Mary Ann Jackson - IR Joe Puishys - CEO Jim Porter - CFO

Noah Kaye - Northland Securities Brent Thielman - D. A. Davidson Jon Braatz - Kansas City Capital Scott Blumenthal - Emerald Advisers

Ladies and gentlemen, good morning, and thanks for joining the Apogee Enterprises Q3 2015 Earnings Call. My name is Ryan. I will be the operator on the event. And at this time, all participants are in listen-only mode. Later, we will be opening the call to facilitate questions. [Operator Instructions] And as a reminder, we're recording the call for replay. And now, I'll turn it over to Ms. Mary Ann Jackson.

Thank you, Ryan. Good morning, and welcome to the Apogee Enterprises' fiscal 2015 third quarter conference call on Thursday, December 18, 2014. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2015 third quarter and our outlook for fiscal 2015. 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 Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary Ann. Good morning everyone, and welcome to Apogee's conference call for Q3 of our fiscal 2015. We appreciate your time this morning. As you have seen, we had outstanding results in the quarter with strong growth in revenues, gross and operating margins, backlog and cash. Looking forward, we're expecting a strong finish to the fiscal year, and we raised the bottom end of our earnings per share guidance and now expect to earn a $1.64 to a $1.72 per share for the full year. Third quarter revenues were up 23%, all four segments achieved strong double-digit growth in revenues. Our operating income grew 62% with all segments having substantial double-digit growth, except for Architectural Services; more on that in a minute. I'm particularly pleased that during the quarter Apogee improved gross margin by 140 basis points and operating margin by 200 basis points compared to the prior year period. In our seasonally adjust -- strongest quarter, the operating margin of 8.4% was our best in over five years. We converted 21% of the incremental growth in the quarter to operating margin, excluding the Canadian acquisition. Earnings per share grew 42% to $0.47 a share in spite of the services headwinds that Jim will walk through. The prior year period benefited from a lower tax rate, accounting for the EPS growth rate being lower than operating income growth rate. Again, Jim will highlight some Q4 tax tailwinds we have. Our backlog grew sequentially and year-on-year to its highest level in six years as we continue to win future work at improving margins. Frankly I had expected the backlog would top $500 million in the third quarter, and though we are a bit shy at that level at $494 million, it was simply due to the timing of project award flowing into the backlog. No projects were lost. In fact, we are expecting backlog to again grow sequentially in the fourth quarter based on contracts that are in review at improved margins. Our cash and short-term investments grew to $34.3 million in the quarter, up from $25 million at the end of our second quarter, despite the pressure from such strong sales volumes. Regarding segment results, Architectural Glass revenues were up 23%. Operating income grew to $5.8 million for a 430 basis point improvement in operating margin. As the U.S. non-resi markets continue to improve, our Viracon Architectural Glass fabrication business is achieving operating leverage on volume growth as well as improved pricing. In operations, the new glass coater that came online in August is now delivering new capabilities and achieving the targeted levels of productivity. We are also in the process of bringing the Utah fabrication facility back on line for a January 2015 start-up. Both of these investments had minimal impact on our Q3 results; both will be accretive to F'16, and Jim will provide more specifics if you wish. Architectural Services grew 10% while operating margins were down slightly, 10 basis points as we took write-downs on a few projects. The project issues were isolated and have been resolved. You will hear more from Jim that none of these mentioned projects are in a lost position. I'm pleased with our project review rigor. We do expect significant improvement in Architectural Services' operating margins in the fourth quarter. In our Framing System segment, revenues grew 36% with organic growth of 19%, excluding the Canadian acquisition from November of 2013. Operating income was up 31%, but margins declined slightly by 40 basis points as good operational performance across this segment was offset by higher aluminum cost and charges related to the acquisition of Custom Window in fiscal 2014. We raised prices for our aluminum storefront products during the quarter, and Q4 will include the full effect of that price action. I'm pleased that our Canadian storefront business is generating improved operating margins and has been growing its backlog. This business is now delivering the results we expected at acquisition, as Canadian non-resi markets improve after a very slow start to 2014. Our Large-Scale Optical revenues grew 13% in the quarter driven by strong orders from all channels, but particularly in retail. Last quarter we noted that we expected strong demand this quarter driven by the timing of retail purchase for the holidays, which came through. This drove operating income to $7.9 million, up over 30% or 410 basis points versus the prior period. We saw a higher mix of value added framing glass and acrylic in this quarter. Now, let me mention few points about the fiscal 2015 outlook. We are very confident about our fourth quarter and have raised our outlook for the full year to a $1.64 to $1.72, up from $1.62 to $1.72. We are expecting revenue growth of at least 20% for the fiscal year. We believe our backlog will grow sequentially in the fourth quarter based on a robust bidding and quoting activity. We are also expecting sustained growth for our architectural businesses based on this strong backlog for 2016 and beyond, as well as the positive external forecast for our end markets. We also expect to drive growth in our Large-Scale Optical segment with our continued launch of exciting new products in new markets. Clearly I'm excited about Apogee's future prospects and opportunities. We've recently completed our fiscal 2016 through 2018 strategic plan, which yielded fiscal 2018 expectations for revenues of $1.3 billion with 12% operating margin. This plan builds on our current strategies and margin enhancement initiatives. We're expecting double-digit architectural market growth through this strategy period with market peaking in fiscal 2019. Drivers for top-line growth, our strategies around new products, new U.S. and international geographies, new markets for architectural and Large-Scale Optical businesses, drivers for operating margins include project and product mix, capacity utilization and productivity improvements including lean tools new product introductions new penetrations in our markets and leveraging capital investments such as the new architectural glass coater in the third anodized finishing line. I expect between 50 and 100 basis points of margin improvement annually from our lean operations initiatives. Jim will now cover the financials, and I'll come back to take your questions at the end. Thank you.

Thanks, Joe. I'm pleased with the strength of our third quarter performance. We have revenue growth of 23% or approximately 17% organic growth excluding the impact of the acquisition that we made late in third quarter of last year. Our operating income grew 62% for the quarter. Earnings per share of $0.47 were up $0.42 compared to the prior year period which benefited from a lower tax rate. On a constant tax basis, earnings per share also would have grown 62%. Our operating margin at 8.4% for the quarter was up 200 basis points driven by gross margin improvement of a 140 basis points. We achieved a 23.2% gross margin for the quarter, our seasonally strongest quarter. In achieving this gross margin level, we overcame project write downs in architectural services as well as higher aluminum and healthcare cost. In our Architectural Services segment, we took write downs on three projects, which impacted us negatively by approximately $2 million in the quarter. All three projects remain profitable and the problems are behind us. Our Architectural Framing System segment continues to be impacted by higher aluminum cost in the quarter as it was last quarter. We have introduced pricing pieces in our U.S. storefront business and expect these price increases to fully offset the aluminum cost increases in our fourth quarter. We again experienced some unusually healthcare cost across the company; combined these items negatively impacted gross margin by approximately 135 basis points in the quarter. Despite these headwinds we achieved strong gross margin improvement over last year and last quarter with improved volume, manufacturing productivity, pricing and mix. Third quarter average capacity utilization across all architectural manufacturing businesses was approximately 85%, up from approximately 75% in the second quarter and 68% in the period year period. The tax rate for the quarter was 33%, up from 24.4% in the prior year period when we had some resolution of certain tax positions in the quarter last year. The third quarter backlog was $493.9 million, up 65% from $299.9 million in the prior year period. We're very pleased this year our fourth consecutive quarter of backlog growth and we continue to have solid biding and quoting activity. But as I do every quarter, I want to remind you that our business can have lumpy order intake activity. So we don't require or necessary expect sequential backlog growth each quarter to be consistent with our longer term trend. As Joe stated we expect sequential growth in the fourth quarter in our backlog but it's always subject to the timing of project awards when they get into our backlog. Our backlog mix at the end of the third quarter reflects some growth in the office and institutional sectors with a slight decline in hotel, entertainment and transportation as we complete some projects. The office sector was approximately 55% of the backlog, the institutional sector was approximately 20% of the backlog with healthcare projects the majority of this but we also started to see some growth in education. Multifamily residential including high-end condos and apartments was approximately 15% of the backlog. And the hotel entertainment transportation sectors were approximately 10% of our backlog. Regarding the timing of our backlog, approximately a $182 million or 37% of our backlog is expected to be delivered in fiscal 2015 with an approximately $312 million or 63% of the backlog in fiscal 2016 and beyond. In the quarter, we had positive pre-cash flow of about $15 million. Non-cash working capital was $98.5 million comparable to the level in the second quarter. It is increased from $77.3 million at the end of fiscal 2014 as we significantly grow our business. We continue to have strong day's working capital management in the company. We define pre-cash flow as net cash flow provided by operating activities minus capital expenditures and Non-cash working capital as the finest current assets excluding cash and short-term available for sale securities, short-term restricted investments and current portion of long-term debt less current liabilities. Before I turn to our outlook, I'd like to know that yesterday we closed down a five year extension to our revolving credit facility. We took advantage of our strong performance and good market conditions provide additional liquidity for future growth opportunities. The revolving credit facility was increased to a $125 million from a $100 million at attractive terms and rates. Now, I'll turn to our outlook. For the full year, we're expecting earnings per share of $1.64 to a $1.72 per share and revenue growth of at least 20%. Despite the anticipated write-downs and charges we had in the third quarter, we raised a low end of our earnings per share outlook to reflect the strength we are seeing in our businesses as we conclude fiscal 2015. We anticipate nice revenue growth in the fourth quarter for all segments except for Architectural Services. As John noted, we expect that Architectural Services segment's fourth quarter operating margin will improve significantly from the third quarter. We expect that the segment revenues and margins for the fourth quarter will be down slightly compared to the prior year fourth quarter just based on the expected timing of project activity. We anticipate that the full year operating margin for the Architectural Services -- improvement compared to fiscal 2014 full year. We're expecting that our consolidated gross margin for the year will be approximately 22%, down somewhat from our previous outlook of a range of 22% to 23% due to the third quarter headwinds that we've discussed. We anticipate a full year tax rate of approximately 33.5% excluding the 48C tax credit taken in the second quarter or any impact from the tax extenders bill that was passed earlier this week and is awaiting signature by the President. Including the 48C impact, the full year rate is expected to be approximately 23%. We expect to generate positive free cash flow for the fourth quarter and full year fiscal 2015, Natural spent approximately $35 million for the full year on capital. There remains balance across investments for growth, productivity, and new products as well as maintenance. Depreciation and amortization should be approximately $30 million for the year. I feel really good about our third quarter results in the core performance trends in our business. We expect that fourth quarter was solid revenue growth and margin contribution, generating positive free cash flow with our outlook of strong end-markets and the strategies we have in place, we are positioned to deliver the longer term goals without delay. Joe?

Thank you, Jim. Okay, Ryan, if you could open the call up for questions, we're ready to go.

[Operator Instructions] And our first question here comes due from Colin Rusch with Northland Securities.

Thank you, gentlemen. It's Noah Kaye in for Colin.

Hi.

First, looking out at Latin America and relative to your guidance, can you talk a little bit about the growth opportunity there and maybe what you expect from the region in the coming years as a percentage of revenue?

Yes. As you know, we have an operation as part of our Architectural Glass business in Brazil, based on Sao Paulo. Business is performing extremely well. No question the end markets are softer this year, and we expect flattish fiscal '16 from Brazil, but we've made some nice productivity investments there. The mix of the business is moving a little bit more to insulated glass away from laminated glass, that's a favorable mix moving for us. So we're extremely pleased with the result of that business, and continue to make investments. We do expect to have some recovery in F'17 on our end-markets and we'll be looking at making capacity investments. We do think we have continued export opportunities from our Architectural Glass business in both in Mexico and Central America. So the Latin American region in total is -- we expect to be tail wins for our business.

Okay, great. And then shifting to a separate geography, you talked about it a little bit in the prepared remarks, but how is the Canadian operation tracking relative to last year?

No question, we've highlighted in the first two quarters, headwinds from our Alumicor acquisition, entirely due to their end markets, which cratered in the winter. Their third quarter results for that business were precisely where we expect that they would be when we acquired them. We still have a lot of synergies that have yet to kick in, but their performance was in the upper single-digits operating margins. So we were pleased with the Q3 performance. And compared to last year, if you compare their full quarter versus their prior fourth quarter, it was favorable. Of course they were only in the results last year for less than one month, but I would tell you we feel Alumicor is now hitting its stride.

Sure, sure, great. Good to hear. Just to go back to what you were talking about in the prepared remarks, the cadence of converting pipeline to backlog, I just wanted to make sure that this was clear from your guidance -- so in the last month or two, that pace of converting pipeline to backlog, you have been seeing that pick up. Is that basically what we should be taking out of this?

We measure not only booked backlog, but projects in review, and cadence has not changed from our prior quarter end comments. The timing of what came out of review and entered the actual booked backlog as I mentioned was just slightly lower than I expected, about $7 million to $10 million, but it's just orders that are still in our pipeline that will just move into Q4. As Jim points out, we have lot of big orders that come in the backlog and sometimes they slip a week or two or a month, then it can make things seem lumpy, but long way around the barn to tell you that nothing changed with our cadence and combined backlog in projects in review from 90 days ago.

Great. And lastly, obviously you've done a really admirable job with operational efficiencies over the last several years. So as you close out the year and look into next year, you mentioned several initiatives that you were focusing on for improved operating leverage. What do you feel are going to be maybe the two or three biggest drivers here? Where do you see the most opportunity?

The investments were making purely from our lean. So we have two efforts. One is, doing things with better process rigor with our lean initiative, which takes no capital. We do expect 50 plus basis points of margin enhancement from our lean efforts around operational excellence, and then our capital investment, which we highlighted about $35 million, most of that is for productivity and process capability that while providing headwinds in the initial few quarters for obvious reasons, most projects don't pay back in the first quarter. And we are making those bets like the super coater, like the anodizing line, a lot of automation in our factories, and that I expect another 50 basis points in margin enhancement. So it's a combination of lean and capital.

Great. Well, thanks so much and congrats on the quarter, gentlemen.

Thanks, Kaye.

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

Hi, good morning.

Brent, good morning.

Just back to kind of the issues in services this quarter; you mentioned they were isolated; it sounds like there's a few different projects. Is this just related to a single office or region? Maybe just more color there.

Yeah. It's -- this is Joe and Jim will expand. I can tell you I've been in the project businesses for a lot of my career where I came the before this. You do have unfortunately hiccups in that. We've repeat none of those projects went into a loss situation. We just would make less margin than we expected. All three of the projects Jim highlighted we saw in our front window as opposed to our rear view mirror. We have pretty good process rigor in that business today. It was really primarily due to not so much in our field but in our assembly operations primarily around one operating facility where we took on a little too much work. We do have the operation fixed and cleaned up and we are convinced that these were non-recurring write downs for this business.

And Brent I'll just add to it, that first of all for context in our Architectural Services business, kind on average we have about 70 active projects at any one time, maybe about 50 where there is more activity, but 70 projects where there can be a little or more activity. So to put in context that we had three projects issues. And as Joe said the majority of it was some bottleneck where we took on a little bit too much capacity as we are ramping up our internal Architectural Services engineering and fabrication and we've gotten through that but incurred some significant cost that worked our way through that.

Brent I've been at many of our -- as has Jim -- many of our project sites throughout this year in this business and my confidence in the continued positive trend of operating margins in this business has not waned, it's really good business with a great ROI. As you know we have very low investment. They don't really have manufacturing. They do assembly for some of their work and just didn't operate effectively in that aspect of the business, but I'm convinced that's behind us.

Okay. Thanks for all the color there, guys. You guys made a move to the Texas market a little bit more than a few years ago. I'm just curious, are you seeing any pause down there with respect to bookings or new business?

It continues to be a strong business for us. It's just one of our geographic growth expansions that we did in a couple of our businesses. We feel we still have opportunity there. There is a lot [technical difficulty] to be determined.

Okay. Thank you. And then on large-scale optical, very impressive quarter here. Could you talk a little bit more about what might've changed during the quarter, because growth hasn't really been tremendous there for the last several quarters? Is it more of a shift in the market or more market share gains?

Just the timing of when some of our key customers place their orders and particularly for the holiday, that's why Jim and I said with confidence at the second quarter don't worry it's a strong business so will continue. We expected tougher comps in the first half and better comps in the second half. And we saw that the holiday orders came through just a little later this year than in prior year end. It's really just the timing thing. We believe that business continues to be very, very sound. And as consumer confidence increases and we're seeing the consumer indices continue to increase and of course the good news on the oil situation is more money in the consumers' pocket, that's good news in the long-term for this business, so just a timing issue.

Okay. Thanks, guys.

You are welcome, Brent.

Next question comes through from Jon Braatz of Kansas City Capital.

Joe, I think I heard you say as you look out three or four or five years that you felt that maybe the non-residential market would maybe peak in 2019, if I understood -- heard you correctly. That's four or five years out from now. But what gives you the confidence -- what are you looking at that suggests that we are indeed going to be peak in that year rather than maybe a year earlier or 2017? What are you seeing out there that gives you that confidence?

Well, to the best of our ability we believe the peak will happen after the mentioned strategic planning horizon over the next three years. If it was '19 or '20 that's extremely possible and no one is smart enough to guess that clearly regardless of what affiliation you're with, but we have a very good visibility to the future. We're in with architects today that are designing buildings that won't be built for three plus years, and particularly our glass business where architects are designing big buildings. We are part of that process. We help them get the look and feel they want as well as the energy efficiency they're looking for. So we've got great radar. We can't predict better than anyone else what might happen in the geopolitical world and major macroeconomic. But we do have good visibility to the future and we base our forecast as much on that as we do everything else we read from McGraw Hill data, what we can get from the industry experts. So we feel confident that we have three to five years of market growth barring any unusual situation in the global economy.

Okay. Relative to maybe where you were like maybe last year at this time, relative to that outlook, are you seeing that momentum building? Or are you sort of still seeing strong but sort of the same level? I'm trying to get a sense of maybe the relative change.

In the last two-three years, we begin to feel better about the end markets. I use terms it still felt like the ice was thin, as we are coming into the recovery. There is still question it feels thicker this year than last year and a lot thicker than two years prior. So I would say it's continued to solidify as favorable. We're seeing more large projects with longer lead time visibility and we feel we're seeing now broader geographical growth. You heard from Jim and myself, we were talking about pockets of recovery like Texas or Silicon Valley, Baltimore Washington, Upstate New York, that's within the last year the positive geographies in U.S. have broadened almost across the Board. We're also -- trust me, we're also trying to reinvent ourselves, so that whether a downturn begins in three five or six years we're better positioned as a company to look a hell lot differently should that happened through our efforts to grow internationally and in particularly with our retrofit initiatives which continues to gain traction for us.

Okay, alright. Thank you very much Joe.

Thanks, Jon.

[Operator Instructions] Our next question comes to you from Scott Blumenthal with Emerald Advisers.

Good morning, Joe; good morning, Jim.

Hey, Scott.

Good morning, Scott.

Jim, could you refresh our memories, does backlog contain anything in services or is that just glass and framing?

No actually the Architectural Services segment is the largest component of our backlog probably about 60% of our backlog is related to Architectural Services.

Okay, thank you.

And then to remind you Scott just excuse me the Architectural Glass business given that's our largest business we'll get committed or awarded a project but that project gets broken down into specific phases. So even for a full project we only have a portion of that project in our Architectural Glass backlog at any one point in time, whereas in our other businesses we will have the contractual value for the entire building.

Okay. Thank you for the reminder, Jim. I appreciate that. Jim, can you also give us some insight into how you believe maybe SG&A is going to fall out in Q4? You've done pretty well this year. You guys deserve to be paid. Maybe you can give us an idea as to where you think that's going to be.

Yeah, we do expect our Q4 SG&A to increase and some of that is as we're starting to ramp-up certain investments and those types of thing. But I think little over 15% on a full year basis for SG&A as a percentage of sales, so you'll see it a little bit higher, probably a little bit closer to between 15% and 16.5% for the fourth quarter.

Okay. That's really helpful. Thank you. And, Joe, could you maybe give us a little bit of an insight into the progress on the St. George restart? What you think that facility -- how loaded that facility is going to be when you give it going next month; and if you've had any trouble staffing that at this point. And what you have seen in the Las Vegas markets, since that's kind of the obvious market for that facility?

Scott, thank you. We're moving right on track to be up and running in early January at the St. George facility. It is the smallest of our -- it was the smallest of our glass fabrication factories. We'll start up with over hundred hourly employees out of the gate by the end of the calendar quarter. We should be at close to full run rate of over 300 employees. We retained more than a dozen of the key individuals from that factory when we temporarily shut it down about 18 months ago. So the plant manager, the HR leader, the maintenance leader, the production supervisors, all those people were retained in the business either redeployed to our Minnesota factory or our Georgia factory. They're going back. So the core nucleus of leadership is already back and getting the place fired up. I expect we'll be at full production in the calendar second quarter. And we didn't get into the financial detail, but that operation will be accretive to our results in fiscal '16, and the first quarter will be probably not so our calendar quarter, maybe our fiscal fourth quarter, but it will be pretty de minimis. The business in Vegas is okay. That facility will be servicing business in the entire Western U.S. and we're pretty effective at shipping glass over the road in the United States. So we can bring glass east from there as well. Vegas will be a piece of the business, we're not seeing massive growth in Vegas, but it is starting to improve. I don't know if I got everything you asked, Scott.

You got it all, Joe. I appreciate; that's very helpful. And maybe utilization rates, I think you made a comment about those on the last call and maybe you can do so here.

Sure, Scott, I mentioned our average capacity utilization for our architectural manufacturing was about 85%. That compares to about 75% last quarter.

Okay, terrific. Thanks Joe, thanks Jim. I appreciate it.

Thank you, Scott.

All right. We have no further questions, so I'll turn it back to Joe Puishys for any closing comments.

Okay, Ryan. Well, once again, everyone thank you for your time today. I'm sure some of you might have more questions for us, we will look forward to taking those from you, and I truly look forward to another strong fourth quarter. It's kind of our results have felt pretty much the same every quarter, it's been like a broken record, but I truly love the music, and I look forward to reporting to you again in about 90 days on our full year, and we will provide some forward-looking guidance at more detail level for fiscal '16's. We look forward to that. Have a great holiday season everyone, and look forward to seeing you in the New Year and have a safe New Year. Thank you.