Apogee Enterprises Inc (APOG) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Apogee Enterprises Inc. earnings conference call. My name is Marie and I will be your operator today. At this time, all participants are in a listen-only mode and we will conduct a question-and-answer session toward the end of the conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the conference over to May Ann Jackson. Please go ahead.

Thank you, Marie. Good morning and welcome to the Apogee Enterprises fiscal 2013 fourth-quarter and full-year conference call on Thursday, April 11, 2013. With us on the line today are Joe Puishys, CEO, and Jim Porter, CFO. Their remarks will focus on our fiscal 2013 fourth quarter and full year, and our outlook for fiscal 2014.

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 environments 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 March 3, 2012, and in our press release issued yesterday afternoon and filed on Form 8-K.

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

Okay. Thank you, Mary Ann. Good morning, everyone. Welcome to Apogee's fourth-quarter and fiscal '13 conference call.

We delivered outstanding results in fiscal '13 as our earnings per share more than tripled to $0.67, reported $0.66 on continuing the ops on revenue growth of 6% in commercial markets or commercial construction markets that continued to be flat in the year. I was pleased that we grew our gross margin by more than 300 basis points to 20.8% in the fiscal '13 and that our conversion rate on that incremental revenue growth to income was more than 60%. Both of our architectural and large-scale optical segments reflected topline growth and excellent profit conversion.

Our architectural segment revenues grew 6% for the year on operating income and operating income improved by more than $21 million. This architectural segment revenue growth was primarily generated by our initiatives to expand domestically in our installation and in our storefront businesses. The significant architectural segment operating income increase resulted from architectural glass pricing discipline, improved product mix, productivity enhancements, operational improvements, and the earnings on the revenue growth in virtually every business.

Large-scale optical segment continued its strong performance with revenues up 2% and operating income growing 7%, with the introduction of new glass and acrylic products and the launch of our international framing markets in spite of very weak end market conditions. Apogee productivity improvements in fiscal '13, a focus for me since the improvement -- since joining the Company 18 months ago, contributed approximately 100 basis points of our more than 300 basis point gross margin enhancement in the fiscal year.

I am pleased our architectural segment backlog grew 25% in the fiscal '13 year compared to the prior year end. It is encouraging that we are seeing growing and improving margins on the work that is added to the backlog. Jim will provide further granularity to the timing and the improved margin and backlog.

Other fiscal 2013 achievements included generating $41 million of operating cash flow to support our $35 million in capital investments. These CapEx investments are focused on future growth. You have heard me say we are stepping on the accelerator before we come out of the curve. Our 2013 capital expenditures for growth, productivity, new products, new capabilities, all included upgrading operations to significantly improve productivity at our second largest Viracon architectural glass fabrication facility, investing in new product capabilities and efficiencies in our largest Viracon facility via new state-of-the-art coater, buying equipment to support growth in the installation and storefront businesses, and increasing in productivity, investments, and new product development in introductions throughout Apogee. These investments are yielding upgraded operational improvements, significant productivity enhancements and allowing us to better manage capacity.

Other growth strategies include our new market initiatives. We're winning some incremental renovation projects, working with building owners and ESCOs and we are starting to penetrate the European picture framing market. Looking at the fiscal 2013 fourth quarter, we continued our quarterly year-over-year improvement in the period. Revenues grew 7%, operating income more than doubled to over $6 million, compared to the prior year period, which also was a very strong quarterly improvement for us.

Architectural segment revenue was led by our installation, window, and architectural glass businesses, and segment earnings benefited from increased revenues and improved architectural glass pricing. I was truly pleased in spite of the fact that we had one less week in our fiscal quarter, and the timing of the December holiday's operating income in our large-scale optical segment was equal to the fourth quarter of fiscal 2012, due to strong operational performance and a nice mix of value-added framing products, resulting in a 140 basis point improvement in operating margin.

Looking at the outlook for fiscal '14, we expect to drive strong top and bottom line improvement in fiscal year as we continue to implement growth and productivity initiatives. On the top line, we are anticipating high single-digit growth for us for a performance that is about 5 percentage points better than we are forecasting for our end markets.

The outlook for United States commercial construction markets in our fiscal '14, based on Apogee's lag to McGraw-Hill's forecast for our segments, is for low single digit market growth. We anticipate that our revenue growth will come largely from architectural segment domestic geographic growth and new products in both segments.

On the bottom line, we expect earnings per share from continuing ops to be in the range of $0.90 to $1, with improvement coming from strong architectural glass pricing, mix, improved installation margins, as both businesses execute more complex projects. We also continue to gain -- expect to gain 50 to 100 basis points of margin improvement from our productivity initiatives. Our outlook for gross margins for fiscal 2014 is to be at least 22%, approximately 200 basis points year-over-year improvement.

We are anticipating capital expenditures of $40 million to $45 million as we continue to invest for growth, productivity, and product development capabilities. Our largest expenditure will be for the new architectural glass coater, which will give us new aesthetic and energy efficient cooking coating capability that will enhance our competitive position. Our new coater will also provide production efficiencies at a vastly increased run rate and faster production changeovers.

We expect, once again, to be free cash flow positive after these significant investments in future growth.

Our anticipated fiscal 2014 performance in investments are the first steps in achieving our three-year target of revenues of $1 billion at double-digit operating margins. I believe that our focus on operational improvements, as well as our strategies to grow through new geographies, new products, and new markets, will allow Apogee to continue to deliver improving results that will allow us to reach these goals by the end of fiscal '16.

Jim will now cover the financials in more detail. Jim?

Thanks, Joe. We are pleased with our fiscal 2013 full-year and fourth-quarter performance. We've made significant progress in commercial construction markets that have remained flat.

I'll first review results for the full year and then I'll move to the fourth quarter. For the year, we earned $0.66 per share from continuing operations on revenues of $700.2 million, which grew 6%. Both earnings and revenues were at or near the upper end of the guidance range we have previously provided. Net earnings for the year were $0.67 per share. Gross margin for the year was 20.8%, up over 300 basis points from 17.7% in fiscal 2012, as we benefited from improved architectural glass pricing, productivity improvements across all businesses, positive project execution, and slightly higher capacity utilization.

Our architectural segment performance improved significantly in fiscal 2013. Full-year operating income grew more than $20 million as we achieved operating earnings of $9.2 million for the year, compared to a loss of $12.1 million for the segment in fiscal 2012. Drivers for this improvement were architectural glass pricing and product mix, earnings on revenue growth of 6% for the year, and good operational performance across the segment. The architectural segment operating margin for the fiscal 2013 full year was 1.5%.

Our large-scale optical segment continued to be a significant contributor to Apogee's performance in fiscal 2013. Revenues were up 2% and the segment delivered $21 million in operating income for fiscal 2013. The large-scale optical segment operating margin for the full year was 26.3%, up from 25% the prior year, as we had strong operational performance and picture framing product mix.

Apogee's tax rate for fiscal 2013 was 29.3% for the year, while we had income for the tax line last year.

Turning to the fourth-quarter results, earnings per share were $0.15 on revenues of $179.7 million, which grew 7% from the prior year period. The fourth-quarter gross margin improved year on year, although sequentially, we were down somewhat from the third quarter on lower revenues as we had expected.

The fourth-quarter gross margin improved 80 basis points from the prior year period, to 20.2% on strong architectural glass pricing and productivity improvements.

In the fourth quarter, the architectural segment moved to operating income of $2.2 million from a loss of $500,000 in the prior year period, on higher glass pricing, strong installation revenues with improving margins, and solid operational performance. Fourth-quarter architectural segment capacity utilization was approximately 57%, compared to approximately 64% in the third quarter due to lower volumes which we had anticipated. Capacity utilization was approximately 56% in the prior year period.

We maintained an architectural segment backlog of approximately $300 million during the second, third, and fourth quarters of fiscal 2013, a period that experienced 8% segment growth. As we have grown our architectural business during the year, we replaced these revenues in the backlog with a good level of new orders.

Our backlog remains at the highest level in three years and we continue to see good bidding activity and improving margins. We feel good about the backlog level and direction. At year end, it was up 25% from the end of fiscal 2012.

As usual, I want to remind you that our business can have lumpy order intake activity so we don't require or necessarily expect sequential backlog growth each quarter to be consistent with the longer term trend. Our backlog mix at the end of the fourth quarter changed slightly from the third quarter as we saw a positive move of approximately 5 percentage points in the office sector.

The institutional sector declined slightly to 50% to 55% of the backlog with healthcare projects the much larger portion than education and government work. At the same time, the office sector increased to just over 35% of the backlog. While (technical difficulty) residential, including high-end condos and apartments, is approximately 5%, and hotel and entertainment, transportation, and retail also are approximately 5% of the backlog.

Regarding the timing of the backlog, approximately $255 million or 86% of our backlog is expected to be delivered in fiscal 2014, and approximately $42 million, or 14%, in fiscal 2015.

For the fourth quarter, our large-scale optical segment had lower revenues but continued to make significant contributions to Apogee's performance. The segment had operating income of $4 million for an operating margin of 20.4%, up from 19% in the prior year period. Revenues were down 9% with one less week in the quarter and the timing of holidays in the current year. We continue to invest in this business to develop new market opportunities and new products to drive future growth.

Apogee's tax rate for the fourth quarter was 18.9% as we benefited from the retroactive extension of the [R&D] credit, along with normal reserve reductions resulting from finalization of previous tax positions. Total debt at year end was $30.8 million, compared to $21 million last year and $30.8 million in the third quarter. Virtually all our debt is low interest industrial revenue or recovery zone facility bonds.

After we announced plans in the quarter to temporarily close our Viracon St. George, Utah, architectural glass facility for approximately two years, we made the decision to redeem the $10 million of unused outstanding recovery zone facility bonds for St. George, since we don't plan to make investments at the plant in the required timeframe. As a result, this $10 million moved from long-term debt to short-term debt at year end on the balance sheet.

This change also added approximately $10 million of the corresponding restricted cash from long-term to our cash and short-term investments. Our reported cash and short-term investments totaled $85.6 million at year-end, compared to $79.3 million at the end of fiscal 2012. We redeemed these bonds in April, reducing both debt and cash.

We had positive free cash flow of $6 million in fiscal 2013 after spending $34.7 million on capital expenditures for growth, productivity improvements, and new products. This compares to fiscal '12 CapEx of $9.7 million.

Our capital expenditures for the year were above the $30 million we had previously estimated as we made an additional -- we made an initial down payment on a new state-of-the-art coater for Viracon late in the fourth quarter. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

Non-cash working capital was $44.1 million compared to $44.4 million at the end of fiscal 2012. Our team continues to effectively manage working capital with our days working capital at 44 days compared to 48 days in the prior year period. We define non-cash working capital as current assets, excluding cash and short-term investments, [plus] current liabilities, while days working capital is computed looking at our controllable working capital assets and liabilities, AR inventory and accounts payable.

Now I'll turn to our outlook. In fiscal 2014, we expect to continue our strong growth trajectory, despite limited help from domestic commercial construction markets. We have a nice backlog level and are seeing good bidding activity. The external metrics we watch, including job growth, the architectural Billings index, McGraw-Hill construction forecast and consumer confidence, point to improving markets for Apogee. We are anticipating that markets will start to strengthen for us in the second half of our fiscal year since our products generally follow construction projects starts by 6 to 9 months.

Our outlook is for earnings per share of $0.90 to $1 on high single digit revenue growth in fiscal 2014. We are expecting our second half to be stronger than the first half, based on our anticipated backlog timing and improving margins through the year, along with expectations that market growth doesn't occur until the second half. We expect full-year gross margins of at least 22% and we anticipate a normal tax rate of approximately 35% for the full year.

We expect to generate positive free cash flow for fiscal 2014 after spending $40 million to $45 million for the full year on capital that's balanced across investments for growth, productivity and new products, as well as for maintenance. We have the financial strength that will also allow us to look for acquisition opportunities that fit our strategic goals.

Annual depreciation and amortization should be approximately $27 million for the year.

Before I turn it back to Joe, I want to say that I am encouraged by our solid improvement in fiscal 2013 and look forward to continued year-on-year growth in fiscal 2014. Joe noted the nice progress we made during fiscal 2013 on our strategic initiatives, establishing a platform for our continuing productivity improvement, geographic expansion, development and introduction of new products. We see significant future opportunities that will leverage Apogee's strong financial position, leading products and services, and operational strategic initiatives.

Joe?

Thank you, Jim. We'll open it up for questions now. Marie, if you could just repeat one more time how our listeners can ask a question and then we will start taking them.

Indeed. Thank you. (Operator Instructions). Brent Thielman, D.A. Davidson.

This is Taryn, filling in for Brent today. I just had a question on, if you could clarify a little bit on that CapEx spending. I know you mentioned that a large portion of it was from the coater. I was wondering if you can kind of talk about the mix, how much the coater is and how much you are seeing from the new product introduction as well as a type of margin improvement you expect from each of these and when you see it flowing through.

The fiscal 2014 capital number which is higher than the prior year does include a portion of the aforementioned high-end coater that we will be installing in our Viracon business, but I would remind you that a piece of that investment happened in fiscal '13. The biggest chunk will happen in fiscal '14, and then there will be some of it at the very beginning of fiscal '15. Less than half of our capital spend will be for the coater. The remaining focus will be on productivity and growth initiatives.

Okay.

This is Jim. As far as the Viracon investment, including the new coater, that is scheduled to be on line mid fiscal '15, is when we actually will begin production from that. So it will be late fiscal '15 before we start to see the capabilities and the benefits associated with it.

Okay. And then, could you quantify how much of a benefit that --?

Could you repeat your question?

Okay. And with this coater, how much of a benefit do you see in margins with it?

With the -- oh, it's Taryn, would be -- well, of course, in fiscal 2014, as Jim mentioned, the coater will not be operational. It goes operational going forward. We will see productivity gains from the coater and we will see capability to have new coatings that we can't do today and capabilities where, at this time, I'm not going to publicly announce our financials behind those numbers.

Okay. That's fine. And then, for the LSO, I know you talked about how there are tougher comps in the second half. However, in Q3 and Q4 you are talking about these isolated events. Do you see any work pushing out into Q1, or should we continue to see a slight sequential decline like we typically see?

The LSO segment, we sometimes have interesting dynamics. Last year, our first half we had stronger comps, and the second half we were weaker. It's going to be just the opposite this fiscal year. We will have more challenging comps in that business in the first half of the year and more favorable comps in the second half.

Overall, the LSO business is performing extremely well and we have a lot of new products in that segment. I couldn't be happier with the performance.

In general, the first half comps will be more challenging than in the second half of fiscal '14.

Traditionally, we do see sequentially, to your question, Q1 a little bit lower than Q4, but it is a business where it is somewhat impacted by timing of retail activities and it's a smaller part of our business so small quarter to quarter changes in revenue have an impact.

Okay. Perfect. Thank you.

Thank you.

Jon Braatz, Kansas City Capital.

Good morning, guys. Joe, when you talk about your 10% target in 2016, when you go back and look at the numbers historically, it's been difficult to get to that number. What kind of market environment do you think it might take to get to that 10%, or do you think it's achievable, let's say, in a market environment sort of similar to what we are seeing currently? Is there that much opportunity in terms of the cost savings, productivity improvements to take that margin higher?

Yes, Jon. Good question. We -- if you get to all those kinds of numbers we need approximately 12% compound growth in our top line over the -- let's say, the three-year period. I've been saying that we need about half of that to come from some end markets and the other half will come from our wins in primarily around new products, new markets, and new segments.

So is mid single-digit growth in the end market conditions likely? I certainly hope so. There is a ton of pent up demand out there. We have proven that we can make substantial earnings in spite of no help from the end markets. So I have no doubt we will blow past our prior operating margin if we can get any help from the markets. So we need, let's say, 6% improvement in our end markets and 6%, we'll deliver on top of that to get to the number and on top of that we will be at double-digit operating margins.

Okay.

And coupled with our initiatives on operations, as I said, we hope to drive 50 to 100 basis points a year in operating improvements from our factories, which we have proven over the last 18 months we can do.

Right. How much capital -- additional capital spending might be required beyond, let's say, the $40 million this year? Are we still looking at a pretty substantial capital spend in 2015 and 2016 to achieve those targets?

We will probably get closer to depreciation kind of numbers this year. It's an unusually large year because of the aforementioned big knot on the super coater that we are going to be installing. Clearly, we have amped up our capital above the last couple of years where we were in a pretty conservative mode on spend in the $10 million range. Jim mentioned we are $27 million of depreciation. I think something closer to depreciation will be in order for us in the years ahead.

I'm not afraid to invest in growth and productivity because they'll pay for themselves. So it will be -- it won't probably be as high as this number we stated for fiscal '14.

Okay. One last question, Joe. The international area in the LSO segment, are you beginning to see some traction or what kind of numbers can you give us in terms of revenue in the LSO segment from international -- your international forays there?

Yes, I am pretty bullish on it. My business leader and I, from that business unit, spent a lot of time yesterday talking about some recent successes. We've signed on additional distribution this year. We've got most countries covered. We are doing well in the fine art market and starting to penetrate the consumer framing market. It will be single-digit million dollar type business for us for the next few years.

But, again, in that business a couple million dollars a year in growth, that's a couple of points to that segment's topline growth. And it's obviously everyone on the phone knows that's an attractive business. So, yes, I am pretty bullish on that. I like what the team is doing and we are making progress with not only sales, but adding distribution.

Okay. Thank you very much.

Thank you, Jon.

Robert Kelly.

Just wanted to talk about, maybe a year or six quarters ago, you had kind of given us a look at projects on commitment, stuff that was about to enter backlog, but wasn't quite there yet. Could you give us a sense of where that is? I mean, you talked about bidding and quoting activities being fairly strong in the press release.

What does that exactly mean? I mean, we can see what the backlog did, but are you seeing even more stuff in the stage right before it moves into backlog?

Yes, sure. I don't want to introduce another non-GAAP metric to the world, but obviously we publish our architectural backlog. You've heard me use the term, we also have what's called projects in review. That's an internal term we use at the projects we've have won. It's going through the legal review process, meaning the contract hasn't been executed.

We also have projects we have won that are not yet in, quote, review. So there's in a way three levels of maturity and we obviously have visibility to projects that have been awarded to us verbally, they then turn into contract negotiations. Jim has been clearing the path those negotiations can take as short as 30 days and as long as four months, depending on the complexity of the project. And then they are entered into a backlog, which we publish.

We monitor all three levels, and at one time I think we hinted that you could expect an increase in the backlog that happened. I am very confident in looking at our backlog and our projects in review and projects that have been awarded to us that we have a very healthy pipeline of work ahead of us.

As Jim said, it can be lumpy and we try not to get overly excited in one fiscal quarter, but over time, we expect to continue to see it go up.

Okay. Thank you.

Bob, this is Jim. Just also, so we have an attractive pipeline of work that we are looking at, but we continue to see the kind of extended time period while the product products out there before that formal award happens. And then also, the larger projects with us, at this point, there's a good chance those are actually not going to fall until fiscal '15 for the bigger projects.

Right. There is pretty big lags. Okay.

The next question that I had was, the mix for your backlog that you are reporting is getting better and it's moving up towards the higher end. But the market as you see it [isn't] really growing. So is it a financing availability catalyst that's moving the high end off the sidelines? Is it just we are a couple of years into the quote-unquote economic recovery? What is going on to help you guys see the mix of projects improve when nonres, as you see it, is still limping along?

Yes. Bob, there has been -- everyone has seen it. There has been a continued level of uncertainty in the US. We started about a year ago this time, people were bullish about the recovery. It waned a little bit in the summer as Europe seemed to go back into a recessionary environment. In the fall, there were headwinds around the uncertainty around the election process and, of course, that uncertainty remains today.

There is a ton of money sitting on the sidelines. I think the term availability of financing is not quite correct. I mean, not quite the issue. The projects are happening.

The architectural billing index has now had one, two, three, four, five, seven months in a row above 50. It hit its high for quite a long time of 55 in February, and we will have March results in about 10 days.

One of the things I noticed -- and it is a nuance, but it's an important one -- for the last two months, the architectural billing index was not only at its highest point in many years, it was above 50 in all four regions that are tracked in the US -- Northeast, Midwest, South, and West -- but also all four segments -- multiuse, mixed use, commercial, industrial, and institutional. So that's the first time we have seen that.

So, again, it's another indication of positive mix, and, again, I do believe that the level of uncertainty continues to hold the lid on the kettle right now. New project inquiries were up to almost 65, which is the highest level since January of 2007. Job creation is the key metric for us. It had been running pretty good. I mean, the 268,000 jobs in February, 150,000-ish in January; in the 200,000 range in December, and 250,000 in November, and then suddenly March was only 88,000. We all saw that last week. That will probably be adjusted two or three times upward, but obviously, not the 250,000 and above that we all want to see. So that was a temporary cause for pause.

But all in all, we are seeing more signs of positive end markets, but it still feels like it's in first or second gear. And I think a little bit of certainty around tax and spending and sequestration out of Washington, regardless of what the decisions are, I believe a level of uncertainty will see a little bit of the floodgates open and some of the monies come off the sideline and go onto the playing field.

Right. I mean, just having said all that, it seems that first and second gear is what is going on, yet you see the mix of the higher end stuff going into your backlog. Is it a share gain? Is it a market shakeout? Is it your balance sheet that is helping to swing some of the higher mix business your way? It doesn't seem like the mix should be improving, just given the way you described the end markets.

Well, as Jim noted, we are seeing a slight tick of gains in the office sector, which is good. And it's not falling off a lot, Bob. Our folks work hard to target work that's more attractive for us, more complex work.

Our installation business, as you've heard me say, has done a really nice job of defining what is the proper kind of work they should be chasing. They are going after it. They are winning. Our architectural glass people are seeing more value-added work.

And we've launched new products not just to have new apples or more apples in our cart, we try to add value-added -- things like digital print capability or new low e-coatings that come at higher prices. Higher complexity, harder for other people to do. Our picture framing business is launching new acrylic products, which, again, harder to do, harder for competitors.

So it's some share gain, some regional expansion, as you know, in two of our businesses, and mix change. But the mix isn't just happening. Our teams are making that mix happen.

Great.

Sorry to be long-winded on that, but, you know, I'm passionate about what's going on with mix and new products.

Understood. As far as some of the share -- the growth initiatives that you're focusing on in fiscal '14 and beyond, as far as like filling in the domestic holes in your installation footprint, it seems like you made a big push into Texas. Is there any next market that you're going into this year or over the next 18 months that you can talk about?

I can tell you we have not exhausted our geographic expansion opportunities for our businesses. For a couple of them, it's more international, like our picture framing business. We have a great footprint in the US. For some of the other more domestic businesses, it's a US expansion capability. I don't want to tip my hand to my competitors.

I can tell you, we have more to do and we are off to a good start in the areas that we've gone public with. So I apologize. I don't want to go any farther beyond that, but we've got good opportunities.

All right. And just on installation. For, I think, for a good piece of fiscal '13, you still had some piece of weak margin, low margin business that you had bid a long time ago to maintain share or keep the wheels running during the downturn. Have we digested all the low-margin market at this point from the installation side?

Yes. I know that we have not. And I'd say, in the backlog that we have today, we probably have 20% to 25% of the backlog is still lower margin work.

And the lower margin stuff washes out by, what? The first half of fiscal '14?

Yes. Largely by the first half. A little bit of it will carry on, but I think by the end of the first half, we'll largely have the lower margin work behind us.

So just, I mean, I know this is all kind of roundish numbers. 75% of your installation business is the better margin stuff that you've been signing up in the first half. And then we get to all of it by the second half and -- I guess -- and beyond?

Yes. But to be clear, it's a progression. So that -- you know, we've been moving margins up in every quarter and been kind of changing that mix and continuing to work to move those up. So [I think it would be] a step change, but we will see relative to that part of the business, gradual improvements in the margins as they flow through.

Okay. Thanks, guys.

Thanks, Bob.

Scott Blumenthal, Emerald Advisers.

Jim, you do get some accelerated depreciation on some of that current year CapEx projects that you're undertaking, correct?

Yes.

Okay. So I guess that could be one -- or that is going to depress margins a little bit from what they normally would be in their regular operating environment when that didn't exist, right?

Well, I'd say that is a tax treatment.

Yes. Okay. Let's see, could you -- Joe, could you maybe give us some insight into the -- into your expectations for the Brazilian operations for the current year?

Yes, Scott. Great question. In fact, Jim and I were with the team in the Sao Paulo area last week. And that business is performing extremely well. They are off to another great start this year and with double-digit growth and it's a great extension of our Viracon US business. It's a market that has high -- a country that has high inbound tariffs so it's very challenging to import architectural glass into that region. So we are happy to be local.

We met with various contractors while we were there and we are seeing a movement in that market to higher value-added glass insulated units versus simple laminated, which bodes well for us. We have plenty of capacity in our factory to grow on the insulated units, which is a higher priced product.

So outstanding team; great compliance to US accounting standards and SOx compliance and, frankly, a gem in our portfolio that's doing extremely well.

Do you have the same type of capabilities there from an overall product perspective -- product and service perspective, I guess, that you have here or do you still have a ways to go with that?

It's a similar business to Viracon US. The coatings capability are different. It has a lot -- you know, it reports to the entity that runs the US entity here for Viracon. So the team continues to share practices back and forth. So I would say it's much smaller than our US business, obviously. It is equally capable in the kinds of things it does in the fabrication side. It uses a different coatings model than the US model uses. And we don't see that changing in the short term.

And in the Brazil market they, like Viracon in other markets, are really a leader in terms of complex value-added products that they bring to the market.

And then how much, if any, of the backlog is attributable to that unit?

First off, it is within the numbers we published. The $300 million does include that. It's a small piece of -- let's say, single-digit millions, but it is at an all-time high and it's in the history of that business.

Okay. That's good to hear. And, Joe, I know that you are constantly turning the wrench or turning the screws there with regard to operations and that you are in the process of doing some reconfiguring in Owatanna in order to improve the layout and the factory throughput. Is that where you expect to get much of or most of the margin improvement this year? Or are you expecting that to be a combination of just throughput there, more orders, more business?

We expect operational contribution to our 50 to 100 basis points from every one of our factories. Owatanna is the largest footprint and the largest factory in our fleet. But -- and, of course, as we've said, the new coater a lot of work happened this year to prepare the site for the new coater, putting in the footprint and making modifications. The performance of the Viracon factories has been outstanding this past year and I expect that to continue, but I don't say that to negate the other businesses. They are all performing extremely well with mid- to upper 90s on on-time deliveries.

So the good news is, I would still say we are getting great results using more muscle and less process rigor that I would like so our journey is really just beginning so that our lean journey of doing things that have discipline, reliable, repeatable business process manner. So, I mean, the good news is I still feel confident over the three years in getting that 50 to 100 basis points a year. But, right now, I couldn't be happier with the trajectory these factories are on, including Owatanna.

Is there going to be some -- I imagine there is going to be some preconfiguration in Owatanna before you get the coater up. Is that going to provide you a benefit -- we understand that the new coater is going to provide a meaningful benefit, but you're building processes and things around it, in order to prepare for that, so you're going to be operating, obviously, for the next 18 months without the coater.

I guess my question is, the processes and systems procedures that you are putting in there now, the coater aside, how much is that going to improve operations and how far have you gotten on that at this point?

Yes, we are on a very early journey of getting that installation up and ready. We are already seeing improvements from Owatanna. We won't get big savings until the coater is up and running at Owatanna.

However, let me just say that between now and then, we will not have any dilution of operating performance. There will be continued slight improvements in that business in spite of the fact that they will be putting a lot of effort into getting the place ready. Obviously, certain costs are capitalized that are involved in the setup and the build of that coater.

So operationally, we will see productivity from Owatanna and then it will pick up incrementally after the installation is online.

And the overall business is gaining productivity. You know, you are well aware, and Jim mentioned it today, our decision to close the third, the smallest, and least capable factory in the Viracon US fleet. We took that down. That has positive earnings impact to us, a couple of basis points right there. So overall, Viracon will be favorable on productivity this year.

I will just add, because I know you have been to Owatanna, and so investments that we've made this year and will make next year at that location as well as all of our businesses, we do have productivity investments. And so, we are already starting to see some enhancements in terms of material handling processes. I know you've seen how that can happen there in that facility and we will continue to drive for improvements as we work towards a new layout and so on.

Okay. Terrific. Thank you for taking my question.

Thanks, Scott.

(Operator Instructions). Jeff Bernstein, AH Lisanti.

Hi. Good morning. So just a couple of questions around Harmon. So I guess you guys have moved into Texas there and I think you don't yet have a license for California. Can you just talk about the opportunities in both those states?

Yes, you are correct. We are up and operating in Texas and doing quite nice there. We got a real head start on a fast-track to entering that market. We did announce and we have made the necessary organization changes to support growth more western of Texas and I don't want to comment any specifics -- like I said, tip off my competitors where I stand. Fiscal '14 will continue to benefit from growth in the South US from the Texas region and surrounding areas. Fiscal '15, we'll begin to see growth from more Western expansion, but I don't want to get into actual status of licensing and things like that. If you don't mind, Jeff.

Got you. And can you just talk a little bit -- you did mention margin improvement in there and I think the strategy has been to be smarter about the business that you are bidding on. How far through high grading the business prospects are you at this point?

First off, we made sure we have a terrific team there and the leader of that business has really solidified his team. We've complemented it with resources from our headquarters staff, and so I feel we are there with a world-class organization. They are far along the path of enhanced project selection and the projects going in the backlog are the kind of projects that they are extremely capable of and extremely capable of executing well, which means better margins, even better sometimes than are booked in. I would say our maturity is pretty high on the execution.

So that business now is all about operating and continuing to drive the growth they've been generating. And the company I used to work for, I ran the Harmon Light business. It was a global installation business and so I am a family friend of that business. I've got to tell you, I couldn't be happier with the position that business is in to compete going forward.

Great. And then, I guess you are doing -- opening a Tubelite facility in Dallas, Ft. Worth area. Is that associated with particular project volumes that you are expecting at some point out of that market? Is it just to serve the Western market in general? Is it Texas-centric?

It's primarily Texas-centric. Our storefront business, as you call Tubelite correctly, is -- has got a great business model and one of their great successes is the delivery model. That results in reliable, repeatable, disciplined deliveries to our customers on same time every day, every week, and it was difficult to succeed with their business model and not be local. And that is one of the strongest growing markets in the US and has been and we made the decision to be local there.

So it was mainly a little bit outside their geographic reach of their arms and we addressed that with this move. It will be primarily for that geographic space.

Jeff, Tubelite's business is a bit more focused on smaller projects so, really, the shorter lead times and closest to the customer base is really key. And so that location is going to enable us to really better service Texas, but also the surrounding markets like Oklahoma, Louisiana, and those types of markets as well.

Great. Great. And then, you know, you alluded to the flexibility to do M&A. Can you talk a little bit about the pipeline out there, about if you have a feel for where sellers are, what they are thinking these days? Any color would be great.

Sure. Jim and I -- it's one of my top initiatives and, as I've said before, you have to knock on 100 doors if you're going to get a deal done. We know, strategically, where we want to be and look, and we are doing that. I definitely saw valuation issues last year, businesses that were perhaps willing to entertain discussion had not been performing well. And, frankly, I saw a lot of businesses in our space performing poorly and folks don't necessarily want to give you a peek under their tent if their numbers are lousy especially when you are in the same competitive field.

So there's definitely some tough valuation going on out there and I think as the economy improves a little bit and businesses are performing a little better, they may be more willing to give us a better looksee. Our process is excellent. Our pipeline is robust and I don't want to predict that we will get a deal done, but I do feel confident that this could be our year.

Okay. And then it looked like SG&A as a percentage of sales upticked a little bit sequentially from prior couple quarters. Anything in particular to point to there? Anything seasonal or anything else?

No. I mean, I see a little bit of a pickup in SG&A. I mean, part of it has -- you know, frankly, as we achieved on the upper end of our incentive target ranges, that drove some of it. But we also have been making some investments during this year relative to new markets, new geographies, like we have talked about and those kinds of things.

Jeff, I try to focus on the S of SG&A so there is some enhancement on the selling line.

Yes. That's good. Great. Thanks very much.

You are welcome, Jeff.

And now I would like to turn the call back over to Joe Puishys.

Okay, Marie, thank you. For everyone who dialed in -- to everyone today, thank you. We appreciate your interest in Apogee and we look forward to another great year in fiscal '14. We'll talk to you in a couple of months. Thank you.

Thank you, ladies and gentlemen. That concludes your conference call for today. Thanks for joining us and you may now disconnect.