Apogee Enterprises Inc (APOG) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2011 Apogee Enterprises conference call. My name is Keith, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later in the conference, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Mary Ann Jackson. Please proceed, ma'am.

Thanks, Keith. Good morning, and welcome to the Apogee Enterprises fiscal 2011 full year and fourth quarter conference call on Thursday, April 7, 2011. With us on the line today are Russ Huffer, CEO, and Jim Porter, CFO. Their remarks will focus on our fiscal 2011 full-year and fourth quarter results and the outlook for 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 in our press release issued last night and 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?

Thanks, Mary Ann. Good morning. Welcome to our conference call. Although it's good to have the challenges of fiscal 2011 behind us, we did have some successes. We maintained a strong balance sheet, generating positive free cash flow for the last three quarters, and made progress on our longer term international strategy for architectural glass with the purchase of the Brazilian fabricator for cash. In addition, our picture framing glass and acrylic business turned in a strong performance, growing revenues and operating income, and most of our operations executed well. Unfortunately, our commercial construction markets remained weak throughout fiscal 2011, impacting revenues. Low architectural glass pricing and low architectural segment capacity utilization led to losses for Apogee. Full-year Apogee revenues were down 16%, and we lost $0.51 per share from continuing operations.

Architectural segment revenues for the year declined 19%, consistent with our markets served. The segment had an operating loss of $37.7 million. Fiscal 2011 Large-Scale Optical segment revenues increased 7%, and operating income for the picture framing business grew 22% to $20.5 million. We sold a strong mix of value-added picture framing glass and acrylic during the year, and the business also performed well operationally.

As the year ended, our balance sheet remained strong with approximately $60 million in cash and short-term investments. We did end fiscal 2011 on a more positive note. In the fourth quarter, we achieved our highest quarterly revenue level for the year, as our Architectural segment revenue decline slowed, and Architectural segment backlog grew for the first time since it peaked at the end of fiscal 2008, signaling that our markets may be stabilizing. In addition, we had positive free cash flow.

In the fourth quarter, Architectural segment backlog grew to $237 million from $166 million in the third quarter. We are encouraged that our year-end backlog increased, but one quarter is not a trend. Since we are coming off a smaller base, the addition of larger projects could cause our backlog to be lumpy in upcoming quarters.

We again sustained Architectural segment operating losses, which resulted from low architectural glass pricing, low segment capacity utilization, costs to implement architectural glass productivity improvements, and expenses related to architectural glass quality issues. You probably noted multiple references to architectural glass in the list of reasons that the Architectural segment recorded a fourth quarter loss. I have assumed direct leadership of this business, and Viracon's solid management team and I are focused on profitable sales, productive operations, and quality products, as markets for our value-added and energy-efficient products are expected to begin growing later this year. Improvement in this business is key to our ability to return to profitability in fiscal 2012.

You may not be aware that I ran Viracon for 12 years before becoming an Apogee executive and have continued to be actively involved in the business. I will continue to lead our architectural glass business, Viracon, until a new CEO is named.

I would like to recognize the good execution in our installation business in the fourth quarter, as it completed projects that had been awarded with higher margins. I would also like to note that the transition with our Brazilian architectural glass acquisition is proceeding smoothly. I'm pleased with the projects that we are winning in Brazil, where commercial construction markets are strong. The Large-Scale Optical segment continued to perform well in the fourth quarter, growing revenues 7%, and generating operating income of $5.5 million.

Next, I'll cover our outlook. I believe that we are finally seeing hints of an upturn for our architectural businesses even though a stronger economy and more jobs are needed to bring renewed life to our commercial construction markets. For fiscal 2012, we are expecting modest growth in revenues and believe we have the potential to be profitable for the year. We also expect Apogee to generate positive free cash flow this year. This improved outlook for Apogee depends on the architectural glass pricing increases we implemented last year, flowing through starting mid-year as anticipated and on our ability to fill an open fourth quarter capacity with projects having higher pricing and margins. We are expecting that the actions we've taken in our architectural businesses ranging from price increases and productivity improvements to product selection changes will result in improving results as fiscal 2012 progresses.

The McGraw-Hill forecast for non-residential construction, as well as the American Institute of Architects' Architectural Building Index, indicate our domestic end markets should start improving later in calendar 2011. Architectural bidding activity continues to be good and remains driven by institutional work. We are starting to see early signs of improvement in some markets including the private sector. However, the majority of work currently being bid is scheduled for fiscal 2013. We believe we have the financial strength to work our way through the weak market conditions and 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.

Before I turn things over to Jim to discuss the financials, I would like to take a moment to comment on my retirement plans and Apogee's CEO search. I announced during the fourth quarter that I plan to retire in the next year when my successor is named. Rest assured, I will continue to be focused on positioning Apogee for future success in the next year. Regarding the CEO search, it is still early in the process. A committee of our Board of Directors is dedicating considerable effort to identify strong candidates to guide Apogee through the next commercial construction cycle. The Board has developed a job description and is selecting a search firm. The search process could take several months. I'm committed to lead Apogee as long as needed. Jim?

Thanks, Russ. Fiscal 2011 proved challenging for Apogee. Our non-residential construction markets again declined, and with low pricing in architectural glass, Apogee's revenues for the year were down 16%. Solid earnings in our Large-Scale Optical segment were unable to offset Architectural segment losses due to low architectural glass pricing and low segment capacity utilization.

For fiscal 2011, we lost $0.51 per share from continuing operations on revenues of $582.8 million. We had a net loss of $0.37 per share. Discontinued operations provided net earnings as we reached resolution on the final significant outstanding exposures related to foreign operations that we discontinued in 1998.

Through concerted efforts across the Company, we have positioned ourselves to manage through the downturn with a strong balance sheet. At year-end, our cash and short-term investments totaled approximately $60 million after utilizing about $21 million in cash in the third quarter to purchase the Brazilian architectural glass fabricator. Despite the operating losses, we generated approximately $15 million in free cash flow in quarters 2 through 4, after the first quarter's seasonal use of cash. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

In the fourth quarter of fiscal 2011, revenues of $147.9 million were flat compared to the prior year period. We lost $0.12 per share from continuing operations compared to earnings of $0.01 per share in last year's fourth quarter. We had some noise in the quarter compared to last year so I'm going to cover a couple of reconciling items.

While pricing at Viracon was the largest single cause for the operating losses in the Architectural segment compared to last year, over $4 million of the increase was from expenses in the fourth quarter for two other items. We incurred outside consulting fees on a targeted initiative to drive significant productivity and quality improvement programs in an architectural glass facility which will generate benefits starting in fiscal 2012. Also, we had a higher level of quality accruals in the quarter, related to identification and resolution of some specific projects. There was some element of timing where a number of these items were addressed in the fourth quarter. We believe these various issues are largely behind us.

In the Large-Scale Optical segment, approximately half of the improvement in operating income resulted from a prior year write-off of some production equipment. In fiscal 2012, we expect to return to the more normal 20% plus segment operating margin. Architectural segment revenues for the quarter were down 2%. It feels like we've seen stabilization and prior year comps have eased. The Brazilian architectural glass business acquired during the third quarter added approximately $4 million to segment revenues, but had minimal impact on the bottom line. We report their results on a 2-month lag, so we had only 6 weeks of results in the quarter.

The Architectural segment had an operating loss of $9.9 million driven by low pricing, costs to implement productivity improvements, and expenses related to quality issues, as I just noted, all in the architectural glass business. These items were partially offset in the quarter by excellent project execution in the installation business where we are completing projects awarded during stronger market conditions along with favorable insurance adjustments.

As Russ mentioned, he is now leading the architectural glass business. He is working with Viracon's management team to improve the performance of this business. Our architectural glass results must improve for Apogee overall to turn in a stronger performance. Russ has been very close to this business since joining Apogee through Viracon and bringing Low E technology to our Company.

In the fourth quarter, the Architectural segment continued to operate at low capacity utilization of 50% similar to the level in the prior year period. An increase in the Architectural segment backlog, in addition to stabilizing architectural revenues, was a positive in the fourth quarter. Our fourth quarter architectural backlog increased to $237.2 million from $165.7 million at the end of the third quarter. This is the first backlog growth we've seen in 3 years. $15 million of the increase came from the addition of backlog from our Brazilian acquisition with the remainder resulting from growth in order intake. 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 and third quarters, we noted that there was significantly more than the normal amount of awarded, but not yet signed contracts. In the fourth quarter, this amount decreased by approximately $30 million to $50 million but remains above the historical levels of projects awaiting final contracts. We continued to receive significant orders for new work in a weak market, but the timing between bid and both awarded and signed contracts remains prolonged. With more complex projects, with tighter margins throughout the supply chain, we're finding that the general contractors and our installation business are spending more time up-front to confirm field requirements and costs.

The breakout of our Architectural segment backlog of $237.2 million by market is -- the institutional sector, government, education, and healthcare projects declined slightly, to slightly over 60% of the backlog. Office sector grew to 30% to 35%, and transportation, hotel, entertainment, and condos are each less than 5% of the backlog. Approximately $200 million, or 84% of the backlog, is expected to be delivered in fiscal 2012, and approximately $37 million, or 16%, in fiscal 2013.

Our Large-Scale Optical segment turned in another good performance, as retail picture framing markets are starting to improve. We have great value-added framing products that customers continue to demand. Revenue of $19.9 million were up 10% compared to the prior year period, while operating income increased to $5.5 million. The operating margin of 27.7% resulted from the volume increase, the ongoing strong mix of value-added products, and excellent operational performance. Long-term debt at the end of the fourth quarter was $21.4 million, up from $8.4 million at the end of fiscal 2010, and down slightly from $21.6 million last quarter.

$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 $39.8 million compared to $52.4 million at the end of the third quarter, and $15.1 million at the end of fiscal 2010. The decline from the third to the fourth quarter was largely the result of timing of collections and payments. Our overall day sales outstanding remained flat to the third quarter at 48 days, and up slightly from prior year-end at 45 days. We define non-cash working capital as current assets, excluding cash and short-term investments, less current liabilities.

We generated $8 million of positive free cash flow in the quarter, driving our growth in cash and short-term investments compared to the third quarter. Full-year free cash flow was negative due to first quarter seasonal use of working capital which drives negative free cash flow. Despite challenging operating results, free cash flow for the remainder of the year was positive.

I'll turn to our outlook. We expect that our fiscal 2012 full-year revenues will increase slightly, in part due to the addition of our Brazilian architectural glass business. We believe we have the potential to be profitable for the year. We expect that second half earnings will offset first half losses.

As Russ has stated, this outlook depends on 2 key factors. First, that the price increases we implemented last year in architectural glass will significantly begin flowing through in the second half of fiscal 2012. However, we expect that competitive project margins will be felt more strongly through much of fiscal 2012 in our installation and window businesses, which face ongoing increased competitive dynamics. Much of the installation in window business volumes scheduled for fiscal 2012 was booked during the tight market conditions. And the second factor is that we're able to fill in open fourth quarter architectural segment capacity with work at higher prices and margin levels.

As the year progresses, we expect sequential revenue growth and improving gross margins although actual timing of project flow is often difficult to predict. We expect to generate positive free cash flow for the year. Capital spending is expected to be at safety and maintenance levels of $10 million to $15 million without any significant strategic investments. Depreciation and amortization should be approximately $29 million. Although forecasts for domestic commercial construction markets look for improvement later this year, we're a late cycle Company and lag our markets by several months. We anticipate benefits from the forecasted market improvement largely in fiscal 2013.

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. Fiscal 2011 was a tough year, but I'm proud of our team's efforts and focus. We understand the importance providing the highest levels of quality and service demanded by our customers, and we believe we are on track to meet these demands while offering new innovative products. I would like to go ahead and open the call for questions.

(Operator Instructions) Your first question is from the line of Robert Kelly with Sidoti. Please proceed.

Hi, Jim. Hi, Russ. Good morning.

Good morning.

Good morning.

Just a question on the quarter just ended. You talked about $4 million, I guess, of unusual costs in the Architectural segment. Is that the right way to think about that?

Yes. Compared to last year, that's right.

Okay, so should the quality accruals spill into 1Q?

This is Russ. Certainly, what we were trying to do is to make sure that we were making accruals for everything that was known to us and to avoid that. So that our goal was to avoid that spilling into it, but we can't -- I can't -- there still could be some unknowns. But hopefully, it's much smaller than what we've talked about.

And as far as the consulting fees, they are a one-time thing? They are done?

There's a little bit of that that flows into Q1 as well.

There's a little bit flowing into Q1, but we are already seeing some positive results that are very encouraging about this project. So we believe that we're all going to be pleased with that.

Okay. So the reason I ask is that it sounds like your Architectural business, less these one-timers for lack of a better term, is running about $5.5 million, $6 million loss. Is that a reasonable run rate to assume for the first half of '11, when you talk about losses continuing for the Architectural business?

In terms of from a run rate perspective?

Yes.

Yes. It's a little bit hard to answer, just because the key issue is related to timing of the projects. And so, I think that you're probably just trying to get to a normal run rate of perspective. And so the $4 million was a little bit unusual. We did have -- especially when I --we referred to the timing of project flows, we mentioned our installation business and the good execution and the completion of projects. And so there's probably, a little bit higher level of improved margin flowing through in Q4 from a timing perspective.

Okay. As far as the $200 million of backlog that you plan to deliver in F '12, can you give us any sense of what reflects the weaker pricing and what reflects projects signed up since you put the price increases through?

Yes. It's going to be a rough number, but probably slightly more than half of it was bid in more competitive margin environments.

Okay, got it. And now, it seems like the language in the release has changed a little bit as far as your F '12 outlook. Whereas last quarter, you seemed more certain that the second half of '12 would bring profits. Now you're a little bit more cautiously optimistic. Is that anything on the competitive front, or is that just a matter of the timing of when these projects hit?

Yes, it's really more a function of the timing. Again, we feel good that we're going to see profitability in the second half of the year. I think, Q1, just based on timing of project flow, we're going to continue to see the low levels of capacity utilization. And then just really, the timing of the improved margins flowing through.

One of the things -- I guess, the questions that you had about what happens in F '12 was the price increases starting to flow through on the fabrication side. Is that -- is there some risk that the pricing you put through a couple quarters ago doesn't stick? Or, what's the issue with that kind of caveat you threw out there?

No, actually we are seeing them stick. And I think the caveat is just the continuation of that. So it really does -- we have put ourselves in a nice position here, and we expect that to continue. But the caveat is whether it is just on the future.

And then also, Bob, we had talked in prior calls about the fact that during fiscal '11, we frankly took some work at pricing that we shouldn't have taken. And so part of the estimation that we have into account is how much of the business we can continue to secure at the increased pricing levels.

Understood. And finally, just one last one. You talk about modest increase in revenue in F '12. The backlog seems to be picking up. Even if you kind of strip out the noise from acquisitions and whatnot a little bit faster than that, is that just an effort to, again, try to catch up with the timing? Or just trying to match up with what the forecasters are saying for the non-res market in 2012? Just maybe help me out with that.

It's really the balance between work that we're bidding now -- larger projects that really flows largely into fiscal '13. So it's some balance between additional work that we can still book for this fiscal year, and we have the potential to do that. But, again, we have some open capacity we have to fill versus continuing to be successful on some of the larger projects which is, from a timing standpoint, going to probably affect next fiscal year more than this year.

Got it. Thanks for your help.

You're welcome.

Your next question is from the line of Thomas Hayes with Piper Jaffray. Please proceed.

Good morning. It's Dan Garofalo on for Tom.

Good morning, Dan.

Good morning, Dan.

Good morning. Just from an SG&A standpoint, I know you mentioned the outside consulting fees. SG&A was very consistent from 1Q to 3Q in 2011. I'm just wondering, is the $29 million or so that we saw in 4Q, is the Delta completely attributable to the consulting fees there?

No, it's -- there's a little bit of timing. Q3 was a little bit lighter, and then also with -- we had some of the acquisition costs, as well as the consolidation of the Brazilian entity associated with it. But maybe the real point would be as we looked at fiscal '12, I think probably $28 million is probably a normalized level of SG&A which does include the consolidation of the acquisition and the corresponding amortization costs.

Okay. That's helpful. And then, you had mentioned some -- there are -- I remember there are some seasonal costs that show up in 1Q. Can you just refresh our memories on the nature of that?

Yes, from a working capital standpoint, first quarter is when we have our cash outflow as related to incentive payments, tax payments, retirement plan contribution, and insurance payments. So in Q1 fiscal '11, that was really a large source of the cash outflow. And then we also had from a receivable standpoint, some earlier receipts of collections in Q4 of fiscal 2010 which drove it down as well.

Okay, fair enough. And then just maybe just a reiteration of a previous question. Looking at capacity utilization, if it stays relatively static. When the business in your backlog does get shipped, would you expect that there would be some incremental improvement in the gross margins relative to 4Q's levels?

Yes.

Thanks.

And your next question is from the line of Eric Stine with Northland Capital Market. Please proceed.

Hi, everyone. Thanks for taking the questions.

You bet.

I just wanted to clarify that last statement and square that with the discussion on SG&A about the $4 million in additional costs. So just to be clear, so $28 million is -- that is a level that we should expect in fiscal year '12?

Yes.

Okay. And then just maybe playing off that -- maybe just touching on margins, I guess -- that implies that particularly in the second half of the year, that you expect margins to trend -- . Is it fair to say that 20% plus by the end of the year is a

That's probably a bit on the high side, but clearly a target. I would say we look at sequential improvement. We need to be a little over 18% for the full year. So we'll need to be above that by year-end.

You expect to be above 18% for the full year?

That's our target, yes.

Okay. And then, it just sounds like for first quarter, given that Harmon had a very good quarter -- it sounds like directionally versus the fourth though, we should expect a lower gross margin.

We think that's very possible, yes.

Okay, and then maybe I'll just turn to the pending orders. Good to see that number come down, but still a pretty high number. Is that -- is this kind of a dynamic that you view as more of the norm here -- at least in the near term?

Again, those kinds of things are going to go up and down by quarter depending upon the size of the jobs and the timing it takes to transition them from the successful bid into backlog.

Okay, fair enough. But so hopeful, because the backlog did increase, but it's too simplistic to think that we should see backlog increases going forward? Just because of timing of orders and lumpiness of large orders?

I think that's fair, but we do feel clearly we've taken a turn to the right direction.

Okay.

So, yes, we -- it feels as like the trend line is positive though. As we've said for a long time, quarter to quarter, you're going to see pluses and minuses in backlog. Just based on the timing as those projects and the contracts get signed. But we definitely think the direction is sustainable based on what we're seeing in the market.

Okay. Maybe last question. Just curious, thoughts on international plans. I know you just did the Glassec acquisition. But if there are any other markets you might consider going forward? Thanks a lot.

I think we continue to evaluate other markets. But -- and as we have said before, we really want to see a stabilization here and a return to a more positive environment in our domestic business to give us the confidence to continue to move forward. So we're not without that focus, but we're -- I would say, we're putting most of our energy into our existing operations.

(Operator Instructions) And your next question is from the line of Eric Prouty with Canaccord Adams. Please proceed.

Great, thanks a lot. First question on Brazil, what are you seeing as the secular growth in building down in Brazil? And would you expect that to pick up at all? Or is the market sort of picking up at all with the Olympics and World Cup coming up?

Yes, we -- in fact, we just met with Brazilian principals this week, and they are still here. I am very encouraged about what we're seeing in Brazil, and they are even reporting that since the acquisition -- and now it's Glassec Viracon. So Viracon is part of their name. And that's really made open doors for them, for these major projects. It's given these architects and international architects and contractors that are going to be doing this kind of work a lot of confidence in this Company to deliver to their needs. So we really are pretty optimistic and see that as a nice trend forward, and that's probably the best we can describe it right now. We will continue to report on their progress.

Just a follow-up to that, maybe just a little discussion around what are your plans to scale that business into a meaningful business that will start contributing to the bottom line? Is that just growing revenue? Do you have to transfer some technology down there, et cetera?

Yes, it's a combination of all of that. Certainly the market -- developing the market presence and making sure that we're promoting the kinds of things that are more favorable to Viracon is a part of it. Then it's managing the capacity of the facility down there and the potential expansion of it. And then finally, matching that up with the market potential that's being delivered to us.

Okay, and then lastly, maybe just discussion back here on the domestic market. Are there any geographic areas of particular strength or weakness that you're seeing?

Certainly the Baltimore, Washington, New York continues to be good for us. Texas continues to be good for us. We're seeing spots of projects throughout the Midwest as well. We're encouraged that the Far West is starting to see some more activity. I would say that it's more broad-based. Our general positive feelings are more broad-based than specific locations.

Great, fair enough. Thank you very much.

All right.

Your next question is from the line of Jonathan Lewis with Ardent Research. Please proceed.

Russ, Jim, good morning.

Good morning.

Good morning.

Russ, hate to see you go.

Thanks.

Please stay. So most of my questions -- I'm sorry?

No, go ahead.

Most of my questions have been asked. I was wondering -- I love the way you have this Large-Scale Optical help paying the bills during the downturn. Can you offer any insights as to your feelings on how far that can go? It's been growing rather impressively for a number of years now.

Certainly, it has been. We have been very successful with, in custom picture framing in big box stores, and there is still significant opportunity in the more independents. We believe that we're beginning to explore some international opportunities, and then finally, acrylics. In fact, acrylics may end up being as important as anything that we've done. We really have some great proprietary technology on the acrylic side for control of reflection, and the marketing arms of this business are pretty sensational in terms of their ability to take these technologies to market. So we're very -- this is a very, very exciting business. And for sure, it's been a great help to us in the downturn.

Okay. So it sounds like you feel like you've penetrated the big box stores about as far as you can go with the existing products, but you have some new products there. And for overall growth, it's going to be international and moving to smaller scale. So probably not growing as fast in the future?

I don't know that we can say that. In fact, I would even say that for the next couple of years, we have some pretty good growth plans for the business.

Fair enough. Thanks much. And like I said, most things were answered. I'll just leave with, Russ, we love you. Don't go anywhere, please.

Thanks.

And that concludes our Q&A session. I would like to turn the call back over to Mr. Russ Huffer for closing remarks.

All right. We really appreciate the time and effort and attention this morning. We really do believe that we are -- we are positioned to get through all of the -- certainly the downturns in the market. And we've got our Company positioned for the future, and that's where our energies are. And that's where mine are. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect. Everyone have a great day.