Apogee Enterprises, Inc. (APOG) Q1 2009 Earnings Report, Transcript and Summary

(Operator Instructions) Welcome to the First Quarter 2009 Apogee Enterprises, Inc. Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call Ms. Mary Ann Jackson.

Welcome to the Apogee Enterprises Fiscal 2009 First Quarter Conference Call on Wednesday June 25, 2008. With us on the line today are Russ Huffer, Chairman and CEO and Jim Porter, CFO. Their remarks will focus on our first quarter results and the outlook for fiscal 2009. 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 the 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 in protection are described in the company’s annual report on Form 10-K for the fiscal year ended March 1, 2008 and in our earnings release issued last night and filed this morning of Form 8-K. The information in this conference call related to projections or other forward looking statements may be relied upon subject to the previous safe harbor statements as of the date of this call and may continue to be used while this call remains on the Apogee website. Russ will now give you a brief overview of the results and Jim will cover the financials. After they conclude Russ and Jim will answer your questions.

We feel good about our first quarter results. They met our expectations for growth in architectural segment revenues and earnings as all businesses performed well. With the ongoing strength in our architectural segment serves the market where we are seeing high levels of commercial construction activity we remain optimistic about Apogee’s outlook and are confirming our earnings per share guidance for fiscal 2009. We are expecting $1.82 to $1.94 per share from continuing operations which would represent a 22% to 30% increase from our fiscal 2008 record earnings of $1.49 per share. In the first quarter we earned $0.36 per share from continuing operations compared to $0.34 per share a year earlier. At the same time revenues grew 14% in the quarter. Architectural segment revenues increased 17% and architectural segment operating income was up 28% in the first quarter. Architectural revenue growth which was in line with our expectations resulted from continued ramp up of new architectural glass capacity in Utah and the converted Minnesota facility as well as the addition of the store front and entrance business in the fourth quarter of last year. The architectural segment operating margin was solid at 6.7% for the quarter and up from 6.2% in the prior year period but was slightly lower than we had expected due to project and product mix in productivity. Productivity was impacted by higher than anticipated labor costs resulting from the mix shift and ramp up of new capacity. We expect that our labor will return to normal levels for the remainder of the year. Architectural segment backlog remains high at $491 million up 19% from the prior year period. This is our second highest quarterly backlog ever. We have repeatedly stated that we need to maintain our backlog at a high level and don’t need growth…

We had a good first quarter and we’re pleased that all our businesses performed well to meet our expectations. At the same time market conditions and trends continue to support demand for our value added products and services. We earned $0.36 per share from continuing operations in the first quarter on revenues of $238.5 million which increased 14%. Operating income grew 11% to $16.6 million. We have only slight seasonality in our business but we tend to experience slightly lower first quarter seasonal revenues while the third quarter is generally or largest quarter. The architectural segment had strong revenue growth from our new architectural glass capacity and Tubelite acquisition late last year. Operating income increased 28%. Although the first quarter operating margin at 6.7% was slightly below our expectation due to mix and product activity we expect continued improvement in architectural operating margins throughout fiscal 2009. Our architectural segment backlog was our second highest in company history at $491 million which gives us good visibility. We see normal quarter to quarter variation in our backlog often driven by timing, duration and size of particular jobs booked in the quarter. The slight decline from the fourth quarter reflects this normal variation is not driven by change in market conditions for our products and services. Approximately $350 million or 71% of the backlog is scheduled to be delivered in fiscal 2009. Approximately $120 million or 25% in fiscal 2010 and approximately $20 million of the backlog is even booked into fiscal 2011. The large scale optical segment operating margin came in at 18.4% up slightly from the prior year period. We achieved the third consecutive quarter of our best value added premium products accounting for more than 50% of segment sales. Revenues and operating income for the large scale optical segment dropped…

I’d like to go ahead and open up the call for questions at this time.

(Operator Instructions) Your first question comes from Michael Cox - Piper Jaffray.

My first question is on the comments you made about the margins within the architectural segment and fuel costs and input costs. In the past you have described the ability to pass those through. I’m just curious if there is something changing from a pricing environment that’s making that more difficult?

The change in the environment is more a function of the real significant and rapid increase in costs. We have been able to hold pricing, in fact all of our business either recently have introducing price increases. Given the lag time that we have in our projects there’s going to be a bit of a lag between the cost increases relative to our ability to pass those on in pricing.

The energy surcharges that we have been passing through continue to provide us with significant protection. A lot of the petroleum based increases that we saw were not in those major supply items so they were in a lot of little items that plus fuel that came into the picture so things were petroleum based. We have reacted to that now and feel that pretty much is behind us at this point.

Can you remind me the flexibility to adjust pricing for projects that are already in the backlog?

Really there’s not an ability to adjust pricing for projects in the backlog. That’s certainly one of the reasons why we saw that impact in this quarter.

On the corporate expenses this quarter jumped up about $1 million are there any special items or one time events in that number?

We’ll see growth in SG&A for the full year and we started to see some of that in the first quarter. It’s a number of items. We do actually have a new system implementation project across the company and actually had our first two entities go on live so we started to see a bit of an increase cost relative to that. Other than that pretty much normal ongoing cost increases.

You mentioned that seeing a small percentage of delays which isn’t out of character from what you’ve talked about in the past. I’d be curious if you’re seeing anything from an accounts receivable perspective, any aging of receivables from customers that are feeling the pinch of tighter credit markets?

Our DSO remains very low. We really are pretty pleased with that.

We’ve actually continued to reduce our DSO slightly from year end and more so over the prior year. We haven’t seen particular receivable issues related to market conditions but it’s definitely something that we watch closely.

Your next question comes from Steve Denault - Northland Securities.

Your CapEx comments about a new LEED certification facility is in reference to what?

This is our Wausau facility so we’re actually just now completing a new factory and office facility for our Wausau window business. That’s a business that’s over 50 years old and is currently operating in a number of separate very old facilities and so we actually made a decision to build a new facility. That’s really all driven by productivity improvements associated with it. We actually built the facility to achieve what we believe will be silver LEED certification.

It will be the only window manufacturing plant in the country at its opening that’s LEED certified.

Any further thoughts on how you’re going to approach if at all the international market?

The international market remains an opportunity for us. There’s no question especially for our glass sales. Right now it still is a market that where our opportunities domestically are more attractive. We will be looking at that as our expansions are completed here and our ability to grow the business here. If it levels off then we will be taking a look at international opportunities in more detail. That’s on the near horizon.

We do continue to service the international market with key premier projects. The key is we do have some strategy underway this year which by the end of this year we expect to have some more formalization over our opportunities and goals in the international.

What do you think international sales in replacement business will be as a percent of total architectural sales this year?

International and replacement?

Yes, if you could separate the two.

International will be between 5% and 10% of revenues and we estimate the replacement at probably about 20% of revenue.

The stat you quoted of 51% glass penetration versus 32% whose statistic is that and the 32% was in reference to what period of time.

Decker, the 32% is approximately 2002-2003 so calendar 2003 versus last year. The use of these high end performance products, energy efficient products is expanding and we expect it to continue to expand and at 50% there’s a lot of room for growth.

Whose statistic is this?

Decker

Decker is a firm that does research in the commercial window market.

Within the LSO the drop off in revenue year over year how much of that was elimination of low end glass versus just a really soft retail market?

Actually the majority of it was elimination of products and is a combination of the low end glass providing more of the revenue decline was getting out of some other products like our pre-framed art product line and some of the commercial products and servicing the non-intra framing market.

Is there anything that can help us get comfortable with in terms of the second half up tick in LSO sales, you’re clearly anti capacity. I know you’re very methodical in the way you approach your business is it safe to assume that you’ve got a home for that product?

First of all the large scale optical segment doesn’t have the benefit of long lead times like we do in our architectural segment. With that said we have the relationships with key retailers and distributors that give us a lot of confidence in being able to do that. Also if you recall the new capacity was really driven by really reaching full capacity on our museum, our highest quality products last year. We were actually constraining the expansion or conversion of certain customers for those products. We have new product conversion scheduled for this year.

We also are expecting some very nice improvements in costs with this new highly automated line.

Of course your renewed or downward revision in architectural operating margins do you feel like you’ve got a handle on that which was somewhat unknown when you first provided that guidance in terms of incremental petroleum based cost increases and things of that nature?

We really do. Certainly we expect these higher costs to continue so we have to overcome those and we’ve identified ways to do that.

The rapid price increases that you saw in advance of your expectations is there any certain bucket that you can point to?

In terms of our cost increases, obviously fuel which would be either our delivery costs or delivery costs that we incur is one key area. To describe our cost increases in more what we refer to as secondary materials. When we look at the key materials glass we’re protected this year. Aluminum we’re largely able, which has been pretty volatile in increasing, as we’ve talked we’re able to protect ourselves or pass those on. We do have timing issues. Particularly in our shorter lead time aluminum parts of the business we expect we’d be able to recover that in pricing but we’ve got a timing issue and so for the year we won’t be able to fully recover that. Then we drop down to some of the areas like chemicals, paint, vinyl, and sealants, those types of items used in our products and manufacturing processes.

Your next question comes from Robert Kelly – Sidoti. Robert Kelly – Sidoti: I don’t know if you covered this already, the contribution from Tubelite in Q1 on both backlog and the quarterly results in architectural?

The contribution for Tubelite was $0.01 for the quarter but was accretive in the quarter. If you add backlog it was may $1 to $2 million, very short lead time business. Robert Kelly – Sidoti: You just had said that you’re protected through the year on glass does that reset in your fiscal 2010 period?

Across the board it will reset and we have anticipated that with price increases. Robert Kelly – Sidoti: The price increases going through now will cover you for fiscal 2010?

Yes. Robert Kelly – Sidoti: The backlog growth continues to be strong and you point to share gains and green buildings. Can we just nail down the bulk of your backlog is Harmon is it not or split between Harmon and Wausau? Do you get green building initiative share gains through Harmon and Wausau? I guess that’s where it doesn’t add up to me. I guess the whole picking up shares through Viracon and Wausau a little bit but do you see share gains driving Harmon business, the green building share gain driving that Harmon business?

You have to recall that Harmon they are the largest glazing contractor in the United States, they’re number one but with a very small market share so the market is highly fractioned. Saying gaining market share, a better way to describe what they’re doing is the mobility strategy that we’ve put in place. What they’re really doing is their capacity is defined by their project management team and they’re keeping their project management team fully engaged and busy by selecting good projects and traveling to those more often that we have done in the past. By doing so we’re able to keep our margins toward the higher end, the kind of projects we can execute well and gives us the best opportunity for success.

I would not articulate that green is driving share gains so much for Harmon. Where Harmon captures share is where customers are looking for value added suppliers of services and Harmon being able to satisfy more complex projects. We describe them as being able to bring the national project competencies to local markets and so what you see is part of the green building movement is you see more sophistication and more complexity into projects which frequently gives Harmon an advantage in their marketplace when they’re bidding on them. Wausau is still not so much driven by green though particularly with the operable windows as one of the elements for lead certification that is a benefit that does help Wausau. I would say though that in both of those businesses we do see green building movement being an increasing presence in the projects that that they see. Robert Kelly – Sidoti: On Q1 you had talked about a lower project mix partial reason for softer operating margins. What does that entail exactly is that just seasonal?

No, one of the things that we’ve talked about in our business is one of the key areas of uncertainty is just the timing of projects that we deal with. That always has the effect of just moving particular project timing of revenue flow around month to month or quarter to quarter to some certain degree. Some of the project mix was where we had a little bit of revenue that moved out of Q1 and so then you have what’s the balance of work in Q1. For example, in our Harmon business we still had a couple million dollars based on percentage of completion revenue related to those Florida jobs that we were completing. So they have a couple million dollars of revenue at zero margin so you have mix related to those kinds of project issues. At Viracon we just had some particular product mix; it was a real slight impact I want to emphasize that. You had a little less complexity with less laminated product relative to inflated product with slightly less margins associated with it. Robert Kelly – Sidoti: When you talk about project mix it’s really just the timing of when you book?

Yes.

Your next question comes from Robert Vermillion – Axial Capital. Robert Vermillion – Axial Capital: In the press release you break out backlog between what’s going to happen this fiscal year and next fiscal year and the fiscal year after that. Could you give me the breakout for Q1 of last year?

In terms of the current year for example currently if we look at our backlog relative to the current fiscal year we’re about 70% and then year ago the amount relative to the current year was 63%. Robert Vermillion – Axial Capital: How about in the one fiscal year out and the two fiscal years out?

I don’t have that specific detail here. I think a year ago I don’t believe we had any backlog that went out beyond one fiscal year. Robert Vermillion – Axial Capital: What was the revenue contribution of Tubelite in the quarter?

It was approximately $12 or $13 million. Robert Vermillion – Axial Capital: How should I think about the backlog, obviously Viracon has got a shorter lead time around six weeks of backlog in there.

A little bit more than that but short. Robert Vermillion – Axial Capital: How much of that backlog is made up of your large Viracon projects like the Goldman Building and the Freedom Tower?

Maybe a little less than 20% of the total backlog of Viracon.

Total Viracon is probably around 25% or so. Just to be clear a project like the Goldman or something like that we’ll only have a couple months worth of the production related to that in our backlog at one time. No significant concentration in Viracon’s backlog.

Your next question comes from Ryan Levinson - Private Fund.

I need a quick clarification on something you said; I kind of missed it from two questions ago. Did you say that there was still a few million dollars of revenue from the Florida jobs that had been written off in Q3, that there’s still a few million dollars of revenue in this quarter?

That’s right. To be clear the write downs in Q3 were related to our projected costs to complete those projects. As those projects are completed we recognized the revenue associated with that.

That revenue is at zero margin.

I’m trying to find my notes from the third quarter conference call but I thought that those jobs were largely done and that they were in the third quarter and that they were going to be completed in the fourth quarter. Did something change did they drag on in some other way?

Actually on time. We did articulate in the fourth quarter so they were not complete as of the third quarter and what we articulated at the end of the third quarter was two of the projects were nearing completion and one of them was a little further out. Two of those projects were completed during the fourth quarter and the final project actually completed in the first quarter.

This is in line with your expectations?

Yes.

What was the billing in excess cost number in the quarter for the current quarter?

It’s up about $10 million, about $49 million.

Does this trend ever reverse?

It would reverse based on a decline in revenue but we still consider this to be a good thing that we’re intentionally implementing to accelerate cash flow and feel like we’ve done it effectively.

At this time we have no questions in the queue I would now like to turn the presentation back over to Russ Huffer for closing remarks.

Our businesses remain strong as reflected in our sustained high levels of backlog and commitments as well as market demand for our products. We are executing on our strategies including leveraging the green building trend. We’re excited about the opportunities for Apogee in fiscal 2009 and beyond. Thank you very much.

Thank you for your participation in today’s conference. This concludes your presentation you may now disconnect. Good day.