Apogee Enterprises Inc (APOG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Apogee Enterprises results conference call.

My name is Keisha and I'll 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 conference over to Ms. Mary Ann Jackson. Please proceed.

Thank you, Keisha, good morning and welcome to the Apogee Enterprises fiscal 2011 third quarter conference call on Thursday, December 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 third quarter results and the outlook for the remainder of fiscal 2011 and moving into fiscal 2012.

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 our Earnings Release issued last night and filed 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?

Thank you, Mary Ann. Good morning and welcome to our conference call.

Apogee's third quarter performance was similar to the first half trend. Commercial construction market conditions are still extremely challenging, impacting our architectural volumes.

In the midst of market challenges, we remain focused on our strategies and longer term opportunities for Apogee.

Our purchase of a leading architectural glass fabricator in Brazil, during the third quarter, gives Apogee entree to the large developing market for energy efficient architectural glass products in Latin America.

We are also gaining share in institutional markets and introducing new energy efficient products. Despite having a difficult quarter, we remain -- we maintained a strong balance sheet with more than $45 million in cash and short-term investments after funding the acquisition.

Apogee's third quarter revenues of $147.2 million were down 18% compared to the prior year period, and we lost $0.08 per share. With lower volume and pricing, architectural segment revenues declined 21%.

The third quarter architectural segment operating loss was largely the result of low pricing in the architectural glass business as well as lower volumes for the segment.

It feels as though our markets and business are bouncing along the bottom of the cycle. Although our third quarter architectural backlog declined, compared to the second quarter, we have more than $80 million of work that has been awarded to us that is awaiting final signed contracts before being added to backlog. This is three times the level normally awaiting final signed contracts.

With more complex projects, we're finding that the general contractors in our installation business, are spending more time upfront to confirm field requirements and costs.

Our picture framing business maintained revenues and strong operating income, and our seasonally adjusted -- seasonally strongest quarter as customers continued to utilize our best value added framing products.

Despite soft retail market conditions, third quarter large-scale optical revenues were flat at $21.5 million, and operating income also was flat at $7.4 million.

Before moving on to outlook for our business, I'd like to provide some color on our purchase of Glassec, the leading architectural glass fabricator in Brazil.

It has been rebranded Glassec Viracon to introduce the Viracon brand in Brazil and will be reported with our Viracon architectural glass business as part of the Apogee architectural segment.

It has a market strategy similar to that of Viracon, and focuses on servicing complex commercial building projects with high quality energy efficient architectural glass. Glassec Viracon has provided glass for a number of high profile projects in Brazil.

The purchase is part of our strategy to increase our architectural glass penetration in international markets.

Brazil is an attractive market for our first fabrication initiative outside the United States. Brazil is growing fast and expected to be the fifth largest economy in the world within 10 years.

In the near term, we anticipate commercial construction opportunities with office vacancy rates of 5%, and lower in the major cities, and substantial infrastructure development needed for the soccer World Cup in 2014, and the Olympic Games in 2016.

Duties have previously made this a cost prohibitive market for Viracon to serve from the United States.

We understand that the line may be cracking. Can we have some comments on how well this is coming across?

You're coming in clear now.

All right. Thank you very much.

You're welcome.

In addition, Brazil is one of the strongest markets in the world for a number of tall greater than 10 story commercial buildings being built.

The commercial glass fabrication market is estimated to be $300 million to $400 million US dollars in size and is converting to high performance products.

In comparison, the US commercial glass fabrication is approximately $1 billion in size.

Although Brazil has primarily been a tinted laminated glass market, low-E energy efficient glass is gaining acceptance and float companies have been investing in local, post temperable coaters. Insulated glass is currently being used in Class A buildings and architects are converting to curtain wall.

We have been asked about synergies for Viracon and Glassec Viracon. The synergies are not centered on cost cutting, but instead on driving growth to generate significant additional long-term value from the purchase.

Synergies we anticipate, include helping move the Brazilian and Latin American markets toward insulating and energy efficient glass and introducing Viracon higher energy efficient coatings in these markets.

In addition, by fabricating in Brazil, we'll be positioned to expand our penetration in such countries as Argentina and Chile, where we have historically done a limited amount of business.

We are excited about the possibilities this acquisition offers for Apogee and also pleased that the management team is remaining with the business to lead it to new levels of performance and growth.

Next I'll cover our outlook. We estimate that Company-wide revenues for fiscal 2011 will be down approximately 17%, with fourth quarter revenues comparable to the prior year period.

We anticipate a loss for the fourth quarter and fiscal 2011 as expected, earnings in our large-scale optical segment will be unable to offset architectural segment losses.

We expect the fourth quarter to be challenging. We anticipate tough pricing in architectural glass on volumes that are expected to be down from the third quarter.

Looking to fiscal 2012, we are expecting to be profitable for the year as architectural glass price increases should begin to flow through early in the year.

However, because Apogee is a very late cycle Company that lags commercial construction markets by several months, we don't anticipate much help from our markets which are not expected to show significant improvement for our fiscal 2012.

The McGraw-Hill Construction expects a further decline in nonresidential construction activity next year. The American Institute of Architects Architectural billing index has shown one month of positive demand for design services in almost three years. Office vacancy rates reported by CB Richard Ellis have yet to consistently decline.

We need to see growth in employment in order for office vacancies to decline and demand for new buildings to increase. Although our markets remain challenging, we continue to book new orders for fiscal 2012 and beyond.

As I noted earlier, even though our reported backlog declined in the third quarter, the total of our backlog along with the dollar value of awarded projects awaiting final signed contracts before being added to the backlog, held steady compared to the second quarter.

During these difficult market conditions for commercial construction, we are working to position our architectural business to thrive when the market turns by executing on the following.

We're working on increasing pricing and productivity where possible.

We're maintaining our facilities at state of the art, with some excess architectural capacity and people to be poised for rapid growth when markets improve.

We're maintaining and developing our key people.

We're developing new energy efficient products for the green building market where we are seeing some renewed interest. A recent report from Ducker confirms our expectation that use of coated glass, which is primarily energy efficient products, is growing. Use of coated glass grew to 57% in 2009, from 53% in 2007, and 41% in 2005.

And finally, we are increasing international penetration of architectural glass.

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 buildings.

Jim will now comment on the financials. Jim?

Thanks, Russ. The first three quarters have proved challenging as expected. Our third quarter loss was $0.08 per share, primarily due to low pricing in our architectural glass business and low capacity utilization for our architectural segment.

Overall, Apogee revenues were down 18% from the prior year period, but they did improve slightly from the second quarter of fiscal 2011.

We are pleased to complete the acquisition of Glassec Viracon in the third quarter. Underscoring that we remain focused on longer term opportunities for our business as we work our way through today's difficult markets.

We funded the approximately $22 million purchase from available cash ending the quarter with $46.4 million in cash and short-term investment after the acquisition.

Third quarter income statement results from the acquisition of Glassec were not material.

Architectural segment revenues were down 21% for the quarter, compared to last year. The architectural segment had an operating loss of $8.4 million, compared to income of $9.6 million in the prior year period. Impacting results were low pricing in architectural glass as well as low volume for the segment.

Architectural segment results included a net benefit of approximately $1 million, resulting from recoveries of costs incurred in the second and third quarters to resolve architectural glass quality issues from a vendor supplied material. We believe we have the impact to this business disruption behind us.

Our third quarter architectural backlog at $165.7 million did drop 14% from the second quarter. At the end of each quarter, we generally have some work that has been awarded to us, but is awaiting final signed contracts before being added to backlog.

At the end of the second quarter, we noted that there was a significantly more than normal amount of awarded, but not yet signed contracts. In the third quarter, this amount increased by more than $20 million.

We ended the quarter with more than $80 million in work awarded, but not yet in backlog. The timing between bid and both award and signed contracts remains prolonged.

The key point is, we continue to receive significant orders for new work in a weak market.

Our architectural segment backlog of $165.7 million by market is the institutional sector, government, education and healthcare projects, declined slightly to 65% to 70% of the backlog.

The office sector grew slightly to 20% to 25%, and condos, hotel, entertainment are each less than 5%.

Approximately $87 million or 52% of the backlog is expected to be delivered in fiscal 2011, and approximately $68 million or 41% in fiscal 2012.

Our backlog doesn't include any backlog for the Brazilian architectural glass business as we transition them to our backlog definition. We will begin including their backlog with our fourth quarter reporting.

Third quarter capacity utilization in our architectural segment averaged approximately 50%, down from about 51% in the second quarter. This compares to capacity utilization of 54% in the prior year period.

The current segment capacity utilization is lower than it was at the last market trough which was roughly 60%.

Despite somewhat soft retail markets, our large-scale optical segment maintained revenues at $21.5 million, and operating income at $7.4 million. We have great value added framing products that customers continue to demand. The large-scale optical operating margin remained strong at 34.5%, comparable to 34.4% in the prior year period.

Long-term debt at the end of the second quarter was $21.6 million, up slightly from the second quarter level of $20.4 million as they assumed approximately $2 million in debt as part of the Glassec acquisition. $20.4 million of our long-term debt is comprised of long-term low interest industrial revenue and recovery [zone facility bonds].

Non-cash working capital was $52.4 million, up from $45.2 million at the end of the second quarter, and $15.1 million at the end of fiscal 2010. We define non-cash working capital as current assets, excluding cash and short-term investments, less current liabilities.

As I mentioned earlier, cash and short-term investments totaled $46.4 million after the acquisition, compared to $69.4 million at the end of the second quarter, and $102.6 million at the end of fiscal 2010. Our free cash flow was almost breakeven in the quarter.

I want to remind you that during the first quarter, we experienced seasonal use of working capital which drove negative free cash flow. Despite challenging operating results, second and third quarter combined were essentially breakeven free cash flow. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

Regarding the acquisition, I'd like to add some information on the financial impact that we did not provide at the time of the announcement in November, when we were in a quarter end quiet period.

We're expecting annual revenues of more than $30 million, with operating margins consistent with our architectural segment during good, but not peak periods. The business has grown the top line approximately 20% last year and in the current year.

Glassec Viracon is currently profitable and we expect it to be accretive in fiscal 2012. Its results will be included within our architectural segment.

We added an estimated $12 million in goodwill and intangibles to our books with the acquisition. Glassec is a well-respected in Brazil and we're excited to add this successful business to the Apogee family as we focus on the opportunities to grow our architectural glass fabrication presence in international markets.

I'll turn to our outlook.

We expect that our fiscal 2011 full year revenues will be down approximately 17% although we anticipate fourth quarter revenues will be comparable to the prior year period as comps get easier.

Our fourth quarter loss could be larger than the third quarter loss. So we are projecting total Company revenues to be up slightly sequentially.

We're expecting lower architectural glass volumes in the fourth quarter, with the tough glass pricing still flowing through, along with some productivity related consulting expenses. We anticipate that fourth quarter cash flow from operations will be neutral to positive.

Before turning to next year, I'd like to note that although we expect a fiscal 2011 full year tax rate impact of 28% benefit, we had tax expense during the third quarter instead of a tax benefit, which would be expected, as we resolved some outstanding state audits.

For fiscal 2012, we expect to return to profitability for the full year, with anticipated earnings in the second half more than offsetting first half losses. We anticipate that improvement in our performance will primarily be the result of our success in increasing architectural glass pricing and holding margins in the rest of the segment.

We are focused on effectively managing through this slowdown and emerging stronger than ever when our markets rebound. We're 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.

I'm very proud of our employees and management team in this troubled economy. They have been very proactive in managing costs, gaining market share, and developing new energy efficient products. Apogee's in good shape to survive the downturn and thrive when markets recovery. I'd like to now go ahead and open the call to questions.

(Operator Instructions)

Questions will be taken in the order received. (Operator Instructions)

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

Thanks. Good morning, Russ. Good morning, Jim.

Good morning, Tom.

I just have -- my first question is on the pricing.

You indicated at least through the fourth quarter, you expect the architectural pricing environment to remain, sounds like, extremely challenging.

Any color that you can provide on why you think -- it sounds like that's going to turn towards a more positive environment in 2012 or at least you're going to capture more pricing.

Sure.

Yes.

What we have --- what we started doing a few months ago is we started changing pricing and increasing it and we've been able to do that and effectively seen that we're still satisfied with our win rate.

Now, these jobs are not flowing through yet. They're just -- might be a trickle at this point in time but that trickle will gradually grow into next fiscal year. So, it just takes that long, from the time you bid until you actually are starting to recognize revenue.

So, we're encouraged already that we've seen increases in the 10%, plus range that will certainly make a difference for us going forward.

We also are being very careful about how we do this. So, we look at those opportunities, the kinds of projects, the things where we're truly providing some extraordinary value and maybe that value wasn't being properly recognized before. So, there are opportunities and we're taking advantage of those, and doing those.

But it still will be -- there's still a lag to when those become meaningful to the revenue.

Right.

Tom, just to add a little color on that, is that on average we'll see a six to nine month lag from when we're bidding and when we begin to see revenue on those projects and then we'll see that revenue over a period of time.

So, as Russ said, we expect to start in Q4, starting to see a little bit of that positive pricing start to flow through and it will take us through the almost the first half of fiscal 2012 before those revenues are largely reflective of the increased pricing activity.

So, it's almost the other side of the curve where we saw over the last -- a year ago, when we saw the higher margin projects work their way through backlog and then out the other side, so this is just kind of the other side of the curve.

Okay.

I guess just my last question, it sounds like the institutional market, when you talk about government, education, healthcare, is holding up okay.

I was just wondering if you could maybe talk about which of those three markets is doing the best and which one's probably lagging?

We can check here a little bit, but offhand -- certainly the appearance is the institutional market remains the strongest for us and there still is a lot of money yet to be spent.

So we continue to look at that.

What we've seen on the office side is really pretty opportunistic. What I would say, very smart businesses making some decisions that say hey, if I'm going to build a new headquarters building or expand and need that space and I'm going to own it, now's a good time to do that. So that's how we've seen a few of those kinds of projects come to fruition.

Okay.

Tom, within the institutional sector, between government, education and healthcare, other than just the normal movement between the segments, we haven't really seen any significant difference within the categories there.

Okay. Just lastly, then, within your long-term debt you have the $20 million of the recovery zone bonds.

If you could just remind us, is there any time limitations when you have to use the money for projects?

Yes.

So $12 million of the $20 million is related to the recovery zone bonds. The other $8 million, I think we have another 15 to 20 years remaining on that.

The recovery zone bonds are for purchases that we have roughly two more years to make again. So, if we actually don't make the investments within those next two years, then we would turn back those bonds.

All right.

Great. Thanks, guys.

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

Hi, everyone. Thanks for taking the questions.

Good morning.

I was wondering, first thing, just bookkeeping, this $1 million benefit, the cost recovery in the quarter, was that accounted for in cost of goods?

Yes.

Okay.

So just doing the math there, it seems like your gross margin would be approximately 15%. Just some insight into that in light of the utilization dropping quarter on quarter. And it seems like that is a bit better than your commentary may have suggested last quarter.

It may be slightly better.

I think we saw some good project margins in our insulation business but there's a little bit of lumpiness quarter to quarter just in terms of how those projects flow.

Okay. Fair enough.

In light of your guidance, is it fair to say, though, that directionally fourth quarter might be down a little bit? Is that how we should think about it?

I'm sorry, could you repeat that, Eric.

I'm just saying in light of your guidance, and that the architectural segment might be down in Q4, should we think about directionally gross margin being down as well, versus the third?

Yes.

Okay.

And any thoughts or just updated thoughts -- clearly, you're more optimistic about fiscal year 2012, but thoughts on when maybe we get back to -- not back to peak, but just back to the high teens to maybe 20% level, is that doable late in fiscal year 2012?

Yes, obviously that's going to depend on what we see in terms of market recovery.

We're going to need to see the combination of the price increases that we've put through, but we're going to need to see increases in volume and capacity utilization for that to happen.

Okay.

And maybe just turning to pending -- the pending awards, clearly that amount again increased pretty significantly.

Is that simply just people that you indicated people taking more time with their projects because they're more complex? And any thoughts on when that could return to historical levels.

I think we will probably continue to see more of this because we are bidding some larger projects. The projects have gotten -- especially when they're blast walls, they're more complex projects. That's why the dollar amounts go up and it takes this extra work to get to signed off.

I'd like to remind everybody that in the Letter of Intent, so it's not a signed contract, but in the Letter of Intent when it's awarded to us, the job is awarded and we actually are able to bill costs incurred to the contract before it's signed as we do our due diligence on these kinds of projects.

So it's a -- for those kinds of projects, that will probably remain. As the other, historical work comes back, then you wouldn't see this quite so much. So it will be a mix of business that will change it, not a change in process.

Okay.

Then just along those lines, this might be a difficult question, but without Glassec, not talking about those numbers, any expectations about when backlog could bottom out?

It seems to feel like it's there now, but I -- I think the caution has to be that it could remain at this level for some time. We just -- we think that there will be some ups and downs before we see positive trends, and it's hard to project that right now.

As we stated in the release, we do see -- we continue to see pretty good levels of bidding and quoting activity.

Right.

We also continue to see the trend where it's not turning into awards as quickly, but we are seeing activity in the market.

Okay.

Just the last question, then I'll jump back into line. Just on the tax rate, just to clarify.

So your commentary seems to suggest that you would -- that in fourth quarter, you would get a tax benefit again as opposed to the expense?

Correct. Correct.

Okay. Thank you very much.

Your next question comes from the line of Brent Thielman with DA Davidson. Please proceed.

Hi, good morning, guys.

Good morning.

Jim or Russ, on the unsigned contracts, just for clarification that you mentioned, are these the same contracts you talked about in the last quarter, the $50 million or so?

Yes, I think -- this is Jim. I think there's one in there, but, the balance of it is new awards.

And maybe I just want to make sure, we have a pretty strict definition for backlog which is we only recognize into backlog once we have a formal signed contract.

As Russ said on the projects that we're talking about, we have Letters of Intent or firm commitments. But so it's a combination of some carryover and new awards.

Okay. Sure.

And then, Jim, I think you said the Brazilian business backlog was not included in the quarter and I'm sorry if I missed this.

But did you quantify or can you quantify sort of where their backlog stands or at least sort of give us a qualitative sense of where they stand in terms of their book of business right now?

Yes.

So the real issue is that we just need -- we want to make sure that we have consistent definition because if you remember in our domestic business for Viracon, the market in the US has commitments rather than contracts that then get broken into purchase orders.

If I had to estimate it, I'd probably put it in the mid single digit million dollar backlog level would be an estimate of what we expect it to be as we work through this definition, but we need to work through both the local market terms and how that business is capturing it.

Okay, and then I guess on your US business, any particular regions that stand out to you where you're seeing more orders relative to others?

Not really.

We continue to see -- the strongest region continues to be the northeast, primarily, the DC Metro area, the Texas market continues to be better on a relative basis. But no real geographic hot spots.

Sure.

And then the last one, just on the large-scale optical, the operating results definitely appear to be sort of flattening out, certainly at strong levels.

Can you remind me, are you operating at or near capacity in that segment?

No, we still have considerable capacity.

Okay. All right.

Thanks, guys.

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

Good morning.

Good morning.

Point of clarification in your comments in the release, you talked about 4Q 2011 sales being comparable with the year-ago period. But I think you said architectural is going to be down sequentially. What am I missing?

Yes.

The architectural glass component of our -- so really Viracon is going to have a softer quarter. So, overall between the balance of the architectural segment and LSO will --.

So LSO will be up.

-- more than make up for that.

Do you think LSO is going to be going to be up double digits 4Q?

No.

No. But growing?

They'll be flat to slightly positive.

Okay. Great.

Now, the pending awards, how long is the typical time between bid and final contract being signed? What are the hold-ups that you're running into now that maybe you haven't run into in the recent past?

I'd like to say that we need -- the typical kind of work we've done in the past has just had sort of the normal delays that are associated with a soft market. In a soft market, people know that they can take their time.

There aren't capacity limitations and so they're -- it begins to stretch out and they even try to get a little better pricing. So that's a normal part.

These contracts that we're talking about specifically are just larger and more complex and so there is more due diligence that takes place and, again, we're even able to bill for some of that activity on these.

So these are larger contracts with some additional complexity that we're able to -- that still meet our strengths in terms of execution.

So we're not -- we're certainly not taking projects that don't line up with our strengths. But because of the sheer size and complexity of them, there's just more due diligence that has to be done and that's what's going on.

So I would say to you, we would expect that to continue as we win this kind of project in the marketplace.

So for F 2012, the Company returning to profitability more towards the second half of the year, is that dependent on these pending awards becoming backlog?

We're very confident that they will become backlog in a time manner that's consistent with good execution. But other than that, we expect the F 2012 to be able to flow through.

Yes, Bob, to be clear, on these pending awards, some of them we're actually performing some work against. As Russ said, the Letter of Intent is in place and there's commitments and key terms are agreed to.

There's just the process and field level details that get finalized before final signatures. And so F 2012 is really not a function of these pending awards as it is the ability to continue to book new awards beyond that.

Okay.

So yes, that was my next question. The new awards that you're booking are the higher priced work, I think you started raising prices during 2Q.

Yes, and that -- again that's primarily at the glass fabrication company and we're maintaining margins elsewhere.

The price increases would go into effect for some of the quick turn work that we wouldn't see hit backlog? Is that the right way to think about it?

Sure. And in fact, our bill -- our book and bill work is at an all-time high now.

So like a year ago, you would give us a percent of your backlog or percent of the quarter that had the high priced margin work that you had to run through?

Here now, as you work through the -- I guess, the low priced margin work, what kind of percent was that of 3Q or give us some sort of sense of how much you have to go through to get to this higher priced work.

Yes, so Q2 was really not material at all.

Even the book and bill work, just to be clear, we're actually often times working those projects for a while and so then once it's awarded, it's awarded and shipped really quickly, but we've actually been working that for a while. So just a rough estimate, the hardest things for us to project are kind of the timing of work.

But I would say Q4 may be might be 10% of our revenues in the glass fabrication business at the new pricing. As we mentioned, it takes some time to work its way through and then it will just kind of gradually continue to increase as a percentage of the revenue.

In the 3Q, the quarter just ended, your low margin work was 100% of architectural, is that the kind of --- or the way to think?.

Yes, that's the right way to think.

All right.

And now, Brazil, you talked about in the first release when you announced the deal, the margins would be approximate to Apogee's over the cycle. But when the US economy was 5% vacancy rates, you were high single, almost double-digit op margins.

Is that the way to think about the Brazil business right now?

So at least what we're learning so far is there's not the same correlation between vacancy rate and new construction in that market as there is in the US market.

And so while there's strong demand, there isn't the same level of new construction activity going on.

So that's why it seems like there -- we're anticipating there to be a good market but it's not the robust levels of construction comparable to what we saw here.

The market size you tossed out in your prepared comments, $300 million to $400 million, what kind of growth rate are you expecting over the next couple of years or if you don't feel like making a projection, what has that been growing at over the last few years, looking backwards?

Yes, I'm not sure that we have real good market -- historical market data.

All right. Thank you.

(Operator Instructions)

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

Thanks a lot, guys.

You mentioned the price increases that you're pushing through. Could you just, I guess, in context discuss that with kind of the competitive landscape.

Do you see a lot of excess capacity out there beyond your own and also there's been a lot of talk about imports, cheap imports into the country, if you push into price increases, it doesn't seem that's as big of an issue, maybe you could talk about each of those.

Okay.

The price increase -- let me -- the price increasing has been working and we believe and what we've seen in terms of the communications with the marketplace, we're really confident that that's going to keep coming forward.

The capacity in the marketplace has not constricted as much as we thought it would. There certainly have been a few announcements of reorganization and closures, but it's not consistent with the decrease in demand that has taken place in the marketplace.

So there's been -- so much more of the capacity is -- I'm sure it's just utilization of those people who remain in the market. So utilization of capacity has just gone down significantly and that's where it stands today.

That doesn't mean it will stand that way a year from now or six months from now, but that's the way it stands today and that's what we can see.

Imports -- imports are less -- certainly import or pricing of imports is used probably every day to point out a price in negotiations, but the timing and the service levels into the US market is just physically not possible to compete with what we can do for a project.

And these projects that I'm talking about that we do are all custom. So there's no standard. It's something that has to be made and engineered and approved for every job.

Now, when you get into some standard windows that might be used in apartment building, lower end construction or apartment buildings, things like that, then you might see more of an imported system that could be closer to a standard kind of product that would be out there.

But that starts to move away -- significantly move away from our core competencies and our core markets. So that's a market that's much more competitive, even in the US, than it is elsewhere.

We have seen recently, though, that metal -- duties on metal systems, framing systems, have gone up significantly and that has caused the market to react to imports quite negatively and has been good for domestic markets. So that's -- those are sort of the anecdotal comments around that question.

Great.

Then, Russ, obviously we see the appeal of acquiring down in Brazil, et cetera. In your discussions with [Glass Tech], what are they viewing as what they're getting out of this relationship with Apogee?

Yes.

Clearly, the people at Glassec really see this as a way to look at advancing their technology and product line and capabilities significantly because of where our market is versus -- their market is just beginning to go into this insulated, high performance glass product and our's has been there for many years.

And they really recognized right away that Viracon is the leader in high performance glass systems around the world and saw that combining with their -- the Brazilian market's use and frequency of tall buildings as being a great match, and we did, too.

And that's certainly the attractive part of this acquisition for both parties. So, they're excited, the people who are remaining with the business, are excited to take their business to a whole new level and to be able to have that accelerated by this acquisition.

Great. Thank you.

You bet.

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

Good morning, guys. Couple questions.

Jim, I think you mentioned that the expectation was that Glass Tech would be accretive in fiscal 2012 and I'm just trying to -- I don't know if you want to answer this, try and calibrate that a little bit.

You also indicated that you thought the Company, Apogee, would be profitable for the full year. Without Glass Tech, do you want to make a comment about the profitability for the entire Company?

Sure. So first of all, for everyone, the name of the business is Glassec.

I'm sorry.

No, that's all right. And the reason this is important is there is a Company called Glass Tech and we don't want it to be confused with that. Not in Brazil, but otherwise.

But anyhow, as we articulated, we expect the Glassec business annual revenues next year to be roughly $30 million, (inaudible) average operating margins. We expect it to be accretive, but it will be accretive at nominal levels.

Okay.

Our outlook for fiscal 2012 holds even including the combined impact of --.

Okay.

And I think you had mentioned that over the last few years, the Company has been growing revenues about 20%. Was that correct?

Yes, for the last couple of years.

Okay.

With the World Cup on the horizon and the Olympics on the horizon, I assume there might be a -- maybe a building boom going on down there.

Would you expect that rate to ratchet up then a little bit over the next, let's say, two to four years?

We believe the potential for that is there. I know that the business is already looking at proposed projects for new stadiums, new hotels, various activities like that.

Okay.

And then lastly, from a competitive position, as you said, they're looking more and more towards insulated glass and energy efficiency and so on.

With the acquisition of Glassec and obviously your expertise in energy efficiency, how does that -- how do you stack up against the other competitors down there?

Yes, the other -- the products just do not exist in that market today. So it will be -- and there will be some -- whenever there's change, there's always resistance to change.

Sure.

So we will be able to help that, help Glassec introduce these products and make sure people understand why they're more energy efficient and why they are great products to use on these buildings.

So, we feel that we're going to be able to help do that and the marketplace down there is just largely not using these products today and so we're -- we feel we'll have a nice advantage.

Just want to clarify that the market's evolving so there is what we refer to here as kind of that core base level of energy efficient products that the general market including Glassec is using today, so that does exist. Russ' reference is two-fold.

One, is as we are able to bring in some additional products with new coatings that are higher energy efficiency, but also the conversion to insulated glass units from what's currently used in the market, increases the energy efficiency performance of buildings.

And it is a very fragmented market but Glassec actually does have a leading position, leading position in the architectural community which is consistent with Viracon's positioning.

I think, at least I've seen, where the Brazilians have dammed a lot of rivers. Is the cost of electricity rather cheap in Brazil and maybe that influences their decision on energy efficiency?

No, I don't think so. Plus -- I can tell you this that the climate there -- they need these products in order to balance the energy efficiency and the comfort of the buildings. Right now, the high performance products that they use only are resisting about half the solar heat gain that you can.

And as a result, in the daytime, those office spaces really build up a lot of heat and that can be largely negated. So it's just -- even if you just looked at it from a straight comfort standpoint, but our understanding is the cost paybacks are there as well.

Okay.

There's a number of market changes going on in the Brazil architectural community. Energy efficiency adopting the LEED standard from the US are important elements in that market as they evolve.

Right.

Thank you very much.

Your next question comes from the line of Tyson Bauer with Wealth Monitors. Please proceed.

Good morning, gentlemen.

Good morning.

Good morning.

How fast can you make a curtain wall for the University of Minnesota's stadium?

Quick question. You talked a lot about new products in Brazil. If you covered this, I'm sorry, but I was in and out here. Are we going to see a lot of additional investment required to get the proper coating machines and other equipment installed to be able to do these products in Brazil like you have in the US?

Initially -- and certainly for a nice period of time here, the local Brazilian market has added some coating capacity that we can tap into through Glassec and it does not present a problem of supply to us. So we're convinced that that model can continue.

The export of material down there would be something that would help us eventually build it up to the point where it may want to have its own coater, but I would say to you that we would let the market and the volumes define that more so than trying to push that -- we don't see a need that we have to push that ahead or put that capital out there before there's real demand.

Okay.

Do you have any preliminary CapEx budget for fiscal 2012?

At this point our maintenance CapEx level remains in the $10 million to $15 million, excluding any strategic investment.

That's for all of Apogee.

All right.

That sounds great. Thanks a lot, gentlemen.

And then --- then I will just -- I do want to respond that the TCF Gopher stadium actually, while it's not on the roof, it does have great Viracon glass and the curtain wall installed by Harmon, so --.

Your next question comes from the line of Kevin Curran with DDJ Capital Management. Please proceed.

Thanks a lot, guys.

Of these -- can you hear me okay?

Yes.

Of this shadow backlog that you have, how many -- what percent of these projects are actually financed fully?

They all are.

They all are, yes.

It's a mix of office and institutional work.

It's a mix of office work. Is there --- is part of the delay just a general reluctance --- or reluctance to push forward with the projects?

No, no, no, not at all. The time that it's taking from when we get a commitment to a -- remember, we have a very strict definition of backlog. We have to have a signed contract.

So from this Letter of Intent to the signed contract, these kinds of projects just take longer because there may be additional testing, there may be more definition, there may be more scheduling requirements that have to be outlined and defined and responsibilities as you -- as they --before that final contract gets signed and that's in the best interest of us as well as the general contractor that we're dealing with to do this.

So it's not a consequence of any negative event. It is a normal process of, in fact I would say a good process, of doing the right due diligence.

And can you -- I'm sorry if I missed it before, but can you walk us through the composition of your backlog in terms of end project type?

Yes. It still remains about three-quarters -- not quite three-quarters, down a little bit, institutional, education, healthcare. The office part did go up slightly, and then the rest of it is pretty -- very small.

So (technical difficulty) the institutional sector, which is how we categorize it as Russ said, government, education and healthcare, that's about 65% to 70% of our current backlog. The office sector is kind of in the range of 20% to 25%, and then the balance, condo, hotel, entertainment, stadium, transportation.

And of those office projects, I assume they're not new builds necessarily, are those mostly retrofits?

No --.

It's actually mostly new build.

Right.

We're probably seeing -- there's a combination of factors. Some is where it's actually like a corporate headquarters where they're doing a consolidation and it's a corporate owned project.

And the other is where we're seeing office, probably where we see a lot of office, in a way it's almost connected to institutional because in the DC, Baltimore market, what we see are private office developments where a key tenant is often a governmental agency or people servicing the government.

And how many individual projects are in that backlog? Is it one or two large projects or is it --?

It's a lot of projects.

So we'll -- we'll have a small number of projects that could be over $10 million. That's going to be less than a handful of projects. And then it's -- it depends a little bit but it's over hundreds of projects, with various sizes.

Okay.

Thank you very much.

There are no questions in queue. I would now like to hand the call back over to Mr. Russ Huffer for any closing remarks.

Thank you very much. Appreciate the interest and everyone have a very happy holiday.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect your lines. Good day.