Apogee Enterprises, Inc. (APOG) Q4 2010 Earnings Report, Transcript and Summary

Welcome to the fourth quarter 2010 Apogee Enterprises conference call. (Operator Instructions) I will now turn the presentation over to your host for today’s call to Ms. Mary Ann Jackson.

Good morning and welcome to the Apogee Enterprises fiscal 2010 fourth quarter and year end conference call on Thursday, April 8, 2010. With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our fiscal 2010 fourth quarter and full year results and the outlook for fiscal 2011. During the course of this conference call, we’ll 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 risk and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the company’s annual report on Form 10-K for the fiscal year ended February 28, 2009 and in our earnings release issued last night and filed on Form 8-K. Russ will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Russ and Jim will answer your questions.

Thank you, Mary Ann. Good morning and welcome to our conference call. Apogee achieved solid operating performance and our third highest earnings ever during fiscal 2010, even though we experienced difficult domestic commercial construction market conditions. We executed well as we worked off Architectural segment backlog booked in a stronger market and focused on improving productivity and aggressively managing costs in the face of the most difficult market in my career. It was a year that saw pricing and margins decline as the year progressed. Despite the challenges, I’m proud of our success at positioning Apogee with a strong balance sheet, leading products, services and brands and people focused on the company’s future opportunities. Apogee earned $1.13 per share from continuing operations on revenues of $696 million, which was down 25%. I’m pleased that we further strengthened our balance sheet as cash and short-term investments grew to $102.6 million at the end of fiscal 2010. Architectural segment revenues declined 27% while operating income decreased 51%. Architectural segment revenues were down comparable to our markets served which have been impacted by tight commercial real estate credit and depressed employment levels. The fiscal 2010 market for large projects, those projects greater than ten storeys which are especially important to our Architectural glass business was down 50% to 60%; this twice the decrease for overall market for Apogee project types. Our success and growth in institutional market share were not enough to offset the decline in large office projects. We have also been successful with our strategy to grow share in underserved architectural glass markets. We grew international export revenues 45% to $36 million in fiscal 2010 and made significant inroads serving new and existing customers in the smaller project market. Earnings declined with low Architectural segment capacity utilization, declining pricing, as we…

Thanks, Ross. Given the difficult market conditions, our fiscal 2010 performance was solid. We made progress in penetrating target and underserved architectural markets, increased our picture framing glass market share, improved productivity and aggressively managed our costs. We earned $1.13 per share on revenues of $696.7 million, both down from the prior year, which was a record year for earnings per share and revenues. Overall, full year revenues were down 25%, slightly below the prior guidance of a 22% to 24% decline. Apogee’s operating margin for the year was 6.5% compared to 8.4% in fiscal 2009, consistent with our prior guidance for margin ranging from 6.3% to 7% for the year. Architectural segment revenues declined 27%, comparable to our overall markets served, but the large office projects, so important to our architectural glass business, were down significantly more. This illustrates our success in penetrating underserved architectural glass market and serving new geographic markets for installation projects. Architectural segment operating income for the year was $31.6 million, down 51%. Fiscal 2010 segment earnings were impacted by low segment capacity utilization and declining pricing, somewhat offset with work we completed that was bid in stronger commercial construction markets. Despite soft retail markets, our Large-Scale Optical segment maintained revenues and operating income for the year. Our superior product attributes, which prevent fading and controls reflection are allowing us to continue to convert more customers to our value added and best value added products. In addition, the business is operating well as it leverages investments made previously. Fiscal 2010 net earnings including discontinued operations were $1.15 per share compared to $1.81 per share the prior year. Fiscal 2010 and 2009 discontinued operations results reflect settlement of litigation and warranties. At year-end, our cash and short-term investments totaled $102.6 million compared to $83.1 million at…

I’m very proud of our employees and management team. They have been very proactive in managing costs and profitably gaining market share in this troubled economy. Apogee is in great shape to survive the downturn and thrive when the markets recover. Let’s turn it over to questions at this time.

(Operator Instructions) Your first question comes from Eric Stine – Northland Securities. Eric Stine – Northland Securities: I was wondering if you could discuss kind of the linearity of revenues and maybe the gap that you said you’re experiencing in the first quarter. Should we read into that the revenue levels could be similar to the fourth?

I think that’s right for the first quarter. Just a reminder, you know we had projects that we were wrapping up in Q4, and even though we had projects in backlog in the pipeline, there were a number of projects that actually didn’t begin until into Q1, so that’s a reasonable assumption. Eric Stine – Northland Securities: Turning to the margin mix, it sounds like it was 20% older business. Should we think of that similar level in the first or should that basically be almost 0% if you’re all the way through it.

We’d pretty much work through it all by the end of the quarter. Eric Stine – Northland Securities: So directionally, margins potentially lower than we saw in this quarter.

Potentially. Eric Stine – Northland Securities: Maybe we could touch on operating expenses. It sounds like you’re pretty committed to keeping the business where it is to be ready for fiscal year 12, so should we assume that this is a good run rate for SG&A?

Yes, I think that’s the right assumption.

We certainly are committed to maintaining our position so we can go forward much more strongly than if we would make more cuts.

Quarter to quarter, as you know, it moves around a little bit, but it’s a reasonable run rate for next year. Eric Stine – Northland Securities: Any cancellations in backlog?

I really haven’t seen that. That’s really gone away for us.

Over this entire fiscal year, actually there’s one really small project, but we have one project that we consider a cancellation, but really it got moved out almost two years and so we treat it as a cancellation, but really other than that, nothing.

You're next question comes from Brent Thielman – D. A. Davidson. Brent Thielman – D. A. Davidson: With respect to Q4 on the architectural business, just wanted to check, but was there any impact from seasonality or weather in terms of that segment. Obviously, the market had an impact as well, but any impact from seasonality or weather.

We would say no, nothing that we can point at. Brent Thielman – D. A. Davidson: Can you talk about the competitive environment right now and the pricing environment relative to what you saw in the last cycle? Is it better or worse, a little more rational this time around. Any clarity there?

It does vary a lot. If I had to put a blanket over all of it I would say that now we’re starting to see a lot more people bid than we would have seen on a bid. So that’s one thing that’s taking place, and that makes it very competitive. We are seeing though, especially on the institutional side, but even on other projects where people are recognizing that they need to have strong suppliers, so bonding and things like that are important so we really say that there’s less fall out.

One of the factors if we compared to last cycle, I think we actually saw probably more industry capacity and more competitors actually going out of the market at this point. We haven’t seen that yet in this cycle. Generally, we thought we’d see a little bit more of it by this point but we haven’t and so I think that’s probably put a bit more pressure on us from a pricing standpoint at this point in the cycle than we experienced last time. Brent Thielman – D. A. Davidson: I guess for those that are still around, you ended your stance on current capacity, are you aware of any of your competitors taking out capacity at this point.

There certainly has been some capacity reductions in the marketplace but in the past downturns we’ve actually seen some major players exit and we’ve not seen that occur at this time. Brent Thielman – D. A. Davidson: On the Large-Scale Optical, I think you mentioned $1 million related to the write off, so that implies that your operating margins were closer to 25% without that write off.

That’s right. Brent Thielman – D. A. Davidson: In terms of excess cash, could you take any shot at it. I guess if you backed out what you need for working capital purposes, but obviously, the cash position sort of continues to build here. What would you think you have available to you?

I’d say our working capital needs really, until we start to see significant growth in the market, are going to be pretty insignificant so it’s going to be less than 10% on near term that we need for working capital.

You're next question comes from Robert Kelly – Sidoti & Co. Robert Kelly – Sidoti & Co.: Can you touch on the $57 million in savings? How much of that was fixed costs?

Probably a little over $10 million of that we consider to be permanent or structural. Robert Kelly – Sidoti & Co.: That’s between fixed capacity reduction and people that you don’t expect to hire back?

Correct. Robert Kelly – Sidoti & Co.: As far as you’ve seen positives on bidding, when would a job bid today or accepted today, when would that hit your backlog?

Unfortunately, it depends. Certainly, on our installation and window business we have a different cycle. Those can hit the backlog sooner, especially the smaller projects. On the glass side, it really has to wait until the window glazing awards are made before those bids come through so it’s a little longer time. So the answer is, it just depends. I’d say on par, it’s probably awarding sooner than it did under normal times.

It really is a range as Russ said, but we are seeing, particularly in some of the Federal Government projects, we’re seeing projects that have been identified, and as you know there’s been some comments about how quickly some of this stimulus money is getting moved. We are seeing some projects that actually both you’re seeing a bit of an acceleration between bid and award and also a bit of an acceleration between award and when they actually want activity to happen in the field. So normally at this point, it gets hard especially for any meaningful sized project to impact the current fiscal year, but we are seeing opportunities that will have a shorter time horizon than that. Robert Kelly – Sidoti & Co.: I’m just trying to reconcile what you have in backlog to ship in F11 and then what you’re going to need to do to hit that kind of down 10% to 15% range. Do you expect the new order flow or the book to bill stuff that we don’t see enter backlog to remain steady in F11?

Actually, we expect it to grow. I think it’s a great point because we have seen that increase both as we’ve been successful with the smaller project market. But I think we talked about it before too. Some of these international projects actually have a shorter time horizon and some book and bill aspect to it as well. So we have seen already some growth in the book and bill within the quarter and we see that growing during the year. Robert Kelly – Sidoti & Co.: So what do you have on a book and bill basis in 1Q11 so far versus what you did in 4Q if you have that at your fingertips?

I don’t have that, but I think traditionally what I think we’ve talked about is about 25% of our revenues is a book and bill basis, and in Q4 we saw that grow up to about 30% and so we see that continuing to grow a little bit. Robert Kelly – Sidoti & Co.: On the international business, it grew nicely in F10. If you were to take a guess on where that shakes out for dollar level in F11?

We’ll get a similar growth so it will increase nicely.

You're next question comes from Ryan Levenson - Privet Fund.

I’m wondering if you could tell us what the embedded margin in the backlog is?

The margin in the backlog is really consistent with the outlook that we’ve given which is going to be kind of the considering [ph] the Q4 performance into losses in fiscal 11.

I’m just trying to figure out what the new normal is because there was a quarter of your business, I think a quarter of the sales you indicated in the fourth quarter were old bid level type sales so I’m just wondering what the new pricing matrix is.

I think Q4, you know for the 80% of our revenues in Q4, I think represented the new normal from a pricing standpoint. Obviously, that 20% goes away. We continue to find in our businesses where we can have differentiated products or I think Russ mentioned where we have an advantage from a bonding capability as opposed to our competition. We still have the ability to have some percentage of our business retain the type of historical margins that we’ve seen.

Historical for – there’s been a few cycles. So I just wonder if you could put a range on it.

If you look at our fiscal ’09 margins, the differentiated portion of our business is continuing to be priced at those levels.

Can you clarify what you mean by shorter bid to award time? Specifically I’m just wondering if that bid, that the award time is being held until later before the project starts or is it that you’re submitting a bid and getting a quick response?

Let me talk at it a couple of ways. In our glass business, as you go from larger projects to smaller projects, there’s a significant reduction in bid to award time, so from months to weeks. So that’s a different one. And then in our other businesses we have, the larger projects are still taking about the same amount of time, but we’re just doing more smaller projects and those have a shorter bid to award time.

With that anecdotal commentary, I’m just wondering if you can help me reconcile something. If I look at what you have in backlog that you’re indicating is going to work off in fiscal 2011, by my estimates, just to reach the low end of your guidance, you’re going to have to put at least $200 million into backlog during this quarter and at five weeks into the quarter, can you tell us how much you’ve put into backlog already or how much you think you have out there that you think is going to come in this quarter? I’m just wondering if you can help us understand that because it’s a pretty critical quarter for your backlog.

First of all, when we look at the outlook of our business and if you recall, in our backlog, our backlog includes the full contractual value for our window and installation business and for our glass business. We have commitments and then the backlog only represents where we’ve received purchase orders for the next six weeks of production relative to that project that we have a commitment to. So the point would be between our visibility of our backlog and our commitments and our bidding activity, as well as our current trend in terms of the in quarter book and bill rate, we feel comfortable with the revenue outlook that we provided.

The last few quarters the actual results have come in consistently lower than the guidance and now you’re also indicating that you’re going to exceed the performance that some of the trade groups are saying, are indicating what they’re expecting for the upcoming 12 months. I’m just wondering if you could maybe get a little bit more granular with that and help us understand what you have in hand today, because what are you going to have in hand in Q3 is really not going to help much for the year. So if we can understand where it’s going to shake out for this quarter, and where you think backlog is going to be, is now and where it’s going to be at the end of this quarter, that could give us a lot more comfort that you could in fact hit that low end even, or maybe even the top end of guidance.

A couple of things and I’ll let Jim answer as well, but we are seeing our win rate up nicely, especially on institutional projects, stimulus projects. That has been a real boost in our confidence and what we see going forward, so those are the kinds of things that are giving us confidence. The other part of it is simply the amount of work that’s turning during the quarter. So you have a lot more. We’re winning nicely in smaller quick turn projects.

But that’s a third of your business, right?

And that continues to be a very - we expect that to continue to show nice improvement.

But on the other two-thirds, if you could, you’ve always had this kind of book and bill business. I’m just wondering if you can give us a couple of numbers here.

First of all, I think I tried to articulate it which is our book and bill number has grown as a percentage of our business.

That’s the 30% number right?

Right, and is continuing to grow as a percentage of our business.

Is that going to grow to 70% though?

No.

But on that other 70%, I just wonder if you could hash it out a little bit for us.

I’m not sure what else we can articulate other than given the backlog that we have on our books, the commitments that we have in house, the bidding activity that we’re pursuing and our confidence factors associated with our bidding activity, we believe that we have the potential to achieve the revenue outlook we’ve provided.

How about new bookings to date number for the quarter?

We haven’t provided that.

I appreciate – we watch that, but it’s a lumpy number. Those come in. Those contracts come in and we’ll get the full value of those contracts in our installation and window business and that number can be very misleading. You need to look at it over a longer period of time than five weeks.

Consistently we’ve been communicating that even quarter-to-quarter backlog is not the appropriate way to measure our business and within the quarter, that’s even more so.

But looking at it from over the course of the quarter, are we going to see a backlog number at the end of this quarter that’s in the say $300 million range in total with maybe $200 million, $225 million that could be worked off for the rest of this year?

We’re not - we don’t forecast our backlog.

(Operator instructions) Our next question is from the line of Rod Hinze with KeyPoint Capital.

My question has been answered. Thank you.

And at this time, there are no other questions in the queue.