more value-added lines more recently, and just trying to compare that segment to the last economic downturn. But can you give any sense as to where you believe margins in that segment are sustainable during the downturn?

Really the prior guidance that we have given in terms of over a cycle here is you are kind of holding the top line and holding the operating margin. But it is tied to the overall retailing marketplace, which is a pretty soft market today.

Okay, okay. That's helpful. Then on the SG&A, were there any significant one-time items in SG&A in the quarter?

No.

No.

Okay. Then on share repurchases, Jim, did you guys repurchase any during the quarter? I'm not sure if I missed that in the opening commentary.

We did not.

Okay. Then lastly on the -- I guess the lower pricing of projects that are coming into backlog now, is that more reflective of the installation business or the glass and framing side of the business?

I would say that is pretty much competitive across the board.

Okay. Thanks, guys.

Eric Prouty, Canaccord Adams.

Great. Thank you very much. Just a couple other questions on some of your metrics. You did a good job taking DSOs down quite a bit it sounds.

Could you just talk about what you see in trends going forward there? Can you continue doing that? Then also have you had to reserve anything on receivables or bad debt to reserves of write-off? What are you doing on that aspect?

Yes, I mean, we haven't seen any change in the requirements relative to our reserves associated with bad debt. We actually saw a slight improvement in the overall aging in the quarter.

As we look forward, we continue to work on processes, in that we are focused on continuing to drive down DSO, but recognizing that in the current economic conditions that is not always possible. But our goal is we believe there is opportunity for us to continue to reduce our DSOs.

Great. You wouldn't consider any of your current projects or your current receivables to be at risk?

No.

No.

Great. Then maybe just a little more. It sounds like you're not kind of running all-out from a utilization standpoint. Will you give us a number for current capacity utilization?

Yes. Kind of our average for our manufacturing businesses in the fourth quarter is probably in the low to mid 60% utilization.

Great. Okay. Then understanding that backlog, kind of a moving number with a lot of moving pieces to it. In a normal economic cycle, when would you expect that backlog number to hit its trough? Would this be in one or two quarters from now?

And within the backlog maybe you could give a little more description about what kind of moving pieces there were. Did you have backlog that slid from one year to the next? Or how much did you have to take out what backlog, if anything, for cancellations, et cetera? Thanks.

Yes, the answer -- we don't know where the trough is yet. We are starting to see some things, but until they become more steady or more repetitive, we can't say that we are at the trough.

Having said that, I will try to answer your questions, though. I think my gut tells me that we may be getting close to it, if we are not there.

So I am optimistic that we -- what I am telling our presidents of our businesses is be aggressive about managing at the level of business we have today. It seems to be as good an indication of where it might be in the future as we can find. And then find ways to improve productivities to take on opportunities as they come about.

There were some projects. Again, the amount of projects came out of backlog --

Yes, so in terms of actual cancellations out of our backlog, roughly $12 million, I think, was the number in terms of backlog cancellations that we saw.

About $4 million of that was a small number of projects that were actually scheduled to be delivered either at the end of fiscal '09 or early in fiscal '10. The remaining roughly eight was projects scheduled to start kind of mid fiscal '10.

There were other projects that were canceled, but they were never in backlog.

They were targeted projects.

They were targeted projects that we were working on.

Great. Then finally I guess maybe an unlooked-for benefit of the downturn here, could you talk about your acquisition activity and if you plan on, with your good balance sheet, taking advantage of this downturn to fill any holes that you might see in the product offering?

Clearly we made a great acquisition a little over a year ago in Tubelite, and that continues to meet our expectations.

The phone is ringing. Certainly there are businesses that are interested in selling. It is a challenging time to evaluate and to bring things to a close, because of differences in valuations. I think that it's going to be a while before we can find that there will be agreements on valuations. But having said that, I think there will be some opportunities come up.

We will have to be careful. We don't want to jeopardize our balance sheet. We want to find ourselves -- certainly manage the Company through this. But I think as we get further along and we can start to see where we think this is going to turn, then you might find some real opportunities because I think that is when people will be the most harmed by this slowdown.

And we will have good visibility then going forward, so I wouldn't -- we will just be opportunistic and we will see what comes.

Great. Thank you very much. I will hop back in the queue.

Robert Kelly, Sidoti.

Hey, Russ, Jim. Good afternoon. Thanks for taking my questions. On the outlook for F10 mid-single-digit operating margin, can we infer that your 4Q margin does not continue into the first half and that kind of slowly moves down the scale to represent the mix of the new business coming through?

Just maybe -- you talk about first half being better than second half. Does first half look like second half F09, sliding down from there? Maybe just a little help.

I think we'll see a slight step change. Clearly first half is going to be stronger than second half. A majority of the backlog is clear where that continues to benefit from project selection and pricing and those kinds of things.

But it's also entering at a little bit lower capacity utilization run rate than we have started Q4 at. So we have -- and just kind of absorption issues on lower revenues.

So yes, we will see the first half stronger than the second half. I wouldn't expect a run rate of Q4 right into Q1.

So what sort of utilization does mid-single-digit operating margin imply for F10?

On average -- and that is frankly one of the points of uncertainty as there really is a fair amount of lumpiness in terms of the visibility that we have. So probably roughly mid-50% capacity utilization.

Okay, great. Then you had quantified what was canceled here. Is there a way to quantify what was delayed?

Yes, in terms of -- and again I will kind of segregate it. In terms of delays from backlog, so in terms of revenues that may be moved from Q4 into fiscal '10, pretty nominal amount I think that we are aware of.

I think the biggest factor in delays really goes back to our comment which is the extended time period between bid and award. These are projects that we have been working on that normally we would see awarded. The projects are either delaying or being put on hold.

Is there, I don't know, a number you can put around what percent of delays ultimately become cancellations, given your past experience? Or is that not the right way to think about this?

Are you talking about backlog [trucks]?

Yes, stuff that you signed up either in commitment or backlog.

Yes, again, historically up until this downturn, it was rate that a delay turned into a cancellation.

I think if we are not out of this cancellation, delay, excessive delay phase, we are getting close to it.

Then you had talked about for the last couple years here you were able to be pretty selective with the mix of projects you selected; tight market for glass and whatnot. Now that those constraints have eased a little bit, are you able to be as selective? Or is everyone kind of fishing in the same small pond?

Certainly there is more competition, more people bidding each job. But one of the points -- and I'm talking about the installation business now is where we really have maintained selectivity and that has helped us the most in our margin.

I really believe that we will be able to continue to do that. Remember, we went to new geographies that really helped us with that.

Then our bonding capacity is clearly making a difference. We have seen jobs lost come back because of bonding. I think we will see bonding -- what we are seeing is developers and owners concerned about a business's ability to complete orders, and so they are really getting strict on the bonding and asking for more of it. That is a clear strength for us.

Where you might have seen in the past we only had a few people bidding, it got to be several. Now this with the bonding I think will reduce the number of people bidding a job and help us win the right selected jobs; so sort of going back in our favor.

As the delays have or the cancellations have settled down, do projects come back? You talked about quoting and bidding being relatively steady. Are projects coming back for rebid yet?

Yes, we have seen quite a bit of that. That's true.

So it's a matter of just having the orders released at this point, and there is little visibility there?

Yes.

Thanks, guys.

(Operator Instructions) Jon Braatz, Kansas City Capital.

Morning, gentlemen. A couple questions. Number one, I was looking at the architectural billings index and it had sort of leveled off in the mid-30s over the last five months. Then the new project inquiries number has picked up in January and February and almost approached 50 in February. Are you encouraged by that? Or how should we look at that?

Obviously you have been doing this for a long time, and these indexes may give you a false read at times, but how would you interpret those numbers? How positive do you think that trend might be as you look at your business?

I will give my opinion. I don't think it signals a turn to a movement upward. I do think it signals some stability coming back to the market where it's been very unstable for the last few months. That would be my interpretation of what I see.

Okay. What would it take for maybe -- in those numbers for you to interpret it as business getting positive again? Would it have to be above 50?

I think it has to get -- it has to start an upward trend. I think you need to see a few months of upward trend.

Okay, okay, okay. Thank you very much.

Rod Hinze, Keypoint Capital.

Could you help me with the mix between your fixed costs and your variable costs and how that can impact margins going forward?

I think in rough numbers it's almost about a third material, a third fixed, and a third variable costs. Clearly as we move towards lower revenues you will see that shift a little bit. But we've been pretty aggressively going after all elements of cost.

Okay. Then when there is a cancellation, how quickly is that reflected in revenues? In other words, is there any sort of early recognition of revenues that get scaled back as the project is canceled or delayed?

No, there is no effect on revenue recognition based on cancellation.

In fact, we been able -- if a project is actually canceled while we are in the midst of manufacturing we have been able to fairly recover our costs and efforts that we've put into the product.

The cancellation would reflect future activity.

Right.

Okay. That's all I have. Thank you.

[Andrew Cash], [Pointe-Claire] Value Management.

Just wondering if in very broad terms you could speak to the government stimulus package. Do you think that the projects that you are looking at could offset the downturn in the private sector? Or will the stimulus even coming close to offsetting the downturn in the private sector?

I don't know if you can talk about maybe if you look forward to the first half of fiscal 2010, might that offset the downturn and you might actually beat fiscal 2009 by that time?

This is -- obviously we don't know the answer to this, but I will try to give you some information that sort of circles around your question. The glass metal installation contract industry is about $15 billion.

Okay.

The industry is down. We are saying our business is going to be down 15%. I think the market is going to be down harder than we are.

But the stimulus package is set at about $6 billion for government -- $5 billion to $6 billion for government buildings. That is more than glass and metal, so that is not all glass and metal. We don't know how much of it is going to be glass and metal at this point in time, but we believe some will be.

And certainly when you are talking about a number that big, even if you get a reasonable percentage of it, it has effect on our industry. So it could be a 5%, 10%, 15% of the total industry. If that's true that is very material, makes a big difference. But we don't know the answers.

Okay, so it is possible that fiscal 2010 could start showing you positive revenue comparisons to first half of fiscal '09. Is that fair?

The timing is hard to project at this (multiple speakers). Again we just don't know what the timing will be. The intent is to get this money into the marketplace as quickly as possible, but what really happens is unknown.

Okay, just secondly if you don't mind, as far as these projects, maybe it's too early to tell. Will these government projects be rigorously competitively bid? Or are there going to be so many different projects that you can pretty much price them any way you want?

We don't know. We don't know. We just don't know. We have not seen any of them bid yet, so we can't -- I don't know how we can comment.

Okay. Thank you very much.

You're welcome. I think that will conclude our question and answers for the day. Again, we really feel that we've got the Company in great shape. We are ready to deliver for you and we will work hard every day. So thank you very much.

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