Apogee Enterprises Inc (APOG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Apogee Enterprises Incorporated earnings conference call. My name is Denise, and I will be the operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Mary Ann Jackson. Please proceed.

Thanks, Denise. Good morning, and welcome to the Apogee Enterprises FY15 first-quarter conference call on Wednesday, June 25, 2014. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our FY15 first quarter and our outlook for FY15.

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 March 1, 2014, 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?

Thank you. Good morning, everyone, and welcome to Apogee's conference call for the first quarter of our FY15 year. We had a very strong first quarter, with revenue growth of 18%, and operating income growth of 28%. Our earnings-per-share growth was even more significant, up 50% to $0.21 per share, including the results of the hard work of our legal team, which secured the final distribution for a long-exited European operation that added $0.03 to our earnings. I am especially pleased with our year-on-year backlog growth of 28% to $385 million, as we continue to win good projects at improved margins.

With our significant backlog growth, solid operating performance, and a stronger outlook for the architectural glass in FY15, as well as what is appearing to be sustainable growth for our end-market sectors, we have raised the bottom end of our range -- per-share range, and now expect to earn between $1.40 and $1.50 per share on revenue growth of 15% to 20%. Jim will explain this in more detail, of course.

I do believe FY15 will be an exceptional year for Apogee. I am feeling particularly positive about the significant growth that all of our businesses are experiencing. In fact, in the first quarter, revenues grew in all four segments, and backlog grew for all of the architectural segments; and all four segments grew backlog sequentially. I also expect backlog to continue to grow in the second quarter, based on the level of project awards and contracts currently in hand.

Operating income improved significantly in our two largest segments, architectural glass and architectural services, which had 170-basis-point and 250-basis-point margin expansion, respectively. The momentum and the backlog increases in these two segments reflect continued strong growth for the remainder of FY15. This strong conversion was partly offset by the large-scale optical and architectural framing systems segments, which we will talk about.

In the large-scale optical segment, the negative conversion in the quarter was purely timing, with the conversion rate for the full year expected to be at the projected Apogee level. Investments were made in the quarter for future growth, including new products, and new market sectors and capacity. We expect new products being introduced this year for retail framing engineered optics in the international market sectors will deliver significant growth for this segment in FY16 at comparable segment margins. New glass thickness products allows us to enter the engineered optics segment, and new print-on-acrylic anti-reflective product for high-end photographers will launch this quarter. We also invested for incremental capacity to allow us to meet the growing demand of this incredible sector. That said, the large-scale optical segment had a 20% operating margin for the first quarter, after making these investments in future business; and our full-year is forecasted to reflect margin enhancement in this very profitable segment.

In the architectural framing systems segment, improved earnings in the windows business were more than offset by the difficult first quarter for our Canadian store-front acquisition due to severe winter weather. As a result, the Canadian business had a loss for the quarter rather than the expected earnings, impacting us significantly, as you will hear from Jim. I am encouraged that the Canadian business started seeing excellent order and bidding activity late in the first quarter. The business started the second quarter strong, with a 15-month high in backlog and customer commitments, with further incremental gains in the first three weeks of the new quarter. We are seeing light at the end of the tunnel after a tough start in Canada.

Looking at the outlook, as I have highlighted at the beginning of the call, we have raised our average range by increasing the bottom end for FY15, based on what we are seeing in our businesses and the market sectors we serve. We now expect to earn between $1.40 and $1.50 a share, up from $1.35 to $1.50 in the prior guidance, on revenue growth maintained in the 15% to 20% range for the year. We continue to expect that the acquisitions made last year will be accretive to our earnings in FY15, as the Canadian store-front business saw improved backlog and commitments at the end of the quarter, as I noted. At the same time, we expect that we will continue to benefit from our strategies to grow through new geographies, new products and new market sectors. We, again, expect to grow faster than our commercial construction markets by at least 5 percentage points.

The outlook for US commercial construction markets based on Apogee's lag from McGraw-Hill Construction forecast for the sectors we serve is for maintaining high-single-digit market growth in our fiscal year. We are also seeing significant signs of market improvement in other metrics we follow. The American Institute of Architects, ABI, the billing index, jumped 3 points in May, the largest increase in over three years, although it continues to indicate modest improvement in billings for architects. At the same time, we are all seeing strong job growth in the United States.

We do expect capital spending for the year of approximately $40 million, as we continue to invest for growth, productivity, product development, maintenance and our long-term growth in this Business. I am pleased that we expect to see free cash flow for the year, even after this level of investment. I believe FY15 will be another exceptional year for Apogee. I believe that our expected FY15 results, along with our strategies to grow through new geographies, new products, new market sectors, will put Apogee on a path to $1 billion in revenues by the end of 2016. At the same time, we believe we can achieve a 10% operating margin in this approximate time frame, in part through our focus on productivity and operational improvement.

I will now ask Jim Porter to go through more details on the financials. Jim?

Thanks, Joe. We had strong growth in our first-quarter performance, with revenues and earnings up significantly, matched with solid new-order momentum. Revenues of $210.9 million were up 18%, as we saw growth in all four segments. Organic growth was 12%. Earnings per share were up 50% to $0.21 per share.

There are several positives for the first quarter. We had good conversion and growth in architectural glass, architectural services, and the window business portion of the architectural framing segment. All had good execution and operating leverage.

We continue to have strong contribution from the large-scale optical segment, with 20% operating margin. And we also recognized the income in other income on the P&L related to receipt of a final liquidating distribution from a European entity that Apogee exited more than 15 years ago. This was worth approximately $0.03 per share, and was in our internal expectations for receipt sometime during this year.

The negative offsets in the quarter were primarily related to the tough winter weather experienced early in the quarter, impacting our shorter-lead-time architectural framing systems businesses. Weather affected volumes and capacity utilization, increased utility costs and some operational costs. The recently acquired Canadian business was impacted most significantly from the extreme winter conditions, which also slowed the Canadian economy.

Overall for the segment, we estimate these impacts cost us approximately $0.03 per share compared to last year. And the impact was higher compared to our internal outlook by roughly $0.05 a share, since we had expected income from the Canadian business instead of a loss. We also had a higher tax rate this quarter, which drove about $0.01-per-share negative comparison to the prior year.

Gross margin for the first quarter was 19.6%, down from 20.3% in the prior-year period. Good margin improvement in our largest businesses was held down by the lower margins within our architectural framing systems segment for the reasons mentioned, along with some increased aluminum costs, as well as lower margins in the large-scale optical segment, which was expected.

Turning to performance by segment in the first quarter: Architectural glass segment revenues grew 6% to $79.6 million, with growth in all geographies served, the core US and Brazil markets, as well as other international exports. Operating income grew to $2.8 million, doubling prior-year period earnings of $1.4 million on higher volume with the resulting improvement in capacity utilization. The segment operating margin was 3.5%, compared to 1.8%, as we see the expected operating leverage in this segment.

Architectural services segment revenues were up 11% to $51.6 million, and operating income was $200,000, significantly improved from a prior-period loss of $1 million. The operating margin was 0.4%, compared to negative 2.1% last year. Revenue growth was from broad-based volume increases across our locations, while bottom-line growth resulted from good execution and improved project margins.

Architectural framing systems revenues of $64.2 million were up 44%, with organic growth of 22% excluding the acquisition made in the third quarter of FY14. We had double-digit growth across the US businesses, as we see market improvement and benefit from geographic extensions and share gains. The window business in this segment delivered especially strong improvement as expected, compared to light revenues in the prior-year period, which we discussed at the time. Operating income was $1.9 million, down 6% from $2.1 million, with operating margin of 3% compared to 4.6% last year. Income growth in the US segment businesses was offset by the loss in the Canadian business, as already described.

First-quarter capacity utilization across all architectural manufacturing businesses was approximately 65%, up from approximately 57% in the prior-year period. Capacity utilization is in line with the FY14 fourth-quarter rate of approximately 66%.

Our large-scale optical segment revenues grew 3% to $20.1 million. Operating income of $4 million was down 16% from $4.7 million. This performance was in line with our expectations, as we increased investments in research and development for new products and new market sectors, as well as for some initiatives to increase manufacturing capacity. The operating margin was 19.8% compared to 24.1%. Just a reminder that with this size business, margin levels are very sensitive to relatively small movement in operating income; $100,000 of incremental expense is a 50-basis-point impact.

Turning to backlog, our first-quarter backlog was $385.1 million, up 28% from $301.8 million in the prior-year period. We are really pleased to see another quarter of solid order activity and backlog growth. As I do each quarter, 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. But obviously, we are pleased to see the expected increase that came through in the first quarter, and we believe we are on a trend line of growing backlog.

Our backlog mix at the end of the first quarter reflects strong growth in the office sector, as well as growth in the multi-family residential sector, offset by a decline in the institutional sector, as we continue to complete projects in the healthcare, education and government sectors. The office sector was 50% to 55% of our backlog. The institutional sector was approximately 25% of the backlog, with healthcare projects still a majority of this portion. Multi-family residential, including high-end condos and apartments, was 10% to 15% of the backlog; and hotel, entertainment and transportation was approximately 5% to 10% of the backlog.

Regarding the timing of the backlog, approximately $307 million or 80% of our backlog is expected to be delivered in FY15, and approximately $78 million or 20% in FY16 and beyond. We are continuing to see good levels of bidding activity, with visibility for new awards and commitments.

Apogee's tax rate for the first quarter was 33.4% versus 29% last year. The prior-year period tax rate benefited from the R&D tax credit, which has not been renewed by Congress.

Cash and short-term investments totaled $17.7 million, compared to $28.7 million at the end of FY14. For the quarter, we had positive operating cash flow, compared to negative operating cash flow last year. For the first quarter, we had negative free cash flow of $7.5 million after capital expenditures of $8.7 million. The quarter's CapEx included the final payment on the new architectural glass coater being installed for improved capabilities and new products.

We generally use cash in the first quarter, which is when we make payments for accrued annual incentives, taxes and insurance obligations. Our non-cash working capital at year end was $87.0 million, compared to $77.3 million at the end of FY14. We define free cash flow as net cash flow provided by operating activities minus capital expenditures, and non-cash working capital is defined as current assets excluding cash and short-term available-for-sale securities, short-term restricted investments, and current portion of long-term debt plus current liabilities.

Now I will turn to our outlook: Our outlook for FY15 calls for another year of significant growth with revenues up 15% to 20%, as our markets improve and implementation of our growth initiatives accelerates in the third year of executing our strategic plan. Our growth outlook of 15% to 20% includes about 4 points of growth from the acquisition made late third-quarter last year. We have raised the bottom of our earnings-per-share guidance, and now expect to earn from $1.40 to $1.50 per share, up from the prior guidance of $1.35 to $1.50 per share.

We had some headwinds in framing systems in the first quarter, which are now behind us. We have visibility to more of our revenue growth coming from the architectural glass segment relative to the other segments than we previously expected, and this segment is delivering stronger conversion than the other architectural segments, and we have visibility to improved margins in our backlog.

I would like to reiterate that the most difficult thing for us to predict is the timing of project flow in our architectural businesses, which is just driven by normal variation in construction project timing. This project flow timing impacts volume, as well as the mix of business, projects and products, all of which affects revenues and margins. Providing that the committed workflow is as anticipated for FY15, and we have our normal expected book-and-bill activity, we do have line of site to the upper end of our revenue and EPS range.

Regarding revenue timing for the year, we expect revenues to be fairly balanced throughout FY15 based on the current visibility of backlog, although actual project execution timing is difficult to predict, as I stated. We anticipate somewhat stronger year-on-year revenue growth in our second and third quarters, and our third quarter is expected to have the highest revenues and earnings of the year.

We are expecting that our full-year gross margin will be approximately 23%. We anticipate that the gross margin will step up in the second quarter, with the third quarter the strongest. We anticipate a tax rate of approximately 34% for the full year, and this compares to the FY14 full-year rate of just under 30%.

We expect to generate positive free cash flow for FY15, after we spend approximately $40 million for the full year on capital that is balanced across investments for growth, productivity and new products, as well as for maintenance. Depreciation and amortization for the year should be approximately $30 million.

We had some challenging impacts in the first quarter, but I feel good about our overall first-quarter performance, and even better about our prospects for the balance of the year. We will continue to see strong growth, expanding margins, and free-cash-flow generation in FY15. I believe we are executing on the goals that we laid out and have communicated, and look forward to benefiting from some sustained, reasonable market growth. Joe?

Thank you, Jim. Okay, Denise, I would like you to please open up the call for questions.

Sure.

(Operator Instructions)

Our first question comes from Colin Rusch with Northland Capital Markets. Please proceed.

Thanks so much. I know you don't break out backlog by market segment, but if you could give us a little bit of color in terms of the growth here in the last quarter? What is driving that growth and a little bit more detail, and how we should think about the margin profile from an operating margin perspective on that business?

Yes, we do breakout the backlog in our Q. You will see the breakout by the four segments. It is balanced.

We had as I mentioned, Colin, we had growth in every one of the segments. Which is a true positive you should take away, is it is not just coming from large services business.

Our windows business grew, so the framing systems segment grew. The glass business had a particularly strong impact. Jim and I are particularly pleased with that. I think you know, we get the best leveraging from the Architectural Glass business.

We had good growth in the first quarter, but we will have stronger growth in Architectural Glass in the next three quarters which obviously is a particularly strong indicator for us because of the margin conversion we get on that business. So we have pretty good insight to the future. But it was balance growth across the board.

Okay. And then on the Architectural Services business, obviously the margins weren't exactly what you were looking for on that, although it was an improvement year over year. Can you just remind us of the seasonality in that business, and how that relates to the backlog growth?

And obviously, there is some lumpiness with the backlog as you have mentioned. But as we look into the back half of this calendar year, what can we expect there?

Yes, Colin. The Architectural Services business which is our insulation arm known as Harmon had a very strong quarter. They did not disappoint me in any way. They also had a strong backlog growth.

I think we improved our operating margins 250 basis points year over year. They have what I would call, better than entitlement profit conversion on the incremental growth, which is an indication of the better projects they booked.

So I -- we will see further growth in our backlog in the second quarter from the services business. And it is always going to be a lumpy business with regards to backlog. And particularly year over year because we, that is a business where we can book a $30 million project in a quarter, so it can really move the needle.

But as Jim mentioned, all of our indicators, the projects we are bidding on that we are aware of, make us feel confident in saying that business will continue to show growth in backlog in the coming quarter or quarters. But they delivered on plan, frankly slightly better than planned margin for that business. I was happy with the performance of the Harmon business. (Multiple Speakers).

Okay. And then -- ?

Say, Colin -- this is Jim. If I could just add, that segment is one portion of our business that is a revenue recognition business. So it is -- there isn't any traditional seasonality, really both the revenue, and then oftentimes the margin project by project is really a function of where any given project is in its lifecycle, and the performance against that project.

So it is going to be kind of lumpy quarter-to-quarter, in terms of improvement in the operating margin in that segment. But from a full-year perspective as Joe said, we continue to expect improvements in that segment.

Okay. That's helpful. And then, just a final one. Can you just talk about general quotation activity? Are you seeing acceleration in that broadly speaking, are they kind of flattish here? Just give us some color on that?

All right. Without question, we are seeing improved quote and bidding activity. Our inquiry levels are up substantially in all the businesses. So this is the first time you have heard me say, appear that our end markets are in for a period of sustained growth.

A year ago, I felt good about the end markets, but it felt like we were all on thin ice in this sector. There is no question that ice has hardened over the last year. And in fact, many of our investments right now are to increase throughput and capacity, as we are seeing substantial increases in quote activity.

Great. Thanks a lot.

Okay. Thanks a lot, Colin.

(Operator Instructions)

Our next question comes from Brent Thielman with D.A. Davidson. Please proceed.

Hello. Good morning

Hello, Brent.

Good morning, Brent.

So I -- just to clarify, I guess in terms of driving that sequential growth in backlog, do you expect the glass, or is it the services business that is the big driver there?

Actually both businesses had a substantial impact. All four segments grew probably proportionally to the size of the business.

I think the glass business had its largest increase in backlog since pre-recession. So they were a big piece of it. But all the businesses grew nicely and frankly, substantially.

And as we look forward, Brent, for the second quarter in terms of our comment -- maybe I will backup, and remind you that the services segment is, they are probably close to 60% of our total backlog. So they are the biggest individual piece. And so, they kind of -- just even if they move proportionally, they are going to have the biggest amount of impact.

But as Joe said, we have seen kind of nice balanced growth across the segment, and we will probably continue to see that balance. But it is the services segment that turns out the largest portion, and will drive the biggest changes usually.

Okay. Thank you. And then, despite this effect from weather, you still had 22% organic growth in framing systems, which is well ahead of some of the other architectural segments. Can you talk about what is helping you realize that growth in that particular area?

Well, part of the growth within that segment came from having Alumicor in our results, and they weren't last -- (Multiple Speakers) -- oh, yes, last year. The major improvement in that segment came from our windows business.

Last year, I highlighted the windows business, our US-based window fabrication business in the framing systems segment was providing us headwinds. You heard us reference a planned hole in our order book.

Last year, that business did its job. They booked a lot of business last year. We will have revenue growth on a comparable basis every quarter. They are providing us the most tailwinds, and they are delivering the profit on that growth this year.

As Jim and I have mentioned, we had a very poor start to our first full fiscal year with Alumicor. There is no question about it, they delivered a loss of versus a planned income in the quarter. So it had a substantial impact on our overall results, kind of hiding the -- why that segment didn't show the profit it should have on that substantial growth.

But as I highlighted, I believe the business is very sound, and I met with the entire sales organization last week. We are seeing robust bidding activity up there as well.

So but frankly, the growth in that segment came from the three core US businesses, most substantially from the Windows. But our finishing business and our extrusion business also saw growth. And our Alumicor business is -- hopefully, we will see the turnaround in Q2.

Okay. That's great. And then, just one last one if I could. Joe, any update on the Brazilian operation, what is going on down there?

It continues to perform nicely. It was a significant piece of the glass business growth in the quarter. The US business will show substantial growth going forward, but our Glassec Brazilian business, Glassec Viracon had very strong growth in the quarter, excellent profit conversion.

Operationally, it is performing well, and Jim and I will be making investments in that business to support future growth. So full steam ahead on the Brazilian business. And although, clearly the end markets aren't as hot as they were two years ago, the softening is modest, and we expect that business to continue to grow each year.

And Brent, just to add one little color -- a note here, which is in the US' next World Cup soccer game, they will be playing in a stadium that has product from our Brazil division, our Glassec Viracon business.

Yes, great. Okay. Thanks guys

Thanks, Brent.

We have no additional questions. I would now turn the call back over to CEO Joe Puishys for closing remarks. Please proceed.

Okay, Denise. Thank you. It is unusual to only have two questions. So Denise, I just want to wait one minute, and see if you get any more, and then, I will indeed close out the call.

Sure.

(Operator Instructions)

Okay, Denise. No need to torture people with silence, so I will close out the call. Everyone, listen, thank you for your time today.

Before I sign off, I would like to remind you that we held an Investor conference in May. Those that attended either live or online heard from our -- four of our business unit leaders, representing each of our segments. And if you would like more color on the strategies for each segment, a replay of that three hour event and the slide deck are available on our website.

As I said, we delivered a very strong quarter. When you peel back the onion, you will see that we had outstanding performance in our glass and services segment.

Your questions, perhaps Joe, is the large-scale optical business going to continue to be a shining star? My answer was yes. The softer quarter on profit was simply timing. That business will grow this year, likely not as substantial as the high-growth we will see in architectural, but it will grow, and it will have margin expansion for the year.

The issues really came down to what was going on within the framing systems segment. I hope we explained well that we expect nice growth from our three original businesses in that sector. As well as Canada for the remainder of the year, albeit an extremely challenging winter for that business, but we are starting to see really strong light at the end of the tunnel.

So I hope our breakdown of the segments, and the peel back of the onion gave you a good view into our businesses, and why we were optimistic enough to up our -- increase our range. This concludes our call. Have a great day everyone, and we look forward to talking to you individually, and as a group on the next quarterly call. Thank you.

This concludes today's conference. You may now disconnect. Have a great day.