Apogee Enterprises, Inc. (NASDAQ:APOG)
Q1 2015 Earnings Conference Call
June 25, 2014 11:00 AM ET
Mary Ann Jackson - IR
Joe Puishys - CEO
Jim Porter - CFO
Colin Rusch - Northland Securities
Brent Thielman - D.A. Davidson
Good day ladies and gentlemen, and welcome to the First Quarter 2015 Apogee Enterprises Incorporated Earnings Conference Call. My name is Denise and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now turn the conference over to Mary Ann Jackson. Please proceed.
Mary Ann Jackson
Thanks Denise. Good morning and welcome to the Apogee Enterprises' fiscal 2015 first quarter conference call on Wednesday, June 25th, 2014. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2015 first 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 1st, 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 then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?
Thank you. Good morning everyone and welcome to Apogee's conference call for the first quarter of our fiscal 2015 year. We had a very strong first quarter, with revenue growth of 18% and operating income growth of 28%. Our earnings per share growth was even more significant, up 50% to $0.21 per share, including the results of the hard work of our legal team, which secured the final distribution for our long exited European operation, that added $0.03 to our earnings.
I am especially pleased with our year-on-year backlog growth of 28% to $385 million as we continue to win good projects at improved margins. With our significant backlog growth, solid operating performance and a stronger outlook for the Architectural Glass in fiscal 2015, as well as what is appearing to be sustainable growth for our end market sectors, we have raised the bottom end of our range, per share range, and now expect to earn between $1.40 and $1.50 per share on revenue growth of 15% to 20%. Jim will explain this in more detail, of course. I do believe fiscal 2015 will be an exceptional year for Apogee.
I am feeling particularly positive about the significant growth that all of our businesses are experiencing. In fact, in the first quarter, revenues grew in all four segments and backlog grew for all of the Architectural segments; and all four segments grew backlog sequentially. I also expect backlog to continue to grow in the second quarter, based on the level of project awards and contracts currently in hand.
Operating income improved significantly in our two largest segments, Architectural Glass and Architectural Services which had 170 basis points and 250 basis point margin expansion respectively. The momentum in the backlog increases in these two segments reflect continued strong growth for the remainder of F 2015. This strong conversion was partly offset by the large scale optical and architectural framing system segments which we will talk about.
In the large scale optical segment, the negative conversion in the quarter was purely timing with the conversion rate for the full year expected to be at the projected Apogee level. Investments were made in the quarter for future growth, including new products in new market sectors and capacity. We expect new products being introduced this year for retail framing, engineered optics and the international market sectors will deliver significant growth for this segment in fiscal 2016, as comparable segment margins.
New glass thickness products allows us to enter the Engineered Optics segment and new print-on acrylic, anti-reflective products for high end photographers were launched this quarter. We also invested for incremental capacity to allow us to meet the growing demand of this incredible sector.
That said, the Large-Scale Optical segment had a 20% operating margin for the first quarter, after making these investments in future business, and our full year is forecasted to reflect margin enhancement in this very profitable segment.
In the Architectural Framing Systems segment improved earnings in the windows business were more than offset by the difficult first quarter for our Canadian storefront acquisition, due to severe winter weather. As a result, the Canadian business had a loss for the quarter, rather than the expected earnings impacting us significantly as you will hear from Jim.
I am encouraged that the Canadian business started seeing excellent order and bidding activity late in the first quarter. The business started the second quarter strong with a 15 month high in backlog and customer commitments, with further incremental gains in the first three weeks of the new quarter. We are seeing light at the end of the tunnel after a tough start in Canada.
Looking at the outlook, as I have highlighted at the beginning of the call, we have raised our average range by increasing the bottom end for fiscal 2015, based on what we are seeing in our businesses, and the market sectors we serve. We now expect to earn between $1.40 and $1.50 this year, up from $1.35 to $1.50 in the prior guidance. On revenue growth maintained in the 15% to 20% range for the year.
We continue to expect that the acquisitions made last year will be accretive to our earnings in fiscal 2015 as the Canadian storefront business saw improved backlog and commitments at the end of the quarter, as I noted. At the same time, we expect that we will continue to benefit from our strategy to grow through new geographies, new products, and new market sectors. We again expect to grow faster than our commercial construction markets by at least five percentage points. The outlook for U.S. commercial construction markets, based on Apogee's lag to McGraw-Hill construction forecast for the sectors we serve, is for maintaining high single digit market growth in our fiscal year.
We are also seeing significant signs of market improvements in other metrics we follow. The American Institute of Architects, ABI, the billing index, jumped three points in May, the largest increase in over three years.
Although it continues to indicate modest improvements in billings for architects, at the same time, we are all seeing strong job growth in the United States. We do expect capital spending for the year of approximately $40 million, as we continue to invest for growth, productivity, product development, maintenance and our long term growth in this business. I am pleased that we expect to see free cash flow for the year, even after this level of investment. I believe fiscal 2015 will be another exceptional year for Apogee. I believe that our expected fiscal 2015 results along with our strategy to grow to new geographies, new products, new market sectors will put Apogee on a path to $1 billion in revenues by the end of 2016. At the same time, we believe we can achieve a 10% operating margin in this approximate timeframe, in part to our focus on productivity and operational improvements.
I will now ask Jim Porter to go through more details on the financials. Jim?
Thanks Joe. We had strong growth in our first quarter performance, with revenues and earnings up significantly, mashed with solid new order momentum. Revenues of $210.9 million were up 18%, as we saw growth in all four segments. Organic growth was 12%.
Earnings per share were up 50% to $0.21 per share. There were several positives for the first quarter; we had good conversion and growth in Architectural Glass, Architectural Services and the window business portion of the Architectural Framing segment, all had good execution and operating leverage.
We continue to have strong contribution from the large scale optical segment, with 20% operating margin, and we also recognize the income in other income on the P&L, related to receipt of our final liquidating distribution from a European entity that Apogee exited more than 15 years ago. This was worth approximately $0.03 per share, and was in our internal expectations for receipts some time during this year.
The negative offsets in the quarter were primarily related to the tough winter weather experienced early in the quarter, impacting our shorter lead time, Architectural Framing systems businesses. Weather affected volumes and capacity utilization, increased utility costs and some operational costs. The recently acquired Canadian business was impacted most significantly from the extreme winter conditions, which also slowed the Canadian economy.
Overall for this segment, we estimate these impacts cost us approximately $0.03 per share, compared to last year, and the impact was higher compared to our internal outlook, by roughly $0.05 a share, since we had expected the income from the Canadian business instead of a loss. We also had a higher tax rate this quarter, which drove about $0.01 per share negative comparison to the prior year.
Gross margin for the first quarter was 19.6% down from 20.3% in the prior year period. Good margin improvement in our largest businesses was held down by the lower margins within our Architectural Framing systems segment for the reasons mentioned, along with some increased aluminum costs, as well as lower margins in the large scale optical segment, which was expected.
Turning to performance by segment in the first quarter; Architectural Glass segment revenues grew 6% to $79.6 million, with growth in all geographies served, the core U.S. and Brazil markets, as well as other international exports. Operating income grew to $2.8 million, doubling prior year period earnings of $1.4 million, on higher volume with the resulting improvement in capacity utilization. The segment operating margin was 3.5% compared to 1.8%, as we see the expected operating leverage in this segment.
Architectural Services segment revenues were up 11% to $51.6 million and operating income was $200,000 significantly improved from a prior period loss of $1 million. The operating margin was 0.4% compared to negative 2.1% last year. Revenue growth was from broad-based volume increases across our locations, while bottom line growth resulted from good execution and improved project margins.
Architectural Framing systems revenues of $64.2 million were up 44%, with organic growth of 22%, excluding the acquisition made in the third quarter of fiscal 2014. We had double digit growth across the U.S. businesses, as we see market improvement and benefit from geographic extensions and share gains. The window business in this segment delivered especially strong improvement as expected compared to lighter revenues in the prior year period, which we discussed at the time.
Operating income was $1.9 million, down 6% from $2.1 million with operating margin of 3% compared to 4.6% last year. Income growth in the U.S. segment businesses was offset by the loss in the Canadian business as already described.
First quarter capacity utilization across all Architectural Manufacturing businesses was approximately 65%, up from approximately 57% in the prior year period. Capacity utilization is in line with the fiscal 2014 fourth quarter rate of approximately 66%.
Our Large-Scale Optical segment revenues grew 3% to $20.1 million. Operating income of $4 million was down 16% from $4.7 million. This performance was in line with our expectations, as we increased investments in research and development for new products and new market sectors, as well as for some initiatives to increase manufacturing capacity. The operating margin was 19.8% compared to 24.1%. Just a reminder that with this size business, margin levels are very sensitive to relatively small movement in operating income. A $100,000 of incremental expenses, a 50 basis point impact.
Turning to backlog, our first quarter backlog was $385.1 million, up 28% from $301.8 million in the prior year period. We are really pleased to see another quarter of solid order activity and backlog growth. As I do each quarter, 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 the longer term trend. But obviously, we are pleased to see the expected increase that came through in the first quarter, and we believe we are on a trend line of growing backlog.
Our backlog mix at the end of the first quarter reflects strong growth in the office sector, as well as growth in the multifamily residential sector, offset by a decline in the institutional sector, as we continue to complete projects in the healthcare, education, and government sectors.
The office sector was 50% to 55% of our backlog, institutional sector was approximately 25% of the backlog, with healthcare projects still a majority of this portion. Multifamily residential, including high end condos and apartments was 10% to 15% of the backlog, and hotel and entertainment transportation was approximately 5% to 10% of the backlog.
Regarding the timing of the backlog, approximately $307 million or 80% of our backlog is expected to be delivered in fiscal 2015, and approximately $78 million or 20% in fiscal 2016 and beyond. We are continuing to see good levels of bidding activity, with visibility for new awards and commitment.
Apogee's tax rate for the first quarter was 33.4% versus 29% last year. The prior year period tax rate benefited from the R&D tax credit, which has not been renewed by congress.
Cash and short term investments totaled $17.7 million compared to $28.7 million at the end of fiscal 2014. For the quarter, we had positive operating cash flow compared to negative operating cash flow last year. For the first quarter, we had negative free cash flow of $7.5 million, after capital expenditures of $8.7 million. The quarter's CapEx included the final payments on the new Architectural Glass corridor [ph] being installed through improved capabilities and new products.
We generally use cash in the first quarter, which is when we make payments for accrued annual incentives, taxes and insurance obligations. Our non-cash working capital at year end was $87.0 million compared $77.3 million at the end of fiscal 2014. We define the free cash flow as net cash flow provided by operating activities minus capital expenditures, and non-cash working capital is defined as current assets, excluding cash and short term available for sale of securities, short term restricted investments and current portion of long term debt as current liabilities.
Now I will turn to our outlook; our outlook for fiscal 2015 caused for another year of significant growth, with revenues up 15% to 20%, as our markets improved and implementation of our growth initiatives accelerate in the third year of executing our strategic plan. Our growth outlook of 15% to 20% includes about four points of growth from the acquisition made late third quarter last year.
We've raised the bottom of our earnings per share guidance and now expect to earn from $1.40 to $1.50 per share, up from the prior guidance of $1.35 to $1.50 per share. We had some headwinds in framing systems in the first quarter, which are now behind us. We have visibility to more of our revenue growth coming from the architectural glass segment, relative to the other segments than we previously expected, and this segment is delivering stronger conversion than the other architectural segments, and we have visibility to improve margins in our backlog.
I would like to reiterate, that the most difficult thing for us to predict, is the timing of project flow and our architectural businesses, which is just driven by normal variation in construction project timing. This project flow timing impacts volumes, as well as the mix of business, projects and products, all of which affects revenues and margins.
Providing that the committed work flows as anticipated for fiscal 2015, and we have our normal expected book and bill activity, we do have [indiscernible] to the upper end of our revenue and EPS range.
Regarding revenue timing for the year, we expect revenue to be fairly balanced throughout fiscal 2015, based on current visibility of backlog, although actual project execution timing is difficult to predict as I just stated. We anticipate somewhat stronger year-on-year revenue growth in our second and third quarter, and our third quarter is expected to have the highest revenues and earnings of the year.
We are expecting that our full year gross margin will be approximately 23%. We anticipate that the gross margin will step up in the second quarter, with the third quarter the strongest. We anticipate a tax rate of approximately 34% for the full year, and this compares to the fiscal 2014 full year rate of just under 30%.
We expect to generate positive free cash flow for fiscal 2015, after we spend approximately $40 million for the full year on capital that is balanced across investments for growth, productivity and new products, as well as for maintenance. Depreciation and amortization for the year should be approximately $30 million.
We had some challenging impacts in the first quarter, but I feel good about our overall first quarter performance, and even better about our prospects for the balance of the year. We will continue to see strong growth, expanding margins, and free cash flow generation in fiscal 2015.
I believe we are executing on the goals that we laid out and have communicated and look forward to benefiting from some sustained, reasonable market growth. Joe?
Thank you, Jim. Okay Denise, I'd like you to please open up the call for questions.
Sure. (Operator Instructions). Our first question comes from Colin Rusch with Northland Capital Markets. Please proceed.
Colin Rusch - Northland Securities
Thanks so much. I know you don't break out backlog by market segment, but if you could give us a little bit of color in terms of the growth here in the last quarter, what's driving that growth in a little bit more detail, and how we should think about the margin profile from an operating margin perspective on that business?
Yeah. We do break out the backlog in our Q; you will see the break out by the four segments. Its balanced we had -- as I mentioned Colin, we had growth in every one of the segments, which is the true positive you should take away is its not just coming from the large services business, our windows business grew, so the framing system segment grew. The glass business had a particularly strong impact. Jim and I are particularly pleased with that. I think you know, we get the best leveraging from the Architectural Glass business. We had good growth in the first quarter, but we will have stronger growth in Architectural Glass in the next three quarters, which obviously is a particularly strong indicator for us, because of the margin conversion we get on that business.
So we have pretty good insight to the future. But it was balanced growth across the board.
Colin Rusch - Northland Securities
Okay. And then on the architectural services business, obviously the margins weren't exactly what you were looking for on that, although it was an improvement year-over-year. Can you just remind us of the seasonality in that business, and how that relates to the backlog growth? Obviously there is some lumpiness with the backlog as you've mentioned, but as we look into the back half of this calendar year, what can we expect there?
Yeah Colin, the Architectural Services business which is our installation arm known as Harmon, had a very strong quarter. They did not disappoint me in any way. They also had a strong backlog growth. I think we improved our operating margins 250 basis points year-over-year. They had, what I would call better than entitlement profit conversion on the incremental growth, which is an indication of the better projects they book. So we will see further growth in our backlog, in the second quarter from the services business, and its always going to be a lumpy business with regards to backlog, and particularly year-over-year because we -- that's a business where we can book a $30 million project in a quarter. So it can really move the needle. But as Jim mentioned, all of our indicators, the projects we are bidding on that we are aware of, make us feel confident and say that business will continue to show growth in backlog in the coming quarter or quarters. But they delivered on plan, frankly, slightly better than planned margin for that business. I am just happy with the performance of the Harmon business.
This is Jim, if I could just add. That segment is one portion of our business, that's the revenue recognition business. So it is -- there isn't any traditional seasonality, really both the revenue and then oftentimes the margin project by project is really a function of where any given project is in its lifecycle and the performance against that project.
So it is going to be kind of lumpy quarter-to-quarter in terms of movement of the operating margin in that segment, but from a full year perspective as Joe said, we continue to expect improvements in that segment.
Colin Rusch - Northland Securities
Okay, that's helpful. And then, just a final one, can you just talk about general quotation activity, are you seeing acceleration in that broadly speaking, are they kind of flattish here, just give us some color on it?
Without question, we are seeing improved flow in bidding activity. Our inquiry levels are up substantially in all the businesses. So it is this first time, you've heard me say -- appear that our end markets are in for a period of sustained growth. A year ago, I felt good about the end markets, but it felt like we are all on thin ice in this sector. There is no question that ice has hardened over the last year. In fact, many of our investments right now are to increase throughput and capacity, as we are seeing substantial increases in quote activity.
Colin Rusch - Northland Securities
Great. Thanks a lot guys.
Okay. Thanks a lot Colin.
(Operator Instructions). Our next question comes from Brent Thielman with D.A. Davidson. Please proceed.
Brent Thielman - D.A. Davidson
Hi. Good morning.
Good morning Brent.
Brent Thielman - D.A. Davidson
Hey. Sorry, just to clarify, I guess in terms of driving that sequential growth and backlog, do you expect the glass or is that the services business that's kind of the big driver there?
Actually, both businesses had a substantial impact. All four segments grew probably proportionally to the size of the business. I think the glass business had its largest increase in backlog since pre-recession. So they were a big piece of it; but all the businesses grew nicely, and frankly substantially.
And as we look forward Brent, for the second quarter in terms of our comment, may be I will back up and remind you that the services segment is probably close to 60% of our total backlog. So they are the biggest individual piece, and so they kind of -- just even if they move proportionally, they are going to have the biggest amount of impact. But as Joe said, we have seen kind of nice balanced growth across the segment, and we will probably continue to see that balance, but it is the services segment that tends to have the largest portion, and will drive the biggest change as usual.
Brent Thielman - D.A. Davidson
Okay, thank you. And then, despite this effect from weather, you still had 22% organic growth in framing systems which is well ahead of some of the other architectural segments. Can you talk about what's helping you realize that growth in that particular area?
Well part of the growth within that segment came from having Alumicor in our results and they weren't last --
The 22% is organic.
Yeah, last year, the major improvement in that segment came from our windows business. Last year, I highlighted the windows business, our U.S. based window fabrication business in the framing systems segment was providing us headwinds. You've heard us reference a planned hole in our order book last year. That business did its job, they booked a lot of business last year. We will have revenue growth on a comparable basis every quarter. They are providing us the most tailwinds and they are delivering the profit on that growth this year.
As Jim and I have mentioned, we had a very poor start to our first full fiscal year with Alumicor. There is no question about it, it delivered a loss versus a planned income in the quarter, so it had a substantial impact in our overall results. Kind of hiding why that segment didn't show the profit it should have on that substantial growth. But as I highlighted, I believe the business is very sound, and I met with the entire sales organization last week, we are seeing robust bidding activity up there as well.
But frankly, the growth in that segment came from the three core U.S. businesses, more substantially from the windows. But our finishing business and our extrusion business also saw growth, and our Alumicor business is -- hopefully you will see the turnaround in 2Q.
Brent Thielman - D.A. Davidson
Okay, that's great. And then just one last one if I could; Joe, any update on the Brazilian operation, what's going on down there?
Continues to perform nicely. It was a significant piece of the glass business growth in the quarter. The U.S. business will show substantial growth going forward, but our Glassec -- Brazilian business Glassec Viracon had very strong growth in the quarter, excellent profit conversion, operationally it's performing well. Jim and I will be making investments in that business to support future growth. So full steam ahead on the Brazilian business.
An although clearly the end markets aren't as hot as they were two years ago. The softening is modest and we expect that business to continue to grow each year.
And Brent, just wanted to add one little color of note here, which is in the U.S.' next world cup soccer game, they will be playing in a stadium that has products from our Brazil division, our Glassec Viracon business.
Brent Thielman - D.A. Davidson
That's great. Okay. Thanks guys.
We have no additional questions. I would now turn the call back over to CEO Joe Puishys for closing remarks. Please proceed.
Okay Denise, thank you. Its unusual to only have two questions, so Denise I just want to wait one minute and see if you get any more, and then I will close out the call.
Sure. (Operator Instructions).
Okay Denise, no need to torture people with silence. So I will close out the call. Everyone listen, thank you for your time today. Before I sign off, I'd like to remind you that we held an investor conference in May. Those that attended these live online or heard from our -- four of our business unit leaders, representing each of our segments, and if you'd like more color on the strategies for each segment, a replay of that three hour event and the slide deck are available on our web site.
As I said, we delivered a very strong quarter, when you peel back the onion, you will see that we had outstanding performance in our glass and services segment. Your questions, perhaps Joe, as the large scale optical business is going to continue to be a shining star, and my answer was yes. The softer quarter on profit was simply timing. That business will grow this year. Likely not as substantial as the high growth we will see in architecture, but it will grow and it will have margin expansion for the year. The issues really came down to what was going on within the framing systems segment. I hope we explain well that we expect nice growth from our three original businesses in that sector, as well as Canada for the remainder of the year, albeit an extremely challenging winter for that business, but we are starting to see really strong light at the end of the tunnel.
So I hope our breakdown of the segments and the peel back of the onion gave you good view into our businesses, and why we were optimistic enough to increase our range.
This concludes our call, have a great day everyone, and we look forward to talking to you individually and as a group on the next quarterly call. Thank you.
This concludes today's conference. You may now disconnect. Have a great day.
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