Apogee Enterprises, Inc. (APOG) Q1 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2013 Apogee Enterprises, Inc. Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] At this time, I would now like to turn the conference over to your presenter for today, Ms. Mary Ann Jackson. Ma'am, you may proceed.

Thanks, Chris. Good morning, and welcome to the Apogee Enterprises Fiscal 2013 First Quarter Conference Call on Thursday, June 21, 2012. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2013 first quarter and our outlook for fiscal 2013. 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 fiscal year ended March 3, 2012, and in our press release issued last night and filed on Form 8-K. Joe will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary Ann, and good morning, everyone. Welcome to Apogee Enterprises' first quarter conference call. We had a very good start to the new fiscal year, with strong earnings of $0.06 a share. This is up $0.14 per share over the prior year period. And our Architectural segment backlog grew 13% compared both to the end of the fiscal year and this same time period one year ago. First quarter revenues grew 1%. However, strong booked orders and award activity in the first quarter resulted in an Architectural backlog growth of 13% or $30 million in the quarter. It then gives us continued confidence in our outlook of mid-single-digit revenue growth for the full year. I'd point out that our Architectural backlog is up $100 million in the past 6 quarters from our trough. Our first quarter earnings performance and strong backlog had given us greater visibility to the full year. This allowed us to increase our earnings per share outlook for the fiscal 2013 year to a range of $0.48 to $0.58 per share. Our guidance heading into the year, as you're well aware, was $0.40 to $0.50 per share. We also had good working capital performance in the quarter in a quarter that we normally have seasonal uses of cash and increased our capital investments for growth and productivity investments. Jim will tell you more about our working capital performance. Capital expenditures in the quarter were $9.5 million compared to $1.6 million in the same quarter last year. First quarter investments included 2 projects that had progressed quite smoothly. We are on schedule with the aforementioned productivity improvements at our Statesboro, Georgia architectural glass facility, which is anticipated to reopen in August of this year. The capacity expansion project in our storefront business is well to support our ongoing growth in that business, and that has been completed. In the quarter, we also purchased curtainwall fabrication equipment to support our installation business's first quarter expansion into Texas. We had plans to expand into this geography in this fiscal year with a new location. In the first quarter, though, we pounced on an opportunity to accelerate those plans. We are already winning business and expect that this investment in the Texas market will be accretive to us in fiscal 2013. As you can see, we are investing in capital for geographic growth, capacity expansions, existing facilities and productivity improvements. I'd like to note that during the first quarter, we increased our quarterly dividend by 10%. This increase, after 3 years of holding our dividend flat, underscores our confidence in Apogee's ability to generate cash as our performance improves from the commercial construction trough. Regarding our first quarter performance in our segments. Architectural segment revenues were flat. Its growth in the storefront and installation businesses were offset by the expected first quarter gap in our architectural glass project timing. Architectural segment operating loss was reduced by more than $5 million from $7 million in the prior period to $1.9 million in the fiscal -- first quarter of this fiscal year. The improvement resulted from higher architectural glass pricing and volume growth in our storefront business, partly offset by lower margin revenues in the installation business, as we'd had expected. Our Large-Scale Optical segment again turned in strong performance, growing 7% in revenues and operating income growth of 14%, generating operating margin of 27.4% compared to 25.7% in the prior year same period, a 170-basis-point improvement. At our -- the team at our Large-Scale Optical business continues to sell its customers in all markets, both at home and internationally, on a better mix of higher value-added picture framing glass and acrylic, an impressive performance record. We are pleased that we achieved high triple-digit-basis-point improvements at gross and operating margin levels in both our Architectural and Large-Scale Optical segments in the first quarter, and Jim will explain more on that. As I look to the outlook, and as I noted in my opening remarks, we have raised our earnings outlook for the fiscal year to $0.48 to $0.58 a share. Our strong first quarter earnings in inbound order activity have given us greater visibility and confidence for the full year's earnings per share. Our outlook for earnings growth for the year is based on full year of improved architectural glass pricing, higher architectural project margins in the second half, the ongoing strong performance of our picture framing glass and acrylic business, as well as improved performance in all of our factories. At the same time, we are maintaining our revenue rec expectations of mid-single-digit revenue growth and anticipate that we will come in part from new geographies, new markets in several of our businesses, patterned and sustained growth in the nonresidential construction markets. For the full year, we expect to generate positive free cash flow after spending approximately $25 million in capital. Our investments will improve productivity, increase capacity, introduce new products and maintain our factories. I believe that our focus on operational improvements, new product introductions, geographic expansions will continue to help Apogee deliver improved top and bottom line results. Jim Porter will now take you through those details of the financials. Jim?

Thanks, Joe. We are pleased that our first quarter performance came in at the high end of our internal expectations with market conditions that have yet to improve. We earned $0.06 per share compared to a loss of $0.08 per share last year, exceeding our prior year performance, as we indicated we expect to do each quarter this year. Apogee's gross margin improved 470 basis points to 20.2%, up from 15.5% in the first quarter of last year. We experienced lower revenues and profits sequentially compared to the fourth quarter as we had expected and previously communicated. Our Architectural segment operating results improved by more than $5 million on flat revenues. Revenue growth in the storefront and installation businesses, which are expanding into new domestic geographies, was offset by the lower revenues in our architectural glass business, as expected due to scheduled timing of projects. The Architectural segment recorded an operating loss of $1.9 million in the first quarter of fiscal 2013 compared to a loss of $7.1 million in the prior year period. Higher architectural glass pricing and the impact of growth in our storefront business were partially offset by the expected lower margin work in our installation business. Architectural segment capacity utilization was lower in the quarter at approximately 52%. Our Architectural backlog increased by $30 million to $267 million in the first quarter, the highest backlog level in more than 2 years. Before I cover the backlog mix, I'd just like to note that we have adjusted how we report the backlog portion from our Brazilian architectural glass operation to be consistent with how we report our U.S. backlog. Our comments take into account that we've made this change retroactive to last fiscal year for our Glassec Viracon backlog, resulting in reduction to previously reported fiscal 2012 quarterly backlogs, averaging a little over $5 million a quarter. Backlog for the Brazil operation represents less than 5% of our total Architectural backlog. Turning to the backlog mix, the institutional sector increased to approximately 60% of the backlog. There's growth in healthcare and education projects and some further decline in government work. Office sector is about 25% of the backlog. Multi-family residential, including high-end condos and apartments, is approximately 10%; and hotel, entertainment, transportation and retail represent less than 5% of the backlog. Regarding the timing of the backlog, approximately $188 million or 70% of our backlog is expected to be delivered in fiscal 2013, and approximately $79 million or 30% in fiscal 2014. The Large-Scale Optical segment continued to make significant contributions to Apogee's performance, with growth in both revenues and earnings. With greater demand from all markets for our best value-added glass and acrylic framing products, revenues were up 7% and operating income increased 14%. Operating margin was 27.4% compared to 25.7% in the prior year period. Our cash and short-term investments at the end of the first quarter totaled $57.5 million compared to $79.3 million at the end of fiscal 2012. Long-term debt increased by $10 million in the first quarter to $30.9 million, as Michigan issued $10 million in industrial revenue bonds with current and projected capacity expansions in our storefront business located in this state. I want to remind you that essentially all of our debt is long-term, very-low-interest industrial revenue and recovery zone bonds. We had negative free cash flow of $17.1 million during the first quarter compared to a negative $22.2 million in the prior year period. In the first quarter, we have normal seasonal uses of cash to fund incentive and tax payments, which impacted both periods by approximately $13 million. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Our noncash working capital was $61.2 million compared to $44.4 million at the end of fiscal 2012 and $63.3 million in the prior year period. The sequential increase was primarily the result of the seasonal first quarter use of cash to the items that I just noted. Today's working capital was 47 days, which I consider very good performance and is in line with both the prior year period and year-end. We define noncash working capital as current assets, excluding cash and short-term investments, less current liabilities. All this working capital here is computed looking at our controllable working capital assets and liabilities, AR inventory and payables. I'll turn to our outlook. After our strong first quarter earnings and backlog growth and the visibility it provides, we're increasing our earning guidance to $0.48 to $0.58 per share from the previous guidance of $0.40 to $0.50 a share. As we booked new orders in the first quarter to fill in our second half, we've added projects with higher pricing or margins than we had originally assumed. In addition, we believe that a strong first quarter operational performance will continue as productivity improvements we have made deliver the expected results. The outlook for our specific end markets is to be flat to slightly down in fiscal 2013. Despite this, we're maintaining our expectations for mid-single-digit revenue growth as our Architectural businesses continue to gain share, including domestic geographic growth at our installation and storefront businesses. As a result of our first quarter improved performance and visibility in the higher project margins, we've increased our expectations for full year gross margins to approximately 21%, up from approximately 20% previously indicated. Through the balance of the year, we continue to expect that each quarter will show growth and improvement over the prior year with revenue ramping based on customer project schedules, continued geographic penetration and second half improved project margins in installation. We continue to expect to generate positive free cash flow for fiscal 2013 after our full-year increased capital spending of approximately $25 million for several new projects. Our first quarter CapEx of almost $10 million included investments in capacity and productivity improvements. Level of spending in the remaining 3 quarters for new products, capacity and productivity improvements and maintenance is not expected to be at first quarter spend levels. Depreciation and amortization for the year should be approximately $28 million. I'm encouraged by our first quarter performance and expect continued improvement as fiscal 2013 progresses. I also look forward to future opportunities that will leverage Apogee's strong financial position, leading products and services and operational and strategic initiatives. Joe?

Okay, thanks, Jim. Operator, I would like to open the call up for questions from our audience.

[Operator Instructions] And our first question comes from the line of Brent Thielman from D.A. Davidson.

Yes, Joe, I guess just kind of looking at the macro picture a little bit here. Data seems to be getting a little bit worse, and obviously, we saw a little softening in the ABI yesterday. How confident are you that you can continue to grow the backlog? Or do you think we might see some leveling off here until the market get some confidence back?

Well, clearly -- Brent, thanks. Clearly, in the last 90 days, the U.S. market has seemed to -- it seems to get a little thinner. Jim and I feel confident that the flat projections were reasonable. Most people thought we're being conservative 90 days ago. I think folks probably feel a little bit that we're probably more in line with what's really going to happen in an election year. I'm not surprised. We had 4 months in a row of improved indices. Now we've had 2 months in a row of slightly below the mid-number. And I'm not surprised at it, frankly. I'm comfortable. The market is doing what we thought it would do this year. We continue to win share in some of our businesses. Our backlog, as we reported, is doing quite well, and I'm confident we'll continue to see the wins throughout the rest of the year. We've got end markets that are somewhat flat, and we're prepared for that for the rest of this year. And I believe that our mid-single-digit growth in a flat market is still as sound as it was 90 days ago. And of course, if end markets improve a little bit, you should expect us to improve accordingly from our forecast. I'm not expecting that this year.

Understood, Joe. And then I guess just in terms of investments and sort of growth initiatives for LSO, that was obviously a little bit more of an impact in Q4. Was it as significant in this quarter?

No. We did make a concerted effort in Q4, so our SG&A did increase, as we highlighted. I think you saw from Jim's comments, our margins, both gross and EBIT, were up nicely. And there was significantly less of an impact in the first quarter.

Okay. And then just lastly, maybe, Jim, you could help me out. Any sense for sort of the tax rate we should be modeling for the year?

Yes, it's roughly -- I mean, normally, it's about 35%. I mean, our outlook this year is in the 34% to 35% range.

The next question comes from the line of Eric Stine with Northland Capital Markets.

Wonder if we can start just with the orders or the backlog. Can you just let us know kind of the pending number? I know it's been around $60 million, abnormally high in the last 3 quarters. Is that pretty similar right now?

It's very similar. We didn't want to confuse people by introducing probably that number that's just another variable. The booked backlog is what we reported today. The award is not yet contracted, so we don't report this. It's been consistent for the last 6 [ph] months.

Okay. I just wanted to confirm, I mean, so the growth is not necessarily that, that number has loosened up. It truly is growth. Okay, and I'm just curious, and you get to the point...

And Eric -- Jim, myself in again -- in my opening comment, I used the word booked backlog and new awards. Our activity on new award is -- has been very consistent.

Okay. Is that -- and before I just get off that topic, I mean, is there something that you think needs to happen or what the limiting factor to that number kind of remaining abnormally high and getting it back to more typical numbers, the $25 million range?

I'll begin with that, Eric...

Yes, sorry, you're asking about the awards not in backlog, and I think...

Yes. I mean, is it still credit, is it hesitation given end market conditions, all of the above, and what do you think needs to change that we see that make it to finalize backlog?

Yes, I guess, maybe we kind of backed off calling out of last quarter, and I think just because we're just seeing a lot of dynamics in the whole kind of booking and order activity, I think Joe's key point is that kind of our new order activity is basically -- it stayed really high, and that's the key. And the issue is we're seeing a number of just dynamic changes project-by-project in terms of the length between when we're bidding projects and when they're being awarded. And it's actually just kind of more volatility right now. In some cases, we're seeing that time period shrink. And in other cases, like we were seeing 2 years ago, where all we were seeing was an extension in those projects dragging out. So I guess it's maybe in and of itself less of a meaningful number.

Okay, okay, fair enough. Maybe we could just turn to margin. Clearly, that was one of the strong points of the quarter. Should we take it from the number you reported that you are largely through that low-margin installation work or getting close to it?

It's going to be through the first half before we really work our way. And we're going to actually see some of it carry through the balance of the year. But I think the majority of it will be behind us in the first half.

Okay. And then any color you could provide on just what the -- clearly, you're gaining confidence given the margin profile of backlog, what you're adding to backlog, just what the profile looks like maybe relative to the last few quarters?

By segment?

No, I mean, just margin profile of backlog. And last quarter, you were very helpful. I think you said in some cases, 200 to 300 basis points better. So just any color along those lines would be helpful.

That's the trend. I mean, that comment still applies. It's certainly not gotten any worse than what we said 90 days ago. It's -- continues to be better than -- the new awards going in are better than what's coming out of the backlog and being revenued, to a similar extent.

Okay. That's helpful. Last one for me, just to confirm some of your comments, Jim. Did you say as part of your guidance, you expect improvement throughout the year? I mean, is that for revenue margins and EPS? Is that how we should take that comment?

Yes. It's not just going to be totally linear. I mean, we tend to have a slight seasonality. In Q3, it's a little stronger. I mean, in our Large-Scale Optical, that's stronger; and Architectural, there's a slight seasonality.

Okay. And that's what I was getting at, that we should still see that typical seasonality as the year plays out.

Yes, to a slight degree, we expect that. And again, in our Architectural segment, quarter-to-quarter is always hard to predict on top line just because we are subject to the timing of projects.

[Operator Instructions] Our next question comes from Robert Kelly with Sidoti & Company.

Just a question on the backlog improvement year-over-year. Is there a way to parse out the improvement on volume and price or mix?

It's predominantly volume, Bob. I mean, because of our improved margins, there's a couple of perhaps rounding impact on price. Of course, it's in there just because the project margins are slightly higher, but it's volume.

Okay, great. And then just as far as your F'13 earnings expectations, you did have some -- I think you characterized it during the first quarter as a gap in project timing for glass fabrication. With the backlog you have in hand, are all those gaps closed for the balance of F'13? Or do you still need to fill open capacity in the latter half of the year?

We have -- I'll let Jim chime in, too. We have -- we don't have 100% of our revenues in our booked backlog, but our position coming out of the quarter is stronger than we anticipated because of the strong backlog. Some of that shifts this year and some in F'14. I think Jim highlighted that. I'm comfortable that what we have left to book is a reasonable forecast.

Okay, great. And then just a point of clarification, we're still expecting end market conditions kind of even or flat with what you saw during your fiscal '12 for F'13?

These projections assume a flat end market for nonresidential construction.

Yes, the way we kind of slice and dice the McGraw-Hill data, it's actually down, kind of low single digits, but kind of flat to slightly down in terms of end market.

And we have no further questions at this time. I would now like to turn the call back over to Joe Puishys for any closing remarks.

Okay, Chris. Thank you. And team, thanks for listening to our story. Obviously, with slight revenue growth but a very strong backlog, I'm clearly pleased with the fact that we improved gross margins and operating margins in both segments. Our awards were strong. As you heard, we're maintaining our mid-single-digit revenue growth, and I'm confident in our improved guidance for the -- or adjusted guidance for the rest of the year. I look forward to talking to you at the end of the third quarter, and you all have a great day. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a great day.