Apogee Enterprises, Inc. F2Q10 (Qtr End 08/29/09) Earnings Call Transcript

| About: Apogee Enterprises, (APOG)

Apogee Enterprises, Inc. (NASDAQ:APOG)

F2Q10 Earnings Call

September 17, 2009 10:30 am ET

Executives

Russ Huffer - Chairman and Chief Executive Officer

Jim Porter - Chief Financial Officer

Mary Ann Jackson - Director of Investor Relations

Analysts

Eric Stein – Northland Securities

Tyson Bauer - Wealth Monitors

John Braatz - Kansas City Capital

Robert Kelly - Sidoti

Eric Glover – Canaccord Adams

Mike O’Martin - Small-Cap Report

Scott Blumenthal – Emerald Advisers

Brad Kelly – Magnum Opus Financial

Operator

Welcome to the Q2 fiscal 2010 Apogee Enterprises Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Mary Ann Jackson. You may proceed.

Mary Ann Jackson

Thank you, operator. Good morning and welcome to the Apogee Enterprises fiscal 2010 second quarter conference call on Thursday, September 17, 2008. With us on the line today are Russ Huffer, Chairman and CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2010 second quarter results and the outlook for the current year.

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 February 28, 2009 and in our earnings release issued last night and filed this morning on 8-K.

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

Russ Huffer

Thanks, Mary Ann. Good morning and welcome to our conference call. We had a very strong operating performance in the second quarter and exceeded prior year earnings per share on revenues that were down consistent with the decline in the commercial construction market. We earned $0.46 per share from continuing operations, up 7% from the prior year period on revenues of $187.4 million which were down 23% from last year.

A number of positive events occurred in the quarter that allowed us to perform at this high level. We were executing architectural work largely bid in better times. We operated well and improved productivity and we managed our costs in anticipation of lower revenues. These actions show our ability to lower our break-even point and to operate profitably through this commercial construction cycle.

As a result of the combination of these positives, our operating margin was 9.5% up from 7.7% in the prior year period. We also continued to generate cash, increasing cash and short-term investments more than $20 million from the prior quarter to $52.3 million at the end of the second quarter. We achieved an architectural segment operating margin of 8.7% compared to 6.7% in last year’s second quarter. We benefited not only from those items I just noted but also from some favorable material costs. Again, on a positive note, our architectural segment backlog declined less than 5% to $295 million. This is the third quarter that the segment’s backlog has been hovering around $300 million.

Our large scale optical segment also performed well with revenues up slightly and operating income up 11% as we saw a strong mix of our best value added picture framing glass and acrylic products in the quarter. Our superior product attributes, which prevent fading and control reflection, are allowing us to continue to convert customers to our value added products despite weak retail markets.

Our strong performance aside, we continue to face commercial construction markets that are impacted by tight commercial real estate credit and decreasing employment levels. We know future periods will be tougher due to the construction slowdown but we are in a strong financial position. We have a healthy balance sheet and are generating positive cash flow.

Before turning to our outlook, I would like to provide more color on our architectural backlog. As we had expected our mix shifted more towards institutional projects in the second quarter. The institutional projects now account for 55-60% of our backlog, up from 40-45% in the first quarter. Office projects have slipped to 25-30% of the backlog from 35-40%. The conduit hotel entertainment sectors each continued to comprise 5-10% of the architectural backlog. Stimulus projects contributed to the increase in institutional backlog. We have been awarded General Services Administration and Department of Defense projects on the stimulus list such as a federal courthouse and a military hospital and are actively bidding on other projects on the list. We will see some revenues from this work this year but the majority of the work will flow into next year.

We are also seeing an increase in international work for our architectural glass business in our backlog although it is a small part of the overall backlog and we are quoting more international work than we have in past years. I am encouraged that we continue to see our competitive advantages holding for large, complex architectural glass and highly engineered window projects as well as for installation project bonding capacity. More projects are requiring performance bonds in this environment.

Next I will cover our outlook. Our solid performance to date in these challenging economic times supports our outlook for continued profitability. For fiscal 2010 we continue to expect a mid single digit operating margin on revenues that we anticipate will be down 20-25% as project timing for new orders has shifted into fiscal 2011. We had previously anticipated fiscal 2010 revenues would decline at least 15%.

We also continue to expect our large scale optical segment to convert more customers to higher value added products despite soft retail markets. Since Apogee is a late cycle commercial construction company and our markets have yet to show signs of a rebound, we expect fiscal 2011 will be tougher than the current year. I am proud of our performance to date during this downturn which has positioned us to operate well throughout a commercial construction cycle. With our improved performance, ongoing productivity enhancements and superb products for green building we believe we have lowered our break-even point.

We are seeing some success in filling in backlog for fiscal 2011 and believe we are well positioned financially and in the market place especially with our leading green, energy efficient products. [commanding] downturn we have aggressively reduced our costs including headcount and overhead costs. We are down more than $45 million on an annualized basis to date including headcount reductions of more than 25% from our peak a year ago. We also are working continuously on productivity improvements across our operation. Our balance sheet remains strong and we expect to generate positive cash flow throughout fiscal 2010. We have good architectural businesses with strong brand and operations that are positioned to serve the growing interest in green energy efficient commercial buildings.

Apogee will be well positioned when commercial construction markets improve. We have production capacities in place, our plants have been upgraded to be state of the art and we are committed to the strategy to allow us to grow, gain share and deliver significant shareholder value. Jim will now comment on the financials.

Jim Porter

Thanks Russ. We are pleased with our second quarter performance and results. We earned $0.46 per share from continuing operations, up from $0.43 per share in the prior year period with good cash flow generation and we had strong margin performance compared to the prior year as we executed work largely bid in better times, operated well, improved productivity and managed costs.

We estimate that roughly 60% of our revenue in the quarter had been booked in stronger markets and thus at higher margin potential than we delivered on. Gross margins were 25.9% in the quarter up from 19.8% last year. Operating margin was 9.5% up from 7.7% in the prior year period. Net earnings were $0.47 per share versus $0.43 last year. The current quarter included $0.03 from a lower tax rate resulting from finalization of previous tax positions we had taken. This was a one-time second quarter event. We also had discontinued operations earnings of $0.01 per share from the favorable resolution of an old outstanding international claim in the current period.

As expected, revenues were down 23% from the prior year reflecting the slow commercial construction market. Although we are making inroads in gaining institutional, smaller projects and international work, the significant overall market decline impacting architectural revenues. Our two largest businesses, architectural glass and installation, experienced the largest declines in sales. Large scale optical revenues were up slightly in difficult retail markets. Both segments had improved operating margins compared to the prior year. The architectural segment margin was 8.7% compared to 6.7% last year due to higher pricing and project selectivity on projects bid in stronger markets, solid project execution, productivity improvements, cost reductions and some favorable material costs.

As Russ indicated, it was all of these items together that resulted in the strong margins. The large scale optical operating margin was 22.9% compared to 21.3% last year due to stronger mix of our best value added products. Our second quarter capacity utilization in the architectural segment averaged approximately 60% compared to approximately 60% in the first quarter or 65% in the fourth quarter and approximately 85% capacity utilization in the year-ago. Our architectural capacity utilization at the bottom of the last cycle was roughly 60%.

We increased our cash position significantly in the second quarter. We generated approximately $25 million in free cash flow in the quarter and approximately $28 million year-to-date. We define free cash flow as net cash from continuing operations less capital expenditures. Capital expenditures year-to-date were $5.9 million down from $39.2 million in the first half of fiscal 2009. Last year we completed key strategic capital investments in both segments that position us for efficient growth when markets improve.

Cash and short-term investments totaled $52.3 million at the end of the second quarter up more than $20 million from $30.8 million at the end of the first quarter. Our day sales outstanding held at 43 days, a low level for Apogee. In general we feel good about the quality of our receivables.

I will turn to our outlook. For the full year we continue to expect mid single digit operating margin on slightly lower revenue. We are now expecting revenues to decline 20-25% compared to our prior outlook of down more than 15%. We expect margins to be lower in the second half of the year than our first half performance as our second half backlog includes greater percentage of work bid and committed to since the economic downturn.

Our current visibility into fiscal 2011 is lower than normal and as Russ said we expect fiscal 2011 will be tougher than the current year. Although the economy has started to show signs of recovery, commercial construction markets remain down significantly with higher vacancies and tight credit conditions for commercial real estate and Apogee is a later cycle company.

We remain focused on cost reductions and productivity improvements in an effort to somewhat offset the impact of declining revenues on earnings. Improving productivity remains a strong focus during this slow down. The slowdown in large projects for our architectural glass business has opened up production capacity and reduced lead times allowing this business to pursue opportunities to generate revenues by penetrating underserved markets including lower margin, smaller U.S. projects and international projects where we are seeing some success.

At the same time, we continue to focus our sales efforts on markets that demand our value added, energy efficient, aesthetic, hurricane and glass products. We have seen strong bidding activity from projects in the institutional sector for education, healthcare and government projects. This sector traditionally tends to be more stable due to the ups and downs of commercial construction cycles and green building is an important trend for institutional work.

We are also continuing product development efforts particularly related to energy efficiency. I am encouraged that part of the Economic Stimulus Package is focused on efforts to make public buildings more energy efficient. We have already won some of this work and are pursuing additional projects although this is primarily fiscal 2011 work.

We continue to pursue our longer term strategies to gain share in our markets, identifying attractive international markets for architectural glass, potentially with off-shore glass fabrication, developing new energy efficient products and systems for the green building trend, expanding our store front and standard window presence and converting more of the picture framing market to value added glass and acrylic.

We expect to continue to generate cash. Our priorities for use of cash are; to look for opportunities to invest in and grow our international architectural glass business where we already have a leading international brand but without current off-shore fabrication. We will also continue to invest in maintenance and safety, productivity improvements and new product development. We plan to continue paying our dividend and beyond that we intend to conserve cash to see us through the commercial construction downturn until we can see increased visibility to the market recovery.

In conclusion, we have good businesses with leading products and services. We continue to aggressively manage costs and drive productivity, expect to generate positive cash flow this year and are carefully managing working capital and capital expenditures. We are focused on effectively weathering the slowdown and emerging stronger than ever when our markets rebound. Russ?

Russ Huffer

Thanks Jim. I want to reiterate that we really have a strong balance sheet, continue to generate positive cash flow and expect to maintain our leading market position during this challenging time. I would like to go ahead and open the call up to questions at this time. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Eric Stein – Northland Securities.

Eric Stein – Northland Securities

I was wondering if we can just start with margins and you could just help us out a little bit and walk us through the components. Certainly it was a very strong margin quarter. In the first quarter you commentary had kind of been not to expect the level we saw there and certainly that was not the case in the second quarter.

Jim Porter

I will address that. I think in general probably the simplest way to respond to that is we tried to articulate it was really the accumulation of many positive aspects across all of our businesses. Really just kind of lining up, as we indicated the timing of projects and in our business one of the most difficult things to predict is the specific timing flow of shipments to a project. So when we look at some of the timing as well as the mix of deliveries during the quarter with a nice amount of that being projects bid during strong time periods combined with cost reductions and productivity improvements, it is really kind of a number of things all lining up in the quarter to really drive that strong performance.

Eric Stein – Northland Securities

Materials cost…was that a major portion of it in the quarter?

Jim Porter

The two primary drivers from a material cost perspective are going to be glass and aluminum and we did see a benefit from that kind of roughly a point of margin in the quarter.

Eric Stein – Northland Securities

Your thinking on keeping operating margin guidance relatively the same? Is the main component there just that you are now getting business signed since the downturn started?

Jim Porter

Yes.

Eric Stein – Northland Securities

Maybe we could just move to your commentary related to 2011. When you talk about it being a tough year are you including any stimulus impact in there or would you consider that on top of that guidance?

Russ Huffer

I would say we are including some of that. Certainly we have seen a few projects now flow into our backlog that will be recognized most of the revenue in fiscal 2011. We would anticipate to be able to win other projects. We don’t see it as being incremental. We see it as part of what we are projecting right now.

Eric Stein – Northland Securities

As far as backlog, did you see any cancellations or was it similar to the first quarter where you really didn’t see much at all?

Russ Huffer

We didn’t see much at all. I don’t recall anything specifically. There might have been something small in there.

Operator

The next question comes from the line of Tyson Bauer - Wealth Monitors.

Tyson Bauer - Wealth Monitors

A couple of follow-up questions. The first one, obviously given your outlook for the rest of the year and what you have done in the first half appears to be falling off a cliff on the margin side. If that holds true would you expect those run rate margins to follow through or drag on into fiscal 2011? I guess you would kind of foresee that by kind of giving us a clue on those backlog margins. Have they steadied or do they continue to deteriorate?

Jim Porter

We see a declining rate of margins over the balance of the fiscal year which will clearly establish the run rate into fiscal 2011. We do expect to be profitable throughout the remainder of fiscal 2010.

Russ Huffer

And positive cash flow.

Tyson Bauer - Wealth Monitors

When you talk about 2011 and the stimulus is somewhat in that outlook is that implying then we could still see a reduction in revenue on the top line? Obviously margins will be lower than earnings but is revenue also at risk in 2011 compared to 2010?

Russ Huffer

It can be. It is just we have such an unclear picture we can’t project that. I would love to say we have reached the bottom. We can’t say that. We know there is the potential for further decrease. There is nothing showing it is going down and there is nothing showing it is stable. I just can’t give you a good answer.

Jim Porter

We are planning the business on the assumption we do see some continued declines in revenues next year.

Tyson Bauer - Wealth Monitors

Backing in and somewhat rhetorical, it would appear your second half gross or operating profits won’t even meet what you had done in Q1. So that will be something to keep an eye on. The last question is the office market, even though it is a lower percent at 25-30% of the backlog is that still the one segment you are the most nervous on given as we get into the refi situation and also unemployment being at 9-10%?

Russ Huffer

I appreciate both of those are accurate. We do focus a little more on employment numbers rather than unemployment because we are looking for a net add of jobs to help us turn the corner here. Clearly financing is something that needs to come through. Both of those are still likely ahead of us and we will be watching for those as our inflection point for the future.

Operator

The next question comes from the line of John Braatz - Kansas City Capital.

John Braatz - Kansas City Capital

Most of my questions were answered, but a couple of things. I think you mentioned 60% of your revenue came from backlog that was priced in better markets, better markets before the recession. What type of number might we be looking at as we go forward into the second half? Does that move down to 20%? 10%? 30%? Can you give us a little color on that?

Jim Porter

The best way to answer it is we will see that gradually decline over the balance of the year.

John Braatz - Kansas City Capital

Secondly, in your commentary about why the margins were so good in the quarter you did cite there was some good execution in some of the projects. Sometimes you have some execution problems and sometimes you don’t. Were these unusually exceptional good execution and that is hard to replicate or hard to think they could recur?

Russ Huffer

We are a pretty good, strong, six sigma company. We have been focused on continuous improvement for many years. I think we have made a change for the better structurally within our company on these kinds of jobs. I do expect us to continue to execute better than we did in the past. Does that mean we will have no problems? No that is not true. You are always subject but I think there will be less of them and less frequently that we will see them. I do see a positive side to this and being able to keep some of these gains in productivity and execution that we have experienced here recently.

Jim Porter

Some of it, as we said it is really a number of factors. In some cases we have seen improved, consistent project execution. We look at the mix of projects that are flowing through so in some cases we might have a little bit more mix just based on customer deliveries of some of these good projects flowing through. Also in our installation business which is our percentage of completion business will periodically have change orders. The way that business works is you may incur a cost to execute a change order but you are not able to recognize the revenue or margin on that until you actually get the signed change order. We did have some change orders in the quarter. They weren’t material drivers of the performance but again those are the factors you can’t really predict quarter to quarter that do flow through. Again, just all those things coming together in the quarter.

John Braatz - Kansas City Capital

You mentioned you are trying to increase your international work. Margins on the international work, how do they compare to domestic margins? Secondly, when you look at your revenue or your expectations as you go out towards 2011 do you anticipate any additional need to cut back employment as you look forward?

Russ Huffer

The first question on the international work, international work as you might anticipate is lower priced. This is in our glass fabrication and we are able to make up for some of that pricing because the international work tends to fit with our manufacturing capabilities more favorably. We are actually able to take advantage of larger volumes, longer runs and therefore get actually a nice difference in through put productivity. So all of that price is not given away. Bottom line is it somewhat lower margin? Yes it is, but not as much as one might think. So it is very good work for us to be running and putting through our factories. So we are real pleased to have that any time we can get it.

John Braatz - Kansas City Capital

Secondly, regarding as we look at expectations for next year in terms of additional cuts and reductions you might have to take?

Russ Huffer

I have clearly said to our people we need to make sure we are state of the art in our factories; we have the best trained key people throughout this time period. We are going to keep our businesses right sized. If there is a change, we will change with that. We will go up and down with it but we will maintain our factories and keep our key people throughout this time period. That is the best way to get through it. It gives you the highest productivity in it and also positions you the best for the turnaround in the end. It inevitably will come. This is a cyclical business. Go ahead, Jim.

Jim Porter

We do have some additional reductions that have been planned and are being executed subsequent to the end of the second quarter. For example, some picked up that we reduced headcount further in our window business. We do have some continued cost reduction activities. As it does relate to fiscal 2011 we also continued the contingency plan. I think the third quarter will be an important quarter for us to see bidding activity and what is happening. When we come out of the third quarter we will have a lot more visibility into what fiscal 2011 looks like and so we are developing plans to correspond to that.

Operator

The next question comes from the line of Robert Kelly – Sidoti.

Robert Kelly - Sidoti

A question on the 60% of higher margin revenue you had booked in the quarter. Can you tell us the gross or operating margin on that business?

Jim Porter

No, we don’t break it out that way.

Robert Kelly - Sidoti

We had talked about longer term what some of the productivity enhancements, cost reductions and architectural being a 10% operating margin business when volumes bounce back. In light of 60% utilization during the current quarter is that kind of a conservative projection?

Jim Porter

As you understand there are a lot of factors that come into it and we talk about it on an annual basis and do continue to believe that we have the potential to get there. Not to repeat it too many times but there really was just kind of a lineup of all these factors in the quarter where we are combining a lower cost structure on lower volume that in some cases with revenue that was bid in a higher market condition environment. So we don’t see these conditions all lining up on a regular basis but we do continue to believe we have the company positioned to achieve those levels we talked about.

Russ Huffer

One of the things I would say to you about the improvements in institutionalizing the improvements and making sure that they are there as we go forward in this construction cycle, I think we will achieve higher margins sooner in the next cycle and be able to exceed the margins we achieved in the last cycle. Because of this drive for continuous improvement and making sure that we hold onto the gain in these areas as we go forward.

Robert Kelly - Sidoti

The backlog you signed up thus far exiting Q2, 42% of it for fiscal 2011 and 2012, is that sort of evenly split?

Jim Porter

No. The majority of it is fiscal 2011. If I had to pick a number it is probably $20 million of it that goes out to fiscal 2012. But those longer time periods those are projects where the actual schedules tend to move around a fair amount as you get closer to them.

Russ Huffer

They can move up or back.

Robert Kelly - Sidoti

So the key now is to find some of the short cycle business that the production capacity has been hoping for?

Russ Huffer

Right. Short cycle and international work are the two fill-ins.

Robert Kelly - Sidoti

Was that prevalent in Q2 2010?

Russ Huffer

We did make some nice improvements in those areas and we continue to be focused on it.

Robert Kelly - Sidoti

Not specifically to backlog, more the revenue booked in the quarter.

Russ Huffer

There was short-term work that actually turned over in the quarter so it wouldn’t even have shown in the backlog.

Robert Kelly - Sidoti

Is that kind of the 40% that represents the margins now?

Russ Huffer

It would be a part of the 40%. There would still be the traditional core work in there for the majority of that but these would be the add ons that helped us make the quarter.

Robert Kelly - Sidoti

You talk about the mid single digit operating margin for 2010 but that is kind of inflated because we just exited the first half with an 8% op margin. Obviously the margins are dropping off but are they dropping off in the low single digits or can you still do a mid single digit operating margin on revenue decline in F11 given the cost cuts and raw material costs? I think that is what everyone is trying to figure out right now.

Jim Porter

We are not at a point yet where we have enough visibility to make that outlook for next year.

Operator

The next question comes from the line of Eric Glover – Canaccord Adams.

Eric Glover – Canaccord Adams

I was just wondering if you could comment a little bit more on your international expansion plans like what region or country are you zeroing in on for your new manufacturing plant and how much might that cost?

Russ Huffer

The international work, I will just start with where we have the strongest brand and the best markets. We have strong brand in the Middle East, South America, Far East and Pacific Rim. Best markets today are going to be South America and the Far East. So that really brings us back to those two. That is where we are putting our energies today and determining where the best place to go is.

I would tell you we are encouraged by both of those locations so I can’t give you an indication of one versus the other. I would also say the cost of the facility is likely to be similar to the cost that we had for St. George which I think was a little over $30 million but there would be adds to that for the cost of doing business overseas. So it would be a little over $30 million plus probably for the facility that we have in mind today.

Jim Porter

I will just add to that. Specifically in terms of where we are looking in the Pacific Rim we look at servicing that whole region and actually the two markets we are zeroed in on from our evaluation standpoint to service those markets are China and Thailand. Then in South America the primary market that we are looking at servicing is Brazil and so looking at operations either in or nearby Brazil that could service those two markets.

The majority of our effort is really focused on which of the markets are attractive enough to have sustainable volume that warrant an operation there. Then the range of investment, as Russ said, the truth is it could vary depending on how we go to market whether we do a Greenfield, the range of capabilities we put in place. So probably a range of $30-50 million in terms of an initial investment.

Operator

The next question comes from the line of Mike O’Martin - Small-Cap Report.

Mike O’Martin - Small-Cap Report

Can you give us any more color on the potential from the stimulus program and how it is meeting your expectations?

Russ Huffer

The stimulus program we have been working this pretty hard. We have met a couple of times with General Services Administration folks that are in charge of allocating the funds and selecting projects and setting specifications. We feel very good the decision making process will put our products and services in a good light. We like competing in this market. We think that the things we do fit well with it.

There are a number of projects that are out there that have not been bid and have not come forward but we expect those. We are encouraged with the beginning and we believe there will be some nice opportunities. I actually think they will find they are going to like the prices in today’s markets too and that will enable them to keep going ahead with these projects and move forward. We remain optimistic about the stimulus projects.

Jim Porter

Our strong presence across the institutional segment is really great. For the federal projects we have a clear line of sight back to the stimulus bill. We are also bidding a lot of work at the state, county or municipal level which is a little more indirect as funds trickle down and are allocated to the states and those areas as well. We don’t have that kind of direct connection point but we do see that as a positive as well.

Mike O’Martin - Small-Cap Report

Does this have the potential looking out a year or so to be 3-5% of your total business or is it smaller than that?

Russ Huffer

I think you are probably on target there. Maybe a little better.

Mike O’Martin - Small-Cap Report

In past economic cycles what has been the pattern of the recovery in your business versus the general recovery in the economy in terms of timing?

Russ Huffer

We are generally about 9 months behind on average. I go back a couple of cycles. The last one was a little even more delayed because of the over-building that took place so it was a slower recovery. I don’t think over-building is going to be a cause of slower recovery. I think the rate of recovery this time is going to be the recovery of the general economy. I think however fast it goes that is how fast we will go. We will just be slightly behind it.

Jim Porter

Employment is going to be the key factor. Our lag is going to be once we see employment start to grow.

Mike O’Martin - Small-Cap Report

When employment starts to grow do you think you could get back to significantly better margins?

Russ Huffer

Again, as I said earlier I think the way we are positioned today and the way we have improved our company we will get higher margins sooner in the construction cycle than we did the last time. I think we will be able to exceed the peak. Those are both good things.

Operator

The next question comes from the line of Scott Blumenthal – Emerald Advisers.

Scott Blumenthal – Emerald Advisers

Can you talk about energy costs during the quarter and the extent they could have contributed something to the pretty good performance you had with the energy intensity of your business?

Jim Porter

Sure. Probably the two key drivers from an energy perspective that have impacted the business, the primary is going to be natural gas as it relates to the way we buy glass so it is really our suppliers pass on an energy surcharge related to natural gas and we did see some benefit from that in the quarter. The other energy related is primarily going to be related to diesel and fuel costs in terms of our transportation expense. Our primary energy usage in our facilities is electricity so we didn’t see a benefit associated with that.

Scott Blumenthal – Emerald Advisers

Do you think it could have been a penny or two in the performance year-over-year?

Jim Porter

I would say $0.01 to $0.02 per share probably.

Scott Blumenthal – Emerald Advisers

The only other thing I would touch on here is you did mention that you are stepping up some of the product development initiatives in order to keep the company moving forward. I guess with all of this cash you have you have the capability to do that. Can you give us some idea as to the extent that you are going to be pushing forward with those?

Russ Huffer

There are some nice projects. We have some in the final stages right now that give us an enhanced total window energy performance. We are really looking at the way we can make the whole window system more energy efficient and we have final stages of testing specifications so we can publish the performance of the products. We continue to bring new coatings to market and new other products that also enhance aesthetics as well as energy performance. Those are always important.

Lastly, we have been putting some effort into a DOE directive to further bring daylight further into a building. Right now they estimate daylight utilization at about 15 feet. They are trying to get it to 30 feet so you can reduce artificial lighting. We are looking at ways of redirecting the sun’s light energy that comes from a window further inside the offices so there are efforts going on in those areas. None of them are big dollars. All of them are just focus and energy and attention that it takes to get them done.

Jim Porter

We also have some CapEx dollars targeted for the fiscal year to upgrade our capabilities to produce some of these projects.

Russ Huffer

Right. Specifically some of the coating types require some color upgrades and we are in the process of doing those.

Scott Blumenthal – Emerald Advisers

Are you undertaking some of those R&D initiatives by yourselves or is this in conjunction with maybe some of the local universities or somebody else you have done research with in the past?

Russ Huffer

We do cooperate with the universities and other entities in new product development. That has always been sort of at the core. We welcome technology from the outside. We have contracted with Lawrence Berkley Labs, University of Minnesota, to help us in the design of the products. In other words we ask them, our world is dominated by aesthetics and oftentimes the aesthetics tend to override true energy efficiency. So we have asked Lawrence Berkley Labs and the University to help us understand specifics of specifications so we have been designing products to those new specifications that optimize energy efficiency. That has been a nice effort for us as well. A lot of things going on in those areas.

Operator

The next question comes from the line of Brad Kelly – Magnum Opus Financial.

Brad Kelly – Magnum Opus Financial

A question about international markets. It sounded like the focus on international is really on the manufacturing side. Are you not doing so much of the installing and more production in terms of international?

Russ Huffer

No, international is just delivery of glass. Right now we are focused one exporting more fabricated glass to the markets and our expansion is actually doing that fabrication overseas.

Brad Kelly – Magnum Opus Financial

So right now you are just delivering but the goal is to actually do the creation of the glass on the floor where you are…

Russ Huffer

Fabrication of it. Not installation.

Brad Kelly – Magnum Opus Financial

In the countries you mentioned, you did not indicate really a big interest specifically in India or places in Africa. Are either of those places you could find yourselves down the road or China and Brazil really are where you see the most opportunity?

Russ Huffer

Today the opportunity is really in China and Brazil. There is opportunity clearly in India and in Africa. We have shipped numerous projects to India and we evaluate and look at Africa as well. It is just that the current markets and what we anticipate going forward in Brazil and China appear to be the most robust. We have to be careful that we are always focused on higher value added, energy efficient products. A robust market may or may not support that specific focus of higher value added and energy efficiency so we have to be careful about that and watch that as we analyze these other markets.

Brad Kelly – Magnum Opus Financial

Specifically related to that higher efficiency, more of the green building segment you alluded to, does that mean in terms of green building that you have an opportunity to replace existing glass in already finished commercial construction? What percentage of your business in green building is derived from new construction versus going back and making a building more energy efficient with your products?

Russ Huffer

Your point is very good. Traditionally about 20% of our output was in retrofit renovation and 80% new construction. In the green building sector we have identified renovation as a very important focus for our businesses going forward. Again, I mentioned earlier we worked with the General Services Administration, developers, architects and others and the point we are getting at on these older buildings that have very old systems and I am talking systems more than 20 years old, 40 years old so to speak, we can reduce the peak energy demand on those buildings by over 60% with window replacement and other lighting and HVAC upgrades. Just by themselves lighting and HVAC is about 25%. The added windows is a big boost.

The issue then becomes are you focused one energy efficiency. Commercial buildings have to be focused on tenants and their willingness to get higher occupancy and higher lease rates by making the building green. People are believing that is true and where they are they are making those kinds of plans. We are working hard to make sure the market understands the total value we can bring to that effort and we believe we will have some success with it. There is a large market out there that is a potential target market for us.

Brad Kelly – Magnum Opus Financial

So going forward we might imagine that some of the decline in new construction could be offset revenue wise by a focus on making existing buildings more energy efficient especially if the stimulus leans in that direction?

Russ Huffer

Yes, we believe longer term that is true. Like I said, it is a focus for us today to make sure we are out there planting the seeds and getting people to understand that, make that part of their thought process and their decision making process.

Operator

This concludes the question and answer portion of the conference. I would like to turn the call back over to the host for any closing remarks.

Russ Huffer

Thank you very much. We really appreciate the time today and the interest in Apogee. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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