Apogee Enterprises Management Discusses Q4 2013 Results - Earnings Call Transcript

Apr.11.13 | About: Apogee Enterprises, (APOG)

Apogee Enterprises (NASDAQ:APOG)

Q4 2013 Earnings Call

April 11, 2013 11:00 am ET

Executives

Mary Ann Jackson

Joseph F. Puishys - Chief Executive Officer, President, Member of The Board of Directors and Member of Strategy & Enterprise Risk Committee

James S. Porter - Chief Financial officer and Principal Accounting officer

Analysts

Taryn Kuida - D.A. Davidson & Co., Research Division

Jonathan P. Braatz - Kansas City Capital Associates

Robert J. Kelly - Sidoti & Company, LLC

Scott B. Blumenthal - Emerald Research

Jeffrey Bernstein

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Apogee Enterprises Inc. Earnings Conference Call. My name is Marie, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the conference over to Mary Ann Jackson. Please go ahead.

Mary Ann Jackson

Thank you, Marie. Good morning, and welcome to the Apogee Enterprises fiscal 2013 fourth quarter and full year conference call on Thursday, April 11, 2013. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2013 fourth quarter and full year and our outlook for fiscal 2014.

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 environments 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 March 3, 2012, and in our press release issued yesterday afternoon and filed on Form 8-K.

Joe will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Joseph F. Puishys

Okay. Thank you, Mary Ann. Good morning, everyone. Welcome to Apogee's fourth quarter and fiscal 2013 conference call. We delivered outstanding results in fiscal '13 as our earnings per share more than tripled to $0.67, reported $0.66 on continuing ops, on revenue growth of 6%, in commercial markets or commercial construction markets that continued to be flat in the year. I was pleased that we grew our gross margin by more than 300 basis points to 20.8% in the fiscal '13 and that our conversion rate on that incremental revenue growth to income was more than 60%. Both of our architectural and Large-Scale Optical segments reflected top line growth and excellent profit conversion.

Our Architectural segment revenues grew 6% for the year and operating income improved by more than $21 million. This Architectural segment revenue growth was primarily generated by our initiatives to expand domestically in our installation and in our store front businesses. The significant Architectural segment operating income increase resulted from architectural glass pricing discipline, improved product mix, productivity enhancement, operational improvements and the earnings on the revenue growth in virtually every business.

Large-scale optical segment continued its strong performance, with revenues up 2% and operating income growing 7%, with the introduction of new glass and acrylic products and the launch of our international framing markets in spite of very weak end market conditions.

Apogee productivity improvements in fiscal '13, a focus for me since joining the company 18 months ago, contributed approximately 100 basis points of our more than 300 basis point gross margin enhancement in the fiscal year. I am pleased that our Architectural segment backlog grew 25% in the fiscal 2013 year compared to the prior year end. It is encouraging that we are seeing growing and improving margins on and to work that is added to the backlog. Jim will provide further granularity to the timing in the improved margin in backlog.

Other fiscal 2013 achievements included generating $41 million of operating cash flow to support our $35 million in capital investments. These CapEx investments are focused on future growth. You've heard me say we are stepping on the accelerator before we come out of curve. Our 2013 capital expenditures for growth, productivity, new products, new capabilities, all included upgrading operations to significantly improve productivity at our second largest Viracon architectural glass fabrication facility, investing in new product capabilities and efficiencies in our largest Viracon facility via new state-of-the-art coater, buying equipment to support growth in the installation in store front businesses and increasing in productivity investments and new product development and introductions throughout Apogee. These investments are yielding upgraded operational improvements, significant productivity enhancements and allowing us to better manage capacity.

Other growth strategies include our new marketing initiatives. We are winning some incremental renovation projects, working with building owners and ESCOs, and we are starting to penetrate the European picture framing market.

Looking at the fiscal 2013 fourth quarter, we continued our quarterly year-over-year improvement in the period. Revenues grew 7%, operating income more than doubled over $6 million compared to the prior year period, which also was a very strong quarterly improvement for us. Architectural segment revenue was led by our installation, window and architectural glass businesses and segment earnings benefited from increased revenues and improved architectural glass pricing.

I was truly pleased in spite of the fact that we had 1 less week in our fiscal quarter and the timing of the December holiday's operating income in our Large-Scale Optical segment was equal to the fourth quarter of fiscal '12 due to strong operational performance and a nice mix of value-added framing products, resulting in a 140 basis point improvement in operating margin.

Looking at the outlook for fiscal '14, we expect to drive strong top and bottom line improvements in the fiscal year as we continue to implement growth and productivity initiatives. On the top line, we're anticipating high single-digit growth. For us, for a performance that is about 5 percentage points better and we are forecasting for our end markets. The outlook for United States commercial construction markets in our fiscal '14 based on Apogee's lag to McGraw-Hill's forecasts for our segments is for low single-digit market growth. We anticipate that our revenue growth will come largely from Architectural segment, domestic geographic growth and new products in both segments.

On the bottom line, we expect earnings per share from continuing ops to be in the range of $0.90 to $1, with improvement coming from strong architectural glass pricing, mix, improved installation margins as both businesses execute more complex projects. We also continue to gain -- expect to gain 50 to 100 basis points of margin improvement from our productivity initiatives. Our outlook for gross margins for fiscal 2014 is to be at least 22%, approximately 200 basis points year-over-year improvement.

We are anticipating capital expenditures of $40 million to $45 million as we continue to invest for growth, productivity and product development capabilities. Our largest expenditure will be for the new architectural glass coater, which will give us new aesthetic and energy-efficient coating capabilities that will enhance our competitive position. Our new coater will also provide production efficiencies that vastly increased run rate and faster production changeovers. We expect once again to be free cash flow positive after these significant investments in future growth.

Our anticipated fiscal 2014 performance in investments are the first steps in achieving our 3-year target of revenues of $1 billion at double-digit operating margins. I believe that our focus on operational improvements, as well as our strategies to grow through new geographies, new products and new markets will allow Apogee to continue to deliver improving results that will allow us to reach these goals by the end of fiscal '16. Jim will now cover the financials in more detail. Jim?

James S. Porter

Thanks, Joe. We are pleased with our fiscal 2013 full year and fourth quarter performance. We've made significant progress in commercial construction markets that have remained flat. I'll first review results for the full year and now move to the fourth quarter. For the year, we earned $0.66 per share from continuing operations on revenues of $700.2 million, which grew 6%. Both earnings and revenues were at or near the upper end of the guidance range we previously provided. Net earnings for the year were $0.67 per share.

Gross margin for the year was 20.8%, up over 300 basis points from 17.7% in fiscal 2012 as we benefited from improved architectural glass pricing, productivity improvements across all businesses, positive project execution and slightly higher capacity utilization.

Our Architectural segment performance improved significantly in fiscal 2013. Full year operating income grew more than $20 million as we achieved the operating earnings of $9.2 million for the year compared to a loss of $12.1 million for the segment in fiscal 2012. Drivers for this improvement were architectural glass pricing and product mix, earnings on revenue growth of 6% for the year and good operational performance across the segment. The Architectural segment operating margin for the fiscal 2013 full year was 1.5%.

Our Large-Scale Optical segment continued to be a significant contributor to Apogee's performance in fiscal 2013. Revenues were up 2% and the segment delivered $21 million in operating income for fiscal 2013. The Large-Scale Optical segment operating margin for the full year was 26.3%, up from 25% to prior year as we had strong operational performance and picture framing product mix. Apogee's tax rate for fiscal 2013 was 29.3% for the year, while we had income for the tax line last year.

Turning to the fourth quarter results. Earnings per share were $0.15 on revenues of $179.7 million, which grew 7% from the prior year period. The fourth quarter gross margin improved year-on-year although sequentially, we were down somewhat from the third quarter on lower revenues as we had expected. The fourth quarter gross margin improved 80 basis points from the prior year period to 20.2% on strong architectural glass pricing and productivity improvements.

In the fourth quarter, the Architectural segment moved to operating income of $2.2 million from a loss of $0.5 million in the prior year period on higher glass pricing, strong installation revenues with improving margins and solid operational performance. Fourth quarter Architectural segment capacity utilization was approximately 57% compared to approximately 64% in the third quarter through the lower volumes, which we had anticipated. Capacity utilization was approximately 56% in the prior year period.

We maintained an Architectural segment backlog of approximately $300 million during the second, third and fourth quarters of fiscal 2013, a period that experienced 8% segment growth. As we've grown our Architectural business during the year, we've replaced these revenues in the backlog with a good level of new orders. Our backlog remains at the highest level in 3 years, and we continue to see good bidding activity and improving margins. We feel good about the backlog level and direction. At year end, it was up 25% from the end of fiscal 2012.

As usual, I want to remind you that our business can have lumpy order intake activity, so we don't require or necessarily expect sequential backlog growth each quarter to be consistent with a longer-term trend. Our backlog mix at the end of the fourth quarter changed slightly from the third quarter as we saw a positive move of approximately 5 percentage points in the office sector.

The institutional sector declined slightly to 50% to 55% of the backlog, with health care projects, the much larger portion than education and government work. At the same time, the office sector increased to just over 35% of the backlog. While family residential, including high-end condos and apartments, is approximately 5% and hotel, entertainment and transportation retail also approximately 5% of the backlog.

Regarding the timing of the backlog, approximately $255 million or 86% of our backlog is expected to be delivered in fiscal 2014 and approximately $42 million or 14% in fiscal 2015.

For the fourth quarter, our Large-Scale Optical segment had lower revenues, but continued to make significant contributions to Apogee's performance. The segment had operating income of $4 million for an operating margin of 20.4%, up from 19% in the prior year period. Revenues were down 9% with 1 less week in the quarter and the timing of holidays in the current year. We continue to invest in this business to develop new market opportunities and new products to drive future growth.

Apogee's tax rate for the fourth quarter was 18.9% as we benefited from the retroactive extension of the R&D credit, along with normal reserve reductions resulting from finalization of previous tax positions.

Total debt at year end was $30.8 million, compared to $21 million last year and $30.8 million in the third quarter. Virtually all our debt is low interest industrial revenue or recovery zone facility bonds. After we announced plans in the quarter to temporarily close our Viracon St. George, Utah architectural glass facility for approximately 2 years, we made the decision to redeem the $10 million of unused outstanding recovery zone facility bonds for St. George since we don't plan to make investments at the plant in the required timeframe. As a result, this $10 million moved from long-term debt to short-term debt at year end on the balance sheet. This change also added approximately $10 million of the corresponding restricted cash from long term to our cash and short-term investments. Our reported cash and short-term investments totaled $85.6 million at year end compared to $79.3 million at the end of fiscal 2012. We redeemed these bonds in April, reducing both debt and cash.

We have positive free cash flow of $6 million in fiscal 2013 after spending $34.7 million on capital expenditures for growth, productivity improvements and new products. This compares to fiscal 2012 CapEx of $9.7 million.

Our capital expenditures for the year were above the $30 million we had previously estimated as we made an additional down -- we made an initial down payment on a new state-of-the-art coater for Viracon late in the fourth quarter. We define free cash flow as net cash flow provided by operating activities minus capital expenditures.

Noncash working capital was $44.1 million compared to $44.4 million at the end of fiscal 2012. Our team continues to effectively manage working capital with our days working capital at 44 days, compared to 48 days in the prior year period. We define noncash working capital as current assets, excluding cash and short-term investments, plus current liabilities, while days working capital is computed looking at our controllable working capital assets and liabilities. They are inventory and accounts payable.

Now I'll turn to our outlook. In fiscal 2014, we expect to continue our strong growth trajectory despite limited help from domestic commercial construction markets. We have a nice backlog level and are seeing good bidding activity. The external metrics we watch, including job growth, the Architectural Billings Index, McGraw-Hill Construction forecast and consumer confidence, point to improving markets for Apogee. We're anticipating that markets will start to strengthen for us in the second half of our fiscal year since our products generally flow -- follow construction project starts by 6 to 9 months.

Our outlook that's for earnings per share of $0.90 to $1 on high single-digit revenue growth in fiscal 2014. We're expecting our second half to be stronger than the first half based on our anticipated backlog timing and improving margins through the year, along with expectations that market growth doesn't occur until the second half. We expect full year gross margins of at least 22%, and we anticipate a normal tax rate of approximately 35% for the full year. We expect to generate positive free cash flow for fiscal 2014 after spending $40 million to $45 million for the full year on capital that's balanced across investments for growth, productivity and new products, as well as for maintenance. We have the financial strength that will also allow us to look for acquisition opportunities that fit our strategic goals.

The annual depreciation and amortization should be approximately $27 million for the year.

Before I turn it back to Joe, I want to say that I'm encouraged by our solid improvement in fiscal 2013 and look forward to a continued year-on-year growth in fiscal 2014. Joe noted a nice progress we made during fiscal 2013 on our strategic initiatives, establishing a platform for a continuing productivity improvement, geographic expansion, development and introduction of new products. We see significant future opportunities that will leverage Apogee's strong financial position, leading products and services and operational strategic initiatives. Joe?

Joseph F. Puishys

Thank you, Jim. We'll open it up for questions now. Marie, if you could just repeat one more time how our listeners can ask a question and then we'll start taking them.

Question-and-Answer Session

Operator

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

Taryn Kuida - D.A. Davidson & Co., Research Division

This is Taryn filling in for Brent today. I just had a question on if you could clarify a little bit on the CapEx spending. I know you mentioned that a large portion of it was from the coater. I was wondering if you can kind of talk about the mix, how much the coater is? And how much you're saying from like the new project -- product introduction, as well as the type of margin improvement you expect from each of these and when you see it flowing through?

Joseph F. Puishys

Yes, sure. Taryn, this is Joe. The fiscal '14 capital number which is higher than the prior year does include a portion of the aforementioned high-end coater that we'll be installing in our Viracon business. But I would remind you that a piece of that investment happened in fiscal '13. The biggest chunk will happen in fiscal '14 and there'll be some of it at the very beginning of fiscal '15. A less than half of our capital spend will be for the coater. The remaining focus will be on productivity and growth initiatives.

James S. Porter

Taryn, this is Jim. As far as the Viracon investment, including the new coater, that's scheduled to be online mid-fiscal '15 is when we -- actually we'll begin production from that. And so it'll be late fiscal '15 before we start to see kind of the capabilities and the benefits associated with it.

Taryn Kuida - D.A. Davidson & Co., Research Division

Okay. And then could you quantify like that how much of the benefit that...

Joseph F. Puishys

Could you repeat your question, Taryn?

Taryn Kuida - D.A. Davidson & Co., Research Division

Okay. And with this coater, what's -- how much of a benefit do you see in margins with...

Joseph F. Puishys

With -- oh, it's Taryn. We'd be -- well, of course, in fiscal '14, as Jim mentioned, the coater will not be operational. It goes operational going forward. We will see productivity gains from the coater, and we will see capability to have new coatings that we can't do today and capabilities. Right at this time, I'm not going to publicly announce the -- our financials behind -- for those numbers.

Taryn Kuida - D.A. Davidson & Co., Research Division

Okay, that's fine. And then for the LSO, I know you talked about how there are tougher comps in the second half and however, in Q3 and Q4, you're talking about these isolated events. Do you see any work pushing out into Q1? Or should we continue to see a slight sequential decline like we typically see?

Joseph F. Puishys

The LSO segment, we sometimes have interesting dynamics. Last year, our first half, we had stronger comps and the second half, we were weaker. This is going to be just the opposite. This fiscal year, we will have more challenging comps in that business in the first half of the year and more favorable comps in the second half. Overall, the LSO business is performing extremely well, and we have a lot of new products in that segment. I couldn't be happier with the performance. In general, the first half comps would be more challenging than the second half in fiscal '14.

James S. Porter

Traditionally, we do see, sequentially to your question, Q1 a little bit lower than Q4. But it is a business where it's somewhat impacted by timing of retail activities and it's a smaller part of our business. So small quarter-to-quarter changes in revenue have an impact.

Operator

And our next question comes from the line of Jon Braatz from Kansas City Capital.

Jonathan P. Braatz - Kansas City Capital Associates

Joe, when you talk about your 10% target in 2016, when you go back and look at the numbers historically, it's been difficult to get to that number. What kind of market environment do you think it might take to get to that 10%? Or do you think it's achievable, let's say, in a market environment sort of similar to what we're seeing currently? Is there that much opportunity in terms of the cost savings, productivity improvements to take that margin higher?

Joseph F. Puishys

Yes, Jon, good question. We -- to get to those kinds of numbers, we need approximately 12% compound growth in our top line over the, let's say, the 3-year period. I've been saying that we need about half of that to come from some end markets and the other half will come from our wins and primarily around new products, new markets and new segments. So it is a mid-single-digit growth in the end market conditions. Likely, I certainly hope so. There is a ton of pent-up demand out there. We have proven that we can make substantial earnings in spite of no help from the end markets. So I have no doubt we will blow past our prior operating margin if we can get any help from the market. So we need, let's say, 6% improvement in our end markets, and 6% will deliver on top of that to get to the number and I'm confident we'll be at double-digit operating margins. And coupled with our initiatives on operations, as I said, we hope to drive 50 to 100 basis points a year on operating improvements from our factories, which we have proven over the last 18 months we can do.

Jonathan P. Braatz - Kansas City Capital Associates

Right, right. How much capital -- additional capital spending might be required beyond, let's say, the $40 million this year? Are we still looking at a pretty substantial capital spend in '15 and '16 to achieve those targets?

Joseph F. Puishys

We'll probably get closer to depreciation kind of numbers. This year is an unusually large year because of the aforementioned big knot on the super coater that we're going to be installing. Clearly, we've amped up our capital above the last couple of years where we were in a pretty conservative mode on spending in the $10 million range. Jim mentioned we're $27 million of depreciation. I think something closer to depreciation will be in order for us in the years ahead. I'm not afraid to invest in growth and productivity because they'll pay for themselves. So it will be -- it won't probably be as high as this number we've stated for fiscal '14.

Jonathan P. Braatz - Kansas City Capital Associates

Okay. One last question, Joe. The international area in the LSO segment, are you beginning to see some traction? What kind of numbers are you -- can you give us in terms of revenue in the LSO segment from international -- your international forays there?

Joseph F. Puishys

I'm pretty bullish on it. My business leader and I from that business unit spent a lot of time yesterday talking about some recent successes. We've signed on additional distribution this year. We've got most countries covered. We're doing well in the fine art market and starting to penetrate the consumer framing market. It'll be single-digit, million-dollar-type business for us for the next few years. But again in that business, a couple million dollars a year in growth, that's a couple of points to that segment's top line growth. And it's, obviously, everyone on the phone knows that's an attractive business. So yes, I'm pretty bullish on that. I like what the team is doing and we are making progress with not only sales, but adding distribution.

Operator

And our next question comes from the line of Robert Kelly.

Robert J. Kelly - Sidoti & Company, LLC

Just wanted to talk about maybe a year or 6 quarters ago, you had kind of given us a look at projects signed, commitment, stuff that was about to enter backlog, but wasn't quite there yet. Could you give us a sense of where that is? I mean you talked about bidding and quoting activity being fairly strong in the press release. What does that exactly mean? I mean we can see what the backlog did, but are you seeing even more stuff in the stage right before it moves into backlog?

Joseph F. Puishys

Yes, sure. I don't want to introduce a new -- another non-GAAP metric to the world, but obviously, we publish our architectural backlog. You've heard me used the term. We also have what's called projects in review. That's an internal term we use. That's a project we've won. It's going through the legal review process, meaning the contract hasn't been executed. We also have projects we've won that are not yet in full review. So there's in a way 3 levels of maturity, and we obviously have visibility to projects that have been awarded to us verbally that is then turned into a contract negotiation. Jim has been clearing the path to those negotiations and it can take as short as 30 days and as long as 4 months, depending on the complexity of the project. And then they're entered into a backlog, which we published. We monitor all 3 levels, and at one time, I think we hinted that you could expect an increase in the backlog that happened. I am very confident in looking at our backlog and our projects in review and projects that have been awarded to us that we have a very healthy pipeline of work ahead of us. As Jim said, it can be lumpy and we try not to get overly excited in 1 quarter, but over time, we expect to continue to see it go up.

James S. Porter

Bob, this is Jim. There's also -- so, we have an attractive pipeline of work that we're looking at, but we continue to see the kind of extended time period of all our products out there before that formal award happens and then also the larger projects with us. At this point, there's a good chance those are actually not going to fall until fiscal '15 for the bigger projects.

Robert J. Kelly - Sidoti & Company, LLC

Right, right. There's pretty big lags. Okay. The next question that I had was the mix for your backlog that you're reporting is getting better and then moving up towards the higher end. But the market as you see it, isn't really growing. So is it a financing availability catalyst that's moving the high end off the sidelines? Is it just we're a couple of years into the "economic recovery?" What's going on to help you guys see the mix of projects improve when nonres, as you see, is still limping along?

Joseph F. Puishys

Yes. Bob, there's been -- everyone has just seen that there's been a continued level of uncertainty in the U.S. We started about a year ago this time, people were bullish about the recovery. It waned a little bit in the summer as Europe seemed to go back into recessionary environment in the fall. There were headwinds around the uncertainty around the election process and of course, that uncertainty remains today. There's a ton of money sitting on the sidelines. I think the term availability of financing is not quite correct -- I mean, not quite the issue. The projects are happening. The Architectural Billings Index has now had 8 -- 1, 2, 3, 4, 5 -- 7 months in a row above 50. It has hit its high for quite a long time of 55 in February. And we'll have March results in about 10 days. One of the things I noticed and it's a nuance, but it's an important one for the last 2 months, the Architectural Billings Index was not only at its highest point in many years, it was above 50 in all 4 regions that are tracked in the U.S., Northeast, Midwest, South and West. But also, all 4 segments, multi-use, mixed-use, commercial, industrial and institutional, so that's the first time we've seen that. So again, it's another indication of positiveness. And again, I do believe that level of uncertainty continues to hold the kettle -- the lid on the kettle right now. New project inquiries wrapped at almost 65, which is the highest level since January of '07. Job creation is a key metric for us. It had been running pretty good. I mean 100,000 -- 268,000 jobs in February, 150-ish in January, in the 200 range in December and 250 in November. And then suddenly March was only 88. We all saw that last week. That will probably be adjusted 2 or 3x upward. But obviously not the $0.25 million and above that we all want to see. So that was a temporary cause for pause. But all in all, we're seeing more signs of positive end markets, but it still feels like it's in first or second gear. And I think a little bit of certainty around tax and spending in sequestration out of Washington regardless of what the decisions are, I believe a level of uncertainty will see a little bit of a floodgates open and some of the moneys come off the sideline and go on to the playing field.

Robert J. Kelly - Sidoti & Company, LLC

All right. I mean just having said all that, it seems that first and second gear is what is going on, yet you see that the mix of the higher-end stuff going into your backlog. Is it a share gain? Is it a market shakeout? Is it your balance sheet that is helping to swing some in the higher mix business your way? It doesn't seem like the mix should be improving just given the way you describe the end markets.

Joseph F. Puishys

Well, as Jim noted, we are seeing a slight pickup of gains in the office sector, which is good. And it's not falling off a lot, Bob. Our folks work hard to target work that's more attractive for us, more complex work. Our installation business, as you've heard me say, has done a really nice job of defining what is the proper kind of work they should be chasing, they're going after and they're winning. Our architectural glass people are seeing more value-added work. And we've launched new products, not just to have new apples or more apples in our cart. We tried to add value-added things like digital print capability or new Low-E coatings that come at higher prices, higher complexity, harder for other people to do. Our picture framing business is launching new acrylic products, which again harder to do, harder for competitors. So it's some share gains, some regional expansion, as you know, in 2 of our businesses and mix change but the mix isn't just happening. Our teams are making that mix happen. Sorry to be long-winded on that, but I'm passionate about what's going on with mix and new products.

Robert J. Kelly - Sidoti & Company, LLC

Understood. As far as some of the share -- the growth initiatives that you're focusing on in F '14 and beyond, as far as like filling in the domestic holes in your installation footprint, it seems like you made a big push into Texas. Is there any next market that you're going into this year over the next 18 months that you can talk about?

Joseph F. Puishys

Well, Bob, I can tell you, we have not exhausted our geographic expansion opportunities for our businesses. For a couple of them, it's more international like our picture framing business. We have a great footprint in the U.S. For some of the other more domestic businesses, it's U.S. expansion capability. I don't want to tip my hand to my competitors. I can tell you we have more to do and we're off to a good start in the areas that we've gone public with. So I apologize, I don't want to go farther beyond that, but we've got good opportunities.

Robert J. Kelly - Sidoti & Company, LLC

All right. And just on installation for, I think, for a good piece of F '13, you still had some piece of weak-margin, low-margin business that you had bid a long time ago to kind of just maintain share or just keep the wheels running during the downturn. Have we digested all the low-margin work at this point from the installation side?

James S. Porter

Yes, I know that we haven't and I'd say in the backlog that we have today, we probably have 20% to 25% of the backlog is still lower-margin work.

Robert J. Kelly - Sidoti & Company, LLC

And the lower-margin stuff washes out by, what, the first half of fiscal '13?

James S. Porter

Yes, largely, by the first half. A little bit of it will carry on, but I think by the end of the first half, we'll largely have the lower margin work behind us.

Robert J. Kelly - Sidoti & Company, LLC

So just, I mean, I know this is all kind of roundish numbers, 75% of your installation business is the better margin stuff that you've been signing up in the first half and then we get to all of it by the second half and I guess and beyond?

James S. Porter

Yes, but to be clear, it's a progression. So that we've been moving margins up in every quarter then kind of changing that mix and continued to work to move those up. So I think that'd be a step change, but we will see relative to that part of the business gradual improvements in the margins as they flow through.

Operator

And our next question comes from the line of Scott Blumenthal from Emerald Advisers.

Scott B. Blumenthal - Emerald Research

Jim, you do get some accelerated depreciation on some of the current year CapEx projects that you're undertaking, correct?

James S. Porter

Yes.

Scott B. Blumenthal - Emerald Research

Okay, so I guess that could be one -- or that's going to depress margins a little bit from what they normally would be in their regular operating environment when that didn't exist, right?

James S. Porter

Well, I've said that's a tax throughput.

Scott B. Blumenthal - Emerald Research

Yes, okay. Let's see, could you -- Joe, could you maybe give us some insight into your expectations for the Brazilian operations for the current year?

Joseph F. Puishys

Yes, Scott, great question. In fact, Jim and I were with the team in Sao Paolo, in area last week. And that business is performing extremely well. They're off to another great start this year, and with double-digit growth, and it's a great extension of our Viracon U.S. business. It's a market that had high -- country that has high inbound tariffs so it's very challenging to import architectural glass into that region. So we are happy to be local. We met with various contractors while we were there and we're seeing a movement in that market to higher value-added glass insulated units versus simple laminated, which bodes well for us. We have plenty of capacity in our factory to grow on the insulated units, which is a higher price product. So outstanding team, great compliance to U.S. accounting standards and SOX compliance, and frankly, a gem in our portfolio, that's doing extremely well.

Scott B. Blumenthal - Emerald Research

Do you have the same type of capabilities there from an overall product perspective -- product and service perspective, I guess, that you have here? Or do you still have a ways to go with that?

Joseph F. Puishys

It's a similar business to Viracon U.S. The coatings capability are different. It has a lot -- it reports to the entity that runs the U.S. entity here for Viracon, so the team continues to share practices back and forth. So I would say it's much smaller than our U.S. business, obviously. It's equally capable in the kinds of things it does in the fabrication side. It uses a different coatings model than the U.S. model uses and we don't see that changing for the -- in the short term.

James S. Porter

And in the Brazil market, they like Viracon, in other markets are really a leader in terms of complex value-added products that they bring to the market.

Scott B. Blumenthal - Emerald Research

And then how much is, if any, of the backlog is attributable to that unit?

Joseph F. Puishys

It's -- first off, it is within the numbers we published. The $300 million does include -- that is -- it's a small piece, let's say, single-digit millions. But it is at an all-time high in its -- in the history of that business.

Scott B. Blumenthal - Emerald Research

Okay, that's good to hear. And Joe, I know that you're constantly turning the wrench or turning the screws there with regard to operations and that you are in the process of doing some reconfiguring in Owatonna in order to improve the layout and the factory throughput. Is that where you expect to get much of or most of the margin improvement this year? Or are you expecting that to be a combination of just throughput there, more orders, more business?

Joseph F. Puishys

We expect operational contribution to our 50 to 100 basis point from every one of our factories. Owatonna is the largest footprint, the largest factory in our fleet, but -- and of course, as we've said the new coater, a lot of work happens this year to prepare the site for the new coater, putting in the footprint and making modifications. The performance of the Viracon factories has been outstanding this past year, and I expect that to continue. But I don't say that to negate the other businesses are all performing extremely well with mid- to upper 90s on-time delivery. So we've got -- the good news is, is I would still say we are getting great results using more muscle and less process rigor than I would like. So our journey is really just beginning so that our lean journey of doing things that have discipline, reliable, repeatable business process manner. So, I mean, the good news is I still feel confident over the 3 years in getting that 50 to 100 basis points a year. But right now, I couldn't be happier with the trajectory these factories are on, including Owatonna.

Scott B. Blumenthal - Emerald Research

Is there going to be some -- I imagine there's going to be some pre-configuration in Owatonna before you get the coater up. And is that going to provide you a benefit -- we understand that the new coater is going to provide a meaningful benefit. But you're building processes and things around it in order to prepare for that. So you're going to be operating, obviously, for the next 18 months without the coater. I guess my question is the processes and systems procedures that you're putting in there now, the coater aside, how much of that is going to improve operations? And how far have you gotten on that at this point?

Joseph F. Puishys

Yes, we're in a very early journey of getting that installation up and ready. We are already seeing improvements from Owatonna. We won't get the big savings until the coater's been running in Owatonna. However, let me just say that between now and then, we will not have any dilution of operating performance. There'll be continued slight improvements in that business in spite of the fact that they'll be putting a lot of effort into getting the place ready. Obviously, certain cluster capitalized that are involved in setup and in the built of that coater. So operationally, we'll see productivity from Owatonna and then it'll pick up incrementally after the installation is online. And the overall business is gaining productivity. You're well aware and Jim mentioned it today, our decision to close the third, the smallest and least capable factory in the Viracon U.S. fleet. We took that down. That has positive earnings impact to us, a couple basis points right there. So overall, Viracon will be favorable on productivity this year.

James S. Porter

Scott, this is Jim. I'll just add because I know you've been to Owatonna and investments that we've made this year and we'll make next year at that location as well as all of our businesses, we do have productivity investments. And so we are already starting to see some enhancements in terms of material handling processes because I know you've seen how that can happen there in that facility and we'll continue to drive for improvement as we work towards the new layout and so on.

Operator

[Operator Instructions] And our next question comes from the line of Jeff Bernstein from AH Lisanti.

Jeffrey Bernstein

So just a couple of questions around Harmon. So I guess you guys have moved into Texas there, and I think you don't yet have a license for California. Can you just talk about the opportunities in both those states?

Joseph F. Puishys

Yes, you are correct. We are up and operating in Texas and doing quite nice there. We've got a real head start on a fast-track to entering that market. We did announce and we have made the necessary organization changes to support growth, more Western of Texas. And I don't want to comment any specifics, like I said, to tip off my competitors. Where I stand, fiscal '14 will continue to benefit from growth in the South U.S. from the Texas region and the surrounding areas. F '15, we'll begin to see growth from more of a Western expansion, but I don't want to get into actual status of licensing, the thing like that, if you don't mind, Jeff.

Jeffrey Bernstein

Got you. And can you just talk a little bit -- you did mention margin improvements there. And I think the strategy has been to be smarter about the business that you're bidding on. How far through kind of high grading the business prospects are you at this point?

Joseph F. Puishys

First off, we made sure we have a terrific team there and the leader of that business has really solidified his team. We've complemented it with resources from our headquarters staff and so I feel we are there with a world-class organization. They are far along the path of enhanced project selection and the projects going in the backlog are the kind of projects that they are extremely capable of and extremely capable of executing well, which means better margins, even better mix sometimes than are booked in and I would say our maturity is pretty high on the execution. So that business now is all about operating and continuing to drive the growth they've been generating. And being at the company I used to work for, I ran the Harmon-like business. It was a global Installation business. And so I'm a family friend of that business. I've got to tell you, I couldn't be happier with the position that business is in to compete going forward.

Jeffrey Bernstein

Great. And then I guess you're doing a -- the opening of Tubelite facility in Dallas/Fort Worth area. Is that associated with particular project volumes that you are expecting at some point out of that market? Is it just to serve the Western market, in general? Is it Texas-centric?

Joseph F. Puishys

It's primarily Texas-centric. Our storefront business, you call Tubelite correctly is -- has got a great business model in there. One of their great successes is a delivery model that results in reliable, repeatable discipline deliveries to our customers on the same time, every day, every week and it was difficult to succeed with their business model and not be local. And that is one of the strongest growing markets in the U.S. and has been. And we made the decision to be local there. So it was mainly a little bit outside their geographic reach of their arms, and we addressed that with this move. It will be primarily for that geographic space.

James S. Porter

And Jeff, Tubelite's business is a bit more focused on smaller projects. So really, the shorter lead times and closest to the customer base is really key. And so that location is going to enable us to really kind of service Texas, but also the surrounding markets like Oklahoma, Louisiana and those types of markets as well.

Jeffrey Bernstein

Great, great. And then you alluded to the flexibility to do M&A. Can you talk a little bit about the pipeline out there, about if you have a feel for where sellers are -- what they're thinking these days? Any color would be great.

Joseph F. Puishys

Sure. Jim and I -- it's one of my top initiatives, and as I've said before, you have to knock on 100 doors if you're going to get a deal done. We know strategically where we want to be and look, and we are doing that. I definitely saw valuation issues last year. Businesses that were perhaps willing to entertain discussion had not been performing well. And frankly, I saw a lot of businesses in our space performing poorly, and the folks don't necessarily want to give you a peek under their tent if their numbers are lousy. And especially when you're in the same competitive field. So there's definitely some tough valuation going on out there, and I think as the economy improves a little bit and businesses are performing a little better, they may be more willing to give us a better look-see. Our process is excellent. Our pipeline is robust, and I don't want to predict that we'll get a deal done, but I do feel confident that this could be our year.

Jeffrey Bernstein

Okay. And then it looked like SG&A as a percentage of sales upticked a little bit sequentially from prior couple of quarters. Anything in particular to point to there, anything seasonal or anything else?

James S. Porter

I mean, I see a little bit of a pickup in SG&A. I mean part of it, frankly, as we achieved on the upper end of our incentive target ranges as that drove some of it, but we also have been making some investments during this year relative to new markets, new geographies, like we talked about and those kinds of things.

Joseph F. Puishys

Jeff, I try to focus on the S of SG&A. So there is some enhancement on the selling line.

Operator

And now, I would like to turn the call back over to Joe Puishys.

Joseph F. Puishys

Okay, Marie, thank you. For everyone dialed in -- to everyone, today, thank you. We appreciate your interest in Apogee, and we look forward to another great year in fiscal '14. We'll talk to you in a couple of months. Thank you.

Operator

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us, and you may now disconnect.

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