APOG
#Yes, we're feeling good about that.
I'm confident of our revenue growth that we stated for the fourth quarter.
And more importantly is the margins.
The margins in backlog are healthy.
Obviously, while our revenue might've been a disappointment to some of you, we have pretty much been trying to signal that the delay issue would impact our third quarter as well; the headwinds from the foreign operations.
You know, Brazil is not going to get better anytime soon, but it's a small piece of business for us.
We continue to stay in the black.
Canada, there's significant signs of a return to a more healthy climate.
They had GDP growth in the calendar third quarter.
So I'm feeling a little better about Canada now than I did.
We made some changes in our operations and saw significant improvement in our abilities up in Canada.
So all in all, very confident on next year's projections.
Yes, no problem, Sam.
Listen, I've been very consistent in saying when we would grow ---+ if you grow 20%, the 30% to 40% conversion on incrementals is more challenging, because you have a lot of headwinds with regards to productivity, new hires.
And we were struggling with those kind of conversions.
When you're growing at closer to 10%, 5% to 10%, we should expect 35% ---+ you know, 25% to 35% conversion, depending on the mix of which businesses are driving the growth.
You know, next year ---+ we haven't completed our AOP process business by business.
That happens for us in January, and I'll review it with my Board in February at the end of our fiscal year.
You know, I'm confident we'll be back to the ---+ you know, somewhere between 20% and 35% conversion, depending on the mix.
That's a pretty wide range.
But as we start growing double digits again, it won't be 80% to 100% conversion.
We still believe we'll continue to grow our bottom line.
You heard my comment ---+ you probably picked up on the comment ---+ we're holding our revenue forecast and earnings forecasts for F18.
You probably caught I said 12% at least.
We haven't locked on our new 2018 forecast yet, so we'll have more clarity on that in a couple of quarters when we talk with you guys.
But we are feeling pretty bullish about that now.
Thanks, Sam.
<UNK> will talk about the returns.
We are going to invest over $50 million.
That project has begun for automation and capability.
We have ---+ some of the new architectural designs called for glass sizes we were not capable of.
If we weren't able to change the stack, we would lose an opportunity.
That is no longer the case.
When you look at the schedule, how the timing works from bidding to actual deliveries, in effect ---+ effective immediately, we are now able to start selling the oversized glass capability for delivery in about 15 months.
And we are very, very pleased to have made that investment.
It's substantial, but it includes significant capability and, as importantly, a lot of automation and productivity in our factory.
As far as return, I'll let <UNK> answer it.
Yes, we generally use a 15% ROIC hurdle for large investments.
And for those of you who have been to our factory know that to really take advantage of some of the Lean initiatives in the architectural glass business, we've got some just shop forward layout issues based on the configuration of the buildings.
So as <UNK> mentioned, it will be ---+ a little over $50 million, and it will actually occur over three fiscal years in terms of the timing of that.
Because we need just some building to be able to introduce some of the automation as well as the new capabilities.
Yes, <UNK>, first off, $378 million ---+ it's almost $70 million more.
Our classification was that $378 million is for F17 and beyond.
The bulk of it or the majority of it is in F17.
A year ago, when we would've been talking about F16 and beyond, that number was closer to $300 million, again, with most of it being in the next fiscal year.
That is an incredibly strong indicator.
We have ---+ most of our businesses are short lead times, so our largest business in Apogee is our glass business.
We have eight-week lead times, six- to eight-week lead times depending on the month.
So typically what in ---+ are by far our largest business, when an order enters the backlog, it's revenued out within eight weeks.
So typically that business has a very small backlog considering the size of the business.
Our largest contributor to backlog is our services sector segment, and our installation.
And that's, I think, over 60% of our backlog.
That business ---+ we've been very public that our goal was not to try to grow that faster than the market or even as fast as a market.
We wanted to focus on results and operating margins.
And as you can see, we were up over 500 basis points this quarter.
We had no project surprises.
We're being very particular about what projects we bid.
Our win ratios are higher because we are focused more on the projects we feel we'll be successful in.
That business will not grow substantially higher; it's about 80% of the capacity we'd like that business in.
So short of an acquisition, we don't see that business growing dramatically.
Maybe mid-single digits.
And we're more interested in the quality of projects and the margins in that business.
The backlog this quarter coming in ---+ you know, it might possibly grow as well.
We have an opportunity ---+ again, we have a lot of big projects that come and go in the backlog, so it's impossible to predict.
<UNK> likes to say every quarter we don't need sequential backlog increase to make our numbers.
More than likely, we'll see some growth in backlog.
But we are ---+ our largest contributor to backlog is getting to the point of the business we want it at.
And if we look at our activity, the forecasted projects we are working on, we are very confident with that, quote, $378 million and beyond, and combined with our forecast of our short lead time businesses that our revenue forecast for next year is solid.
<UNK>, I'll just make a couple of comments.
First of all, as <UNK> indicated, the current backlog level ---+ frankly, our view is that level, plus or minus a little bit, really supports our kind of two-year outlook for growth.
I do want to remind everybody that the way we capture backlog for all of our businesses other than architectural glass, we receive a contract or purchase order for the full project value.
The way the architectural glass industry evolved in that, as <UNK> said, our biggest business, we receive commitments for a project.
And that project gets down into construction phases representing that short lead time that <UNK> referenced.
So in our backlog itself, we only have a portion of the project that's been committed to us in architectural glass.
But we have really good visibility beyond what's in our backlog.
Yes, this is <UNK>.
I mean, as we look at ---+ so first of all, there are different businesses in Canada.
You know, this is ---+ Q4 is just a seasonal slow time period.
But I think we've seen stabilization from a volume standpoint there.
So we're getting close to kind of anniversarying the exchange rate impact.
So you'll probably see a little negative impact, headwinds and Q4.
And then similarly, as we go to the Brazil business, volumes are not quite stabilized yet.
We are still working through backlog that we had and kind of the exchange rate issue.
As we look into next year, our current expectations would be kind of relatively flat in the Brazil market before any exchange rate adjustment, and maybe some slight declines, but that's small business.
And then in Canada, our expectations are that we start to see the benefits of what ---+ you know, we have seen some growth in GDP up in Canada, and the outlooks are for some economic improvement.
So, again, we're just now working on our plans for next year.
But at this point, we would expect to see, on constant currency basis, some growth in that business.
Yes, <UNK>, for the first time in probably a year, I'm beginning to have the beginning of some confidence in our opportunities in Canada.
There are ways for us to take advantage of the $0.73 exchange rate with the Canadian/US dollar in the marketplace, so we're going to try to do that.
But operationally we've made a lot of improvements in the last six months.
So starting to feel better about that.
And as <UNK> said, you know, Brazil ---+ let people struggle to make money in Brazil.
We didn't.
It was a high moneymaking operation for us when I first showed up here, and our US business was struggling.
The tables have turned a little bit.
We all know what's going on with the situation of the scandal in Brazil.
We are anticipating two more years of trouble down there in the economy.
But for us to keep that business in the black is actually a pretty impressive accomplishment.
It's very small, so doesn't have a big impact on us.
The economy will return; they will continue to build buildings down there; and we'll be ready when it does turn around.
Oh no, we were not surprised.
12% is conservative for that business.
<UNK>, 12% is our goal for overall Apogee.
And I think we've been clear that architectural services is always going to be our lower-margin business, with a goal of getting to 10%, which then obviously requires our other businesses to exceed 12%.
Well, as <UNK> said, our largest business doesn't ---+ I'll give you an example.
As <UNK> mentioned, if we win a $15 million award in our services business, $15 million goes into backlog on one day, and it might take a year to revenue.
So over the course of a year, it has an average backlog impact of $7.5 million over that time period.
Same thing for our large window business.
But when you look at the glass business, our largest business, if they have a $4 million win, unfortunately, we don't put $4 million into backlog, because we don't have a legally binding purchase order for that yet.
We'll get a PO for the first four floors in the building for $300,000.
And that will go into backlog and come out within eight weeks.
And we might get 5 to 10 purchase orders for that particular project.
So even though the backlog impact of Viracon is low, we have great visibility for what the total award is worth.
It's just the way it's done.
So I like to mention, we have for levels of visibility to our future work.
One that we highlight and discuss publicly ---+ the one non-GAAP metric we use ---+ is booked backlog, the $545 million.
We also have awards that are in hand, yet we do not have a signed contract; so that's called contracts in review.
They virtually all enter backlog within the next 90 to 120 days.
There are a lot of negotiations on our contracts in our long lead times services business.
You've heard me say repeatedly: we never would sign the first version of a contract that comes across our desk.
It typically calls for us to be responsible for anything that goes wrong in the world, including weather.
It takes a lot of work to get the contracts the way we want them.
That's the contracts in backlog.
We have a third level of visibility.
It's projects we've been awarded ---+ whether it's verbally, or we're working with one GC, and if the general contractor wins the award, that's our business.
So we know a contract is coming.
We put it into the win column, and it probably will materialize the backlog in the next 6 to 12 months.
And then the fourth level of visibility is the least concrete, but by far the largest: it's work we are bidding on.
And when we bid work, we know what our probability of success is.
Of course, we bid work where we are the long shot, and we score that in the low probability; but we also bid a lot of work where we know we're the likely winner if the project goes forward.
By far that is largest category, so we try to weight that.
And when we combine those four levels of visibility, we have a fairly accurate position of what are revenue potential will be in the next 12 to 24 months.
You bet, <UNK>.
Yes, <UNK> will do that here.
We obviously will do that in the Q.
But <UNK>, to have the numbers in front of you.
Yes, excuse me.
For our segment backlog for the quarter, our architectural services segment, I'll just kind of round off the numbers ---+ and this is [four intercompany eliminations].
It would be about almost $360 million.
So that represents roughly 60% of our total backlog consistently.
Our architectural glass business is about $85 million.
Architectural framing systems about $112 million.
And then our large-scale optical business, a little less than $3 million.
And then we have about $15 million of elims against that.
Well, the increase in the backlog this quarter of over $30 million was entirely new work.
You know, I suppose if we had revenued $20 million more in revenue this ---+ you know, if we had been able to revenue $20 million more, obviously our backlog would have been down, and it would be a different story.
So I'm sure that would've made all the difference in the world.
But it is what it is.
We had in that range of $275 million to $280 million of new orders in the quarter.
So it continues to be a strong order activity.
Well, I think you're talking about competitors from international sources.
There aren't a lot of people in the US that can do with our Viracon glass business can do, which is coat and fabricate.
Most of our competitors in the US are regional fabricators who buy precoated glass.
Slightly different business model.
So for premium high-end Class A commercial buildings, our business is really the cream of the crop.
We do have international competitors.
Clearly, on the Eastern coast, European competitors that are similar to our Viracon business have tailwinds because of the strength of the US dollar, you know, the comparative weakness of their own.
They've got a European cost base; selling in the US dollar, it gives them an effective price increase without having had to raise their prices.
So we've been pretty good at maintaining our share.
We're doing a really nice job of competing in spaces we've not tried to compete in before.
There's not been a noticeable change in market share, but clearly we've got ---+ the current exchange rate ---+ the power of the US dollar has clearly opened the door for international competitors to try to move in.
We're building our plans and strategies around not expecting any improvement in the US dollar.
There are other ways that we can continue to get our fair share of business out there.
And our Viracon glass business really has focused on the really one-third of the non-resi building market that is high-end, where we've had a very strong market share position.
There's another two-thirds of the market out there where things we've done, like our new coater that went into place in August of 2014 ---+ some of the investments <UNK> and I referenced early in this call ---+ that allow us to be a better competitor in the entire non-resi sector and not just a slice.
So we are confident where we are.
Thanks, <UNK>.
Yes.
Either you or someone asked about that, and I didn't answer, so I appreciate your bringing it back up.
As far as glass pricing ---+ <UNK> will comment on aluminum ---+ but as far as glass pricing, all of our projects are forward purchase.
So if the raw material on glass increases, which it has in the last couple of years; it was pretty steady for 10 years ---+ the float guys took out capacity in the recession, I think about 25% of the capacity of float was removed from industry.
As that price started to go up, we just reflect that in our quotes and our bidding activity.
So there's really no exposure on glass pricing.
So we have no issue there.
We're certainly enjoying versus a little over a year ago, where we had headwinds on aluminum costs.
And I'd mentioned in our segments, we are ---+ our industry is very, very slow to pass on aluminum cost increases to the marketplace.
It's equally slow in passing on the aluminum favorability in the form of pricing.
And that's where we stand today.
So we're certainly enjoying an improvement in our margins from aluminum, but frankly it's one aspect.
It's not the dominant reason for our profitability improvement in our framing systems businesses.
It's been primarily productivity in our factories.
The aluminum cost had been a contributor, though, but we continue to hold our pricing in that segment.
As it relates to aluminum material costs, <UNK>, we are ---+ probably about 50% of our aluminum-related purchases we have a forward buy on those.
And the other are spot buy.
But we are anticipating maintaining relatively low aluminum costs over the next year, but we are also looking at some additional hedge opportunities.
Thank you, Sam.
Lauren, are there any more questions.
Yes, you know, it's probably roughly only about $0.01.
Because the level of the business is ---+ as <UNK> said, we're happy to kind of be staying in the black in those businesses, but it's pretty modest.
And it started to get pretty modest a year ago.
Yes, <UNK>, I don't want to telegraph my strategies to my competitors.
I just ---+.
I want to be careful there.
But I would just tell you, there's lemonade in that lemon.
You know, it was mentioned, I think ---+ I don't know if it was Sam, or <UNK>, or <UNK>, but somebody asked about the impact of the international people coming here.
Well, guess what.
I have an international operation that's getting at the same exchange advantage, if we want to use that to compete.
And we will take advantage of that if it's possible.
You bet.
<UNK> can give you any specifics, but let me open just simply by saying our capacity utilization dropped in the quarter, but the primary reason was the start up of our new anodizing line.
We don't ---+ you know, within the framing systems segment, one of our business is our finishing operation that does anodization and painting of the aluminum systems that go on buildings.
And it's a great business that's been growing, especially the anodizing side.
We added about 60% capacity to that business with this major project we announced a year ago.
The project went online in this quarter, and we are already running 24/7 on that line.
And then our glass business, our St.
George factory, is up and running.
And frankly, we are at full capacity there as well.
Our glass business is really humming right now.
So our capacity utilization dropped, but it was mainly because of the capacity we brought online in the last year in St.
George, Utah, in glass and in our Wausau Linetec business.
I think maybe the key point, <UNK>, we feel ---+ we continue to feel that we are largely capacitized to be able to get to our fiscal 2018 revenue numbers, other than we're making investments in capabilities and productivity.
And then there is kind of nominal investments for capacity.
Thank you, <UNK>.
All right, Lauren, thank you very much.
And everybody, I appreciate your dialing into our call today.
Hopefully, we provided more clarity to our strong results.
We have ---+ obviously we'll be talking to many of our analysts over the next couple of days and weeks.
And <UNK> and I will be on our usual roadshows throughout the quarter and look forward to seeing you on the Street.
And clearly look forward to talking to you in about 90 days, as we wrap up another phenomenal year.
I'd like to remind you: we set some pretty significant goals three years ago of getting to $1 billion and 10% operating margin, and a lot of people didn't believe us.
And we are virtually knocking on that door, and we'll literally be there at the end of this fiscal year.
I hope you feel we've earned the credibility when we say $1.3 billion and at least 12% operating margin in fiscal 2018, which is only ---+ we'll be there in literally two fiscal years.
So look forward to continuing to do what we said we'll do.
And we'll talk to you all soon.
Thank you.
