APOG

Apogee Enterprises, Inc. (APOG)

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Apogee Enterprises, Inc. (APOG)

F2Q09 Earnings Call

September 18, 2008 11:00 am ET

Executives

Mary Ann Jackson - Director of Investor Relations

Russell Huffer - Chairman and Chief Executive Officer

Jim Porter – Chief Financial Officer

Analysts

Eric Glover - Canaccord Adams

Steve Denault - Northland Securities

Brent Thielman – D.A. Davidson

Tom Hayes - Piper Jaffray

Jonathan Braatz - Kansas City Capital

Richard Nelson - Jesup & Lamont Securities Corporation

Robert Kelly – Sidoti

Robert Vermillion – Axial Capital

Presentation

Operator

Welcome to the second quarter fiscal 2009 Apogee Enterprises, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mary Ann Jackson.

Mary Ann Jackson

With us on the line today are Russ Huffer, Chairman and CEO, and Jim Porter, CFO. Their remarks will focus on our second quarter results and the outlook for fiscal 2009.

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 on March 1, 2008 and in our earnings release issued last night and filed this morning in form 8-Q.

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

Russell Huffer

We continue to grow Apogee’s architectural business with great products and great services and despite internal operational challenges in the second quarter, grew our EPS in the period. In what we now see as challenging market conditions, we expect to grow revenues and earnings to record levels in fiscal 2009 while generating strong cash flow. We continue to see the benefits of our architectural glass products and services leadership position in the green building movement.

During the second quarter, internal issues affected our profitability and changing commercial construction markets have affected our revenue growth outlook for the full year. As a result we have reduced our fiscal 2009 earnings guidance to $1.65 - $1.82 per share. We have seen significant changes to some sectors of our markets in a short period of time. We normally experience project delays in our business primarily driven by job site schedules. However, in the past six weeks, we have seen an unusual amount of project delays along with a small number but high dollar value of cancellations. Some of the delays are normal of course, but economic uncertainty has also become a factor. This is a rate of change we have not seen before and we continue to closely monitor near term market developments. The big question is what happened in the past two months to significantly change the outlook for Apogee’s architectural segment?

The issues primarily relate to our Viracon architectural glass business with some market softness today for our Wausau window business. Two major Viracon casino projects were cancelled in early August including one already in production and we started seeing more project delays which are moving work from the current fiscal year into fiscal 2010. It has been difficult to fill this capacity that opened up due to the short notice and long selling cycle for much of our architectural glass and window work. As we attempted to fill the open capacity in our schedules, the shorter lead term work, it became apparent that there are fewer small to mid-size projects being financed, and given the state of the residential markets, there is more US competition and thus pricing pressure for these smaller jobs.

At the same time, we experienced internal operational challenges in our large Minnesota architectural glass fabrication facility. These were worse and more extensive than we originally anticipated and took longer to resolve. These issues, which led to higher labor costs than planned to overcome production bottlenecks while maintaining our focus on delivering complete high quality product orders on time to customers, and also impacted the second quarter results and our full year outlook. As a result we have lowered our full year outlook for earnings and revenues. I am encouraged that we continue to expect to grow our business despite uncertain and softer market conditions and our internal operating problems at Viracon where production has been back to normal levels since the beginning of September.

Turning to our second quarter results, our operating performance with the exception of Viracon was strong. Operating margins improved in our installation and window businesses as we had expected and operating margins were higher than anticipated in our picture framing business even though revenues declined due to the elimination of less profitable product lines and soft framing market conditions. During the quarter we completed our new Wausau window building where we are consolidating operations from three separate very old buildings into what we expect to be a silver LEED certified manufacturing facility, the first of its kind in this industry. We also continued to generate significant cash flow in the quarter with $18 million in free cash flow. We grew architectural segment revenues and earnings but our operating margin was impacted by the operational problems at Viracon. At 6.7% for the quarter, the operating margin was below our expectations and the prior year period’s 7.3%.

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