Apogee Enterprises Inc (APOG) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Apogee first-quarter 2012 conference call. My name is Deanna, and I'll be the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host, Ms. Mary Ann Jackson. Please proceed, ma'am.

Thanks, Deanna. Good morning and welcome to the Apogee Enterprises fiscal 2012 first-quarter conference call on Wednesday, June 22, 2011. With us on the line today are Russ Huffer, CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2012 first-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 26, 2011, 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, and welcome to our conference call. Our businesses are beginning to see signs of improvement from the bottom of the commercial construction cycle. Among the first-quarter signals pointing to Architectural segment improvement were the sequential backlog growth, as well as the revenue growth in our domestic architectural businesses.

Within the architectural segment, there were modest improvement on several fronts. In architectural glass pricing, capacity utilization, and order activity, window business margins and market share gain. These improvements were offset by softer installation margins, as we had expected. Tru Vue again performed well, growing revenues and operating income as it continues to convert customers to higher value-added picture framing glass and acrylic in an improving retail market.

From an operations standpoint, we were pleased that all businesses performed well in the quarter, even though the architectural businesses continue to face low capacity utilization, due to the difficult commercial construction market. Our balance sheet at the end of the first quarter remained solid, with cash and short-term investments at $43 million. The positive movement we are seeing has allowed us to somewhat increase our outlook for fiscal 2012 to a slight profit on 10%-plus revenue growth.

Turning to the quarterly results, Apogee's losses continued in the first quarter. We lost $0.08 per share compared to a loss of $0.13 per share last year. Overall, Apogee revenues increased 7% to $153.3 million. Revenues for the architectural segment also increased 7%, and there was an architectural segment operating loss of $7.1 million. As expected, these losses resulted from low pricing on architectural glass projects and lower margin installation work, both bid through the bottom of the commercial construction cycle, as well as low architectural glass capacity utilization.

Compared to the prior year, our architectural segment loss eased somewhat as the impact from revenue growth in our window and storefront businesses was somewhat offset by lower margin work and installation. I am encouraged that the architectural glass price increases we implemented last year are starting to flow through and operational improvement initiatives are having an impact on quality and our cost structure. This business is running well, and is looking at increasing level of potential projects for later this year and into fiscal 2013.

In the newest part of our architectural glass business, our Brazilian acquisition accounted for 5 percentage points of the 7% revenue growth for the architectural segment, but had a minimal impact on operating income. The integration is proceeding smoothly, and I'm pleased with the projects we are winning in Brazil, where commercial construction markets are stronger than here in the US. In the first quarter, our architectural segment backlog grew to $247 million from $237 million in the fiscal 2011 fourth quarter and $215 million a year ago. We are encouraged that our backlog again increased. I want to remind you that our backlog can be lumpy from quarter to quarter, depending on project size and timing, but we feel good about the improved trend.

Large scale optical segment revenues increased 8%, and it generated operating income of $4.6 million. The operating margin of 25.7% resulted from the ongoing strong mix of value-added products, the volume increase and strong operational performance. This compares to an operating margin of 20.2% in the prior year period.

Next, I'll cover our outlook. I believe we are finally seeing the beginning of an upturn for our architectural segment. Even though a stronger economy and more jobs are needed to bring ongoing steady growth to our commercial construction markets. For fiscal 2012, our outlook has improved slightly, as we've become more confident that architectural glass price increases should flow as the year progresses and stronger volume is anticipated for our architectural glass and storefront businesses, with both market improvement and share gain. We now expect revenue growth to exceed 10%, and we expect to be slightly profitable for the year.

This outlook in part depends on our ability to fill an open fourth-quarter capacity in our architectural segment. Roughly half of our full-year revenue growth comes from inclusion of the Brazilian architectural glass business. We are expecting that the actions we've taken in our architectural businesses, ranging from price increases and productivity improvements to project selection changes will contribute to improved fiscal 2012 results. Somewhat offsetting improvements will be lower margins in the installation business, as it executes projects bid at the cycle trough. We also expect to generate positive cash flow from operations in fiscal 2012.

The McGraw-Hill forecast for non-residential construction, as well as the American Institute of Architects' Architectural Billing Index indicate our domestic end markets should start improving later in calendar 2011. To date, this is translating into stronger architectural bidding activity, which is driven by institutional work. We are starting to see early signs of improvements in other markets, including the private sector; however the majority of work currently being bid is scheduled for fiscal 2013.

As domestic commercial construction markets recover, we believe we are well-positioned financially, and anticipate renewed interest in value-added energy-efficient products which will benefit Apogee's businesses. Jim?

Thanks, Russ. As we continue to operate through challenging commercial construction market conditions, we are encouraged by the first-quarter architectural segment backlog growth, revenue level, and decline in losses for Apogee. We lost $0.08 per share in the first quarter, compared to a loss of $0.13 per share last year, on revenues of $153.3 million, which grew 7%. Our architectural segment revenues also increased 7% to $135.3 million, and the operating loss for the segment declined to $7.1 million from $8.6 million in the prior-year period.

The Brazilian architectural glass business we acquired contributed 5 percentage points of the increase in segment revenues. Although its impact on the segment operating line was minimal, we continue to expect it to be accretive for the year. We saw revenue growth in our window and storefront businesses, as they gained share, which more than offset a decline in glass fabrication exports, down partly due to timing. The impact of increased volume at our window and storefront businesses was somewhat offset by lower installation business margins on work that was bid during the trough.

In the first quarter, the architectural segment capacity utilization increased to approximately 55% from 50% in the fiscal 2011 fourth quarter, and 52% in the prior-year period. The sequential increase in architectural segment backlog was also a positive in the first quarter. In this tough market, we continued to book a significant amount of new business. Our first-quarter architectural backlog increased to $247 million from $237.2 million at the end of the fiscal 2011 fourth quarter.

The break out of our architectural segment backlog by market is the institutional sector, government, education, and healthcare projects is 55% to 60% of the backlog. Office is 25% to 30%. Condos are almost 10%, and transportation, hotel and entertainment are a little more than 5% of the backlog. Approximately $175 million, or 71% of the backlog is expected to be delivered in fiscal 2012 and approximately $72 million or 29% in fiscal 2013.

Our large scale optical segment turned in another good performance as retail picture framing markets have seen some improvement. We have great value-added framing products that customers continue to demand. The large-scale optical segment earned $4.6 million on revenues of $18.1 million, which increased 8% from the first quarter of fiscal 2011, the low point last year in revenues and margin for the business. The operating margin was 25.7%, up from 20.2% in the prior year period. The increase was due to the ongoing strong mix of higher value-added glass and acrylic products, the revenue growth, and continued strong operational performance.

At the end of the first quarter, our cash and short-term investments totaled $43 million compared to $60.6 million at the end of fiscal 2011. In terms of key drivers for the change, during the quarter, we added $10.3 million as we closed on the sale leaseback associated with certain equipment to take advantage of low, long-term lease rates and to further strengthen our balance sheet. Working capital used $25 million in cash, with $15 million for our normal first quarter seasonal needs to fund incentive and retirement plans and tax payments. We also grew working capital approximately $10 million to support first quarter and future planned growth, largely in accounts receivable and inventory.

We also paid $3 million in the quarter to fund resolution of an outstanding claim related to a foreign operation discontinued in 1998. It had been fully reserved in discontinued operations at the end of fiscal 2011. Non-cash working capital was $63.3 million compared to $39.4 million at the end of fiscal 2011. The increase was the result of the items I just noted. We maintained our overall day sales outstanding level which improved slightly to 47 days compared to 48 days at the end of fiscal 2011. We defined non-cash working capital as current assets excluding cash and short-term investments, plus current liabilities.

I'll turn to our outlook. As Russ said, our fiscal 2012 outlook has modestly improved. We have become more confident that architectural glass price increases announced last year will increasingly flow through as fiscal 2012 progresses. In addition, we'll leverage stronger volume that we now anticipate for our architectural glass and storefront businesses. Tempering this will be the lower margins on the installation business, as we flow projects that were bid during the market trough. We now anticipate revenue growth of more than 10%, and we expect to be slightly profitable for the year.

We expect the second half of the year to be better than the first half with pricing, volume, and operational improvements positively impacting margin as we go through the year. Based on our current visibility, we expect the fourth-quarter revenues and margin to be slightly lower than in the second and third quarters with anticipated project timing driving somewhat lower capacity utilization in the fourth quarter. Just a reminder that quarter-to-quarter timing is always difficult for us to predict given the nature of construction projects. We expect the full year gross margin to be between 17% and 18% with the end of the year run rate at the high end of this range.

We believe material cost increases and volatility have been built into our outlook. In terms of key material cost drivers, diesel and freight costs have been higher than we have planned. Bulk glass manufacturers have recently announced price increases, and aluminum remains somewhat volatile. We are working to offset cost increases through productivity improvements and price increases. We expect to generate positive free cash flow for the year. Capital spending is expected to be less than $20 million without any significant strategic investment.

Depreciation and amortization should be approximately $29 million. We define free cash flow as net cash flow provided by operating activities, less capital expenditures. We are focused on effectively managing through a still-challenging fiscal 2012 and emerging stronger when the market rebound benefits Apogee as anticipated for fiscal 2013. We are well-positioned financially, have leading products, services and brands, and remain focused on operational and strategic initiatives to strengthen our business. Russ?

Thanks, Jim. I'm proud of our team's efforts and focus through these challenging times for commercial construction. We understand the importance of 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. Now I'd like to go ahead and open up the call to questions.

(Operator Instructions) The first question will come from the line of Daniel Garofalo, Piper Jaffrey.

Good morning, everyone.

Good morning.

Guys, I was just wondering if we could get a little more color on the lower margins in the installation business. Is it a situation where the installation was discounted to win business or more of a one-time cost overrun that resulted in the less favorable margins this quarter?

Yes, this is Jim. So it's not associated with any kind of one-time or any execution issues. There's two factors. One is the nature of our installation business has competitive dynamics where a majority of our competition are local and regional independents, so it just has tougher competitive dynamics, and then that business really has the longest lead time, if you will, in terms of when we're bidding work and when that flows through so really it's just this year is when we're flowing through the work that was bid in the most competitive time periods, and we expect to see the lower project margins relative to last year, for the full year.

Okay, fair enough. You had went over the backlog mix and it seems as though you've really moved off the trough in terms of the proportion of non-institutional business, it looked like 40% to 45%. I was just wondering if you could refresh our memory for what the trends have been in terms of institutional versus non-institutional?

Sure. So what I called out was that the institutional is 55% to 60% for the quarter and that's been bouncing around for the last probably six quarters at anywhere from 60% to even over 70%, so we are seeing some better balance, and I think the key is, and what allows us to feel a little bit better about the business is we are seeing a little bit broader activity in terms of bidding and that's both geographic as well as segment, but institutional does continue to be the strongest part of the market that we're both servicing and continuing to look at.

And I guess just one follow-up on the institutional stuff. I mean, is that strength something that you see continuing throughout the second half of fiscal 2012, based on your visibility?

Yes. We still see that kind of ratio and it's good business for us today.

Okay, fair enough. Thanks for taking the questions, guys.

And the next question will come from the line of Robert Kelly of Sidoti & Company.

Hi, Russ, Jim. Good morning.

Good morning.

A question on architectural segment loss in the quarter just ended. Is the project work that was bid at the cycle trough, is that offsetting profits in the storefront and the window business, in the glass window business, or are those businesses on their own still operating below breakeven?

Yes, the architectural glass business is the one that still has a flow through. We talked last quarter there will be a flow through, with gradual improvement in pricing as we go through this year so the first quarter had, still had very depressed pricing for the glass fabrication business, so the installation business low margins are not taking away profits. They are just not adding.

Okay, and then once the new pricing starts to flow through, even at 55% utilization, you're still profitable? Is that the way to think about it, or do you expect utilization to rise as well?

We expect slight rises in utilization as well. I think we're looking at kind of ranging from 60% to 65% capacity utilization over the balance of the year.

Okay, so what, if you could, the percentage of low margin architectural glass and installation work that's depressing profits right now. What percent is that and when does that all start to go away completely?

It starts, well so first of all, in the installation business, we'll be seeing the lower margin project work relative to last year for the full year. In terms of in the glass fabrication business, it's really the second half of the year where we start to see that meaningfully. I'd say in terms of the first quarter, in terms of glass fabrication, we estimate that it's probably close to 90% of the business was still work bid at lower prices.

And then does that gradually shrink to what as the year progresses? I mean, what are you expecting? I'm just trying to get an idea of the phasing for your projected return to profitability.

Yes, certainly as we get through the first two quarters, most of that will go away and then we'll be into, where we raised prices last year, we'll be into business that reflects those price increases and then we've continued to raise prices as well, so we just see a gradual improvement as we go through the whole year but the real drag is through the first two quarters.

Got it. Okay, so as far as the price increase, you said that you continue to raise them. What's the cumulative price increase from, I think it was things troughed out the Summer of last year and then what percent, or how much in your 10%-plus revenue growth forecast for fiscal 2012 is going to be from price?

So first of all, in terms of the plus 10%, we called out roughly there's a portion of that that's related to the Brazilian business, and then related to that, it's really pretty much split between volume and pricing.

Okay, great. And then the cumulative price increase since things bottomed out?

In terms of the glass fabrication business, it's probably kind of in the 10% to 15% on average.

As far as glass, when does that start to contribute profits? Is that 3Q? 4Q?

We start to expect it actually in Q2 but at pretty small levels.

Oh, so it's adding just de minimus to the operating line right now?

Yes.

Okay. And then you called out something in the press release that I hadn't seen you call out before, project selection. Is that just things are tightening up and you have a better mix of work to choose from?

So what that really refers to and I believe we actually called out last quarter too but it's really just being really focused and that's really related to all of our businesses which is, as we've talked early last year in glass fabrication, we got too aggressive with pricing and probably less selective and so getting more focus there, but then also in the institutional business, we've really been focusing on institutional projects, and the broader geography, and then within that, just being really in our window business too just being really selective about where we can be most competitive, where the projects have more value-added characteristics, where we can really add value and command more of a premium associated with that.

Okay, great. Thank you.

The next question will come from the line of Eric Stine, Northland Capital Markets.

Good morning. Thanks for taking my questions.

Good morning.

You've talked about it here a little bit, but just curious. More detail about what's changed since you last provided guidance from a revenue perspective. Is it prior to the last time, has it increased confidence that the price increases are in fact sticking? Is it better activity in these various end markets? Any clarity there would help and then also, if you could just comment on the May ABI which was just released and showed another drop in the ABI and also in inquiries and how you think about that in light of the guidance?

Yes. Clearly, on the ABI, what we saw there was a small drop. We're not sure if that's going to be indicative of the long term or not. There seems to be some indication that it could just reflect some seasonality, but we'll just have to watch it. One quarter doesn't make a trend so we'll just have to watch that. On the pricing side --

Well, in terms of what's giving us more confidence in terms of the revenue growth, it's really a little bit of all of the above in terms of the things that you mentioned, so first of all, in terms of pricing, we had talked last quarter about the importance of being able to see the pricing stick, but probably more importantly to win the work at that higher pricing and we have been doing that. We have seen also in terms of some of our shorter lead time business like the storefront business and some of the standard window business, we've been successful, we believe, in gaining share and a little bit more momentum than we saw a quarter ago in that business.

And then also in terms of end markets and again, it's nothing -- not one key point but we are just seeing a little bit more activity in the non-institutional sector in both broader geographic activity as well as across segments, and even if you go to the ABI where the one segment which was up a little bit is multi-family and we saw a small pick up in our condo backlog, which is actually condo/apartment and again, that's a small number of projects for us even though it's maybe 10% of our backlog, but again, you are starting to see in certain markets a little bit of activity in value-added projects like multi-family.

Okay.

Go ahead. The only thing I was going to add and reiterate is the increased confidence has really come from winning project, being more selective, and winning the projects at better prices, so we're seeing a better win rate than this gave us confidence that win rate is going to support this projection.

Got it. So clearly, and you've obviously indicated this but still, market uncertainty but you're gaining share and feel good about that?

Yes. Fair enough.

As far as the fourth quarter and indicating the capacity that needs to be filled in, can you just talk about what your visibility there is or what your confidence level is that you will be able to do that?

We clearly have line of sight to a pipeline of projects that we're pursuing that would enable us to fill this in, so if we continue with normal win rates or the win rates we've been experiencing, then we have that ability. It's just not filled in, and it's always subject to that kind of a shift, so it feels reasonable, it looks reasonable. The opportunity is there. It's just not lined up yet.

And in terms of the larger projects, we kind of start to run out of time in terms of when those projects can actually be awarded, and when the construction site can actually take place, so and then also, in terms of ongoing projects, there's always some volatility of just timing of projects, so it's both you could see projects move out as well as projects that we have line of sight on, whether or not they actually close and move forward this fiscal year or into next year.

Okay, and if you do fill that in, I mean you're incorporating that into your discussion that you still expect the fourth quarter to be down slightly from the second and third?

Yes.

Okay. Maybe last thing for me, just an update on how things are going with the CEO search.

Yes, I think we're encouraged that the process is on plan and is surfacing very good candidates, so it's moving forward.

Okay, thank you very much.

The next question will come from the line of Eric Prouty, Canaccord Genuity.

Great. Thanks. Just shifting over to the optical side. Margins there have been pretty impressive the last number of quarters. Maybe, what is kind of built into your forward guidance for margins on the large scale optical?

Our outlook continues to be a little better than 20% operating margins for the segment.

Okay, great, and then I know this question has been asked a few different ways but just again to try to get greater understanding, if we look at the backlog, I mean you're looking for a good margin improvement here the remainder of the year. If you look at the margin for the business that you've bid and is in backlog in the margin of the business that you're bidding, that might go into backlog. I mean, can you see that margin increase in that backlog business, or what I guess is the mix between better pricing in the backlog and say higher capacity utilization rates that are going to get you to that much higher gross margin number you're looking for, for the remainder of the year?

We're going to get some benefits from both. There's no question about it and we do see, but we definitely see pricing moving in the right direction. And pricing and margins in the architectural side.

Okay, so with what you're projecting for the full year, I guess my question is, is that kind of backed up by what you have backlogged now?

Yes.

In the margins?

Yes. So it is supported by the backlog that we have and the work that we're bidding. With the key uncertainty is we still have some more work to bid and the capacity utilization if we aren't able to land the work in this fiscal year.

Great. Okay, thank you.

The next question will come from the line of Brent Thielman, D.A. Davidson.

Hi, good morning, Russ and Jim.

Good morning.

I guess just one left for me. Just curious in your optical segment, had you seen any changes in sort of order trends or activity levels, just obviously with a little more concern with the consumer as of late, and sort of how do you think about that going forward?

There seems to be enough activity and competitiveness in the market that it's pulling through expected volumes for us, so yes, that market, there are some shifts at the end market probably more towards the big box away from the custom but that overall, it seems to still be working quite well for the mix of products we're supplying to the marketplace.

We've seen some slight improvement in terms of kind of the overall market in both independent and the kind of chain store if you will but in terms of timing and seasonality, frankly probably promotional activity in the regional and national chains is driving it more than any kind of seasonal patterns.

Okay, great. Good luck in the quarter. Thanks.

Thanks.

The next question will come from the line of Mark Rogers, Gagnon Securities.

Thanks. Just wondering on the Brazilian opportunity, have you seen the effects of the Olympics or the World Cup start to take hold in your Glassec acquisition? Thanks.

Yes. No, there's nothing in current results but what we have seen is architectural activity and it is a real plus, that we're able to add Viracon to that name, because as we look at, as international architects become involved, they're very familiar with Viracon, and it has a great international brand, and so that's been a real plus for us in being able to engage, but that engagement process is very early on.

There are some projects related to the World Cup that we have visibility to that we're looking at, still early and then it's still early specifically for the Olympics. There's kind of broader general activity in terms of planning for hotel and those kinds of things, but nothing tangible that we can point to at this point.

Overall, the indications are we get from the marketplace is that they continue to expect their markets to be very robust and that's a general comment, including everything that we're talking about here, so we are really pretty optimistic about those markets for the next years to come.

Behaviorally, are the Brazilians and the construction market there, are they more receptive, less receptive or equally receptive to value-added glass products such that you could see margins looking like in Brazil like they did in North America when the cycle was strong?

Yes, they are very supportive and demanding of high performance products. There's a slight difference, that's laminated glass there versus insulated here and sometimes insulated is laminated, but in their tall buildings, they're using these high-performance value-added products almost exclusively, so it's a solid market for these products.

Thank you.

(Operator Instructions) I'd like to turn the call back to Russ Huffer for closing remarks.

Well thank you for your time this morning. We really appreciate it and we look forward to continuing to service you and meeting your expectations.

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect and have a great day.