Apogee Enterprises Inc (APOG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter fiscal 2011 Apogee Enterprises' conference call. My name is Keisha and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct 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 hand the call over to Ms. Mary Ann Jackson. Please proceed.

Thank you Keisha. Good morning and welcome to the Apogee Enterprises' fiscal 2011 second quarter conference call on Thursday, September 16, 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 second 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.

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 February 27, 2010, and in our earnings release issued last night, filed on Form 8-K. Russ will now give you a brief overview of the results and then Jim will cover the financials. After they conclude, Russ and Jim will answer your questions. Russ?

Good morning and welcome to our conference call. Apogee's second quarter was essentially a repeat of the first quarter. Commercial construction market conditions continued to be extremely challenging, impacting our architectural volumes and pressuring pricing and margins, with the result being an earnings per share from continuing operations loss for the second quarter. We maintained our cash and short-term investment level as we generated a small amount of free cash flow in the quarter. And although backlog declined, we continue to book new orders and have a high level of pending awards to sign.

Apogee's second quarter revenues of $145 million were down 23% compared to the prior year period, and we lost $0.18 per share from continuing operations. With lower volume and pricing, Architectural segment revenues declined 25%, which was comparable to the decreases in our markets served. The first quarter Architectural segment operating loss was largely the result of low pricing in the architectural glass business, lower project margins, and lower volumes throughout the segment. We got very aggressive with architectural glass pricing to win projects and market share in both domestic and international markets. Candidly, in some cases, we reduced pricing too far which we have since adjusted.

Architectural segment results included the costs associated with the architectural glass quality issues that we identified in our first quarter release. We are pleased with the performance of our manufacturing operations and installation project execution during the quarter. It feels as though our markets and business are bouncing along the bottom of the cycle. Although our second quarter architectural backlog declined compared to the first quarter, we had more than $50 million of work that has been awarded to us that is awaiting contract signing before being added to backlog.

This is at least double the level normally awaiting contract signing. Most of these projects will impact fiscal 2012. Our picture framing business grew revenues slightly, and maintained a strong operating margin in weak retail market conditions as new and ongoing value-added product customers continued to convert to our best framing products. Second quarter Large-Scale Optical revenues were up 3%, while operating income grew 19% to $4.2 million.

Next, I'll cover our outlook. Fiscal 2011 will continue to be very challenging for our architectural businesses, given tough commercial construction conditions and the fact that Apogee is a late cycle Company and lags the overall market. The large project market that is core to our businesses has virtually disappeared. Our fiscal 2012 outlook is more positive with a forecasted start of a market recovery. Along with this, we expect that recent architectural glass price increases will allow us to return to profitability for the full fiscal year. I am encouraged that the recent architectural glass price increases are holding in the majority of new work.

While we have seen some growth in employment, we believe we will need to see further growth in employment to support our outlook for market recovery. Fiscal -- for fiscal 2011, we expect that Company-wide revenues will be down approximately 15%. We anticipate a loss for the second half of the year as expected earnings in our Large-Scale Optical segment which continues to outperform its markets will be unable to offset architectural losses. Our current outlook takes into account the architectural glass product quality issues resulting from a vendor-supplied material.

During these difficult market conditions for commercial construction, we have focused on making our architectural business as competitive as possible and are working to position the business to thrive when the market turns by executing on the following -- working continuously on productivity improvements and increasing pricing where possible, maintaining our facilities as state-of-the-art with some excess architectural capacity and people to respond to anticipated fiscal 2012 market growth, maintaining and developing our key people, developing new energy efficient products for the green building market where we are seeing some renewed interest, and completing our analysis of long-term 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 believe we have the financial strength to work our way through the ongoing weak market conditions, and to remain focused on our growth strategies for the recovery. Our architectural businesses have strong brands and operations to serve the aesthetic energy efficient, hurricane and blast resistant glass requirements for commercial builders. Jim will now comment on the financials. Jim?

Thanks, Russ. The first two quarters have proved challenging, largely as expected. Our second quarter loss from continuing operations was $0.18 per share primarily due to low pricing in our architectural glass business and low capacity utilization across our Architectural segment. Overall, Apogee revenues were down 23%. Net results per share for the quarter were breakeven. Our continuing operations loss was offset by discontinued operations' non-cash earnings of $0.18 per share in the current period. During the quarter, we finally reached resolution of an outstanding exposure related to a foreign operation we discontinued in 1998, allowing us to release the associated reserve.

Architectural segment revenues were down 25%, as architectural business volume and pricing, especially in architectural glass decreased. The Architectural segment had an operating loss of $10.8 million, compared to income of $14.9 million in the prior year period. Impacting results were low pricing in architectural glass and lower project margins and lower volumes segment wide. In hindsight, in some cases our architectural glass business became too aggressive on price to win work and share in the export and smaller project markets.

Also, Architectural segment results included approximately $2 million in expenses, or about $0.05 per share, to address the architectural glass quality issues due to a vendor-supplied material. This expense was primarily in cost of goods sold. It should be noted that the prior year quarter was especially strong, benefiting from a large percentage of work bid in stronger markets with better margins and higher capacity utilization. Our second quarter architectural backlog at $193 million declined 10% from the first quarter. At the end of each quarter, we generally have some amount of work that has been awarded to us that is awaiting contract signing before being added to backlog.

At the end of the second quarter, there was significantly more than normal. It was approximately $30 million to $40 million higher than the average awarded but not yet signed level of $10 million to $20 million. We don't normally call this out but we felt that the amount of pending awards was significant enough to comment on. Our Architectural segment backlog of $193 million by market is the institutional sector, government, education and healthcare projects, is 70% to 75% of the backlog. Office is approximately 20%, and condos and hotel/entertainment are each less than 5%. Approximately $124 million or 65% of the backlog is expected to be delivered in fiscal 2011, and approximately $68 million or 35% in fiscal 2012.

We continue to have higher levels of book and bill revenue within the quarter as we serve smaller projects and have capacity to provide shorter lead times. Second quarter capacity utilization in our Architectural segment averaged approximately 51%. This compares to capacity utilization of 60% in the prior year period. The current segment capacity utilization is lower than it was at the last trough which was roughly 60%. Despite somewhat soft retail markets, our Large-Scale Optical segment revenues grew 3% to $17.4 million, and operating income was up 10% to $4.2 million, as the volume and mix of our best value-added picture framing products increased compared to the prior year period. The Large-Scale Optical operating margin remains strong at 24.4%, compared to 22.9% in the fiscal 2010 second quarter.

Long-term debt at the end of the second quarter was $20.4 million, the same level as the first quarter debt. The long-term debt is industrial revenue bonds as well as $12 million in long-term low interest recovery zone facility bonds received in the first quarter, which is included in both second quarter long-term debt and long-term assets. Cash and short-term investments totaled $69.4 million compared to $69.6 million at the end of the first quarter, and $102.6 million at the end of fiscal 2010.

We had slight positive free cash flow in the quarter. Just a reminder, our first quarter use of cash was largely to fund seasonal working capital needs. We define free cash flow as net cash flow provided by operating activities, minus capital expenditures. Non-cash working capital was $45.2 million, compared to $15.1 million at the end of fiscal 2010, and $48.5 million in the prior year period. We define non-cash working capital as current assets excluding cash and short-term investments, less current liabilities.

I'll turn to our outlook. We expect that our fiscal 2011 revenues will be down approximately 15% in fiscal 2011. Due to the lower architectural glass pricing which we expect will continue through much of the year, and lower architectural volume, we're expecting a loss for Apogee in the second half of fiscal 2011. The expected earnings in the Large-Scale Optical segment will be unable to offset losses in our Architectural segment. We're expecting to see the start of improvement in commercial construction in fiscal 2012. Combined with the impact of the recent architectural glass price increases, we're expecting to return to profitability for the full year in fiscal 2012.

Our fiscal 2011 outlook includes the $2 million in expense recorded in the second quarter for the architectural glass product quality issues resulting from a vendor-supplied material. We continue to quantify any additional impact which we don't expect will be material. We expect to have neutral free cash flow for the second half of the year based on full year maintenance capital expenditures of $10 million to $15 million. 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 evaluation of incentives we have available, we will consider additional strategic investments if the timing is right for attractive long-term opportunities.

We have energy investment tax credits available the next three years for future investments in better energy efficient product capabilities for our architectural glass facilities in Utah and Minnesota. And we continue to evaluate our opportunities to expand our architectural glass business internationally. We're focused on managing through the slowdown and emerging stronger than ever when our markets rebound. We're well-positioned financially, have leading products and services and brands and remain focused on operational and strategic initiatives to strengthen our business for the rebound in our markets. Russ?

Thanks Jim. I'm very proud of our employees and management team. In this troubled economy, they have been very proactive in managing costs, profitably gaining market share, and developing new energy efficient products. Apogee is in great shape to survive the downturn and thrive when markets recover. I'd like to now go ahead and open the call for questions.

(Operator Instructions) Your first question comes from the line of Tom Hayes with Piper Jaffray. Please proceed.

Great. Good morning, Russ. Good morning, Jim.

Good morning.

I was just wondering, first on the price increase, could you just maybe provide a little color on when you implemented it, maybe some idea on the size of the increase and was it across all the segments?

The price increases were taking place pretty much throughout the second quarter. It began earlier in the quarter and we do expect that these levels that we're seeing and starting to see hold, give us and encourage us to see us return to a profitable nature in that business. You've got to remember that it takes about six months for these to work their way through to the bottom line.

I mean, were they generally single digit price increases? Double-digit roughly?

I'd say cumulatively, Tom, we expect to see as we get throughout the years to hopefully get to low double-digit price increases. It varies by product and by project but continuing to roll these out selectively and as Russ said, we hope to start to see the impact of some of that in our Q4 but it's primarily going to be a fiscal 2012 impact.

I guess that leads into my next question. As things started to get a little weak over the last year or so, probably took us three or four quarters for the earnings to fully reflect the lower project cost environment and your comments earlier today, it sounds like that environments going to stick around for the next couple quarters. So I'm just wondering, to your comments of returning to a full year profitability next year, it's -- I know you're not providing full 2012 guidance but your thoughts on top line growth or is it going to be a margin expansion off the 12.4% this quarter?

I would say it's going to be more of a margin expansion.

Okay. I mean, does that mean roughly you can get back to the -- we talked last conference call, getting back to that 14%, 15% range. Is that still reasonable?

Relative to what, Tom, 14%, 15%?

[15%] gross margin for the full year for next year.

That seems reasonable.

Okay. Thank you.

Your next question comes from the line of Eric Glover with Canaccord. Please proceed.

Hi. Good morning.

Good morning.

I was wondering if you could talk a little about these new project awards, is this new construction awards or is it more retrofit activity and what market segments seem to be most active in the bidding here?

Yes, retrofit has increased to a higher percentage, primarily driven by stimulus projects, and the most recent ones is pretty much an across-the-board look at things. So it's not -- more in the, I would say, the traditional market that we served is probably where they're strongest.

Okay. And then I was just wondering if you could provide some more color on the bid to award timing? Is it improving at all? You mentioned over the past few quarters that it's been pretty slow.

It's continued to be that way. We've not seen -- we're still seeing a lot of bid activity and we're encouraged by that activity, but the rate at which it turns into orders has still remained relatively slow. We haven't -- I don't know if we could say it's changed materially.

Okay. Great. Thanks.

Your next question comes from the line of Eric Stine with Northland Capital Markets. Please proceed.

Good morning, thanks for taking the questions.

Good morning.

Maybe we could just go back to margins, it looks like without the charge that you took in the quarter, there was a slight sequential improvement. I mean, any thoughts on whether we can think about your previous quarter, the first quarter being the bottom potentially on the gross margin line?

That's our expectation.

Okay. And then when you talked about the aggressive pricing which maybe went a little bit too far. I mean, should the read-through be that near term, a more normalized margin in the 13% to 14% range is probably a decent way to think about it as that works its way through and then you've got the price increases?

That's right.

Okay. And then just to clarify your answer to a previous question, when you were talking about 14% to 15% gross margin, was that thinking about back half of this year or were you referring to 2012?

I think that's probably the back half of this year.

Okay. Okay, that's helpful. And maybe just turning to your outlook for fiscal year 2012. I mean, anything that you're seeing specific to your business aside from the price increases, which have held. In the past you've talked about slight improvement in close rates and that you saw some private projects starting to move. I mean, has anything noticeably improved in those two areas?

It certainly has not gotten worse. I would say that if anything, we feel that there's opportunity there and we're optimistic about that opportunity. Coming off of low points, these things feel -- do give you a positive feeling for the future.

Okay. And then I mean, as far as linearity of revenues, it would seem the best way to think about it would be the back half of 2012 is where we start to see things picking up, at least on the top line?

We would agree with that.

Yes.

Okay. Thank you very much.

Your next question comes from the line of Brent Thielman with D.A. Davidson & Co. Please proceed.

Hi, good morning.

Good morning.

Morning.

Yes, just a clarification. You mentioned good execution out of the manufacturing and installation businesses. Were those profitable for you in the second quarter and it's the glass business that's been the primary drag?

Glass business has been the primary drag.

Okay. And then just on the LSO segment, I mean, sales were up from last year but maybe at a little bit more modest pace than what we've seen in previous quarters. Is there anything in particular that you saw changed during the quarter that might have influenced that or is it simply just tougher comparisons compared to last year as we start to see that business start to grow again?

Yes, I mean, definitely there's a little bit of comparison, second quarter last year is quite a bit stronger than the first quarter last year. So other than that, really nothing significant in the difference.

Okay. Thanks, guys.

Thank you.

(Operator Instructions) Your next question comes from the line of Robert Kelly with Sidoti & Company. Please proceed.

Good morning, Russ. Good morning, Jim.

Good morning.

Good morning.

Question on the market where pricing got a little too low, the small scale export. What percent of architectural was that business in 2Q?

Of the total architectural, I mean, export was less than 10% and it's probably 20% for the small project, roughly.

So that 30% of your revenue right now is small scale export where the pricing is really depressed?

Yes.

Okay. And now is the pricing -- I mean, it's down in the remainder of the business and are you taking action to raise prices there as well?

Yes, we are. We're raising prices across the board.

But that other 70% --

Excuse me. Across the board in the architectural glass business.

So was that business as predatory as the smaller scales -- as intense as the smaller scale business or less intense? Just trying to get a sense.

Less intense.

Okay. Great. Now, as far as the new awards that you have planned to hit backlog for fiscal 2012, does that business reflect the price increases that you instituted?

That business is across the board. That's all businesses and because the lead times are longer for our installation and window business, that reflects more their backlog than it does the architectural glass.

But --

So of the backlog that we currently have for fiscal 2012, the majority of that was bid under the tougher pricing or project margin environment.

But the projects that you're bidding now or being awarded now have a little bit of lift in the price?

Well, remember, for most of our work, projects that we're being awarded now we've been working on for several months and would have bid them several months ago.

Okay. So the expectation is that bids from here, maybe today, forward will include the price increase?

Last couple months.

Okay. Got you. Thanks, guys.

Your next question comes from the line of Jim Brilliant with Century Management. Please proceed.

Hi, guys. Can you hear me?

Yes, you bet, Jim.

Along the lines of the pricing and the backlog to follow up on some of the last caller's questions, when did you put the price increases in place?

They started in June and July. We've done more than one.

June and July. Okay. So of the backlog, there isn't too much right now that has these new price increases in it. Could you quantify how much, roughly?

You're correct, there's not very much right now.

Okay. And then on the part that was too aggressive, when were those bid?

Last winter.

Okay. So and is there some more in the backlog that were even worse pricing than those?

I would say the worst is behind us.

The worst is behind us.

Right.

Okay. And then on to 2012, in your outlook you talked about -- I guess I'm trying to get an idea of what your -- what the implied expectations are with regards to the recovery in the commercial markets? So what are you looking at in terms of commercial starts and specifically, I guess the impact on your mix of business, because that's really the key to improving your margins is going to be an improvement in your mix?

Right.

What's the implications on your -- or what are you thinking of in terms of the outlook for 2012 with regards to mix?

The McGraw-Hill data, and we've always talked about that, we believe that it's directionally correct and it's certainly subject to changes. But because we lag it and we're now at a point where our lag to the most recent data would be affecting our fiscal 2012, the most recent McGraw-Hill is an 8% increase through this time period. So that 8% increase would be reflected in our fiscal 2012 numbers. So that's the primary data point. That, as we also feel and we see enough work being bid or committed or being worked on that it seems to support that action. So it's not -- it's that, plus this activity that encourages us for the future. Now, still a lot can happen between now and then, especially in terms of the timing of the way things are awarded. That would be the -- but even if it's just with this longer duration which we've seen, these two factors would indicate and support this fiscal 2012 optimism that we've given you.

Just a couple other points. So you're right about mix but also we look at mix, not just by segment, but really by type of project and so part of the assumption is we are seeing some attractive institutional non-government projects that have either more complexity or high characteristics of green building or energy efficiency associated with it. And we're still seeing not a trend but more isolated examples of office projects coming back to market. So we are seeing a little bit of activity that allows us to have our outlook that, as we get into fiscal 2012 we'll see some recovery in that part of the business.

Okay. And I guess the last thing I have, back to the backlog, how much business was awarded due to your aggressiveness in terms of price that if you would have held price you may not have gotten?

It appears that -- and again, this is pretty much in the glass division, not the whole architectural division.

Right.

It appears that we could have reduced it by about 10%.

What would that mean in terms of dollars?

Maybe $10 million to $20 million for the first half, maybe $10 million.

Okay. And --

We lost you.

I do apologize. We lost Jim's line. Just one second. Jim, you may go ahead again.

Yes, I'm sorry. Did you comment on what you expected the free cash flow levels to be in the second half of the year?

Yes, we expect it to be neutral, basically zero, but free cash flow for the second half of the year.

And that's defined as earnings plus depreciation, minus CapEx. It's not a working capital reduction number?

It does have working capital. It's our cash from operating activities less CapEx.

Okay. And what's the expectation from a working capital standpoint?

Should be -- it shouldn't change too much.

Okay. Thanks. That will do it for me.

There are no further questions in queue at this time. I would now like to turn the call back over to Mr. Russ Huffer for any closing remarks.

All right, thank you. We certainly appreciate the time you spent with us this morning and hopefully, we've been able to answer all your questions. We certainly are in great shape to weather this storm and we're committed to doing that for you. I am very proud of our employees and management team. This is a troubled economy and we've been very proactive in managing our costs, going after market share and developing new products, especially new energy efficient products and we are in good shape to survive. So thank you very much.

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