Apogee Enterprises Earnings Call Nuggets: Expectations and Margin Forecast

On Thursday, Apogee Enterprises (NASDAQ:APOG) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Expectations

Eric Stine – Northland Capital Markets: First, just wanted clarify something you said at the end, Jim, line kind of cut out. So, on SG&A, just what are the expectations for the year? Did you say modest increases from current levels?

James S. Porter – CFO: Correct.

Eric Stine – Northland Capital Markets: I’m wondering if you can just talk about the gap in the first quarter. Is that something that you see there is a chance that that could be filled by some short cycle work or I mean, are we too late in the quarter for that to be the case?

James S. Porter – CFO: It’s pretty much too late. I mean, there’s a little bit that could fill in, but we’ve really – there could be some variation with it, but we definitely look at sequentially down first quarter just really based on the backlog that we have and the work that’s available.

Eric Stine – Northland Capital Markets: Sequentially down revenues obviously also margins?

James S. Porter – CFO: Yes.

Eric Stine – Northland Capital Markets: Maybe just turning to backlog, the last few quarters, you’ve had kind of an abnormally high level of pending orders. Just curious where you ended the fourth quarter on the pending order line?

Joseph F. Puishys – CEO: This is Joe. The pending order remained consistent since we started talking about it, is evidenced by our strong finish in the fourth quarter, compared to the third quarter when we talked about it. And I really don’t want to get into projecting first quarter fiscal ‘13, but our one month into the New Year, the trend in increased backlog continued. So we’re continuing to see a very robust backlog that improved margins and I’m confident that – and our backlog as I said earlier in my discussion, is up significantly over last five quarters, so we’ve been able to hold the gains to that number.

Eric Stine – Northland Capital Markets: I was just getting at, so you grew backlog nicely this quarter, but that pending number is still kind of in that $60 million range is that how I should think about it or I mean it’s above historical levels still?

Joseph F. Puishys – CEO: It’s consistent with that, yes.

Eric Stine – Northland Capital Markets: Then maybe just last thing, you mentioned some planned investments in international market if you can just give a little more detail there Joe that would be helpful?

Joseph F. Puishys – CEO: I’ll talk about what we have done. I am more comfortable with that than sharing my strategy, with my competitors. But we did begin our international operations in our large-scale optical business and we do have plans for revenue growth in Europe in our picture framing glass business and we’re very excited about that. They are an extremely strong competitor in the U.S. and I’d like to flex that prowess in Europe as well. We continue to reap the benefits of our investment in Brazil and we being in the strongest position in Brazil, I expect as that market continues to mature to more value-added glass we will continue to invest in sales investment in that region. So those are the two areas we’ve accomplished in the last year. We obviously have further plans to expand our – some of our businesses internationally.

Confidence Behind Margin Growth

Brent Thielman – D.A. Davidson: Joe or Jim, I guess just on the architectural side what kind of gives you the confidence in getting margins back up at Harmon in the second half? Is it a function of you guys changing the mix of work that you’re pursuing or something else?

Joseph F. Puishys – CEO: A couple of things are going on there Brent. First up there have been some competitors that have shut their doors. Of course when the market was so depressed in ‘09 a lot of people were taking on work at lower margins. Our business of course ended up taking business at lower margins. We’re starting to see a retreat from that phenomenon. Some of its due to competitive shakeout and businesses cannot sustain doing that for a long time. While being backed by a strong public company as we are, our installation business is seeing even more inquiries as some of the private firms have closed their doors. The proof though is in the numbers and our margins on book projects going into our backlog are at a couple of hundred basis points better than what was – that we’re revenue in right now. Hence Jim and in my comments, that as those – as that improved backlog both dollars and margin begin to revenue in the second half and into fiscal ‘14. It certainly gives us tailwinds on our second half operating margins and as I repeated earlier, I was particularly focused on our conversion on revenues when I entered this business and was really pleased that we broke the 40% hurdle which I thought was certainly a our entitlement with the mix of our businesses and our fiscal ’13 conversion will be higher than that partly due to the improved margins coming out of the installation business.

James S. Porter – CFO: So just to add as Joe said we have the visibility and the backlog and the second half comment is based on really when network is scheduled, you one thing as you know we have the least amount of control over as what the actual timing of those projects are, but the way the work is currently scheduled that leads us to our comment.

Brent Thielman – D.A. Davidson: Then on the I guess the business down in Brazil, I mean any sort of talk qualitatively or quantitatively about the backlog growth there and I guess kind of just in general about the growth you are seeing in that business, as a standalone just kind of a feel there.

Joseph F. Puishys – CEO: The business grew double-digit the backlog was also up 10% so we’re comparable that business is going to continue to perform at double digit growth and as I said they were accretive in the first year I was – my hats off to Jim and team for finding that business. It’s a very attractive business run by a team that’s very focused on U.S. type controls and growth. So double digit both in growth and backlog right now.

Brent Thielman – D.A. Davidson: Then just lastly if I could on the LSO segment obviously you talked about the growth initiative there. How do we think about the impact kind of going forward both in terms of I guess near term margin implications were there any additional potential spending and then also thinking about kind of the growth opportunity from these initiatives, I mean you talked about expanding in Europe, this doesn’t assume change the future profit margin profile, but maybe just the scale of the business, may be a little more color there.

Joseph F. Puishys – CEO: The future of the business, it’s an awesome business and we have had some new product introductions around acrylic products we have a really nice pipeline of NPI new products introduction in that business that I am pleased with and some of that we’ll launch in domestic market and some internationally. We have a couple points of growth for international expansion. I hope we are being conservative there. I challenged my business leader to push for more growth in Europe, and I believe the margins are going to continue to remain strong that they are in that business. As Jim mentioned, below the line investment, we added some headcount in sales, marketing, and business development in that business. It’s the right thing to do. It’s an extremely attractive business. The margins remain unchanged, and I believe again with operational improvements we are doing in our factories, we certainly have some opportunity to increase margins on the manufacturing shop floor and we’ll continue to drive that, but we’ll continue to grow that business. It’s an extremely attractive ROI for us, and I do not expect any significant movement on margins.

Brent Thielman – D.A. Davidson: Just as a follow-up I mean, do you expect that kind of same level of marketing spending or that $1.5 million going forward?

Joseph F. Puishys – CEO: I do, and certainly the investment we made, some of it is promotional activity that can or – it may or may not continue depending on results, but some of it’s also headcount investment in feet on the street to sell and deliver our products in other parts of geographies we are not in, and yes, that will of course continue. Will I do a similar incremental spend? To be determined, and I am very bullish on that business.