Apogee Enterprises Inc (APOG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fiscal 2011 Apogee Enterprises Incorporated conference call. My name is Mary 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 this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Mary Ann Jackson. Please proceed.

Thank you, Mary. Good morning and welcome to the Apogee Enterprises fiscal 2011 first quarter conference call on Wednesday, June 23, 2010. With us on the line today are Russ Huffer, Chairman and CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2011 first quarter results and the outlook for the remainder of fiscal 2011.

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. The statements are not guarantees of future performance and actual results may differ materially. Important risk and other important factors that the 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 February 27, 2010, and in our earnings release issued last night and filed on Form 8-K.

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

Good morning and welcome to our conference call. Fiscal 2011 has started out to be extremely challenging, as we had expected, due to the tough commercial construction market conditions. Our strategy of managing our business over a cycle has allowed us to establish a strong balance sheet with cash on hand which positions us well during these difficult markets. We are encouraged that employment and credit markets are starting to improve, and that we are beginning to see early signs of positive movement in some markets.

That said, our revenues of $143 million were down 21% compared to the prior year period, and we lost $0.13 per share in the quarter. Architectural segment revenues declined 24% comparable to the decreases in our markets served. The first quarter architectural segment operating loss of $8.6 million was the result of low pricing and low volume. We continue to focus on productivity improvements and we are pleased that manufacturing operations and installation project execution performed well during the quarter. Our architectural segment backlog ended at $214.9 million, compared to $227.5 million at the end of fiscal 2010 and $310 million in the prior year period. Bidding activity, which continues to be driven by institutional work, is starting to grow. We have visibility to a number of attractive potential projects. However, bid to award timing remains slow.

The institutional sector grew to almost 75% of our backlog, underscoring our success in winning stimulus and other government, education and healthcare projects. Our picture framing business grew revenues and operating income in weak retail markets as new and ongoing value-added product customers continued to convert to our best framing products. First quarter large scale optical revenues were up 18% compared to a very weak prior year quarter, while operating income grew 69% to $3.4 million.

Next I'll cover our outlook. As we've been stating since last Fall, fiscal 2011 will be very challenging for our architectural businesses. We are a late cycle commercial construction company and lag the overall market. We are continuing to expect that revenues will be down 10% to 15%. However, our earnings outlook has changed as we experienced lower than expected architectural glass pricing in the first quarter, which will likely continue further into fiscal 2011 than we had anticipated. We are now expecting a loss for the year for Apogee. Expected earnings in our large scale optical segment, which continues to outperform its markets, will be unable to offset architectural losses.

Neither our current outlook nor our reported results reflect the potential impact of architectural glass product quality issues resulting from a vendor supplied material. We learned early in June that Dow Corning, the silicon supplier for our architectural glass business, had received reports in the field of instances of insulating glass units with micro air bubbles in the secondary seal. These micro bubbles potentially affect the quality of the product. The quality concerns relate to the insulating glass seals that may have been fabricated as our three Viracon architectural glass facilities using certain lots of sealant. Our supplier, Dow Corning, has referred to this issue as intermittent and isolated and our review of suspect insulating units supports this. Our architectural glass business, Viracon, is the leading glass fabricator in the United States and has always taken quality very seriously. Our testing done to date indicates no safety issues due to the impacted silicon. We are addressing the quality issues with our customers and attempting to quantify the related costs.

During these difficult market conditions for commercial construction, we have focused on making our business as competitive as possible. We've reduced costs and are working continuously on productivity improvements. At this point we have decided to strategically maintain architectural capacity and people to respond to potential growth in fiscal 2012. Further capacity reductions would be structural, difficult, costly, and possibly slow to ramp up, but we will continue to monitor the market and evaluate this strategic decision. We are incurring an estimated $4 million to $6 million in annual costs to maintain this capacity.

Our architectural businesses have strong brands and operations that are well positioned to serve the aesthetic, energy efficient, hurricane and blast resistant glass requirements for commercial buildings. It's encouraging that we are seeing renewed interest in green building as our bidding activity starts to improve. During fiscal 2011, our architectural segment will be focused on continuing to penetrate underserved markets for smaller architectural glass projects and new installation project geographies, pursuing institutional sector stimulus projects, which are demanding the value-added products and services that we bring to the market. We are continuing to demonstrate our success with these complex projects. Maintaining our facility as a state-of-the-art, including excess capacity if we feel the recovery timing and opportunities support this decision. Maintaining and developing our key people, evaluating, upgrading facility and equipment capabilities that enable new products and productivity improvements as well as growth capital for the future. Since we have some attractive incentives primarily for architectural glass that may justify committing sooner than we otherwise would, and completing our analysis of international growth and expansion possibilities for architectural glass.

During this challenging year, we are willing to invest in projects that we believe present attractive long term opportunities to grow, gain share, and create shareholder value. We are confident that we have the financial strength to work our way through the expected ongoing weak market conditions and to remain focused on our growth strategies for the recovery. Jim will now comment on the financials. Jim?

Thanks, Russ. We expected that fiscal 2011 will be a difficult year, but the first quarter proved especially challenging. We reported a loss of $0.13 per share for the first quarter as low pricing, especially in architectural glass business and low volume in our architectural businesses overall impacted our results. Revenues were down 21%. There are though positives behind the architectural numbers in how our facilities and people operated in the first quarter. In addition, we believe we are gaining share in architectural glass. The large scale optical segment grew revenues and earnings as volume and mix of value-added picture framing glass and acrylic increased compared to a very weak prior year period. Our superior product attributes, which reduced fading and control reflection, are allowing us to continue to convert more customers to our value-added and best value-added products.

Architectural segment revenues were down 24% due to lower pricing in architectural glass and gaps in project timing in the installation and window businesses that continued from the fourth quarter. The architectural segment had an operating loss of $8.6 million, compared to income of $10.8 million in the prior year period. Impacting results were declining pricing which was lower than anticipated in our architectural glass business, with our decision to aggress every compete for smaller projects. As a result, architectural glass pricing was down as much as 20% year on year. Lower volume, in part due to the gaps in project timing for the installation and window businesses, also affected results.

Our architectural segment backlog of $214.9 million by market is the institutional sector, government, education and healthcare projects, is 70% to 75% of the backlog. Office 20% to 25% and the condo and hotel and entertainment sector each less than 5%. Approximately $160 million of the backlog, or 74%, is expected to be delivered in fiscal 2011 and approximately $55 million, or 26%, in fiscal 2012. With the increase in smaller project market penetration, we have seen some growth in the book and build business. Despite soft retail markets, our large scale optical segment revenues grew 18% to $16.7 million and operating income was up 69% to $3.4 million, as the volume and mix of our best value-added picture framing products increased compared to a very weak prior year quarter. The large scale optical operating margin was 20.2% compared to 14.0%.

Long term debt at the end of the fourth quarter(Sic-see press release) was $20.4 million, up from $8.4 million at the end of fiscal 2010. During the quarter, we closed on $12 million in long term, low interest recovery zone facility bonds. The $12 million is included in both first quarter long term debt and long term assets as restricted investments. These bonds are part of the stimulus package and were issued for our architectural glass facility in St George, Utah. We have three years to invest the dollars which we've primarily targeted for equipment to extend the energy efficient products offered at this facility to better serve the Southwest market, especially California where there are now more stringent energy codes.

Cash and short-term investments declined to $69.6 million, compared to $102.6 million at the end of fiscal 2010, largely due to seasonal working capital uses including annual payments for incentive compensation, retirement plans and taxes. Non-cash working capital, current assets excluding cash and short-term investments less current liabilities, was $46.3 million compared to $15.1 million at the end of fiscal 2010, and this is primarily due to the reduction in accruals. I'll turn to our outlook.

We continue to expect that our revenues will be down 10% to 15% in fiscal 2011. Due to the lower architectural glass pricing in the first quarter which we expect will continue through much of the year, we are now anticipating a loss for Apogee in fiscal 2011. The expected earnings in the large scale optical segment will be unable to offset losses in our architectural segment. We continue to expect that the second half will be stronger than the first half for Apogee with increased revenue and volume and slightly improved gross margins. As Russ said, neither our current outlook nor our reported results reflect the potential impact of the recent discovery of architectural glass product quality issues resulting from a vendor supplied material used in a portion of first quarter production. We are in the process of addressing the quality issues and attempting to quantify the related costs. We are projecting slightly negative free cash flow for fiscal 2011 based on maintenance capital expenditures of $10 million to $15 million. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

As we continue to focus on our longer term strategic initiatives to expand the breadth and capacity of our energy efficient architectural glass offerings in the US and internationally, along with the valuation of incentives we have available, we will consider additional strategic CapEx spending in fiscal 2011. One of the incentives is the $12 million in recovery zone bonds for future investments in our architectural glass facility in St George, Utah that I discussed earlier. We've also been awarded energy investment tax credits available the next three years for similar investments in better energy efficient product capabilities for our architectural glass facilities in Utah and Minnesota. We continue to evaluate our opportunities to expand our architectural glass business internationally. As Russ said, we are willing to invest if the timing is right for attractive long term opportunities.

Although we had a tough start to the year, we feel we may be beginning to see small positive signs in our architectural business as bidding hit rates and inbound order rates appear to be improving slightly. We remain focused on productivity improvements and managing our costs in an effort to somewhat offset the impact of declining revenues on earnings. We are focused on effectively managing through the slowdown and emerging stronger than ever when our markets rebound. We are well positioned financially, have leading products, services and brands, and remain focused on operational and strategic initiatives to strengthen our business for the rebound in our markets. Russ?

Thanks, Jim. Apogee is a cyclical company with the ability and position to create shareholder value over a cycle. We have a great business with leading products and services and we will grow profitably as we emerge from the trough. I am very proud of our employees and management team. They've been very proactive in managing costs and profitably gaining market share in this troubled economy. Apogee is in great shape to survive the downturn and thrive when markets recover. I'd like to now open it up for questions.

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

Good morning, gentlemen.

Good morning, Tom.

Good morning.

I was just wondering if you could provide a little insight into the gross margin outlook. It was down meaningfully year-over-year. What would be a fair representation going forward? You indicated some expectations for some improvement in the back of the year, but are we thinking around the 13% or 14% range this year or climbing back towards the 17% to 18% range?

I'd say we're going to see gradual improvement throughout the year. Q1 has a low point with probably slow improvement, but some gradual improvement in Q2 but a little bit more in Q3 and Q4.

Is that just reflective of the margin profile of the projects coming in and the under utilization in the factories?

Yes, exactly both of those points, a reflection of the pricing in the margins on projects in the backlog coming in, but also with some increased volume in the absorption associated with that.

Okay, I know you commented on the issue with Dow and the sealant. Are some of the costs you may incur, would you expect to get reimbursement for those?

Certainly those are things that are yet to be determined, but what you have to understand is that Dow has come out and identified the root cause of the issue within their facilities. Both companies right now are very focused and cooperating completely in terms of making sure that we have no safety issues, making sure our customers needs are met so that they can efficiently build their buildings and do what they need to do, and so we're really working hard in those areas and we will resolve these. Certainly we're very responsible companies and we will resolve these other issues when it's appropriate.

Just one last one. Jim do you have any -- you had called out on the fourth quarter call some details on the utilization rates. Do you have any updates through the first quarter?

I just have to find that in front of me. I think overall our actual utilization increased slightly in Q1 over Q4. I'm trying to find the number and it was really -- it was uneven during the quarter. March in and of itself was actually quite slow, the first month of the quarter and we actually got busier as the quarter went on, but I think it was about 52% roughly on average for our architectural manufacturing operations.

Great. Thanks, good luck for the year.

Thank you.

Thank you. Your next question comes from the line of Eric Stine from Northland Capital Markets.

Hi, everyone. Thanks for taking the questions.

Hi, Eric.

Good morning.

First thing I'd like to ask is just the -- you mentioned the seasonal working capital needs in the quarter. Can you go into a little more detail since you don't break that out in the release and should we expect that to somewhat normalize here going forward?

Yes, I think the change in working capital kind of roughly $30 million of it are annual payments associated with the key items that I mentioned which are incentive payments, retirement plan contributions, tax payment and then we have some annual premiums that we pay in the first quarter as well, and so those are kind of normal Q1 uses of cash.

Okay. All right that's helpful, and given that you talked about some of the capital investments you're thinking about, can you go into those? I would assume you're talking about a facility in Asia. You've talked about Brazil as being an area you're looking at. Is that something that you likely take on a little more debt for?

Yes, so as we prioritize the items that you mentioned and also the potential for equipment in our architectural glass business, and just I know we've talked about this before, but to clarify that those investments are really around increasing capabilities and capacity, and with the availability of certain incentives may make the timing of those investments more attractive now even though we don't necessarily need the capacity to service them, and the capability is primarily centered around increasing the product offering for the green building trend or energy efficient products, and so we could see that. And then as it relates to international, as you said, we would be willing to incur debt to pursue those initiatives. Depending on the timing of those, we may not need to do so, but we are prepared to do so if we are excited about the opportunities.

Okay, maybe I'll just turn to SG&A. You did a nice job in the quarter of kind of scaling that back in response to the business. Is that the level we should think about? Is that sustainable to an extent going forward?

It's slightly lower on an annualized basis. Q1 was just a little bit lower than you'd see as a normalized level.

Okay, so gradual increases but nothing in there that would mean we would see a big step up going forward?

No, probably the biggest variable is for example, commissions which are going to be revenue related, but not a step change, just a slight increase as we look forward.

Okay, and as far as revenues, the last two quarters you've had gaps in the installation business. Is that something that's a thing of the past or might still be an issue going forward?

The big question right now is as we look out into Q4, our ability to fill in where we have some openings there, which we still have time to do, and then we're always subject to kind of normal timing of construction projects. We have recently seen some delays and I'd be careful. They are just more kind of timing of projects. So the projects themselves are either underway and just the timeline has shifted out or projects that we've either been awarded or expect to be awarded, the start time of those projects has slipped out where some of the project may be moving from fiscal 2011 into fiscal 2012. So as we look out, right now I think we don't see big gaps like that other than Q4 which we still have some time to fill in.

Okay, and last question and I'll jump back into line. Just on the Dow Corning, the sealant issue, any thoughts on potential timing of when this could be wrapped up or dealt with? Also it sounds like you think that the scope has been substantially narrowed, but thoughts on timing would be helpful.

Yes, clearly, we have worked hard certainly to make sure that we stick to our priorities, making sure the product goes on the buildings is right, making sure our customers are serviced with good product. We really feel that that has substantially reduced the scope. We think that some time during the second quarter we should have our hands around this.

The uncertainty is the effort that it takes to make sure that we understand all the product that's in the field and that's what we're working on. And again, I also want to remind people that if you read the announcements from both companies, both Dow and Viracon, this is an isolated and rare occurrence. So it's not something that's common place, but yet it's serious enough that we're taking this very seriously and working on it. So to answer your question, probably some time during the second quarter that we should have our hands around the cost to completely mitigate the issue.

And I know it's two batches I believe is what is effected. Can you just give us a sense of is that two batches of how many are typically used in a quarter?

Okay, the quantity is more than two batches and unfortunately, you almost have to have a glossary because there are lots of batches sometimes that are the same, but what Dow has really done is identify a range of lots and a date time of those. A lot of that material was quarantined before it was ever used and so therefore, that reduces that quantity substantially and then you've got other uses for it and that reduces that quantities again and then you get down to the products that we need to really be focused on. So at this point in time, we know we've had thousands of units produced, hundreds of projects, but a very small percentage of this product is actually affected by the issue. So it's working through all of that that we still have to do.

Okay, that's helpful. Thanks a lot.

Thank you. Your next question comes from the line of Robert Kelly from Sidoti.

Good morning, Jim, Russ, how are you?

Good morning, Bob.

So the Dow Corning issue likely contained by mid fiscal year 2011?

Yes, we would agree with that.

Okay. Now you talked about some positives developing in your markets, bidding is picking up, inbound order rates rising. Where are you seeing that and what does the project mix look like there?

Well again, primarily the project mix is institutional. So it's government, hospital, schools, and that's the primary area. We do see signs, or again we see some initiative signs of other things. It still comes back to confidence. It still comes back to seeing a positive trend in employment. We think money will flow if we see demand rise. So the sources of funds has been a concern, we've talked about in previous quarters, that appears to be lesser of the issue today, more of the issue of confidence and watching the economy on a positive progression that we think will trigger these things to move forward.

Well institutional continues to dominate. We are seeing some, I'll call them glimmers, where we are seeing some private projects move forward that we're working on. We're starting to see some projects that were on hold, have work being done on them maybe not actually kind of out for award yet, but some isolated examples where we are seeing at least some movement but still pretty small in the private side of the business.

So in the release then in the prepared comments where you talk about the competitive pricing issues, is that on the institutional side of the business or more in the quick turn kind of fill in?

Yes, it's really not sector specific. It really has to do with the product type itself. So as we've been successful in gaining share in the smaller project part of the business, just a lot of smaller projects have less use of maybe proprietary coatings and things lake that, so more standard value-added products in the marketplace. So where we're seeing competition largely is where we're just going more head-to-head with less differentiation on the product side of things and being aggressive relative to the competition that's there.

So the majority of business you're winning in the quick turn is not using the highest value add projects like institutional? I'm just trying to figure -- to reconcile the gradual improvement you expect throughout the year and what you're seeing on the competitive pricing side.

Yes, so I think that's true that the smaller projects in general tend to useless value-added. Still they are still using kind of base energy efficient products, but not as much as the real high end or complex stuff because sometimes complexity has to do with really the design or architectural orientation of the building itself, but so the assumptions going forward is in terms of the improvements a little bit associated with mix, some of it in pricing where we are wherever we can working to try and increase pricing that we're offering in the marketplace. And then also as we see a little bit of volume growth, we see the benefit of the absorption from that.

Understood, and then in past quarterly calls you've talked about the state of the industry, how rational pricing has been. Has that stayed relatively rational here or gotten a little bit better on the pricing front as we move into Q2?

Yes, it stayed rational in our installation and manufacturing or window businesses, it's been more rational although there's been pressures there as well. The real pricing pressure came through the glass division as we were more aggressive in taking market share from markets that we typically didn't serve. So that's where you got a lot more pressure on the pricing side. That pain seems to have been felt now and we believe that there certainly has been some announcements and people moving prices in a positive direction and clearly, we're in support of that.

Have you seen any shake out in the industry on the glass side, competitors falling by the wayside?

Yes, we saw a major competitor go through Chapter 11. We've seen other competitors. Certainly we understand that there's pain out there pretty much across-the-board. So I think that as the duration takes longer then more rational heads start to prevail and I think that's what we're seeing.

Okay, thanks.

Thank you. Your next question comes from the line of Brent Thielman, DA Davidson.

Hi, good morning.

Good morning, Brent.

Yes, just a few wrap up questions here I guess. With respect to the institutional project work you've seen, any guess as to what portion of that is stimulus related versus sort of what you'd normally see out of the public sector?

Yes, that's a great question. Certainly there are specific projects that we can identify that are stimulus related because they're named Federal Government projects, but the Federal Government also through the stimulus bill provided a lot of funds to State and local governments and those funds in turn have helped them do some work as well. So it's not as clear that those projects come through that, but we understand that that's part of it. So I think that these are -- this source of funds has been important and will continue to be important and there is a lot of money unspent in this area. So we believe that this will continue for certainly for the next few quarters.

Sure, and then with respect to your outlook, in terms of the improvement in the second half, do you see that improvement even across both segments, because I think typically your LSO business tends to have a pretty good Q3. Do you see the same trends in terms of that improvement in the second half in the architectural business as well?

Yes.

Okay, and then just lastly on the LSO business, is this 20% plus operating margin sustainable going forward?

Yes, we believe 20 plus percent operating margin is sustainable in that business.

Okay, thanks a lot.

Yes.

Thank you. Your next question comes from the line of Eric Prouty, Canaccord.

Great, thanks, good morning.

Good morning.

First just a question on your raw material inputs. Are you seeing any pricing pressure especially from the float glass guys and if so have you been able to pass that along or is that impacting your margin currently?

There was a recent price increase that came for specialty type glasses and that's actually the easiest thing for us to pass along. Traditionally that's something we've been able to put into quotes and to move along. So I think that's a real positive, even though it had some sort of limitations to it that certainly is a statement that the industry is feeling the pain and they need to move this forward. Those are the easier ones for us, but again, those are the easier ones for us to pass along. I don't believe we will get that squeezed by those changes.

To this point, Eric, there hasn't been a glass cost impact on our margin, and as Russ said, going forward as we do see select increases from the suppliers, we believe we'll be able to pass that along. Our other key raw material input is aluminum and even though aluminum has come down this year, it's still quite a bit higher than a year ago and the market traditionally has seen pricing move more in step with aluminum costs and this year, we've seen a bit more pressure on the margins on the aluminum side of things, whereas we've seen higher costs relative to a year ago, the pricing hasn't reflected it to the same level.

Sure, okay, great. And then I guess kind of asking a question that's been asked before, but in a little bit different way, all to do with the back half of the year expectations. Meaning you -- the projects that you are booking into backlog right now that are going to rollout the back half of the year early next year, are you booking these at kind of a little bit higher margin than what's rolling out of backlog now? Will you kind of have visibility or are you expecting a margin pick up more from higher utilization rates than actually higher priced margin business?

Eric, I would kind of rank it as capacity utilization being the primary driver of improvements with slight improvements in pricing their margins.

Okay, so can you, obviously it's still a choppy market, but can you say that what your -- you've probably seen the lowest as far as business you're booking in the margin that you're booking it at, does that seem to bottom out where you're now booking into backlogs slightly higher margin projects?

Yes, we are still -- yes, I believe that's true, but let me give you a slight caveat. There still would be some awards, some work that's coming in that would have been six months ago that would still be coming into lower levels, but we're not bidding at those levels any longer.

Okay, good. So what you have in backlog now starts rolling into revenue, we should start seeing this margin gradually raise off the bottom here as booked business gets executed into revenue.

That would be true, but the bigger impact is going to be fiscal 2012.

Right.

Yes, okay. That's fair and then finally from a cash standpoint, you've mentioned a few projects that you might look to use cash with, but is uses of cash with acquisition and buyback off the table or are both or one of those still under consideration?

Those remain available options to us.

Okay, great, and then finally again, just to I guess get a little bit more of an answer off of a previously asked question, from an end market standpoint where you are seeing glimmers of hope, are these one off projects, are you seeing any geographic strength or is it just kind of across-the-board a little bit more activity than you've seen before?

I think it's more across-the-board. The mentality even in the better markets, even in the DC market or even some other locations where markets were better, once the general marketplace got into this price, driving the price down, it really took place across-the-board. So even in your better markets and a lot of times that was facilitated by people coming into the good markets from outside markets that were very poor. So you had some of that taking place this Winter, especially this Winter. Now as things start to improve, we expect that to start to change again, but are there better areas geographics? Sure there are, but when people start traveling and throwing out some crazy prices then even those areas got effected by it.

Sure, that makes sense and then just finally, retrofit, it's always been an attractive market. Are you seeing more activity there or is that still a tough sell?

We're seeing some activity in those areas, especially in the government side. So I would say it's picked up from that side more so. I think -- but I do agree with you that the retrofit will come into play as we go forward because as green becomes important and people are looking at their buildings and the competitiveness of their buildings in the marketplace, I think that green and retrofit will become more important, but I don't think that we're going to see -- we'll see that in the institutional side, current fiscal year into next year, I think it will be past that late next year and into the future before we see it in the non-institutional side of the business.

Sure, that's fair. Great. Thanks a lot.

You bet.

Thank you. (Operator Instructions) Your next question comes from the line of Brent Thielman, DA Davidson.

Hi, just a quick follow-up. I guess sort of stepping away from your end markets for a second. Are there any developments, be it adoption of new building codes or other sort of increased standards we should be looking for that might have a material impact on your business?

There certainly is an energy bill in Congress right now that we've been very active in trying to influence the outcome of that bill, and it has not been finalized and it's not out, but our objective would be to have the government promote and support through credits, energy credits, high performance window, glass and glazing products and so that would be probably the most important piece that we've seen. We've seen some local things, especially in California and Texas that have been favorable to us in those local markets and we've positioned new products or existing products that are favorable for those markets to our sales and marketing people to make sure they take full advantage of those, but I would say the meaningful one is yet to come and there's uncertainty whether it will or will not come through.

Sure, and are you tracking or following other states that are sort of pushing through similar initiatives like California?

Yes, California and Texas seem to be the leaders. I think the other states seem to be more in line and waiting for what the Federal Government does.

Okay, thanks for the update.

You bet.

Thank you. Your next question come from the line of Drew Wilson from Wellspring.

Good morning.

Good morning.

Thanks for taking the questions. I've got a couple for you. You touched on how you have been successful in increasing your presence in some smaller projects. How should I think about in terms of the business volume that you're running through your platform now, how much of that is the smaller projects versus your legacy larger stuff? How has that changed?

We're digging for that information. We know that it is substantial. It is material to our overall business, so --

We'll try and find the right number here, but I think historically, the small project part of the business, particularly in our architectural glass business was I'm going to say maybe 25% to 30% of the volume that we run through the business and today is probably in the 50% to 60% kind of volume, maybe 40% to 60% depending on the specific timing, but pretty material change.

That makes sense and you mentioned from your comments it sounds like that's where much of the pricing pressure has been. When we look at the other side of your business, what I perceive to be kind of the legacy stuff, the larger projects, have we seen pricing changes there as well or is it just, is it isolated on the smaller side?

No, we certainly are seeing pricing pressures across-the-board and I can sort of give you a sound bite to describe that. Basically, you have more people bidding work today than ever before. So people have to go further, bid more work to try to win work to do that and as a result of that, instead of having two or three bids on a job there might be seven to 10 and inevitably one of those prices is out of line low and usually people are smart enough to know not to use that number, but then they use that number to aggressively go after price reductions from everybody else.

So this is just a phenomenon that happens at the trough of the business. It's not something we haven't seen before. It does start to self-correct, but that's why certainly we don't compromise on -- aggressively compromise on products where we feel we have a proprietary position or there's some advantage that we can use to hold specifications. So it's just part of the process we go through today.

Just one clarification or addition to that though is that the size of the project doesn't by definition really kind of characterize it because strategically, we've looked at further penetrating in the smaller project market, but really focused on the smaller project market that is looking for higher value-added kind of more proprietary product associated with it. The reality in today's marketplace is that with price as a key driver even smaller projects there's this view of where they are looking for that higher value-added product, but in the major project differentiated, even though there is some pricing pressure we are able to command better pricing and even much of the price decrease able to offset through productivity and cost reductions.

That makes sense and just to make sure I'm thinking about it correctly, your typical smaller project would be one to two story office building or a strip retail center or something of that nature?

Two to four story building would be the real -- not so much strip. We really are probably not into that unless it's part of a bigger building, but that's sort of the beginning spot for us.

Thank you, and then one last question and again thanks for sharing your time, but so I was looking at the ABI data that came out last night, the architectural billing data and I guess the overall number stepped down a couple of points, but what stood out to me is that the commercial and industrial piece actually moved over 50. It actually -- it continued its upward trend and broke into the growth area. You touched earlier on the fact that you're seeing some projects that are on hold, be discussed, or worked on. I know that's just the ABI just one data point, but does that reflect the kind of thing that you're seeing in your world and if so, I'd love to hear more about that.

Yes, I think probably more anecdotally unfortunately, but we feel like that does reflect it because, as we said, we're seeing instances where maybe the project isn't full steam ahead but there's activity. So somebody is spending money with the architects and activity is being rejuvenated if you will on a number of projects. So that's kind of one data point also that we look at that somewhat attracts what we're seeing in the market.

Right.

Well thank you for taking my questions. I appreciate it.

You're welcome.

Thank you. Your next question comes from the line of Robert Kelly, Sidoti.

Hi. Just one question. The confidence that you have that things get better in the second half of the year, is that partially stemming from the fact that you're seeing more bidding activity or the fact that the bidding activity is actually turning into projects being awarded?

Yes, I would say we feel good about the second half of the year, but there's risk associated with it because there's some of it that's projects being awarded and some of it that's bidding, that probably the primary caution that we have is even where we are seeing some good data points, there's a little bit of concern about the timing of these projects and if the projects will still flow in fiscal 2011 or slide out into fiscal 2012.

Yes, so I don't know if you have this type of number at your discretion, a percent of bid that turned into an award maybe historically and what it looks like now for you?

We do track that and I'll go back to an earlier statement that I made is that we as well are bidding more projects today than we would have in the past, just like everybody else is. So you got a numerator and a denominator to get to your hit rates. When you start bidding more activities and you're still winning sort of the normal or maybe a few more, but you're inviting more competition, that equation goes down. It just simply goes down. That doesn't mean that's bad necessarily, but I would tell you that the trend has gone in what we would say is not a good direction, but it's because of the way that everyone is reacting to these soft conditions.

Right, okay, thanks.

Yes.

Thank you. Your next question comes from the line of Gentry Klein, Cedrus Capital.

Hi, thanks for taking the question. I think most of mine have been answered. I just had one question relating to a break out of revenues or operating income, at least in a normalized environment in terms of the installation business of Harmon versus the fabrication business. Just want to get a sense as to what the magnitude is on the installation side.

We don't break out the components of our segments. Harmon is our second largest business in the architectural segment and it's a business that probably has been the strongest over the past maybe 18 months in terms of the operating margin contribution as they had a bit of a longer kind of time period if you will associated with projects that they bid in the flow through of those projects, as well as they have probably the lowest fixed cost structure really being a people business. So capacity utilization if you will doesn't have the same effect in that business.

Got it, thank you.

Okay. All right, well thank you very much for your questions this morning. Certainly, we remain very positive about our position in our marketplace and our future and again we look forward to speaking to you in the future.

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