Apogee Enterprises Inc (APOG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Apogee Enterprises Incorporated results conference call.

My name is Regina and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will be conducting a question-and-answer session. (Operator Instructions). Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mary Ann Jackson. Please go ahead, ma'am.

Thank you. Good morning, and welcome to the Apogee Enterprises fiscal 2012 second quarter conference call on Thursday, September 15, 2011. With us on the line today are Joe Puishys, CEO, and Jim Porter, CFO. Their remarks will focus on our fiscal 2012 second 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 risk and uncertainties which are beyond the control of management. These statements are not guarantees of future performance and actual results may differ materially. Important risk 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.

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

Thank you, Mary Ann, and good morning, everyone. We've got a great attendance for today's call, and I thank you for joining me in my first conference call as the CEO of Apogee.

I am following a great leader in Russ Huffer, very well known in this industry, and I thank him for what he has done for our business for the last several decades. I am really excited to be leading Apogee, and I believe I can have a great impact on this Company's performance and results. I'll be focusing on operational improvements in the short-term, and in the longer term working to develop and execute strategies to grow our business, not just in the United States but internationally.

I bring a background of operational, manufacturing, marketing and technical excellence from my years at Honeywell, and extensive experience in growing businesses worldwide, both organically and through acquisitions. I know the construction business. I've led 2 large Honeywell operations and businesses that serve this industry.

Honeywell has an integrated approach that includes building controls, lighting controls and 2 building systems businesses closely related to Apogee's energy efficient building products and services. I'd like to say I've had outstanding leadership, training, development and mentoring in these areas from some of the best in the industry at Honeywell, who uses significant rigor and discipline in their approach to operational excellence. I will bring that here to Apogee.

In the coming months, you'll hear more about Apogee's strategies. In the meantime, as we continue to manage through the commercial construction downturn, we will make many operational improvements that will better position Apogee for not only sustaining in the downturn, but also as we grow it in the upturn. Our solid balance sheet and cash reserves position us well in the commercial construction markets.

Looking at the second quarter results, I saw many positives. We grew our revenues 14%. 7 percentage points of that were organic, 7 points coming through our acquisition of the Brazilian architectural glass acquisition. At the same time, we substantially reduced our architectural segment losses. They were less than half of what they were a year ago, and our earnings per share was nearly at breakeven, when you exclude the CEO transition costs of approximately $0.05 a share. I'd like to point out that last year we had a loss of $0.31 a share; and sequentially, our loss is less than the first quarter. As I said, we are nearly at breakeven.

We believe the architectural segment backlog trend remains positive, as the decline and the slight decline from the first quarter resulted from the timing of contract signings. The level of awarded projects to Apogee awaiting final signed contracts actually grew to more than $60 million by the end of the second quarter. That's up from $40 million at the end of the first quarter. So, while those numbers are not in the recorded backlog, they will go into backlog as the contracts are signed. So, the total backlog picture is very positive at Apogee.

The picture framing business, what we call our large-scale optical glass and acrylic business, continued to deliver strong financial results. The operating margins did dip slightly, due to lower volume resulting from softer retail markets and the timing of customer promotions.

Finally, we had positive cash flow from operations of $6 million in the second quarter, and we maintained our solid cash and short-term investment position. Jim will expound on this more in a few moments.

As we look to the outlook, I've had plenty of time to scrub our deck for the rest of year. Our fiscal 2012, we continue to expect revenue growth will exceed 10% and that Apogee will be slightly profitable for the year. In addition, we expect Apogee to generate positive cash flow operations for fiscal 2012.

While we do need to fill in some fourth quarter architectural segment capacity, and maintain our improved architectural glass pricing and mix to achieve the outlook, we continue to see good bidding activity. We're encouraged that we are seeing more projects in sectors beyond the institutional sector, meaning education, healthcare and government, and more growth in the commercial sector.

So, as we enter the second half of the year and we do, of course, see the economic uncertainty in the market, the recent McGraw-Hill construction forecast for non-residential construction and the American Institute of Architects billing index indicating that the market will continue to be soft throughout the rest of 2011 and into calendar 2012. While we see that concern, again, we feel confident with our bidding activity being large.

My focus will be on running our business better, preparing for the upturn, while markets remain difficult. I'm very optimistic about the longer term opportunities for Apogee, and committed to growing our business and improving our profitability.

After Jim Porter's comments, I look forward to your questions of my business. Thank you. Jim?

Thanks, Joe. We're encouraged by the second quarter architectural segment revenue growth and the segment's decline in losses, along with the continued contributions from our large-scale optical segment. Apogee, overall, lost $0.06 per share from continuing operations in the second quarter, compared to a loss of $0.18 per share last year on revenues of $165.6 million, which grew 14%.

Fiscal 2012 results include $0.05 per share related to CEO transition costs in the quarter, with the expense recognized in SG&A. The prior-year period included approximately $0.05 per share in expenses to address architectural glass quality issues due to vendor-supplied material last year.

On a comparable non-GAAP basis, adjusting for these reconciling items, we had a loss of $0.01 per share from continuing operations in the fiscal 2012 second quarter, compared to a prior year period loss of $0.13 per share with the architectural segment improvement. We had positive free cash flow of $3.9 million during the second quarter, compared to less than $1 million in the prior-year period. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

Our architectural segment revenues increased 17% to $149.1 million, and the operating loss for the segment declined to $5.1 million, from a loss of $10.8 million in the prior-year period. Inclusion of the Brazilian architectural glass business we acquired last year contributed 7 percentage points of the increase in segment revenues. Although its impact on the segment operating line was minimal in the quarter, we continue to expect it to be accretive for the year.

The revenue growth came from share gain in our window and storefront businesses and the improved architectural glass pricing. This higher pricing, along with better segment capacity utilization, contributed to lower operating losses. These improvements were somewhat offset by lower margin work in installation, as expected, for work on projects bid during the trough of the cycle.

We've regularly talked about the lumpiness that could occur in our backlog and we saw this for the second quarter. While our backlog declined to $231 million, this was offset by a significant increase in the level of projects awaiting final contract signing.

At the end of each quarter, we generally have some work that's been awarded to us but is awaiting final signed contracts before being added to backlog. In the second quarter, this amount of awarded but not yet signed contracts increased by more than $20 million from the first quarter. We ended the quarter with more than $60 million in work awarded but not yet in backlog, compared to approximately $40 million at the end of the first quarter.

The normal level of projects awaiting final contract signing is in the range of $20 million to $25 million. Though, over the past year, we've seen more of this with larger projects that have greater contract detail. They take longer to finalize and sign, which is when we recognize them in backlog. The key point to this is that we continue to receive significant orders for new work in markets that continue to be difficult.

The backlog mix changed slightly, with a 5 percentage point shift from the institutional to office sector in the second quarter. The backlog mix is now the institutional sector, government, education and healthcare projects, is 50% to 55% of the backlog; office is 30% to 35%; condos are almost 10%; and transportation, hotel, entertainment and retail is 5% to 10% of the backlog. Halfway through fiscal 2012, 50% of our backlog is expected to be delivered in fiscal 2012 and the other half in fiscal 2013. We have more work scheduled for the next fiscal year than we did at this time last year.

Second quarter architectural segment capacity utilization increased to approximately 60%, from approximately 55% in the first quarter and 51% in the prior-year period. Our large-scale optical segment turned in a solid performance, although revenues and earnings declined compared to the second quarter of last year. For fiscal 2012 year-to-date, segment revenues and operating income are up compared to the prior-year period, due to a strong first quarter in the current year. We have great value-added framing products that customers continue to demand.

Second quarter large-scale optical segment revenues were $16.4 million, down 6% from the prior-year period, due to a combination of softer retail markets and the timing of customer promotions. Operating income on the lower revenues was $3.5 million, compared to $4.2 million in the prior-year period, and the second quarter operating margin was 21.4% compared to 24.4% in the prior-year period.

At the end of the second quarter, our cash and short-term investments totaled $45.3 million, compared to $43 million at the end of the first quarter. Non-cash working capital was $68.2 million, compared to $63.3 million at the end of the first quarter, with growth in our business. Our overall days sales outstanding level increased only slightly to 50 days. We define non-cash working capital as current assets excluding cash and short-term investments plus current liabilities.

I'll turn to our outlook. We are maintaining our outlook, and continue to anticipate revenue growth of more than 10%, and to be slightly profitable for the year. At the same time, we expect to have positive free cash flow for the fiscal 2012 full year. We continue to 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, somewhat offset by expected lower margins on the installation business, as we flow more projects that were bid during the market trough.

Based on our current visibility, we expect the fourth quarter revenues and margin to be slightly lower than in the third quarter, due to anticipated project timing also driving somewhat lower capacity utilization in the fourth quarter. We expect the full year gross margin to be between 17% and 18%. We expect to generate positive free cash flow for the full year. Capital spending is expected to be less than $20 million without any significant, strategic investments. And depreciation and amortization should be approximately $29 million.

We remain focused on effectively managing through a still challenging fiscal 2012 and emerging stronger when the market rebound benefits Apogee. We are well-positioned financially, have leading products, services and brands, and are focused on operational and strategic initiatives to strengthen our business. Joe?

Thank you, Jim. I would like to point out that across the board, Apogee's performance reflected good year-over-year performance on both the P&L and the balance sheet and equally important, sequential improvement. We are continuing to maintain our guidance to grow double digit, top line, deliver income, and realize positive cash flow while maintaining a great balance sheet.

I'd now like to go ahead and ask our operator to open the call for your questions. Thank you.

(Operator Instructions). Tom Hayes, Piper Jaffray.

Just a quick question on the guidance for the full year profitability. Does that include the $0.05 that you guys spelled out this quarter for the transition costs?

Yes.

Yes? Okay. And my next question is on your expectations for the gross margin for the full year in the 17%, 18% range. Margins have been pretty stable over the last 4 quarters at the 15.5%, 15.7% range. What's going to drive the margin improvement to get you to that level? It's a pretty big step up over 2 quarters to kind of lift the full-year margin?

Tom, this is Jim. Probably the biggest issue coming in the second half of the year is, I think that -- we've talked about, in terms of Viracon's business, the lower pricing that was flowing through the year. And it was really going to be through the first half of this year that we were going to work through that. And so we still had, in the second quarter, we are seeing the improving mix, in terms of the new, better price work and some of the older, lower priced work. And so that should really be pretty much behind us as we come out of the second quarter.

The next item is if -- as you probably recall in our large-scale optical segment, our Q3 is traditionally and seasonally our strongest quarter. And so we'll see -- our expectation is that we'll continue to see that seasonal strength in the third quarter. And then overall, just as the business continues to grow a little bit, we see increased capacity utilization as well.

Okay. When we were kind of entering this downturn, you had provided or used to provide -- to your comment that we are starting to see the tail end of the lower margin projects. Are we 80%, 90% of the way through those lower-margin projects?

I would say in Viracon's business, yes, I would say it's in that 80% to 90% range, in terms of that being behind us. But I do want to remind you that we have the difference in timing in our installation business. Harmon is a little bit later cycle, and so there is somewhat of an offsetting effect that Harmon really went into the lower price work later, so we'll see that throughout this fiscal year.

And just lastly, on the Brazilian operation, you indicated it would be accretive for the year. Will that be accretive for the cumulative full year or just a couple of quarters for the back half of the year?

Both.

Both? All right. Thank you.

It's basically been relatively neutral for the first half of the year, and so it's going to come from the second half.

All right. Thanks.

Eric Stine, Northland Capital Markets.

I was just curious if you could talk about what you need to fill in for the fourth quarter, and your visibility into that? And then, also, just touch on the pending projects. Is any of that work that could fill in that gap?

Eric, it's Jim. So first of all, we have generally pretty good visibility. In fact, we have visibility to the work to fall into Q4. The biggest uncertainty is really the timing of when that work flows. And so that's a combination of the projects that have been awarded not in backlog.

But probably the bigger part of it, because those tend to be somewhat larger projects which are going to be longer term, though there is some of that work that could fall into Q4. But probably the bigger area is in Viracon's business.

As you recall, in Viracon's business we have commitments on a project, but as they work through phases of the project they award a PO for about 2 months of production. And so we have good visibility to the work. Again, it comes down into timing.

And then in terms of some of the smaller project work in our other Architectural business, similarly I think we have good visibility, but it's really just while our Q3 is pretty solid, Q4 there is just still some uncertainty about when that work is going to transpire and whether it's going to fall into Q4 or potentially slip out into Q1.

Okay. Just to clarify, though, it sounds like the visibility is a result of projects that you're already working on, it's just getting that next stage of commitment, moreso than dependence on new projects?

Correct. It's largely work that we've already been bidding on.

Okay. Very helpful on that. Maybe we could just turn to the bidding activity and kind of more diversification of that? Clearly a more positive tone. Maybe you could just talk about that a little more? And then curious, your take on what you're seeing as far as timing of bid to award and whether that has improved?

I will take a little bit of that, Jim. Hey, Eric, this is Joe. I appreciate your question.

I would say, I think Jim said it well earlier, we continue to receive significant orders for new work in spite of the end markets which, if you read the papers, continue to be a little bit of a quagmire. But we've got enough indicators to say that the incoming work is still there. The project business is seeing -- as Jim said, we still have to bleed off some of the project work that came in at lower margins, but the inbound work going into the backlog are at better margins.

Our non -- the smaller Architectural businesses that are on shorter cycle continue to see good order book. And, as Jim mentioned, the mix -- the slight mix from institutional to commercial is a good sign and goes against the grain of what the indexes from -- the Architectural Index and McGraw-Hill data is saying.

So, I think we're comfortable that we are bouncing along the bottom of the cycle and will come out. And I think that's evidenced in the margins and in the slight improvement in the mix we are seeing.

I'll just add to that a little bit, which is -- so first of all, we continue to see Institutional as a significant part of the work that we are continuing to bid. So I just wanted to make sure to emphasize that. But the good news is that we are seeing more of the private sector. And actually kind of seeing it spread across all the sectors.

We've seen, as we saw in this backlog, continuing to see some attractive office projects. We'd like to see more of them, but seeing some activity in office. We're seeing a little bit of an increase in work in multi-family, high-end multi-family. And so what we're looking at there is both high-end condos as well as some high-end and large apartment buildings. A little bit of hotel work, and actually, even a little bit of retail. But for us, what I'm talking about are kind of major, high-end mall type activity.

So, it's nice that we're seeing some activity across the segments, not huge levels of activity, but just definitely an increase from where we had been in the past.

And bid to award timing; any change there?

No. It continues to be long.

Okay. And then just 1 last 1 for me. Just turning to Large-Scale Optical. Is there any way to quantify the results, the impact of the economic softness versus the promotion timing? Just trying to judge what the third quarter of this year could look like, relative to last year? Thanks a lot.

So, I assume the question is it related to the impact on operating margin. And in a smaller business, the leverage on volume has a big effect. And so I think that's probably -- so it would probably be the timing of promotions, in terms of Q1 being bigger than Q2 and just having that impact. So assuming that we have another good seasonal strong Q3, we should see the appropriate margins.

I was also curious on revenues as well, just your take on that.

That is probably more timing than economic softness.

Okay, Thank you.

Robert Kelly, Sidoti.

Just had a question, a point of clarification, on the $0.05 charge. It was $1.2 million, pre-tax? In the segment break out, you have corporate as $1.07 million, that's where that charge is on the line item?

No. So first of all, Bob, kind of on a pre-tax basis, it was kind of roughly $2 million. And so that was all in SG&A and that goes into our allocation methodology. It all goes to the segment level.

What the expense line in our corporate line on our income statement that is roughly a little over $3 million a year is where we capture what we call -- I'd almost call them costs associated with being a public company, costs that don't directly go back to the segment activities.

Alright, so if we were to adjust the operating income lines for each segment to strip out that $2 million pre-tax, what are we talking about for second quarter?

You could roughly spread that comparable to the mix in revenues.

Okay. So 90% of it would be in the Architectural segment.

Approximately.

Okay. Okay, that kind of leads into my next question, because you need to be at or close to breakeven to do your -- in the Architectural segment, to do your second half margin outlook. I guess if we were to pull $2 million out of the $5 million you booked, or almost $2 million, we're much closer. So you're saying that the projects that you have in hand on the Viracon side get you near breakeven over the next couple of quarters in that segment?

That's getting us in that direction, yes.

Okay. One of the questions that we've fielded on Apogee and the other non-res names is the slowdown in the Architectural Billings Index, yet there is some disconnect with your bidding and your backlog trends, in that we're up so sharply in a slowing ABI reading environment. Is there some sort of lag time that we are missing? Or, are there projects that you see that the ABI is missing?

I think the way that I responded to that in the past is, frankly, I look at the ABI more or less as just being flat over the past year. And plus or minus 50 by a couple of points. So as we've talked, our business has seen pretty consistent bidding activity, but it has been at pretty good levels over that entire time period. So while the ABI has kind of moved up and down, I think we haven't maybe seen it as much as what you're seeing overall in the market. We've seen a little bit more consistency.

Now that said, we continue to see bid work that doesn't get turned into projects, and so that stuff hangs out there. So I think we've just seen more of a consistency in our business.

That's encouraging. And then, just 1 final 1. Maybe Joe can field this one. The LSO business, it's a nice margin business. I'm just wondering what the long-term thought process is for LSO? Will this business be part of the Apogee Enterprises in 3 to 5 years? Is this a natural fit for what you guys do?

Yes, Bob. I see -- unequivocally I see it being part of the business going forward. I like the business a lot, and I believe we can do a little bit more with synergies. And with regards to technologies, we're still dealing with glass and treating glass. It's a slightly different operation obviously, but there's a lot of things that they do at the Large-Scale Optical business that we could translate operationally for improvements into our Architectural business and vice versa. And I believe our teams can be working together and talking more, and I plan to do that.

So yes, I see it as part of the portfolio going forward. I like the business a lot. I think we can do more with it.

Great answer. Thank you.

Okay. You're welcome.

Eric Glover, Canaccord.

You sort of touched on my question previously. Just wondering if you could talk about your outlook for architectural glass pricing, which you say has been improving. And the prior caller was talking about declines in the AIA's ABI. It just seems like a difficult market to be pushing through higher pricing. I'm wondering if perhaps you're gaining share, or if you could just explain it a little bit better?

Jim, I'll go first, and you can elaborate. Some of the favorable pricing is the completion of projects that were taken during the downturn at very low margins; and as we get them out of the system where the net effect is positive.

As the -- a decade ago, the value added -- the percentage of business that had value added, meaning coated glass -- in the last 10 years that has increased. So even at stable volumes, as the mix moves more towards coated and what we call value-added products, the mix on price is favorable, and we experience that to a slight degree every year. And over time, it has much larger impacts.

Okay.

Eric, I will just add to it a little bit which is, a year ago we were both taking less value-added work at lower prices, and then we had articulated that we frankly lowered price too much on products that we were really differentiated on. And so, as we got -- regained our focus towards the highest value-added products, that's really allowed us to focus on really our pricing discipline.

But, what's also important is, and actually is a positive trend, is that looking at pricing in this business is also a factor of mix in terms of complexity. And so we're seeing a combination of increased complexity, which for us means increased level of value-added characteristics to the products, which is really our core and our target. And as we can see more projects that have more value-added characteristics, that gives us the ability to continue to pass those price increases through. And then, we've also seen some price increases overall in the market.

Eric, I'd like to add to that -- to those comments. As beyond the market dynamics, there's process rigor around the jobs you do go after. And I've seen that the team in the last year has done a better job at being more selective of the projects that they are going after. And the ones we win, therefore, are going to be better margin projects.

Thanks for the color there. And then turning to the Brazilian glass business, do you expect revenue growth in that business to accelerate in the back half of the year? And how are the margins there compared to what you typically receive in the United States?

We do expect some acceleration in the second half of the year in that business. And then, the way we've answered that is that the margins in that business today are comparable to what we saw as average overall Architectural segment revenues. And the opportunity is that as we work with that business and continue to move them towards increased complexity and higher value added as well, we see the ability to not just grow the business but also increase the margin.

When you say margins are comparable, are you talking about during sort of the normal mid-cycle architectural glass margins?

Yes.

Okay. Alright, thanks.

(Operator Instructions). Brent Thielman, D.A. Davidson.

Yes, you guys mentioned you are still working through some lower price projects in Harmon through the year. And I'm wondering, have you seen a material difference in pricing or profitability for new installation projects that you are booking? Because it seems that would be a pretty competitive area still right now.

Go ahead, Jim. I'll elaborate.

So the answer is that we have seen improvement. The work that we were booking into backlog the second half last year and into the first part of this year, I would say was at the trough. And it still is competitive, but our approach to continuing to be selective in terms of the projects we go after is that we are seeing an improvement in the project margins that we're currently bidding and looking at booking.

Brent, if I can add to that. This is Joe. Jim and I yesterday, coincidentally, went through the entire bid -- it's a fairly significant list of all the projects that Harmon is bidding on, and virtually every single 1 of the projects will be accretive to the margin and backlog when they go in.

Okay. That's helpful. And then --

Brent, I just want to add 1 comment, which is in that business though, the work that we are bidding today is really going to be flowing into our business, probably the larger projects, not until the latter part of fiscal 2013 even. So some of these projects will stretch out a ways. But -- and some earlier. But I want to make sure you are aware of that.

Okay. That's great. And then, of the unsigned contracts, the $60 million, how much is a carryover from the $40 million you mentioned last quarter? And could you sort of clarify any risk that those don't turn into backlog?

So first of all, I would say about two-thirds of it is new, in terms of that $40 million, maybe you had half of that carry over into this quarter, kind of roughly. And, what was the second --?

What's the risk of it not coming --

Oh, yes. No. This is work ---

We've been awarded.

We've been awarded the project. And we are really at the point now where we are just kind of negotiating final terms and conditions and field schedules and those kinds of things related to the contract.

It turns relatively quickly.

Okay. I mean, is it possible these things can get deferred over several quarters? Or is that not typical?

I mean, we should -- what's typical is that we would see them all flow in during this quarter. What we've seen in maybe the last year is they might stretch out 2 quarters.

Okay. Thanks, guys.

I would like to turn the conference over to Joe Puishys for some closing remarks. This does conclude the question-and-answer portion of today's event.

Okay, Regina, thank you; and team, thank you very much. I truly appreciate your time today. I certainly look forward to meeting many of you, as I get out on the road and meet investors and analysts. I'm clearly optimistic about Apogee's longer-term opportunities. And as I indicated, having seen the business, I am confident in the projections we've given you today. And I look forward to taking this business to the next level. And I thank you for your attention today. We'll see you soon. Have a great day.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect.